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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee Required)
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934 (No Fee Required)
For the transition period from ______ to _______
Commission File No. 1-11476
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(Name of small business issuer in its charter)
California 95-3977501
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
18425 Burbank Boulevard, Suite 506
Tarzana, California 91356
(818) 757-1100
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class: Name of each exchange on which registered:
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Common Stock $.001 stated value None
Securities registered under
Section 12(g) of the Exchange Act:
None
Check whether the issuer (l) 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 the past 90 days. Yes [ ] No
[X]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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[ ].
State issuer's revenues for its most recent fiscal year: $3,327,777
The aggregate market value of the issuer's Common Stock held by
non-affiliates as of April 15, 1998 (assuming for this purpose that only
directors and officers of registrant are affiliates of registrant), based on the
closing price on that date, was approximately $719,000.
As of April 15, 1998 there were 16,049,072 shares of Voice Powered
Technology International, Inc. Common Stock, $.001 par value, outstanding.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Voice Powered Technology International, Inc. (the "Company"),
incorporated in California in June 1985, began active operations in January
1990. The Company was formed to develop, market, and distribute low-cost voice
recognition and voice activated products on a world-wide basis, both directly
and through licensing agreements. From January 1990 until July 1992, the Company
operated as a development stage enterprise.
The Company's voice-recognition VoiceLogic(TM) Technology (the
"Technology") is fully developed and in commercial use in a variety of consumer
oriented products manufactured for the Company under contract with third
parties. The Technology consists of a combination of rights developed, acquired,
and licensed by the Company for advanced low-cost voice recognition technology
called VoiceLogic, which can operate on penlight or nicad batteries. This
Technology permits utilization of the human voice as a replacement for manual
controls, such as buttons, switches, and dials in activating and controlling
everyday consumer and business products. The Technology can also be licensed for
use in a variety of products with only limited modifications to the application
software for adaptation to the specific product. The core Technology can also be
adapted easily for use in virtually any spoken language in the world, thus
enabling it to be used in virtually any country in the world (See "Item 1.
Description of Business - Significant Financial Transactions/May 1997 Franklin
Transaction").
Since the calendar quarter ended December 31, 1995, the Company has
experienced sustained significant operating losses. These losses were the result
of multiple factors inclusive of unsuccessful introductions of new models of the
Company's core product line (the IQ-VOICE(TM) Organizer), failed launches of new
products, increased competition from lower priced digital recorders, and a
general decline in domestic retail sales of the entire hand-held electronics
category.
Through 1996 and the first nine months of 1997, the Company attempted to
improve its financial condition by reducing fixed operating costs, liquidating
inventories, and streamlining operating departments. In addition, the Company
entered into two transactions in an attempt to strengthen the Company's
financial position. The first transaction, in February 1996, resulted in the
Company issuing to one of its contract manufacturers 1.37 million shares of the
Company's common stock at market value, the proceeds of which were applied to
the Company's outstanding trade debt to such contract manufacturer (See "Item 1.
Description of Business - Significant Financial Transactions/February 1996 Stock
Issuance"). The second transaction, in May 1997, resulted in the Company
transferring ownership of its Technology (subject to a license back to the
Company), selling a portion of its product line, and issuing 2,000,000 shares of
the Company's common stock, all to Franklin Electronic Publishers, Inc.
("Franklin") for a combination of cash and long term debt. The proceeds of this
sale were used to settle outstanding trade debt with creditors and increase cash
availability (See "Item 1. Description of Business - Significant Financial
Transactions/May 1997 Franklin Transaction"). Despite these efforts, the Company
was unable to generate sufficient revenues and gross profit to sustain its
ongoing operations, further depleting cash and working capital. Lastly, the
Company was sued by Everen Securities, Inc., a company which had been retained
in May 1996 to assist the Company in seeking out strategic alternatives,
inclusive of potential financing and merger candidates. The Company terminated
the agreement in February 1997. The suit asserted a claim against the Company of
$435,000 for fees allegedly due as a result of the aforementioned May 1997
Franklin transaction. Although the Company disputed this claim, it did not have
adequate cash resources to defend this suit (See "Item 3. Legal Proceedings").
On September 22, 1997, the Company filed a voluntary petition with the
United States Bankruptcy Court, Central District of California, under the
provisions of Chapter 11 of the Bankruptcy Code (the "Bankruptcy Proceedings").
Throughout the course of the Bankruptcy Proceedings, the Company has been
operating as a "Debtor in Possession" under such code. On January 21, 1998, the
Company, in conjunction with Franklin, filed a combined Amended Disclosure
Statement and Plan of Reorganization (the "Plan") with the Bankruptcy Court. The
Disclosure Statement aspect of this Plan has been approved as to form by the
Bankruptcy Court, and submitted to all interested parties for approval. Under
the terms of the Plan, Franklin will provide the Company with a $350,000 loan in
order to create a fund to be dedicated to the payment of creditor claims and
certain administrative expenses of the Bankruptcy Proceedings (the "Creditor
Fund Loan"). The Creditor Fund Loan will bear interest at eight percent (8.0%)
per annum and will be due and payable in a lump sum five years from the funding
date. In addition, the Plan provides for the conversion of the Company's
outstanding 500,000 shares of preferred stock into 2,000,000
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shares of the Company's common stock. The Plan also provides for Franklin to
convert its $1,708,750 pre-petition secured loan to the Company into an eighty
percent (80%) interest in the equity of the Company, after conversion of the
preferred stock, through the issuance by the Company of additional shares of the
Company's common stock. On March 16, 1998, the Company filed a motion with the
Bankruptcy Court for confirmation of the Plan and a hearing to grant such motion
is scheduled for April 23, 1998. Until final confirmation by the Bankruptcy
Court, no assurance can be given that the Plan will be completed and
implemented. Success of the Company after confirmation of the Plan, if
confirmed, is dependent, among other things, on reaching a satisfactory level of
profitability and generating sufficient cash flow resources to meet ongoing
obligations (See "Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Future Plans"). No assurance can be given
that the Company will be able to achieve such level of profitability and
continue as a going concern. Further, no assurance can be given that Franklin
will continue to participate in the Plan. Should Franklin cease its
participation, the Company may be forced to liquidate.
Since the commencement of the Bankruptcy Proceedings, the Company has
received post petition financing from Franklin pursuant to a Loan and Security
Agreement dated September 22, 1997 ("Post Petition Financing"). Pursuant to the
terms of this Post Petition Financing, the Company was provided a revolving line
of credit based upon a borrowing base equal to seventy-five percent (75%) of the
Company's eligible accounts receivable plus fifty percent (50%) of the Company's
eligible outstanding customer purchase orders, up to a maximum loan amount of
$400,000.
As a result of concern on the part of the Company's major retail
customers regarding the Company's financial stability, the limited cash and
working capital resources available to the Company, and the potential exposure
to the Company which would result from price protection, advertising, and stock
balancing commitments required by these major retail customers, the Company
discontinued shipments of its IQ-VOICE Organizer products to many of its major
retail customers since the commencement of the Bankruptcy Proceedings. At
present, the Company is engaged in only limited business activities consisting
of sales of IQ-VOICE Organizer products to smaller retailers and wholesale
accounts, to international distributors, and through various direct marketing
programs. As a result of this contraction in the Company's business activities,
the Company has terminated the employment of a number of its employees,
inclusive of the Company's Vice President of Sales and Marketing and Vice
President of Engineering and Development. In addition, in May 1997, prior to
commencement of the Bankruptcy Proceedings, the Company's president/CEO
resigned, and such duties were assumed by the Company's vice president/CFO
thereby further reducing the Company's ongoing costs for executive management
personnel.
Management of the Company is presently focused on the successful
completion of a pending licensing agreement for the Company's Technology (See
"Item 1. Description of Business - Markets for the VoiceLogic Technology"), the
development of targeted direct marketing channels for its current products, as
well as maintaining and servicing its remaining customer base in order to
sustain operations through completion and confirmation of the Plan. Until such
time, the Company has suspended development of new products and major expansion
of sales activities into new markets. It should also be noted, however, that
upon confirmation of the Plan, the Company will become an 80% controlled
subsidiary of Franklin, and therefore subject to Franklin's direction regarding
future business activities.
SIGNIFICANT FINANCIAL TRANSACTIONS
The following paragraphs summarize the significant financial
transactions entered into by the Company prior to the commencement of the
Bankruptcy Proceedings:
FEBRUARY 1996 STOCK ISSUANCE. In February 1996, the Company executed a
Termination Agreement with Flextronics (Malaysia) SDN. BHD. ("Flextronics"), a
contract manufacturer for the Company, which established the terms and
conditions pursuant to which the Company would wind down its relationship with
Flextronics. The terms of this agreement included: 1) the issuance to
Flextronics of 1,371,966 shares of the Company's common stock at market value,
the proceeds of which, amounting to $1,955,052, were applied to the Company's
trade debt to Flextronics as of December 31, 1995; 2) a payment schedule through
October 1996 for the remaining balance of the related trade debt as of December
31, 1995; 3) terms and conditions related to the Company's obligation regarding
component parts purchased or committed to Flextronics for manufacture of the
Company's products; and 4) purchasing and payment terms for the remaining
products to be manufactured and shipped to the Company. The Company filed a
registration statement with regard to the shares issued to Flextronics. The
Company did not make
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payments due on various dates pursuant to this agreement, however, the Company
reached a settlement with Flextronics in May 1997 (See "Item 1. Description of
Business Significant Financial Transactions/May 1997 Creditor Settlements").
MAY 1997 FRANKLIN TRANSACTION. In May 1997, the Company consummated a
transaction involving two agreements with Franklin. The first agreement was a
Purchase and Loan Agreement in which the two companies entered into the
following transactions: 1) The Company transferred and sold to Franklin for
$450,000 in cash its inventory, rights to work in process, manufacturing assets,
marketing assets, and software and hardware design assets for the Company's
IQ-VOICE Organizer Models 5150 and 5160 (IQ-VOICE Pocket Organizers); 2) The
Company sold to Franklin for $150,000 in cash 2,000,000 shares of the Company's
common stock, par value $.001 per share, representing the approximate market
price of the Company's common stock at the time of the transaction; and 3)
Franklin loaned the Company cash equal to $1,200,000, in addition to $500,000
plus accrued interest previously loaned to the Company in February 1997, and
restructured the payment terms of a new $1,708,750 note over a four year period.
The second agreement was a Technology Transfer Agreement in which the two
companies entered into the following transactions: 1) The Company granted to
Franklin a non-exclusive perpetual license for technology rights evidenced by
the Company's patent related to operation of Voice Organizer products as well as
other technology and software developed by the Company related to or used in the
Model 5150 and 5160 for a non-refundable advance royalty of $700,000 against an
agreed upon per unit royalty; and 2) the Company assigned the rights to the
VoiceLogic Technology to Franklin, and Franklin granted back to the Company a
non-exclusive perpetual license of the VoiceLogic Technology, including the
right to sublicense, for the development, manufacture, sale, and distribution of
Voice Organizer products with recording times in excess of four minutes and any
other electronic products that are not Voice Organizers, subject to the Company
remaining obligated to pay royalties to Franklin at the same rates for which the
Company was obligated to the inventor of the VoiceLogic Technology prior to its
assignment to Franklin. As a result of the foregoing transactions the Company
recognized income from the sale of the Company's Technology in the amount of
$700,000 and a gain on sale of assets in the amount of $141,000. (See also "Item
1. Description of Business - Significant Financial Transactions/May 1997
Creditor Settlements" for a discussion of further transactions entered into by
the Company utilizing a portion of the proceeds from the transaction with
Franklin.)
MAY 1997 CREDITOR SETTLEMENTS. In May 1997, the Company entered into
agreements with Flextronics and GSS/Array Technology, Inc. ("GSS"), contract
manufacturers of the Company's products, relating to the resolution of
outstanding liabilities and commitments. The Company entered into a Settlement
Agreement with Flextronics under which the Company made a cash payment and
assigned the proceeds due pursuant to a licensing agreement with Kong Wah Video
for a voice operated television remote control device to Flextronics as full and
final settlement for all outstanding liabilities and commitments other than
approximately $260,000 in inventory which had already been manufactured by
Flextronics. The Company had committed to purchase such inventory prior to June
30, 1997, however, as of the commencement of the Bankruptcy Proceedings the
Company had failed to complete approximately $75,000 of these purchases. The
Company also entered into a Discounted Payment and Adequate Assurance of
Performance Agreement with GSS under which the Company made a cash payment and
issued 500,000 shares of non-voting, non-cumulative, convertible preferred
stock, with a $0.06 per share mandatory dividend payable annually in cash or
common stock at the option of the Company on the anniversary date of issuance,
as full and final settlement of outstanding liabilities. The preferred stock had
a $1.00 per share liquidation preference and each share was convertible into
four (4) shares of the Company's common stock. Pursuant to the terms of the
Plan, this preferred stock will be converted into 2,000,000 shares of the
Company's common stock if and when the Plan is confirmed and becomes effective.
Also under the Discounted Payment and Adequate Assurance of Performance
Agreement, GSS had agreed to continue to manufacture pursuant to the terms of
the original Manufacturing Agreement for a period of not less than six months,
and the Company had agreed to provide GSS with a standby letter of credit to
secure the Company's payments. Lastly, in May 1997, the Company entered into
agreements with many of its other trade creditors in which the trade creditors
agreed to accept discounted lump sum payments in full consideration of the then
current obligations of the Company. As a result of the foregoing settlements the
Company recognized a gain from forgiveness of debt in the amount of $1,388,000.
THE VOICELOGIC TECHNOLOGY
The Technology is proprietary technology which was owned by the Company,
and as a result of the Franklin transaction described above (See "Item 1.
Description of Business Significant Financial Transactions/ May 1997 Franklin
Transaction") is now licensed by the Company from Franklin. As of February 1996,
the
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Company had acquired from the inventor of the Technology all right, title,
interest, and any future improvements in and to the Technology, subject to
payment of ongoing royalties, thereby eliminating any and all limitations as to
the Company's use of the Technology. The Technology is protected by copyrights
and trade secrets. The low-cost, low-power consumption, portable, and compact
features of the Technology were designed for use in conjunction with everyday
mass-marketed consumer and business electronic products. The Technology
incorporates a proprietary voice recognition algorithm capable of operating on
most low-cost eight-bit microprocessors. Further, the Technology is
speaker-dependent technology, which, though requiring training, is easily
adaptable for use in any language.
The Company believes that its Technology provides accurate voice
recognition at lower cost, and with less power required, than can be provided by
alternative technologies suitable for low power, portable applications.
PRODUCTS CURRENTLY MARKETED
Prior to the commencement of the Bankruptcy Proceedings the Company
developed a variety of voice activated consumer products which include the
Company's most successful product line, the IQ-VOICE Organizer. Nearly all of
the Company's sales are derived from the IQ-VOICE Organizer product line. In
addition to the IQ-VOICE Organizers, in 1996 the Company marketed the IQ-VOICE
Tell-It Phone, the IQ-Voice Organizer/Pager, and engaged in on-going
exploratory development activities of various other voice activated products
which the Company believed would provide enhanced consumer benefits as a result
of the inclusion of voice technologies.
IQ-VOICE ORGANIZER. The IQ-VOICE Organizer ("Organizer") functions as a
voice-operated, palm-sized, electronic notebook, calendar, message prompter, and
telephone directory. Data entry and retrieval are largely accomplished by voice,
eliminating the need for tedious keypad data entry required by existing
electronic organizer products. The Organizer receives and stores voice messages,
then plays them back at designated dates and times. As an example, a user
wishing to calendarize an important phone call to John Jones at 10 am on the
upcoming Tuesday would say: "Call John Jones, 10 am, Tuesday." The Organizer
would beep at 10 am, Tuesday, and with the press of a button, the user would
hear the user's recorded message, "Call John Jones."
The Organizer also functions as an appointment calendar. Appointments
are entered by voice, and are automatically arranged chronologically by date and
time. The user is then able to review the calendar for a particular day merely
by saying the day or date, and listening to the stored appointments.
Appointments may be stored up to one year in advance.
The Organizer also permits the user to create a telephone directory by
storing names and telephone numbers entirely by voice. Numbers can then be
recalled and displayed on the LCD screen by simply speaking the person's name
into the Organizer. The Organizer also verbally states the person's name to
ensure that the correct number has been recalled. The Organizer is only slightly
larger than a credit card, fits easily into a shirt pocket, purse, notebook, or
briefcase, and weighs three ounces, including batteries.
During 1996, the Company introduced two new models of the Organizer,
both based upon new Flash memory technology. This new technology significantly
reduced the manufacturing costs of the Organizer, improved reliability and
responsiveness, and eliminated the need for backup power required by the
previous memory technology. The first model, introduced in June 1996, was the
IQ-VOICE Pocket Organizer (See "Item 1. Description of Business Significant
Financial Transactions/May 1997 Franklin Transaction" for information regarding
the sale of the Pocket Organizers to Franklin). This model featured a very
compact size and simplified operation, while maintaining most of the
functionality of the existing Organizers. The IQ-VOICE Pocket Organizer is
capable of storing up to 2.5 minutes of total audio recording, forty (40) names
and phone numbers, and up to sixty (60) reminders/appointments for up to a full
year in advance. The second model was a redesign of the Company's most popular
512 KB Voice Organizer capable of storing up to 4.0 minutes of total audio
recording (expandable to 1024 KB and 8.0 minutes of total audio recording),
which had been in distribution since the fourth quarter of 1994. In addition to
the benefits of Flash memory technology, this design featured an improved outer
case, as well as two new functions. First, the user could now define up to
twenty categories (or files) under which recorded memos could be stored, thereby
allowing easier access and retrieval. Second, the Organizer could now store
voice data regarding fifteen categories of business expenses, each time and date
stamped, for the easy compiling of expense reports. This model also incorporated
a simplified user interface featuring easily identifiable icons for each
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operating function. An international version of this design featuring a
multi-lingual display was made available in the second quarter of 1997.
IQ-VOICE ORGANIZER (PC COMPATIBLE). In September 1997, prior to the
commencement of the Bankruptcy Proceedings, the Company developed and introduced
a new line of the IQ-VOICE Organizer product. This line of products utilizes a
state-of-the-art technology for compression of voice data which enables the
units to store fifteen (15) minutes of digitally compressed audio data in the
same 512 KB Flash memory that previously allowed only four (4) minutes of audio
data. These new models feature, in addition to all of the features previously
contained in the IQ-VOICE Organizer, a proprietary personal computer interface
("PCLink") which allows the user to archive to a personal computer all of the
voice memos, reminders, and telephone numbers stored in the IQ-VOICE Organizer.
The computer interface also permits the user, using a computer keyboard, to add
limited text or numeric labels to selected data stored in the IQ-VOICE Organizer
such as names of files, and names and addresses for telephone directory entries.
Further, using the PCLink software, the user can send voice files over most PC
based e-mail systems. These units also feature a backlit display. During 1997,
the Company introduced models within this product line with recording capacities
of 15, 30, and 60 minutes, phone directories for up to 800 phone numbers for 200
names, and storage of up to 250 memos and reminders. Retail prices for these
products range between $99 and $169. Also, prior to the commencement of the
Bankruptcy Proceedings, the Company had substantially completed development of
international models of this product line which were introduced in the second
quarter of 1998. These models are capable of displaying text information in five
languages and the Company is completing development of the PCLink software for
use in a personal computer in all five languages.
OTHER PRODUCTS RECENTLY DISCONTINUED
IQ-VOICE ORGANIZER. During 1997, the Company discontinued further
production of several of its older models of the IQ-VOICE Organizer product
line. These models included a 128 KB version that had been originally introduced
in 1995, as well as the original battery operated 512 KB version introduced in
1994. During 1997, the Company substantially completed liquidation of its
remaining inventories of these products.
IQ-VOICE ORGANIZER/PAGER. In January 1996, the Company entered into an
agreement with MobileComm (subsequently acquired by MobileMedia Corporation)
pursuant to which the Company would develop, and both the Company and
MobileMedia would market and distribute, a new product which would combine the
features of the Company's IQ-VOICE Organizer with the functionality of a numeric
pager. The product was initially introduced in September 1996. The introduction
of this product was negatively impacted by financial problems experienced by
MobileMedia. In January 1997, these financial problems resulted in MobileMedia's
filing for Chapter 11 protection in the U.S. Bankruptcy Court in Delaware. As a
result of these problems, in November 1996 MobileMedia sought to obtain, and the
Company granted, a termination of MobileMedia's commitment to distribute the
IQ-VOICE Organizer/Pager in exchange for MobileMedia's agreement to pay the
Company a $100,000 cancellation fee, as well as to provide paging services and
marketing support for the product. Lastly, MobileMedia agreed to continue to pay
continuing fees to the Company based upon airtime revenue received by
MobileMedia from end users of the IQ-VOICE Organizer/Pager. As part of the
subsequent settlement in January 1997, the Company, after MobileMedia defaulted
on its payment obligations under the November 1996 agreement, waived the
$100,000 cancellation fee, as well as an additional $100,000 in penalties as a
result of MobileMedia's default, in exchange for payment in full of
MobileMedia's trade balance of $252,400. By reason of all of the foregoing, the
Company discontinued further production of this product in 1997. During 1997,
the Company substantially completed liquidation of its remaining inventories of
this product.
IQ-VOICE TELL-IT PHONE. The IQ-VOICE Tell-It Phone ("Phone") was a voice
activated telephone into which the user was able to enter as many as 40 names
and 120 telephone numbers (three for each name) by voice command. The Phone also
included Caller ID technology. As a result of the limited distribution obtained
by the Company for this product in the domestic retail market, combined with the
redesign cost necessitated by the obsolescence of a key component, the Company
decided to cease further production of this product, and has written off the
remaining tooling and other deferred costs associates with the product as of
December 31, 1996. During 1997, the Company substantially completed liquidation
of its remaining inventories of this product.
IQ-VOICE MESSAGEPAD AND VCR VOICE PROGRAMMER. The IQ-VOICE Home
MessagePad was a digital recording device designed to leave audio messages for
others, thereby eliminating the need for handwritten notes. In addition, the
Company had developed a version of this product tailored for use in office
environments,
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however, this model was never introduced due to less than anticipated retail
interest, as well as limited availability of a critical component. The VCR VOICE
Programmer was a hand-held, voice-activated, universal remote controller that
allowed a user to operate the functions of a VCR, including timed recordings,
with simple voice commands, and to control the functions of a television and
cable box. The Company decided to discontinue further production of these
products at the end of 1995 as a result of consumer resistance at retail price
points which would enable the Company to generate future profits. The Company
had written down at December 31, 1995 and again at December 31, 1996, its
remaining inventory of these products in accordance with lower of cost of market
valuation method, and has substantially completed liquidation of the remaining
inventory of these items as of February 1997.
DAISY. Daisy was a voice activated interactive diary, organizer, and
game system designed for preteen and teenage girls. The Company had intended to
introduce Daisy in fall, 1996. The lack of funds needed to build product
inventories and market the product forced the Company to alter its strategy.
Efforts were made to license Daisy to major toy companies. Although interest was
shown in such a license for Daisy, the cost of the product proved to be an
obstacle to completing such licensing arrangement. The Company has written off
the costs associated with this product as of December 31, 1996.
MARKETS FOR THE COMPANY'S PRODUCTS
DOMESTIC. The Company's products are designed to enable consumers and
business people to control the operation of electronic products by voice. As
such, the markets for the Company's products potentially include all
distribution channels where customers are likely to shop for such electronic
products. Prior to the commencement of the Bankruptcy Proceedings the Company
had obtained distribution in many of these channels including specialty
electronic retailers, catalogs, office superstores and department stores. The
Company also utilized direct response marketing to advertise and promote its
products directly to consumers through various media, including magazines,
newspapers, in-flight magazines and other periodicals. Since the commencement of
the Bankruptcy Proceedings, concern on the part of the Company's major retail
customers over the Company's financial stability, the limited cash and working
capital resources available to the Company, and the potential exposure to the
Company which would result from price protection, advertising and stock
balancing commitments required by these major retail customers, the Company
discontinued shipments of its IQ-VOICE Organizer products to many of its major
domestic retail customers. At present, the Company is engaged in only limited
business activities consisting of sales of IQ-VOICE Organizer products to
smaller retailers and wholesale accounts and through various direct marketing
programs. The Company's ability to reintroduce its products to major domestic
retail and catalogue accounts if and when the Plan is confirmed will depend upon
the Company's ability to obtain adequate working capital to support such sales
activities as well as consumer acceptance of the products' new features and
retail prices.
In 1997, the Company had one customer, Radio Shack, whose purchases,
totaling $418,000, exceeded 10% of the Company's net sales.
INTERNATIONAL. As the Company's VoiceLogic Technology is adaptable to
virtually any language, the Company designs and manufactures its products to be
marketed on a worldwide basis. The Company believes its products have potential
in markets outside the United States and, accordingly, devotes management and
other resources to the identification and development of distributors in other
countries capable of marketing and distributing the Company's products. The
Company presently has exclusive distribution agreements for sales and
distribution of its IQ-Voice Organizer products in certain countries in Europe,
China, Russia, and Mexico, as well as non-exclusive distributors in South
America and the Middle East. During 1997 the Company terminated its distribution
agreements in the United Kingdom, Germany, and France, and pending the
confirmation of the Plan and successful completion of the Bankruptcy
Proceedings, the Company would seek to reestablish distribution for the
Organizer in these markets. During 1997, approximately 15% of the Company's net
sales were international sales, primarily in Europe.
MARKETS FOR THE VOICELOGIC TECHNOLOGY
Prior to the commencement of the Bankruptcy Proceedings, the Company
sought out licensing arrangements with major manufacturers in product categories
for which the Company believed the Technology would be advantageous. These
categories included, but were not limited to, telecommunications, personal
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electronics, video and audio, wireless communications, and toys, as well as
semiconductor manufacturers who manufacture and distribute microprocessors for
inclusion in the above product categories. The Company believed that voice
recognition could provide value-added differentiation to products in these
categories with a relatively low incremental manufacturing cost. Pending the
confirmation of the Plan and successful completion of the Bankruptcy
Proceedings, as well as the subsequent availability of adequate financial and
human resources, the Company will continue to seek other licensing opportunities
in these categories.
The licensing of the Company's Technology is usually accomplished in two
phases. The first phase involves a joint development between the Company and the
manufacturer of the intended product to identify, evaluate, and test the
performance of the Company's Technology in a specific application (the
"Development Phase"). This phase is funded, in most instances, by the
manufacturer. The second phase involves the implementation of the voice
recognition features in the actual production for commercial distribution of the
product after which the Company receives royalties based upon sales or a lump
sum licensing fee (the "Production Phase"). The Company currently has two
licensing agreements described below:
The Company had developed a voice operated one-button remote control
which was designed to be sold with original equipment VCR's, televisions, cable
boxes, satellite receivers and audio equipment. The Company currently has in
force a licensing agreement with Kong Wah Video Company Limited, a Hong Kong
company. The agreement requires the payment of guaranteed minimum royalty
through 1999; however, the required payments that were due for the second half
of 1997 were not made, and the agreement is presently in default. Further, in
conjunction with a settlement agreement reached with one of the Company's former
manufacturers, the Company assigned the future proceeds of this licensing
agreement to said manufacturer (See "Item 1. Description of Business -
Significant Financial Transactions/May 1997 Creditor Settlements"). Accordingly,
this agreement will not result in any future revenues to the Company.
In December 1997, the Company concluded negotiations and entered into an
non-exclusive license agreement with a Taiwanese semiconductor manufacturer to
license the Technology for inclusion in a new microprocessor being developed for
introduction in 1998. This agreement is still in the Development Phase. If the
Development Phase is successful, the Company will receive a lump sum payment for
the license. No assurance can be given that the Development Phase will be
successful and the licensing fee will be paid as agreed.
Two other licensing agreements that the Company had entered into were
terminated as of January 1997. The first was an agreement with Max Zapf
Puppen-und Spielwarenfabrik GmbH & Co. ("Zapf"), a German company, for an
interactive voice activated talking doll; the second was with Hansol
Electronics, Inc. ("Hansol"), a South Korean company, for the right to use the
Company's VoiceLogic Technology in products manufactured by Hansol. The former
was terminated by Zapf due to lower than projected sales of the doll, which did
not justify the continuing payment of the required minimum royalties. The latter
was terminated due to a change in Hansol's business strategy. Payments required
under both licensing agreements have been made in full.
COMPETITION
The consumer electronics industry is highly competitive. Prior to the
commencement of the Bankruptcy Proceedings, the Company believed that it had a
technological head start on its competition in adapting voice recognition
technology for use in consumer products. Since commencement of the Bankruptcy
Proceedings, the Company has suspended all research and development activities,
and has eliminated all but one of its full time engineering and development
personnel in order to conserve cash resources. Such reduction will diminish the
Company's ability to keep pace with new technologies and developments which
could impede the Company's ability to compete. Furthermore, the Company's
current products compete with those of various companies which currently market
consumer and business oriented electronics products. Many of these competitors
are larger, have greater and stronger financial resources, name recognition, and
reputation, and have more established channels of distribution and marketing
capabilities than the Company. The Company's ability to compete effectively in
the marketplace in the future will depend upon the successful completion of the
Bankruptcy Proceedings, confirmation of the Plan, and obtaining adequate
financial and human resources to resume research and development activities. The
Company believes, however, that its unique Technology, combined with existing
know-how and issued patent, will enhance the Company's ability to compete in the
marketplace if and when the Bankruptcy proceedings are successfully completed.
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<PAGE> 9
IQ-VOICE ORGANIZER. The Company believes its IQ-VOICE Organizer is a
unique product which competes indirectly with electronic personal organizers and
paper bound personal organizers, both of which have developed markets of
substantial size. The Company believes that the Organizer's unique voice data
entry distinguishes it from other electronic and paper based organizer products.
The Organizer also competes with lower cost digital recorders and voice
managers, neither of which have the capability to retrieve data by voice
command. These devices are capable of performing only a memo recording function
by voice. The Company believes that the new PC compatible product line also
competes with a new category of pocket electronic devices designed to exchange
data with a PC computer. In order for the Company to compete successfully in the
PC compatible category in the future, the Company will need to dedicate
significant resources to the improvement of its PCLink software to enable
greater flexibility, features, and processing speed, as well as compatibility
with other existing PC based personal information management software. No
assurance can be given that such resources will be available to the Company if
and when the Bankruptcy Proceedings are successfully completed.
TECHNOLOGY. The VoiceLogic Technology competes with other voice
recognition technologies currently available, as well as others that are in
development. Among the companies that have developed and are marketing these
technologies, several are larger and have stronger financial resources, name
recognition, and marketing capabilities than the Company. The Company is aware
of two voice recognition technologies that are capable of operating on an
eight-bit microprocessor. These technologies are being offered in the form of
chips for potential licensing applications. Neither technology is believed to be
as cost effective as the Company's VoiceLogic Technology. No assurance can be
given that the Company will maintain its technological advantage in the future.
MARKETING AND DISTRIBUTION OF THE COMPANY'S PRODUCTS
Prior to the commencement of the Bankruptcy Proceedings the Company had
adopted a strategy for the marketing of its proprietary products that emphasized
three channels of distribution. First, during the initial introduction of a
product, the Company utilized, as appropriate, direct marketing via targeted
print advertising or other direct response advertising media in conjunction with
strategic catalog placement in order to generate consumer awareness for the
product. Second, the Company established its own retail distribution in the
United States in an attempt to maximize exposure and sales of its products in
the marketplace. Third, the Company developed a worldwide network of
distributors, each being responsible for marketing and distribution of the
Company's products in their respective countries. As a result of concern on the
part of the Company's major domestic retail customers over the Company's
financial stability, the limited cash and working capital resources available to
the Company, and the potential exposure to the Company which would result from
price protection, advertising, and stock balancing commitments required by these
major retail customers, the Company discontinued shipments of its IQ-VOICE
Organizer products to many of its major retail customers since the commencement
of the Bankruptcy Proceedings. At present, the Company is engaged in only
limited business activities consisting of sales of IQ-VOICE Organizer products
to smaller retailers and wholesale accounts, international distributors, and
through various direct marketing programs.
The Company filed an application to register as a trademark "IQ-VOICE."
While the application is still pending, the Company believes it will be granted
for all purposes except telecommunications products and services. The Company
has adopted this trademark as its brand name for most products. The Company
believes that establishing a common brand name will assist in building consumer
confidence, loyalty, and acceptance for the Company's products.
The Company has also filed an application to register as a trademark
"VoiceLogic." A Notice of Allowance has been issued for the trademark
application and the Company has been granted extensions of time through August
1998 to file its Statement of Use. The Company intends to resume its efforts to
obtain the trademark if and when the Bankruptcy Proceedings are successfully
completed.
DIRECT MARKETING DISTRIBUTION. Prior to the commencement of the
Bankruptcy Proceedings the Company contracted with third party companies for
most of the operational activities related to the Company's direct marketing
activities including media placement, inbound telemarketing, order fulfillment,
shipping, warehousing, and credit card processing. As a result of the reduced
level of sales activity since the commencement of the Bankruptcy Proceedings,
the Company has absorbed the fulfillment and telemarketing functions in-house.
During the course of the Bankruptcy Proceedings, the Company has continued its
direct marketing activities, primarily through direct mail campaigns and other
targeted promotional programs. The Company maintains its own toll-free
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<PAGE> 10
customer hot line which provides technical support for both direct marketing and
domestic retail customers. The Company also maintains its own service and repair
facility to manage repairs of its products as well as product quality control
for all domestic sales.
RETAIL DISTRIBUTION. Since commencement of the Bankruptcy Proceedings,
the Company has significantly reduced its emphasis on retail distribution. The
Company has maintained relationships with certain of its third party sales
representative organizations, each with a specific territory within the United
States. Warehousing and shipping services were provided by a third party company
under contract with the Company through April 1997, however, during 1997, as a
result of the reduced volume of domestic sales activity, the Company began
performing these functions in-house.
INTERNATIONAL DISTRIBUTION. Prior to the commencement of the Bankruptcy
Proceedings, the Company had established a network of distributors for its
products in countries outside the United States. The Company has maintained
certain of these distribution agreements during the course of the Bankruptcy
Proceedings as well as entered into new agreements. At present, the Company has
agreements with distributors covering approximately 11 countries in Europe,
Russia, Mexico, and China, as well as non-exclusive arrangements in South
America and the Middle East. During 1997, the Company terminated its agreements
with distributors in the United Kingdom, France, and Germany due to the failure
of these distributors to achieve agreed minimum sales criteria. International
sales were $1.7 million in 1996, and $501,000 in 1997 ( equivalent to 15% of net
sales for each year).
In 1996, the Company entered into a Business Cooperation Agreement with
a South Korean Company, Hansol Electronics, Inc. ("Hansol"). This agreement
granted Hansol exclusive marketing, manufacturing and distribution rights,
subject to Hansol achieving agreed performance criteria for certain countries in
the Far East, including China, Hong Kong, and India. As consideration to the
Company for granting these rights, Hansol had agreed to pay the Company $1.0
million in six installments during the initial two years of the agreement. A
total of approximately $600,000 was paid by Hansol in 1996. In January 1997,
Hansol advised the Company that it wished to terminate the agreement as a result
of a change in Hansol's business strategy. The Company and Hansol agreed to a
termination on mutually satisfactory terms, whereby Hansol paid to the Company
all amounts due and owing, and the Company agreed to purchase the finished goods
inventory of the IQ-VOICE Organizers that Hansol had produced.
Prior to the commencement of the Bankruptcy Proceedings the Company had
established, through contract with a third party company, a distribution center
in Holland to service distributors in Europe. As a result of the Company's
decreased level of sales in Europe due to termination of its agreements in the
United Kingdom, France, and Germany, the Company's utilization of this facility
has been significantly reduced. Most remaining distributors are serviced by the
Company through either the Company's manufacturer or the Company's service
facility in the United States.
MANUFACTURING
The VCR VOICE Programmer and the IQ-VOICE Organizer products had been
manufactured for delivery by the Company under an agreement with Flextronics
which had been due to expire June 30, 1996. On February 23, 1996, the Company
executed a Termination Agreement with Flextronics which established the terms
and conditions pursuant to which the Company would wind down its relationship
with Flextronics. The terms of this agreement included: 1) the issuance to
Flextronics of 1,371,966 shares of the Company's common stock at market value,
the proceeds of which were applied to the Company's trade debt to Flextronics as
of December 31, 1995; 2) a payment schedule through October 1996 for the
remaining balance of the related trade debt as of December 31, 1995; 3) terms
and conditions related to the Company's obligation regarding component parts
purchased or committed to Flextronics for manufacture of the Company's products;
and 4) purchasing and payment terms for the remaining products to be
manufactured and shipped to the Company. The Company filed a registration
statement with regard to the shares issued to Flextronics. The Company did not
make payments due on various dates pursuant to this agreement, however, the
Company reached a settlement with Flextronics in May 1997 regarding the
Company's outstanding obligations (See "Item 1. Description of Business -
Significant Financial Transactions/May 1997 Creditor Settlements").
During 1996, the Company had entered into agreements with two new
sources of manufacturing for the Company's products. In February 1996, the
Company entered into an agreement with GSS, a U.S. manufacturer
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<PAGE> 11
with manufacturing facilities in the United States, China, and Thailand for the
manufacture of the Company's products on a non-exclusive basis. This agreement
had an initial one-year term and provided for the Company to receive from GSS
30-day payment terms for all goods manufactured and shipped. The Company had not
been current in its payments to GSS. An agreement was reached in May 1997
resolving the outstanding balance with GSS, as well as revised payment terms for
future orders (See "Item 1. Description of Business - Significant Financial
Transactions/May 1997 Creditor Settlements"). In addition, in February 1996, the
Company entered into a Business Cooperation Agreement with Hansol Electronics,
Inc., a South Korean based company. This agreement, which was terminated in
January 1997, granted to Hansol, among other rights, the right to manufacture
products for the Company, subject to certain requirements, including competitive
price and terms (See Item 1. Description of Business - Marketing and
Distribution of the Company's Products/International Distribution").
In May 1997, the Company began manufacturing at a new factory with
headquarters in Hong Kong and manufacturing facilities in the Peoples Republic
of China. At present, this new factory is manufacturing all of the Company's
products for both domestic and international customers. The Company believes
this new source of manufacturing provides higher quality at lower prices than
any of the Company's previous contract manufacturers, and has adequate
manufacturing capacity to meet the Company's needs in the foreseeable future.
All goods purchased from this manufacturer are paid for in cash prior to
shipment.
Each of the Company's products typically utilize a sole source for
certain critical components of such products including the microprocessor and
memory chips. The Company has no agreement with such suppliers of these chips,
and interruption of such source of supply could adversely affect the Company
until an alternative supplier could be found. Alternative sources are available,
and the Company believes it could make alternative arrangements, although
potentially at some increase in component cost.
PATENTS AND COPYRIGHTS
Prior to February 1996, the Company was the licensee under three license
agreements with respect to the Technology, which together aggregated the
foundation of the Company's exclusive rights to the Technology. One of the
license agreements was with the original inventor ("Inventor") of the
Technology, who is also a director of the Company. The other two license
agreements were with a company ("Licensor") to whom the Inventor had assigned
certain rights with respect to the Technology. Under these agreements, the
Company was obligated to pay royalties of varying amounts to the Inventor and
Licensor for units of products sold by the Company which contained the
Technology, as well as royalties applicable to the Company's licensing
activities of the Technology. These agreements also had annual minimum royalties
payable by the Company to retain exclusivity which varied depending upon the
agreement and the product category.
On February 20, 1996, the Company entered into a new agreement with the
Inventor which effectively replaced the three prior licensing agreements, the
result of which was that the Company acquired all right, title, interest, and
any future improvements in and to the Technology, inclusive of an assignment of
all intellectual property rights associated with the Technology. In
consideration of this transfer, the Company agreed to pay $100,000 in two
installments to the Inventor, $50,000 of which was paid at the execution of the
agreement, and $50,000 of which was paid in July 1996. In addition, the Company
granted an option to purchase 33,333 shares of the Company's common stock to the
Inventor of the Technology at an exercise price per share which was cumulatively
$50,000 lower than the then current market value as a means of paying the
balance of the purchase price for the rights. In addition, the agreement
required payment of royalties by the Company to the Inventor equal to: 1) $0.50
per unit for each unit of any product sold by the Company which contains the
Technology; 2) 5% of net proceeds from the sales of computer chips which contain
the Technology; and 3) 15% of licensing revenues (excluding licensing revenues
for computer chips) received by the Company as a result of licensing agreements
relating to the Technology. The foregoing royalties were subject to a minimum of
$60,000 per year payable quarterly. In May 1997, this agreement with the
Inventor was assigned to Franklin Electronic Publishers, Inc. under the terms of
a Technology Transfer Agreement (See "Item 1. Description of Business
- -Significant Financial Transactions/May 1997 Franklin Transaction"). Under the
Technology Transfer Agreement the Company transferred to Franklin certain rights
evidenced by patent and copyright, and assigned certain rights to the VoiceLogic
Technology in exchange for a non-refundable royalty advance, with Franklin
granting back to the Company a non-exclusive license to the Technology to
utilize in Voice Organizer products with recording times in excess of four
minutes in duration, as well as to use and/or sublicense the Technology in any
other product category. With respect to the annual minimum royalty due the
Inventor by Franklin, the Company remains obligated to
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<PAGE> 12
Franklin for the $60,000 per year less royalties due and payable to the Inventor
by Franklin (See "Item 1. Description of Business - Significant Financial
Transactions/May 1997 Franklin Transaction").
The Company has been granted two United States patents for its products,
one related to the functionality of the Company's Voice Organizer, and the other
a design patent for the VCR-VOICE Programmer. The Company is currently
prosecuting two trademark applications with the United States Patent and
Trademark Office. The Company does not know, for any patents issued, whether
they will provide significant proprietary protection or will be circumvented or
invalidated. Additionally, since issuance of a patent does not guarantee the
right to practice the claimed invention, there can be no assurance that others
will not obtain patents that the Company would need to license or design around
in order to practice its patented technologies, or that licenses that might be
required to practice these technologies due to patents of others would be
available on reasonable terms. Further, there can be no assurance that any
unpatented manufacture, use, or sale of the Company's Technology, processes, or
products will not infringe on patents or proprietary rights of others. The
Company also relies on trade secret laws for the protection of its intellectual
property, and there can be no assurance that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets or disclose such
technology, or that the Company can meaningfully protect its rights to
unpatented trade secrets.
From time to time the Company receives notices from other companies with
respect to patents. During the first quarter of 1998, a United States Patent was
brought to the Company's attention relative to its IQ-VOICE Organizer product,
and a license was offered thereunder. The Company is continuing its
investigation of this patent and evaluating whether a patent license is needed
or otherwise desirable; however, no assurance can be given as to the outcome of
the foregoing or the impact thereof on the business of the Company. The Company
has received other such notices during past years and believes such notices were
irrelevant to the Company's products or, to the extent relevant, the noticed
patents are not infringed and/or valid. However, no assurance can be given that
the Company's use or sale of its products will not result in challenges from
other third parties claiming patents, copyrights or other rights to such
products or parts thereof in the future. The Company may find it advantageous,
or may be required, to purchase additional licenses in the future.
Given the fact that the Company has assigned its rights in the
Technology to Franklin (See "Item 1. Description of Business - Significant
Financial Transactions/May 1997 Franklin Transaction"), the Company has no
continuing rights to control the disposition of the Technology. However, the
Company has a non-exclusive perpetual license, from Franklin, including the
right to sublicense, for the development, manufacture, sale, and distribution of
Voice Organizer products with recording times in excess of four minutes and any
other electronic products that are not Voice Organizers, subject to the Company
remaining obligated to pay royalties to Franklin at the same rates for which the
Company was obligated to the inventor of the VoiceLogic Technology prior to its
assignment to Franklin
EMPLOYEES
As of March 31, 1998, the Company had 12 employees, of which one was
manufacturing/research and development, four were general and administrative,
five were warehousing, and two were customer service. None of the Company's
employees are represented by a labor union, and the Company is not aware of any
current efforts to unionize the employees. Management of the Company considers
the relationship between the Company and its employees to be good.
RESEARCH AND DEVELOPMENT COSTS
For the years ended December 31, 1996 and 1997, the Company spent
$1,062,000 and $684,000, respectively, on research and development. The Company
has suspended development of new products pending confirmation of the Plan .
ITEM 2. DESCRIPTION OF PROPERTY
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<PAGE> 13
Through March 31, 1998, the Company was renting facilities for its main
offices and service operations from unrelated parties, consisting of
approximately 5,000 square feet of space in the Los Angeles, California,
metropolitan area for an aggregate annual rental of approximately $70,000. A
lease for the main office facilities expires March 31, 2000, but contains
provisions for cancellation by the Company, at no penalty to the Company at any
time after June 30, 1998 with 45 day written notice. The lease for the service
operations is renewable on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
On August 26, 1997, the Company was served with a civil action initiated
by Everen Securities Inc. and filed in the United states District Court,
Northern District of Illinois, asserting a claim against the Company in the
amount of $435,000. Everen Securities Inc. had been retained by the Company in
May 1996 to assist the Company in seeking out strategic alternatives, inclusive
of potential financing and merger candidates. The Company terminated its
agreement with Everen in February 1997. The suit asserted a claim against the
Company of $435,000 for fees allegedly due as a result of the aforementioned May
1997 Franklin transaction. Although the Company disputes this claim, it did not
have adequate cash resources to defend this suit. In conjunction with the
Bankruptcy Proceedings, the Company has entered into an agreement with Everen in
which the Company agreed not to object to an unsecured claim by Everen in the
amount of $300,000 which is included as pre-petition liabilities, and will be
resolved in accordance with the Bankruptcy Proceedings.
In addition, the Company has been sued by several trade creditors for
balances due and owing such trade creditors prior to the commencement of the
Bankruptcy Proceedings. All of these actions have been stayed as a result of the
Bankruptcy Proceedings, and will be settled in accordance with the provisions of
the Plan if and when the Plan is successfully completed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote by the Company's security holders
during the fourth quarter of the year ended December 31, 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's Common Stock, "VPTI," and Warrants, "VPTIW," have been
quoted on NASDAQ since the Company's initial public offering on October 20,
1992. The Company's Stock and Warrants were delisted from NASDAQ on April 9,
1997 and the Company's Warrants expired in October 1997. The Company's Common
Stock continues to be quoted on the OTC Bulletin Board. The following table sets
forth, for the periods indicated, the high and low closing bid prices for the
Company's Common Stock and Warrants, as reported on NASDAQ or the OTC Bulletin
Board, for the quarters presented. Bid prices represent inter-dealer quotations
without adjustments for markups, markdowns, and commissions, and may not
represent actual transactions.
<TABLE>
<CAPTION>
CALENDAR 1996 BID PRICES
------------------------
HIGH LOW
------ -------
<S> <C> <C>
First Quarter
Common Stock 3 1/16 1 13/16
Warrants 1/2 5/16
Second Quarter
Common Stock 1 5/8 1 1/8
Warrants 1/2 1/4
Third Quarter
Common Stock 1 1/2 1
Warrants 5/16 1/8
Fourth Quarter
Common Stock 13/16 5/32
Warrants 3/32 1/32
CALENDAR 1997
First Quarter
Common Stock 9/16 1/8
Warrants 1/16 1/16
Second Quarter
Common Stock .33 .03
Warrants 1/16 1/16
Third Quarter
Common Stock 3/16 .05
Warrants 1/16 .01
Fourth Quarter
Common Stock .39 .01
Warrants -- --
CALENDAR 1998
First Quarter
Common Stock 1/16 .03
</TABLE>
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<PAGE> 15
At April 15, 1998, there were 16,049,072 shares of Common Stock
outstanding, which were held by approximately 6,000 shareholders of record,
including approximately 100 broker/dealers in street name on behalf of
shareholders. As of such date, there were no warrants outstanding to purchase
shares of the Company's common stock.
The Company has never paid any dividends to its common stock
shareholders. Future cash dividends or special payments of cash, stock or other
distributions, if any, will be dependent upon the Company's earnings, financial
condition, and other relevant factors. The Board of Directors does not intend to
pay or declare any dividends in the foreseeable future, but instead intends to
have the Company retain all earnings, if any, for use in the Company's business.
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<PAGE> 16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Since the calendar quarter ended December 31, 1995, the Company has
experienced sustained significant operating losses. These losses were the result
of multiple factors inclusive of unsuccessful introductions of new models of the
Company's core product line (the IQ-VOICE(TM) Organizer), failed launches of new
products, increased competition from lower priced digital recorders, and a
general decline in domestic retail sales of the entire hand-held electronics
category.
Through 1996 and the first nine months of 1997, the Company attempted to
improve its financial condition by reducing fixed operating costs, liquidating
inventories and streamlining operating departments. In addition, the Company
entered into two transactions in an attempt to strengthen the Company's
financial position. The first transaction, in February 1996, resulted in the
Company issuing to one of its contract manufacturers 1.37 million shares of the
Company's common stock at market value, the proceeds of which were applied to
the Company's outstanding trade debt to such contract manufacturer (See "Item 1.
Description of Business - Significant Financial Transactions/February 1996 Stock
Issuance"). The second transaction, in May 1997, resulted in the Company
transferring ownership of its Technology (subject to a license back to the
Company), selling a portion of its product line, and issuing 2,000,000 shares of
the Company's common stock, all to Franklin Electronic Publishers, Inc.
("Franklin") for a combination of cash and long term debt. The proceeds of this
sale were used to settle outstanding trade debt with creditors and increase cash
availability (See "Item 1. Description of Business - Significant Financial
Transactions/May 1997 Franklin Transaction"). Despite these efforts, the Company
was unable to generate sufficient revenues and gross profit to sustain its
ongoing operations, further depleting cash and working capital. Lastly, the
Company was sued by Everen Securities, Inc., a company which had been retained
in May 1996 to assist the Company in seeking out strategic alternatives,
inclusive of potential financing and merger candidates. The Company terminated
the agreement in February 1997. The suit asserted a claim against the Company of
$435,000 for fees allegedly due as a result of the aforementioned May 1997
Franklin transaction. Although the Company disputes this claim, it did not have
adequate cash resources to defend this suit. In conjunction with the Bankruptcy
Proceedings, the Company has entered into a stipulation agreement with Everen in
which the Company agreed not to object to an unsecured claim by Everen in the
amount of $300,000 which is included as pre-petition liabilities and will be
resolved in accordance with the Bankruptcy Proceedings (See "Item 3. Legal
Proceedings").
On September 22, 1997, the Company filed a voluntary petition with the
United States Bankruptcy Court, Central District of California, under the
provisions of Chapter 11 of the Bankruptcy Code (the "Bankruptcy Proceedings").
Throughout the course of the Bankruptcy Proceedings, the Company has been
operating as a "Debtor in Possession" under such code. On January 21, 1998, the
Company, in conjunction with Franklin, filed a combined Amended Disclosure
Statement and Plan of Reorganization (the "Plan") with the Bankruptcy Court. The
Disclosure Statement aspect of this Plan has been approved as to form by the
Bankruptcy Court and submitted to all interested parties for approval. Under the
terms of the Plan, Franklin will provide the Company with a $350,000 loan in
order to create a fund to be dedicated to the payment of creditor claims and
certain administrative expenses of the Bankruptcy Proceedings (the "Creditor
Fund Loan"). The Creditor Fund Loan will bear interest at eight percent (8.0%)
per annum and will be due and payable in a lump sum five years from the funding
date. In addition, the Plan provides for the conversion of the Company's
outstanding 500,000 shares of preferred stock into 2,000,000 shares of the
Company's common stock. The Plan also provides for Franklin to convert its
$1,708,750 pre-petition secured loan to the Company into an eighty percent (80%)
interest in the equity of the Company, after conversion of the preferred stock,
through the issuance by the Company of additional shares of the Company's common
stock. On March 16, 1998, the Company filed a motion with the Bankruptcy Court
for confirmation of the Plan and a hearing to grant such motion is scheduled for
April 23, 1998. Until final confirmation by the Bankruptcy Court, no assurance
can be given that the Plan will be completed and implemented. Success of the
Company after confirmation of the Plan, if confirmed, is dependent, among other
things, on reaching a satisfactory level of profitability and generating
sufficient cash flow resources to meet ongoing obligations (See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Future Plans"). No assurance can be given that the Company will be
able to achieve such level of profitability and continue as a going concern.
Further, no assurance can be given that Franklin will continue to participate in
the Plan. Should Franklin cease its participation, the Company may be forced to
liquidate.
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<PAGE> 17
Since the commencement of the Bankruptcy Proceedings, the Company has
received post petition financing from Franklin pursuant to a Loan and Security
Agreement dated September 22, 1997 ("Post Petition Financing"). Pursuant to the
terms of this Post Petition Financing, the Company was provided a revolving line
of credit based upon a borrowing base equal to seventy-five percent (75%) of the
Company's eligible accounts receivable plus fifty percent (50%) of the Company's
eligible outstanding customer purchase orders, up to a maximum loan amount of
$400,000.
As a result of concern on the part of the Company's major domestic
retail customers regarding the Company's financial stability, the limited cash
and working capital resources available to the Company and the potential
exposure to the Company which would result from price protection, advertising,
and stock balancing commitments required by these major retail customers, the
Company discontinued shipments of its IQ-VOICE Organizer products to many of its
major retail customers since the commencement of the Bankruptcy Proceedings. At
present, the Company is engaged in only limited business activities consisting
of sales of IQ-VOICE Organizer products to smaller retailers and wholesale
accounts, to international distributors, and through various direct marketing
programs. As a result of this contraction in the Company's business activities,
the Company has terminated the employment of a number of its employees,
inclusive of the Company's Vice President of Sales and Marketing and Vice
President of Engineering and Development. In addition, in May 1997, prior to
commencement of the Bankruptcy Proceedings, the Company's president/CEO
resigned, and such duties were assumed by the Company's vice president/CFO
thereby further reducing the Company's ongoing costs for executive management
personnel.
The Company reported a net loss of $3,713,300 for the year ended
December 31, 1997, resulting in a $0.24 net loss per common share. The 1997
amounts included $1,130,000 in charges related to decisions to discontinue
certain products, $206,000 in charges related to price protection programs for
the Company's retail accounts, and $1,388,000 in extraordinary income from
forgiveness of debt. The Company reported a net loss of $4,834,000 for the year
ended December 31, 1996, resulting in a $0.35 net loss per outstanding common
share. The 1996 amounts included $420,000 in charges related to decisions to
discontinue certain products.
Sales for the year ended December 31, 1997 were $3,328,000 while sales
for the year ended December 31, 1996 were $10,813,000. After reduction of price
protection costs of $206,000 charged against sales, net sales in 1997 were
$3,122,000. The decrease in sales, as noted above, related to the decreased
levels of sales to retail customers, increased competition from lower priced
digital recorders, and a general decline in domestic retail sales of the entire
hand-held electronics category. The 1997 price protection costs relate to a
program that the Company instituted to reduce the retail price of two of its
product lines. Accordingly, certain established retail accounts were issued
credits for on-hand inventory equal to the difference between the wholesale
price at which they had purchased the products and their new wholesale price
which is based on the reduced retail price.
Total costs and expenses for the years ended December 31, 1997 and 1996
were $8,869,000 and $15,479,000, respectively. The decrease in expenses in 1997
as compared to 1996 is the result of decreased costs associated with the
Company's decreased sales volume and efforts made by the Company to
significantly reduce its fixed costs. These decreases in costs were partially
offset by costs associated with the discontinuation of certain products in 1997
that were in excess of similar costs required in 1996.
Costs of goods sold decreased to $2,798,000 in 1997 from $7,620,000 in
1996 due to the Company's decreased sales. As a percentage of sales, costs of
goods sold increased to 84% from 70% primarily due to the Company's liquidation
efforts and the related selling of older products at book value.
In 1997 the Company charged $1,130,000 to operations relating to
discontinued model costs. The Company elected to discontinue future production
of its IQ-VOICE Organizer/Pagers, its low cost line of IQ-VOICE Organizers, and
its original battery operated IQ-VOICE Organizer. As a result, the Company wrote
down the inventory value of the related finished goods by $828,000 in accordance
with the lower of cost or market methodology, and wrote off $302,000 which was
the book value of tooling and product development costs related to the
discontinued products.
In 1996 the Company charged $419,960 to operations relating to
discontinued model costs. The Company elected to discontinue future production
of its IQ-VOICE TELL-IT Phone product line as well as write off costs relating
to its Diary/Organizer product, previously capitalized. Due to the high
marketing and start-up manufacturing costs associated with the introduction of
Diary/Organizer, the Company, due to the limitation of cash
17
<PAGE> 18
resources, was unable to introduce this product in 1996 and did not believe that
sufficient cash resources would be available in the near future. As a result, at
December 31, 1996, the Company wrote off $419,960, which was the book value of
product development costs related to the two products.
Marketing expenses decreased to $1,064,000 in 1997 from $2,803,000 in
1996. The decrease is associated with the Company's lower volume of sales and
the related lower marketing and distribution costs, as well as lower fixed
costs. As such, the Company incurred decreased advertising costs of $836,000,
commissions expense of $350,000, promotional costs of $154,000, trade show
expenses of $100,000, consulting expenses of $60,000, and international sales
expenses of $50,000. As a proportion of sales, marketing expenses increased to
32% in 1997 from 26% in 1996.
General and administrative expenses increased to $2,650,900 in 1997 from
$2,568,000 in 1996. The increase resulted primarily from accruals related to the
Company's default under the agreements with its former president/CEO in the
amount of $200,000, and the previously noted settlement with Everen in the
amount of $300,000. Such increases were offset by decreases in fixed costs such
as rent of $102,000, salaries of $80,000, and legal fees of $50,000. Further,
royalty expenses decreased by $87,000 due to the lower volume of sales in 1997.
As a proportion of sales, general and administrative expenses increased to 80%
in 1997 from 24% in 1996.
Research and development expenses decreased in 1997 to $684,000 from
$1,062,000 in 1996. The decrease is primarily related to decreased salaries of
$283,000. As stated, the Company has suspended development of new products
pending confirmation of the Plan.
Warehouse expenses were $541,000 in 1997, and $1,006,000 in 1996. The
decrease is directly related to the decreased sales and related costs. As such,
the Company incurred decreases to temporary labor costs of $152,000, freight
expenses of $147,000, and third party fulfillment costs of $155,000. As a
percentage of sales, warehouse expenses increased to 16% in 1997 from 9% in
1996.
Included in other income for the year ended December 13, 1997 are
$141,527 in gain on sale of assets and $700,000 in income from sale of
technology license. Both of these items relate to the previously mentioned
agreements entered into with Franklin in May 1997 (See Note 3 of notes to
financial statements).
Interest expense for the year ended 1997 was $140,000 as compared to
$228,000 in 1996, and was related to the Company's decreased levels of activity
under its accounts receivable transfer and purchase agreement offset by its note
payable and loan payable to Franklin.
Included as a reorganization item is $42,300 in expenses relating to
legal fees incurred as a result of the Company's Bankruptcy Proceedings.
Included as an extraordinary item is $1,387,842 in income from
forgiveness of debt relating to agreements entered into with the Company's
manufacturers and certain other trade creditors (See Note 8(d) of notes to
financial statements).
FUTURE PLANS
On September 22, 1997, the Company filed a voluntary petition with the
United States Bankruptcy Court, Central District of California, under the
provisions of Chapter 11 of the Bankruptcy Code (the "Bankruptcy Proceedings").
Throughout the course of the Bankruptcy Proceedings, the Company has been
operating as a "Debtor in Possession" under such code. On January 21, 1998, the
Company, in conjunction with Franklin, filed a combined Disclosure Statement and
Plan of Reorganization(the "Plan") with the Bankruptcy Court. This Plan has been
approved as to form by the Bankruptcy Court, and submitted to all interested
parties for approval. On March 16, 1998, the Company filed a motion with the
Bankruptcy Court for confirmation of the Plan and a hearing to grant such motion
is scheduled for April 23, 1998. Until final confirmation by the Bankruptcy
Court, no assurance can be given that the Plan will be completed and
implemented.
At present, the Company is engaged in only limited business activities
consisting of sales of IQ-VOICE Organizer products to smaller retailers and
wholesale accounts, to international distributors, and through various direct
marketing programs. Management of the Company is presently focused on the
successful completion of a
18
<PAGE> 19
pending licensing agreement for the Company's Technology (See "Item 1.
Description of Business - Markets for the VoiceLogic Technology"), the
development of targeted direct marketing channels for its current products, as
well as maintaining and servicing its remaining customer base in order to
sustain operations through completion and confirmation of the Plan. Until such
time, the Company has suspended development of new products and major expansion
of sales activities into new markets.
If and when the Plan is confirmed, the Company will seek to obtain
adequate working capital resources, either through internally generated cash
flow or external sources, in order to reintroduce its products to major domestic
retail and catalogue accounts, resume research and development activities for
new products and improvements to its Technology, dedicate additional resources
to the development of licensing opportunities for its Technology, and explore
further improvements to its PC compatible IQ-VOICE Organizers inclusive of
improvements to its PCLink software. There can be no assurance that the Company
will be able to obtain adequate working capital. Upon confirmation of the Plan
the Company will become an 80% controlled subsidiary of Franklin, and therefore
subject to Franklin's direction and discretion regarding future business
activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred net losses for the past three years, including
$3,713,300 for the year ended December 31, 1997. Further, the Company has an
accumulated deficit of $2,484,129 at December 31, 1997. Because of these and
other factors, on September 22, 1997, the Company filed a voluntary petition for
relief with the United States Bankruptcy Court, Central District of California,
under the provisions of Chapter 11 of the Bankruptcy Code. Throughout the course
of the Bankruptcy Proceedings, the Company has been operating as a "Debtor in
Possession" under such code. On January 21, 1998, the Company, in conjunction
with Franklin, filed a combined Amended Disclosure Statement and Plan of
Reorganization (the "Plan") with the Bankruptcy Court. The Disclosure Statement
aspect of this Plan has been approved as to form by the Bankruptcy Court and
submitted to all interested parties for approval. On March 16, 1998, the Company
filed a motion with the Bankruptcy Court for confirmation of the Plan and a
hearing to grant such motion is scheduled for April 23, 1998. Until final
confirmation by the Bankruptcy Court, no assurance can be given that the Plan
will be completed and implemented. Success of the Company after confirmation of
the Plan, if confirmed, is dependent, among other things, on reaching a
satisfactory level of profitability and generating sufficient cash flow
resources to meet ongoing obligations. No assurance can be given that the
Company will be able to achieve such level of profitability. Further, no
assurance can be given that Franklin will continue to participate in the
Company's Plan. Should Franklin cease its participation, the Company may be
forced to liquidate. These matters raise substantial doubt about the ability of
the Company to continue as a going concern. The financial statements do not
include any adjustments that may be necessary should the Company be unable to
continue as a going concern. The Company's independent certified public
accountants have included an explanatory paragraph in their report with respect
to this matter.
Since the commencement of the Bankruptcy Proceedings, the Company has
received post petition financing from Franklin pursuant to a revolving $400,000
Loan and Security Agreement dated as of September 22, 1997, with letter
amendments dated October 7, 1997 and March 2, 1998. The loan is due and payable
the earliest of (a) May 15, 1998; (b) the effective date of an order confirming
a plan of the Company; or (c) at the option of Lender, immediately and without
notice upon the occurrence or during the continuation of an Event of Default as
defined in the agreement. The agreement is collateralized by all of the assets
of the Company. Borrowings under the agreement are permitted up to 75% of
accounts receivable and 50% of open customer purchase orders held by the
Company. Accounts receivable and open customer purchase orders to be borrowed
against must be approved by Franklin for eligibility. The agreement carries an
interest rate of 12% per annum on the average daily balance. The agreement also
provides for Franklin to guarantee payment to the Company's suppliers for
shipments pursuant to purchase orders, which have been approved by Franklin, for
the manufacture of products. The amounts of such guarantees are deducted from
the amount otherwise borrowable based on approved accounts receivable and
purchase orders. The December 31, 1997 balance of $185,000 was the highest
balance during 1997.
Included in the 1997 statement of cash flows as adjustments to reconcile
net loss to net cash used in operating activities are gains on the sale of
assets for $141,000 and on forgiveness of debt for $1,387,000. The gain on sale
of assets relates to an agreement entered into with Franklin in May 1997 (See
Note 3 of notes to financial statements). The gain from forgiveness of debt
relate to agreements entered into with the Company's manufacturers and certain
other trade creditors (See Note 8(d) of notes to financial statements).
19
<PAGE> 20
Further included as adjustments to reconcile net loss to net cash used
in operating activities is price protection of $206,000 related to programs that
the Company established during the first three quarters of 1997. The Company
instituted these programs to reduce the retail price of two of its older product
lines. Accordingly, certain established retail accounts were issued credits for
on-hand inventory equal to the difference between the wholesale price at which
they had purchased the products and their new wholesale price which was based on
the reduced retail price.
Finally included in the 1997 statement of cash flows as an adjustment to
reconcile net loss to net cash used in operating activities, are charges of
$1,130,000 relating to discontinued model costs. The Company decided to
discontinue future production of its IQ-VOICE Organizer/Pagers, its low cost
line of IQ-VOICE Organizers, and its original battery operated IQ-VOICE
Organizer. As a result, the Company wrote down the inventory value of the
related finished goods by $828,000 in accordance with the lower of cost or
market methodology, and wrote off $302,000 which was the book value of tooling
and product development costs related to the discontinued products.
The decrease in accounts receivable of $1,448,000 reflects the Company's
overall decreased sales levels in 1997.
The decrease in inventory of $633,000 is primarily attributable to the
Company's efforts to reduce inventory levels from December 31, 1996 through its
liquidation efforts.
The net decrease in pre- and post-petition accounts payable and accrued
expenses of $1,586,000 primarily relates to decreased payables to the Company's
manufacturers and other trade creditors. The Company used proceeds from its May
1997 transactions with Franklin (See Note 3 of notes to financial statements) in
order to make payments to these creditors.
Unused net operating losses of approximately $27,000,000 are available
as of December 31, 1997 to offset future years' federal taxable income, and
expire through 2012. Unused California net operating losses of approximately
$12,000,000 are available as of December 31, 1997 to offset future years'
California taxable income and expire through 2002. Under federal tax law IRC
Section 382, certain significant changes in ownership of the Company may
restrict future utilization of these carryforwards. In the event the loss
carryforwards are fully utilizable, the Company has a deferred tax asset of
approximately $10,000,000 as of December 31, 1997. In addition, the Company has
research and development tax credits of approximately $250,000 and $123,000 for
Federal and California tax purposes respectively. They will begin to expire in
2007. The Company has a valuation allowance equal to, and which offsets, the net
deferred tax asset as the Company cannot conclude that it is more likely than
not the net deferred tax asset will be realized.
Capital expenditures for the year ended December 31, 1997 amounted to
$166,000. The primary components of these expenditures were tooling purchases
relating to the Company's new IQ-VOICE Organizer product lines.
Expenditures for deferred costs of $199,000 is primarily attributable to
costs associated with the extensions of the Organizer product lines, which
feature a PC interface compatible with Windows 95(TM) allowing the user to
archive data as well as upload and download data to modify and/or add records
and other information. These models were designed to feature extended recording
capabilities(15, 30 and 60 minutes in length) and a backlit display.
Proceeds from the sale of product line to Franklin ($450,000), proceeds
from pre-petition note payable to Franklin ($1,709,000), and proceeds from sale
of common stock ($150,000) relate to the agreements entered into with Franklin
in May 1997 (See Note 3 of notes to financial statements). Proceeds from
post-petition loan payable relates to the agreement entered into with Franklin
in September 1997 (See Note 6 of notes to financial statements).
The Company does not anticipate material costs relating to its products,
hardware, or software regarding year 2000 computer issues.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS 129), issued by the FASB is effective
for financial statements ended after December 15, 1997. The new standard
reinstates various securities disclosure requirements previously in effect under
Accounting Principals
20
<PAGE> 21
Board Opinion No. 15, which has been superseded by SFAS No. 128. The adoption of
SFAS No. 129 did not have an impact on the Company's financial position or
results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
does not expect adoption of SFAS 130 to have an impact on its financial position
or results of operations and any effect will be limited to the form and content
of its disclosures.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131), issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS 131 requires that public companies report certain
information about operating segments, products, services and geographical areas
in which they operate and their major customers. The Company does not expect
adoption of SFAS 131 to have any impact on its financial position or results of
operations and any effect will be limited to the form and content of its
disclosures.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED HEREIN ARE FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS TO AND
UNCERTAINTIES IN THE COMPANY'S BUSINESS, INCLUDING, AMONG OTHER THINGS, THE
AVAILABILITY OF ADEQUATE WORKING CAPITAL, CHANGES IN TECHNOLOGY, THE IMPACT OF
COMPETITIVE PRODUCTS, THE COMPANY'S DEPENDENCE ON THIRD PARTY COMPONENT SUPPLIES
AND MANUFACTURERS, AND OTHER RISKS AND UNCERTAINTIES THAT MAY BE DETAILED FROM
TIME TO TIME IN THIS AND OTHER OF THE COMPANY'S SEC REPORTS.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are included (with an index
listing all such statements) in a separate financial section at the end of this
Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 22
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CENTRAL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
As of December 31, 1997, the directors and executive officers of the
Company were as follows:
<TABLE>
<CAPTION>
Positions and Offices Director
Name* Age Held with Company Since
- ----- --- --------------------- --------
<S> <C> <C> <C>
Mitchell B. Rubin 42 President, CEO,
CFO, Director,
Chairman of the Board 1994
Kenneth I. DeWitt 62 Vice President, Director 1997
Myron H. Hitchcock 57 Director 1990
</TABLE>
- ------------------
* Table does not include Ernest W. Townsend, who became a director in 1994,
and resigned as a director in March 1997 in order to devote more time to
personal business. Table also does not include Edward M. Krakauer, former
President, CEO, and Chairman of the Board (See "Item 9. Directors and
Executive Officers of the Company - Significant Events").
Mitchell B. Rubin joined the Company as vice president and general
manager in January 1994, and was elected a director in July 1994. In December
1994, Mr. Rubin assumed the newly created position of vice president, finance
and operations, which included the responsibilities of chief financial officer;
and in January 1995 Mr. Rubin was also appointed secretary of the Company. In
May 1997, Mr. Rubin became the Company's president and CEO, and in December
1997, was appointed chairman of the board of directors. Previously, from July
1991 through 1993, Mr. Rubin held various positions (including executive vice
president and chief operating officer from April 1992 through 1993) with Regal
Group, Inc., a television direct-response company with which the Company did
business. In late 1994, when Mr. Rubin was no longer associated with Regal,
Regal filed a petition for protection under Chapter 11 of the U.S. Bankruptcy
Code. From 1990 to 1991, Mr. Rubin was senior vice president and chief financial
officer of Quantum Marketing International, where he was responsible for
operations, systems, and finance. From 1984 to 1990, Mr. Rubin was treasurer and
chief financial officer at Chase Financial Management Corporation, a holding
company, where he had responsibility for negotiation of all business and real
estate acquisitions and sales, finance and operations. Prior to 1984, Mr. Rubin
was a partner in Margolis & Company, Certified Public Accountants, in
Pennsylvania. Mr. Rubin holds a B.S. degree in Business
Administration/Accounting from Drexel University, 1977, and became licensed as a
certified public accountant in the State of Pennsylvania in 1978.
Kenneth I. DeWitt joined the Company as vice president of manufacturing
in July 1995, and was appointed to serve as a director in December 1997. In his
capacity as vice president of manufacturing, he is responsible for all of the
manufacturing activities and quality assurance of the Company's products. Prior
to joining the Company, Mr. DeWitt was vice president of engineering for
Universal Security Instruments, a consumer electronics company which designs and
manufactures telephones, answering machines and other related technical consumer
products. In 1989 and 1990, Mr. DeWitt was senior vice president of Rabbit
Systems, Inc., directing the development and manufacture of innovative consumer
electronics products. From 1978 to 1989, and again from 1991 to 1995, Mr. DeWitt
was director of research and development and vice president of engineering at
Universal Security Instruments. Mr. DeWitt has over twenty-five years of
experience developing and manufacturing high volume consumer electronics
products both domestically and off-shore. He holds a B.S. degree in Electrical
Engineering from the University of Pennsylvania, Moore School, has taught
Engineering courses at Penn State University, and holds various patents in
electronics products.
Myron H. Hitchcock became a director of the Company in December 1990. He
has been associated with the Company since July of 1990. He is vice president
engineering, chief financial officer, treasurer, and a principal shareholder of
Voice Control Products Inc., which develops and licenses speech recognition
technology principally to toy manufacturers and previously to the Company.
During the previous six years, he was also president and the owner of ESSO
Development Inc., which had developed speech recognition related
microprocessor-based products from design to implementation. In the past, Mr.
Hitchcock has licensed, and more recently he sold, to the Company certain
22
<PAGE> 23
of the VoiceLogic technology utilized by the Company. Prior to ESSO, he was
employed by various divisions of Figgie International in the area of voice and
speech product research and development. Mr. Hitchcock holds a B.S. degree in
Mathematics with a minor in Electrical Engineering from the University of
Massachusetts, and has engaged in graduate studies in computer science,
engineering management and linguistics.
No director or executive officer of the Company has any family
relationship with any other director or executive officer of the Company.
SIGNIFICANT EVENTS. In May 1997, the Company entered into three
agreements with Edward M. Krakauer establishing the terms and conditions under
which Mr. Krakauer resigned as the Company's president and CEO. Under the first
agreement, a Termination Agreement, Mr. Krakauer's employment agreement was
terminated and a negotiated payment plan was established for accrued salaries
owed to the date of termination plus a discounted balance of the terminated
employment agreement. As of the commencement of the Company's Bankruptcy
Proceedings, the Company had defaulted under the terms of the Termination
Agreement, thus causing the discounted balance of the terminated employee
agreement to revert back to the full balance due. Under the terms of the second
agreement, a Consulting Agreement, Mr. Krakauer agreed to serve as a part-time
consultant through June 30, 1998. Under the third agreement, Mr. Krakauer was
granted 75,000 stock options at an exercise price of $.008 per share (which was
20% of the fair market value per share at the time of the grant in accordance
with previous options granted by the Company for non-employee directors).
Simultaneously, Mr. Krakauer voluntarily terminated his rights in previous
option agreements granted by the Company which covered 648,825 shares at
exercise prices ranging from $1.6875 to $3.00. Mr. Krakauer remained Chairman of
the Company's Board of Directors until December 1997, at which time he resigned
due to personal commitments that would have limited his future availability to
the Company. Payments applicable to the foregoing agreements were to be made at
various intervals through June 30, 1998, and $31,000 in such payments were made
prior to the commencement of Company's Bankruptcy Proceedings. The remaining
balances due under these agreements are included as pre-petition liabilities and
will be resolved in accordance with the Bankruptcy Proceedings.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equities securities
("10% Holders"), to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission (the
"SEC"). Officers, directors, and 10% Holders are required by regulation to
furnish the Company with copies of all Section 16(a) forms that they file with
the SEC.
To the Company's knowledge, based solely on the Company's review of the
copies of such forms received by the Company, the Company believes that all
reports required to be filed under Section 16(a) of the Exchange Act and the
related rules were timely filed by all officers, directors, and 10% Holders
except for a Form 4 relating to the cancellation of vested Directors Stock
Options for Mr. Taub, a former director of the Company, a Form 4 relating to the
cancellation of unvested Directors Stock Options for Mr. Townsend, a former
Director of the Company, upon his resignation from the Company's Board of
Directors in March 1997, a Form 4 related to an incentive stock option grant to
Mr. Larry Kloman, a former officer of the Company, in May 1997, a Form 4 related
to Mr. Hitchcock in partial consideration of the modification of Mr. Hitchcock's
assignment of the Technology to the Company and to Franklin Electronic
Publishers, Inc., in May 1997, a Form 4 related to Directors Options granted to
Mr. Krakauer, a former officer and director in May 1997, a Form 4 related to
Stock Options granted to Mr. Rubin in consideration of his promotion to
President and CEO in May 1997, a Form 4 for Mr. Krakauer related to the
cancellation of vested Stock Options related to his resignation as President and
CEO in May 1997, a Form 4 related to Mr. Rubin's voluntary cancellation of
vested Stock Options in May 1997, a Form 4 related to cancellation unvested
Stock Options for Mr. Fischer, a former officer, upon the termination of his
employment in November 1997, a Form 4 related to cancellation of unvested Stock
Options for Mr. Kloman, a former officer, upon the termination of his employment
in November 1997, a Form 4 related to cancellation of vested Stock Options for
Mr. Fischer, a former officer, upon the expiration of those Options in February
1998, a Form 4 related to cancellation of vested Stock Options for Mr. Kloman
upon the expiration of those Options in February 1998, and a Form 4 related to
the cancellation of vested Directors Options for Mr.
Townsend upon the expiration of those Options in March 1998.
23
<PAGE> 24
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company
for services rendered during the year ended December 31, 1997 to each executive
officer whose aggregate cash compensation exceeded $100,000:
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------------------
(a) (b) (c) (g) (l)
NAME AND SECURITIES ALL OTHER
PRINCIPAL UNDERLYING OPTIONS COMPENSATION
POSITION YEAR SALARY ($) (#) (1) ($)
--------- ---- ------- ------------------ ------------
<S> <C> <C> <C> <C>
Mitchell B. Rubin 1997 147,500 400,000(4) 2,500 (2)
Chief Executive Officer, Chief 1996 135,000 0 0
Financial Officer, and President 1995 157,750 0 0
Kenneth I. DeWitt 1997 100,000 75,000(5) 0
Vice President, Manufacturing 1996 100,000 25,000 0
1995 57,308 (3) 60,000 0
</TABLE>
(1) The amounts in this column represent shares which are subject to stock
options granted by the Company to the named persons under the Company's
1992 and 1994 Stock Option Plans. Pursuant to the terms of the Plan of
Reorganization, all options unexercised as of the Effective Date of the
Plan of Reorganization will be canceled.
(2) Dollar value of 62,500 shares of Common Stock of the Company issued to Mr.
Rubin at market value ($.04 per share) as payment of deferred salary due at
the time of Mr. Rubin's appointment to the positions of president and CEO.
(3) Mr. DeWitt's annualized base salary upon joining the Company in July 1995
was $120,000.
(4) Mr. Rubin's 1997 options granted represent 44% of total options granted to
employees during the fiscal year and are exercisable at $0.26 per share.
(5) Mr. DeWitt's 1997 options granted represent 8% of total options granted to
employees and are exercisable at $0.26 per share.
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES:
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
NUMBER OF SECURITIES VALUE OF
SHARES UNDERLYING UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS/ IN-THE-MONEY
ON VALUE SARS, FY-END (#) (1) OPTIONS AT FY-END ($) (1)(2)
EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME (#) ($)
- ---- -------- -------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Mitchell B. Rubin 0 0 200,000/200,000 0/0
Kenneth I. DeWitt 0 0 152,500/37,500 0/0
</TABLE>
24
<PAGE> 25
(1) The Company has not granted any stock appreciation rights to any persons.
Pursuant to the terms of the Plan of Reorganization, all options
unexercised as of the Effective Date of the Plan of Reorganization will be
canceled.
(2) Potential unrealized value means the fair market value on December 31, 1997
($0.01 per share), less the option exercise price (for options with respect
to which the exercise price is less than $0.01 per share), times the number
of shares.
EMPLOYMENT AGREEMENTS
Mr. Rubin. In January 1994, the Company entered into an employment
agreement with Mitchell B. Rubin under which he served as the Company's vice
president and general manager until December 1994, when he became vice president
of finance and operations and CFO. The agreement was amended in January 1996,
September 1996, and January 1997. In May 1997, under this agreement, Mr. Rubin
was appointed by the Board of Directors to assume the positions of president and
CEO. The amended agreement expired in February 1998 and provided for a 1997 base
salary of $150,000 ($147,500 of which was paid in cash, and $2,500 of which was
paid with 62,500 shares of the Company's common stock at fair market value,
which was $.04 at the time of issuance) which continued through the expiration
of the agreement. The Company also entered into an agreement with Mr. Rubin in
January 1994 providing him with indemnification on various matters that may
result from his service to the Company.
In February 1998, the Company entered into another employment agreement
with Mr. Rubin under which he serves as the Company's president and CEO. The
agreement provides for a base salary of $150,000. The agreement expires in
December 1998, subject to the right of the parties to terminate the agreement
earlier under certain conditions, including the right of the Company to
terminate the agreement on thirty days' notice, and Mr. Rubin to terminate the
agreement on thirty days' notice. If such termination is by the Company without
cause, Mr. Rubin is entitled to receive 25% of the annual base salary as
severance. If termination results from death or disability, he is entitled to
25% of the annual base salary. The employment agreement contains certain
restrictions on Mr. Rubin's right to compete.
In connection with Mr. Rubin's assuming the positions of president and
CEO in 1997, the Company granted him stock options for a term of ten years under
its 1994 Stock Option Plan to purchase up to 400,000 shares of the Company's
Common Stock at an exercise price of $0.26 per share, the then market price of
such stock. Mr. Rubin simultaneously agreed to cancellation of his prior
remaining option grants aggregating to 150,000 shares at an exercise price of
$1.69 per share. Pursuant to the terms of the Plan of Reorganization, all
options unexercised as of the Effective Date of the Plan of Reorganization will
be canceled.
Mr. DeWitt. In June 1995, the Company entered into an employment
agreement with Kenneth I. DeWitt under which he served as the Company's vice
president of manufacturing. Pursuant to this agreement, the term of employment
expired June 1997, and provided for a base salary of $120,000 per annum.
Effective January 1, 1996, this agreement was amended to reduce Mr. DeWitt's
1996 base salary to $100,000, subject to a January 1, 1997 reinstatement of the
prior base salary. Effective January 1, 1997, this agreement was again amended
to provide for a deferral of a portion of salaries otherwise payable until such
time as the Company obtains additional capital, completes a merger or other
business combination, or the employment agreement is otherwise terminated. 1997
compensation paid to Mr. DeWitt was $100,000, and the deferred portion of his
1997 salary is included as a pre-petition liability and will be resolved in
accordance with the Bankruptcy Proceedings.
In February 1998, the Company entered into another employment agreement
with Mr. DeWitt under which he will serve as the Company's vice president of
manufacturing and development. The agreement provides for a base salary of
$100,000. The agreement expires in December 1998, subject to the right of the
parties to terminate the agreement earlier under certain conditions, including
the right of the Company to terminate the agreement on thirty days' notice, and
Mr. DeWitt to terminate the agreement on thirty days' notice. If such
termination is by the Company without cause, Mr. DeWitt is entitled to receive
25% of the annual base salary as severance. If termination results from death or
disability, he is entitled to 25% of the annual base salary. The employment
agreement contains certain restrictions on Mr. DeWitt 's right to compete.
25
<PAGE> 26
During the term of his employment with the Company, Mr. DeWitt had been
granted options to purchase the Company's Common Stock under its 1992 and 1994
Stock Option Plans. These grants occurred in May 1995, February 1996, December
1996, and May 1997 for 60,000 shares, 30,000 shares, 25,000 shares, and 75,000
shares respectively, at exercise prices of $3.13 per share, $1.50 per share,
$0.38 per share, and $0.26 per share, respectively, in each case the then market
price of such stock. Pursuant to the terms of the Plan of Reorganization, all
options unexercised as of the Effective Date of the Plan of Reorganization will
be canceled.
BOARD OF DIRECTORS COMPENSATION
There was no 1997 compensation made by the Company to any of its
Directors other than the stock options issued to Mr. Krakauer in accordance with
his May 1997 agreements (See "Item 9. Directors and Executive Officers of the
Company - Significant Events"). Subsequent to year end, in April 1998, Mr.
Krakauer elected to exercise options to purchase 37,500 shares of common stock
that were granted in accordance with the foregoing.
1992 AND 1994 STOCK OPTION PLANS.
In July 1992 and January 1994, the Company adopted, respectively, the
1992 Stock Option Plan (the "1992 Plan") and the 1994 Stock Option Plan (the
"1994 Plan"). Subject to adjustment by reason of stock splits or similar capital
adjustments, each of the 1992 Plan and the 1994 Plan provides for the granting
of non-statutory stock options or incentive stock options to employees or
consultants to purchase up to an aggregate of 700,000 shares of Common Stock.
As of December 31, 1997, options for 383,078 shares of Common Stock had
been granted and remained outstanding and unexercised under the 1992 Plan; of
these, options for 285,578 shares were exercisable as of December 31, 1997 at
prices ranging from $0.26 to $4.50 per share. These options provide for maturing
of exercise rights over periods ranging from one year to three years from the
dates of grant. As of December 31, 1997, options for 408,880 shares of Common
Stock had been granted and remained outstanding and unexercised under the 1994
Plan; of these, options for 371,380 shares were exercisable as of December 31,
1997 at a prices ranging from $0.26 to $3.56 per share. These options provide
for maturing of exercise rights over periods ranging from one year to three
years from the dates of grant. Pursuant to the terms of the Plan of
Reorganization, all options unexercised as of the Effective Date of the Plan of
Reorganization will be canceled.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information with respect to each person
known to the Company to be the beneficial owner of more than five percent of the
Company's outstanding Common Stock as of December 31, 1997. To the Company's
knowledge, based on information set forth in their respective Schedule 13-D
filings with the Commission, unless otherwise indicated in the notes below, each
beneficial owner has sole voting and investment power with respect to the Common
Stock set forth opposite his or her name in the following table:
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS OF NUMBER OF TOTAL SHARES
BENEFICIAL OWNER SHARES OUTSTANDING
---------------- ------ -----------
<S> <C> <C>
Franklin Electronic Publishers, Inc. 2,000,000 12.5%
One Franklin Plaza
Burlington, New Jersey
Flextronics (Malaysia) SDN.BHD 1,356,966 8.5%
2241 Lundy Avenue
San Jose, California
</TABLE>
The following table sets forth existing stock ownership by the directors
and executive officers of the Company, as well as all directors and executive
officers of the Company as a group. To the Company's knowledge, all of the
shares shown in the following table are owned both of record and beneficially,
and the persons named possess sole voting and investment power, except as
otherwise indicated in the notes to the table.
26
<PAGE> 27
<TABLE>
<CAPTION>
Shares Beneficially Owned
As of December 31, 1997
-------------------------
Percent of
Name (1) Amount (2) Class
- -------- ------------ ----------
<S> <C> <C>
Mitchell B. Rubin 262,500 1.6%
Kenneth I. DeWitt 152,500 1.0%
Myron H. Hitchcock(3) 91,034 *
All directors and
executive officers of the
Company, as a group 506,034 3.2%
</TABLE>
- -----------------------
* Less than 1%.
(1) The address of each individual, unless otherwise indicated, is c/o Voice
Powered Technology International, Inc., 18425 Burbank Blvd., Suite 506,
Tarzana, California 91356.
(2) The amounts shown include shares subject to stock options exercisable as of
December 31, 1997 or exercisable within 60 days from such date. Mr. Rubin
and Mr. DeWitt have options to purchase 200,000 shares and 37,500 shares,
respectively, which were not exercisable as of December 31, 1997, or
exercisable within 60 days from such date. The amounts shown do not include
options for shares previously granted to former officers and directors of
the Company as follows: Edward M. Krakauer, 37,500; George H Fischer,
178,046; and Ernest W. Townsend, 28,028. Pursuant to the terms of the Plan
of Reorganization, all options unexercised as of the Effective Date of the
Plan of Reorganization will be canceled.
(3) The amounts shown include stock options granted to Mr. Hitchcock in 1994,
1995, and 1996 for serving as a directors of the Company, as well as
options granted in 1996 in association with the Company's purchase of
technology from Mr. Hitchcock. Pursuant to the terms of the Plan of
Reorganization, all options unexercised as of the Effective Date of the
Plan of Reorganization will be canceled.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MISCELLANEOUS
Prior to February 1996, the Company was the licensee under three license
agreements with respect to the Technology, which together aggregated the
foundation of the Company's exclusive rights to the Technology. One of the
license agreements was with the original inventor ("Inventor") of the
Technology, Myron Hitchcock, who is also a director of the Company. The other
two license agreements were with a Company ("Licensor") to whom the Inventor had
assigned certain rights with respect to the Technology. Under these agreements,
the Company was obligated to pay royalties of varying amounts to the Inventor
and Licensor for units of products sold by the Company which contained the
Technology, as well as royalties applicable to the Company's licensing
activities of the Technology. These agreements also had annual minimum royalties
payable by the Company to retain exclusivity which varied depending upon the
agreement and the product category.
On February 20, 1996, the Company entered into a new agreement with the
Inventor which effectively replaced the three prior licensing agreements, the
result of which was that the Company acquired all right, title, interest, and
any future improvements in and to the Technology, inclusive of an assignment of
all intellectual property rights associated with the Technology. In
consideration of this transfer, the Company agreed to pay $100,000 in two
installments to the Licensor, $50,000 of which was paid at the execution of the
agreement and $50,000 of which is payable not later than June 30, was paid in
July 1996. In addition, the Company granted an option to purchase 33,333 shares
of the Company's common stock to the Inventor of the Technology at an exercise
price per share which was cumulatively $50,000 lower than the current market
value as a means of paying the balance of the purchase price for the rights. In
addition, the agreement requires payments of royalties by the
27
<PAGE> 28
Company to the Inventor equal to: 1) $0.50 per unit for each unit of any product
sold by the Company which contains the Technology; 2) 5% of net proceeds from
the sales of computer chips which contain the Technology; and 3) 15% of
licensing revenues (excluding licensing revenues for computer chips) received by
the Company as a result of licensing agreements relating to the Technology. The
foregoing royalties are subject to a minimum of $60,000 per year payable
quarterly.
For the years ended December 31, 1996 and 1997, the Company paid Mr.
Hitchcock, a director of the Company, $98,000 and $82,000, respectively, in
royalty payments.
In May 1997, the agreement with Mr. Hitchcock, the Inventor, was
assigned to Franklin Electronic Publishers, Inc. under the terms of the
Technology Transfer Agreement (see "Item 1. Description of Business -
General/Subsequent Events").
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
See Exhibit Index
(b) REPORTS ON FORM 8-K.
Form 8-K filed with the SEC on December 18, 1997 under Item 5, Other
Events, of the Exchange Act.
28
<PAGE> 29
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-1
Balance Sheets at December 31, 1996 and 1997 F-2
Statements of Operations for the years ended
December 31, 1996 and 1997 F-3
Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996 and 1997 F-4
Statements of Cash Flows for the years ended
December 31, 1996 and 1997 F-5
Summary of Significant Accounting Policies F-6
Notes to the Financial Statements F-9
</TABLE>
29
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Voice Powered Technology International, Inc.
Tarzana, California
We have audited the accompanying balance sheets of Voice Powered Technology
International, Inc. (the "Company")(Debtor-in-Possession, as of September 22,
1997), as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the two
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide 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 the Company, at December 31,
1996 and 1997, and the results of its operations and its cash flows for each of
the two years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered from recurring losses from
operations, including a net loss of $3,713,300 for the year ended December 31,
1997, and has minimal working capital as of December 31, 1997. The Company filed
a voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court on September 22, 1997. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
BDO Seidman, LLP
Los Angeles, California
April 3, 1998
F-1
<PAGE> 31
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS
ASSETS (NOTES 3 AND 6)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 226,615 $ 34,559
Restricted cash (Note 4) 150,000 --
Receivables, net of allowance for doubtful accounts (Notes 4 and 6) 323,409 148,228
Receivables sold to financial institution (Note 4) 3,367,772 --
Less initial payments received from financial institution 1,889,052 --
------------ ------------
Net amount due from financial institution 1,478,720 --
Inventory 1,831,217 213,717
Prepaid expenses 101,495 10,500
------------ ------------
Total current assets 4,111,456 407,004
------------ ------------
Property and equipment (Note 8(a))
Equipment 1,882,569 404,236
Other 142,512 69,508
------------ ------------
2,025,081 473,744
Less accumulated depreciation 1,376,449 230,611
------------ ------------
Net property and equipment 648,632 243,133
Patents and technology rights, net of amortization 267,241 204,704
Deferred costs, net (Note 5) 620,749 248,361
Other assets 127,496 28,883
------------ ------------
Total assets $ 5,775,574 $ 1,132,085
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities not subject to compromise
Accounts payable $ 4,340,981 $ 63,518
Accrued expenses 857,922 138,320
Loan payable (Note 6) -- 185,000
------------ ------------
Total current liabilities not subject to compromise 5,198,903 386,838
Liabilities subject to compromise (Note 7) -- 3,229,376
Commitments and contingencies (Note 8)
Stockholders' equity (deficit) (Note 9)
Preferred stock, 10,000,000 shares authorized; $1.00 stated value, 0 and
500,000 shares issued and outstanding;
aggregate liquidation preference of $500,000 -- 500,000
Common stock, 50,000,000 shares authorized;
$.001 stated value, 13,949,072 and 16,011,572
shares issued and outstanding 13,949 16,012
Additional paid-in capital 27,746,645 27,897,082
Accumulated deficit (27,183,923) (30,897,223)
------------ ------------
Total stockholders' equity (deficit) 576,671 (2,484,129)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 5,775,574 $ 1,132,085
============ ============
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-2
<PAGE> 32
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Sales (Note 10) $ 10,813,447 $ 3,327,777
Less price protection costs (Note 11) -- 205,500
------------ ------------
Net sales 10,813,447 3,122,277
Costs and expenses
Cost of goods sold 7,620,465 2,798,344
Discontinued model costs (Note 12) 419,960 1,130,295
Marketing 2,803,361 1,064,094
General and administrative 2,567,782 2,650,900
Research and development 1,061,885 683,732
Warehouse 1,005,901 541,164
------------ ------------
Total costs and expenses 15,479,354 8,868,529
------------ ------------
Operating loss (4,665,907) (5,746,252)
Other income (expense)
Gain on sale of assets (Note 3) -- 141,527
Sale of technology license (Note 3) -- 700,000
Interest expense (227,841) (140,447)
Other 59,508 (13,670)
------------ ------------
Loss before reorganization item and extraordinary item $ (4,834,240) $ (5,058,842)
Reorganization item
Professional fees -- (42,300)
------------ ------------
Loss before extraordinary item (4,834,240) (5,101,142)
Extraordinary item
Forgiveness of debt (Note 8(d)) -- 1,387,842
------------ ------------
Net loss $ (4,834,240) $ (3,713,300)
============ ============
Before extraordinary item $ (0.35) $ (0.33)
Extraordinary item -- 0.09
------------ ------------
Net loss per share $ (0.35) $ (0.24)
============ ============
Weighted average common
shares outstanding 13,720,414 15,233,523
============ ============
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-3
<PAGE> 33
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock
------------------ -------------------- Paid In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity(Deficit)
------- -------- ---------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 -- -- 12,486,273 $12,486 $25,679,900 $(22,349,683) $ 3,342,703
Vendors/employees exercised
stock options (Note 9(a)) -- -- 90,833 91 15,065 -- 15,156
Stock options issued to Board
of Directors members (Note 9(a)) -- -- -- -- 48,000 -- 48,000
Stock options issued to
related party (Note 9(a)) -- -- -- -- 50,000 -- 50,000
Shares of common stock issued
to manufacturer (Note 9(c)) -- -- 1,371,966 1,372 1,953,680 --
1,955,052
Net loss -- -- -- -- -- (4,834,240) (4,834,240)
------- -------- ---------- ------- ----------- ------------ -----------
Balance, December 31, 1996 -- -- 13,949,072 $13,949 $27,746,645 $(27,183,923) $ 576,671
Preferred stock issued
to GSS (Note 9(c)) 500,000 500,000 -- -- -- -- 500,000
Stock issued to
Franklin (Note 9(c)) -- -- 2,000,000 2,000 148,000 -- 150,000
Stock issued to
president (Note 9(c)) -- -- 62,500 63 2,437 -- 2,500
Net loss -- -- -- -- -- (3,713,300) (3,713,300)
------- -------- ---------- ------- ----------- ------------ -----------
Balance, December 31, 1997 500,000 $500,000 16,011,572 $16,012 $27,897,082 $(30,897,223) $(2,484,129)
======= ======== ========== ======= =========== ============ ===========
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-4
<PAGE> 34
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,834,240) $(3,713,300)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 832,415 741,498
Compensatory stock options 48,000 --
Gain on sale of assets -- (141,527)
Gain on forgiveness of debt -- (1,387,842)
Provision for price protection -- 205,500
Write-off of tooling related to discontinued models -- 87,406
Write-off of deferred costs related to discontinued models 419,960 214,676
Writedown of inventory related to discontinued models 150,000 828,213
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash (150,000) 150,000
Decrease in receivables 3,260,987 1,448,401
Decrease in inventory 980,613 632,889
Decrease in prepaid expenses 37,386 90,995
(Increase) decrease in other assets (155,918) 98,613
Increase (decrease) in pre-petition accounts payable 2,394,383 (1,868,091)
Increase in post-petition accounts payable -- 63,518
Increase (decrease) in pre-petition accrued expenses (747,458) 80,156
Increase in post-petition accrued expenses -- 138,320
----------- -----------
Net cash provided by (used in) operating activities 2,236,128 (2,330,575)
----------- -----------
Cash flows from investing activities:
Capital expenditures (259,569) (165,970)
Proceeds from the sale of product line to Franklin -- 450,000
Proceeds from the sale of property and equipment -- 9,677
Expenditures for patents and technology rights (100,000) --
Expenditures for deferred costs (494,509) (198,938)
----------- -----------
Net cash provided by (used in) investing activities (854,078) 94,769
----------- -----------
Cash flows from financing activities:
Payments on loan payable (3,265,439) --
Proceeds from the exercise of stock options and warrants 15,156 --
Proceeds from pre-petition note payable -- 1,708,750
Proceeds from post-petition loan payable -- 185,000
Proceeds from sale of common stock -- 150,000
----------- -----------
Net cash provided by (used in) financing activities (3,250,283) 2,043,750
----------- -----------
Net decrease in cash and cash equivalents (1,868,233) (192,056)
----------- -----------
Cash and cash equivalents at the beginning of the year 2,094,848 226,615
----------- -----------
Cash and cash equivalents at the end of the year $ 226,615 $ 34,559
=========== ===========
</TABLE>
See summary of accounting policies and notes to financial statements.
F-5
<PAGE> 35
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES
On September 22, 1997, the Company filed a petition for relief with the
United States Bankruptcy Court, Central District of California, under the
provisions of Chapter 11 of the Bankruptcy Code. The Company is continuing to
operate as a "Debtor-In-Possession" under such code (See Note 2).
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of product.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORY
The inventory balance shown at December 31, 1997 consisted of $94,231 of
finished goods, and $119,486 of parts and collateral materials. The inventory
balance at December 31, 1996 consisted of $1,468,391 of finished goods, and
$362,826 of parts and collateral materials. Inventory is valued at the lower of
cost or market, on a first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on a
straight-line basis using estimated useful lives which range from 2-7 years.
PATENTS AND TECHNOLOGY RIGHTS
Patents are stated at cost less amortization, which is provided on a
straight-line basis over 15 years. Technology rights are stated at cost less
amortization, which is provided on a straight-line basis over 3 years. Patents
and technology rights are expensed when management believes they provide no
future benefit.
DEFERRED COSTS
Deferred costs include capitalized product development, product
improvement, and user manual design and development costs, less amortization,
which is provided on a straight-line basis over 2-3 years. Such costs are
periodically reviewed each year based upon management's estimates of sales of
the related products. Deferred costs are written off when management believes
they provide no future benefit.
LOSS PER SHARE
On March 31, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128), during 1997. SFAS No. 128
provides a different method of calculating earnings per share than is currently
used in accordance with APB No. 15, "Earnings Per Share." SFAS No. 128 provides
for the calculation of basic and diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the reporting period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. Due to losses ocurring in 1996 and 1997,
dilutive and basic loss per share amounts are same for each year. This
pronouncement is effective for fiscal years and interim periods ending after
December 15, 1997. The Company has adopted this pronouncement and it had no
effect on its loss per share computations.
Loss per share is based on the weighted average number of common shares
outstanding during each period presented. For years ended December 31, 1997 and
1996, outstanding stock options and warrants of 1,386,020 and 2,942,124,
respectively, are not included in the earnings per share calculation since their
effect would be anti-dilutive.
F-6
<PAGE> 36
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME TAXES
The Company utilizes Statement of Financial Accounting Standards No.
109, 'Accounting for Income Taxes' (SFAS No. 109). This standard employs an
asset and liability approach in accounting for income taxes, the objective of
which is to recognize the amount of current and deferred taxes payable or
receivable at the date of the financial statements using the provisions of
enacted tax laws.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses at the date that the financial statements are prepared. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, cash equivalents, restricted cash, accounts
receivable, accounts payable, and loan payable approximate their fair values
because of the short maturity of these instruments.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) establishes guidelines regarding when impairment losses on
long-lived assets, which include plant and equipment, and certain identifiable
intangible assets, should be recognized and how impairment losses should be
measured. Long-lived assets are written off when management believes they
provide no future benefits.
STOCK BASED COMPENSATION
As of January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), which establishes a fair value method of accounting for stock-based
compensation plans. In accordance with SFAS 123, the Company has chosen to
continue to account for employee stock-based compensation utilizing the
intrinsic value method prescribed in APB 25. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the fair market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.
Also, in accordance with SFAS 123, the Company is to make a footnote
disclosure with respect to stock-based employee compensation. The cost of
stock-based employee compensation is measured at the grant date based on the
value of the award and recognized over the service period. The value of the
stock based award is determined using a pricing model whereby compensation cost
is the excess of the fair value of the stock as determined by the model at grant
date or other measurement date over the amount an employee must pay to acquire
the stock. For the years ended December 31, 1996 and 1997, additional
compensation cost as measured pursuant to SFAS 123 for options granted in 1997,
1996, and 1995 was not material. Accordingly, pro forma net loss and net loss
per share is not applicable.
RECLASSIFICATION
Reclassification of certain prior year amounts have been made to conform
to current year classification.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS 129), issued by the FASB is effective
for financial statements ended after December 15, 1997. The new standard
reinstates various securities disclosure requirements previously in effect under
Accounting Principals Board Opinion No. 15, which has been superseded by SFAS
No. 128. The adoption of SFAS No. 129 did not have an impact on the Company's
financial position or results of operations.
F-7
<PAGE> 37
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
does not expect adoption of SFAS 130 to have an impact on its financial position
or results of operations and any effect will be limited to the form and content
of its disclosures.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131), issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS 131 requires that public companies report certain
information about operating segments, products, services and geographical areas
in which they operate and their major customers. The Company does not expect
adoption of SFAS 131 to have any impact on its financial position or results of
operations and any effect will be limited to the form and content of its
disclosures.
F-8
<PAGE> 38
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
Voice Powered Technology International, Inc. (the "Company"), incorporated in
California in June 1985, began active operations in January 1990. The Company
was formed to develop, market, and distribute low-cost voice recognition and
voice activated products on a world-wide basis, both directly and through
licensing agreements. From January 1990 until July 1992, the Company operated as
a development stage enterprise.
The Company's voice-recognition VoiceLogic(TM) Technology (the "Technology")
is fully developed and in commercial use in a variety of consumer oriented
products manufactured for the Company under contract with third parties. The
Technology consists of a combination of rights developed, acquired, and licensed
by the Company for advanced low-cost voice recognition technology called
VoiceLogic, which can operate on penlight or nicad batteries. This Technology
permits utilization of the human voice as a replacement for manual controls,
such as buttons, switches, and dials in activating and controlling everyday
consumer and business products. The Technology can also be licensed for use in a
variety of products with only limited modifications to the application software
for adaptation to the specific product. The core Technology can also be adapted
easily for use in virtually any spoken language in the world, thus enabling it
to be used in virtually any country in the world.
2. PETITION FOR RELIEF UNDER CHAPTER 11 AND BASIS OF PRESENTATION
On September 22, 1997, the Company filed a voluntary petition for relief with
the United States Bankruptcy Court, Central District of California, under the
provisions of Chapter 11 of the Bankruptcy Code. Under Chapter 11, certain
claims against the Company in existence prior to the filing of the petition for
relief are stayed while the Company continues business operations as a
"Debtor-In-Possession." These claims are reflected in the December 31, 1997
balance sheet as "liabilities subject to compromise." Additional claims
(liabilities subject to compromise) may arise subsequent to the filing date
resulting from rejection of executory contracts, including leases, and from the
determination by the court (or agreed to by parties in interest) of allowed
claims for contingencies and other disputed amounts. Claims collateralized
against the Company's assets ("collateralized claims") are also stayed, although
the holders of such claims have the right to move the court for relief from the
stay. Collateralized claims are collateralized primarily by liens on the
Company's assets.
The financial statements have been prepared by the Company in accordance with
Statement of Position 90-7: Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code. The Company incurred a loss of $3,713,300 for the
year ended December 31, 1997, and has an accumulated deficit of $1,984,129 and
has minimal working capital at December 31, 1997. Because of these and other
factors, the Company is in reorganization under the federal bankruptcy laws in
the United States Bankruptcy Court. These matters raise substantial doubt about
the ability of the Company to continue as a going concern. The financial
statements do not include any adjustments to the financial statements that may
be necessary should the Company be unable to continue as a going concern.
F-9
<PAGE> 39
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
On January 21, 1998, the Company, in conjunction with Franklin Electronic
Publishers, Inc. ("Franklin"), the Company's largest secured creditor (Note 3),
filed a combined Amended Disclosure Statement and Plan of Reorganization (the
"Plan") with the Bankruptcy Court. The Plan includes a significant reduction of
the Company's pre-petition obligations, in addition to Franklin waiving their
pre-petition secured claim in exchange for an 80% interest in the equity of the
Company. This Disclosure Statement aspect of the Plan has been approved as to
form by the Bankruptcy Court, and has been submitted to all interested parties
for approval. On March 16, 1998, the Company filed a motion with the Bankruptcy
Court for confirmation of the Plan and a hearing to grant such motion is
scheduled for April 23, 1998. Until final confirmation by the Bankruptcy Court,
no assurance can be given that the plan will be completed and implemented.
Success of the Company after confirmation of the Plan, if confirmed, is
dependent, among other things, on reaching a satisfactory level of profitability
and generating sufficient cash flows to meet ongoing obligations. If and when
the Plan is confirmed, the Company will seek to obtain adequate working capital
resources, either through internally generated cash flow or external sources, in
order to reintroduce its products to major domestic retail and catalogue
accounts, resume research and development activities for new products and
improvements to its Technology, dedicate additional resources to the development
of licensing opportunities for its Technology, and explore further improvements
to its PC compatible IQ-VOICE Organizers inclusive of improvements to its
PCLink software. No assurance can be given that the Company will be able to
obtain such working capital, achieve such level of profitability, and continue
as a going concern. Further, no assurance can be given that Franklin will
continue to participate in the Plan. Further, upon confirmation of the Plan the
Company will become an 80% controlled subsidiary of Franklin, and therefore
subject to Franklin's direction and discretion regarding future business
activities. Should Franklin cease its participation, the Company may be forced
to liquidate.
3. PRE-PETITION AGREEMENTS WITH FRANKLIN ELECTRONIC PUBLISHERS, INC.
In May 1997, the Company consummated a transaction involving two agreements
with Franklin. The first agreement was a Purchase and Loan Agreement in which
the two companies entered into the following transactions: 1) The Company
transferred and sold to Franklin for $450,000 in cash its inventory, rights to
work in process, manufacturing assets, marketing assets, and software and
hardware design assets for the Company's IQ-VOICE(TM) Organizer Models 5150 and
5160 (IQ-VOICE Pocket Organizers); 2) The Company sold to Franklin for $150,000
in cash 2,000,000 shares of the Company's common stock, par value $.001 per
share, representing the approximate market price of the Company's common stock
at the time of the transaction; and 3) Franklin loaned the Company cash equal to
$1,200,000, in addition to $500,000 plus accrued interest previously loaned to
the Company in the first quarter of 1997, and restructured the previous payment
terms into a new $1,708,750 promissory note. The new note is collateralized by
the assets of the Company, and carries interest at a rate of 10% per year. The
interest is payable monthly, with principal payments of $400,000 due on April 30
of each year commencing April 30, 1998 and ending April 30, 2001, with the final
installment in the amount necessary to repay the full balance of the loan. The
second agreement was a Technology Transfer Agreement in which the two companies
entered into the following transactions: 1) The Company granted to Franklin a
non-exclusive perpetual license for technology rights evidenced by the Company's
patent related to operation of Voice Organizer products as well as other
technology and software developed by the Company related to or used in the Model
5150 and 5160 for a non-refundable advance royalty of $700,000; and 2) the
Company assigned the rights to VoiceLogic(TM) Technology to Franklin, and
Franklin granted back to the Company a non-exclusive perpetual license of the
VoiceLogic Technology, including the right to sublicense, for the development,
manufacture, sale and distribution of Voice Organizer products with recording
times in excess of four minutes and any other electronic products that are not
Voice Organizers, subject to the Company remaining obligated to pay royalties to
Franklin at the same rates for which the Company was obligated to the inventor
of the VoiceLogic Technology prior to its assignment to Franklin. As a result of
the completion of these transactions, the Company recognized $141,527 as a gain
on the sale of assets, and $700,000 as income from the sale of the technology
license.
The Plan also provides for Franklin to convert its $1,708,750 pre-petition
secured loan to the Company into an eighty percent (80%) interest in the equity
of the Company, after conversion of the preferred stock, through the issuance by
the Company of additional shares of the Company's common stock.. As such, the
promissory note is included in liabilities subject to compromise (Note 7).
See post-petition loan agreement with Franklin at Note 6.
F-10
<PAGE> 40
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. ACCOUNTS RECEIVABLE
In August 1996, the Company entered into a $3,000,000 accounts receivable
transfer and purchase agreement with a financial institution. The agreement
expired during 1997, and on December 30, 1997 the Company made a final payment
to the financial institution with which the Company re-purchased its previously
transferred outstanding receivables, extinguishing all potential obligations to
the institution, in exchange for release of the security interest held by this
institution on the assets of the Company.
Under the terms of the agreement, the Company could sell certain accounts
receivable to the financial institution for an initial payment from the
institution of 65% of the net amount of the related invoices. The Company paid a
fixed discount of 1.25% of the net amount upon sale of the invoice, and a
variable discount of a base rate maintained by the bank plus 2% per annum (10.5%
at December 30, 1997) on the initial payment until the related invoices were
paid by the customer. Further, the Company was required to maintain a reserve
and a restricted cash deposit with the financial institution to be used as a
collateral account for a cumulative amount that varied from zero to $750,000
($300,000 reserve and $150,000 cash collateral at December 31, 1996), depending
on the amount of outstanding uncollected accounts sold to the financial
institution.
At December 31, 1996, the Company had $3,367,772 in accounts receivable which
had been sold to the financial institution, 65% of which was used to establish
the $300,000 reserve and fund the initial payment of $1,889,052 which had been
received from the financial institution. The December 31, 1996 balance was the
largest amount of outstanding receivables sold under the agreement during 1996
or 1997. The average rate of interest under this agreement was 21.9% in 1996 and
11% in 1997.
5. DEFERRED COSTS
Deferred costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ---------
<S> <C> <C>
Product improvement costs $ 430,165 $ 117,487
Product development costs 476,798 271,869
User manual design and development costs 145,809 --
---------- ---------
1,052,772 389,356
Less accumulated amortization 432,023 140,995
---------- ---------
$ 620,749 $ 248,361
========== =========
</TABLE>
6. LOAN PAYABLE
As of September 22, 1997, with letter amendments dated October 7, 1997 and
March 2, 1998, the Company entered into a revolving $400,000 Loan and Security
Agreement with Franklin. The loan is due and payable the earliest of (a) May 15,
1998; (b) the effective date of an order confirming a plan of reorganization of
the Company; or (c) at the option of Lender, immediately and without notice upon
the occurrence or during the continuation of an Event of Default as defined in
the agreement. The agreement is collateralized by all of the assets of the
Company. Borrowings under the agreement are permitted up to 75% of accounts
receivable and 50% of open customer purchase orders held by the Company.
Accounts receivable and customer purchase orders to be borrowed against must be
approved by Franklin for eligibility. The agreement carries an interest rate of
12% per annum on the average daily balance. The agreement, as amended, also
provides for Franklin to guarantee payment to the Company's suppliers for
shipments pursuant to purchase orders, which have been approved by Franklin, for
the manufacture of products. The amounts of such guarantees are deducted from
the amount otherwise borrowable based on approved accounts receivable and open
customer purchase orders. The December 31, 1997 balance of $185,000 was the
highest balance during 1997, and said amount was in excess of the borrowings
allowed under the terms of the agreement. Franklin is aware of this occurrence,
but has not given the Company any notice of default.
F-11
<PAGE> 41
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
Accounts payable $ 585,048
Accrued expenses 935,578
Note payable to Franklin (Note 3) 1,708,750
---------------
$ 3,229,376
===============
</TABLE>
8. COMMITMENTS
(a) As of December 31, 1997, the Company has one operating lease that
requires future minimum rental payments with initial or remaining terms in
excess of one year:
<TABLE>
<CAPTION>
OPERATING
LEASE
---------
<S> <C>
1998 $ 51,000
1999 51,000
2000 12,750
---------
Total $ 114,750
=========
</TABLE>
The operating lease pertains to a lease for the Company's office facilities.
The lease expires March 31, 2000, but contains provisions for cancellation by
the Company, at no penalty to the Company at any time after June 30, 1998 with
45 day written notice. The cancellation is not included in the above schedule.
The Company also has a lease on certain warehouse facilities which is renewable
on a month-to-month basis. Rent expense was $264,000 and $162,000 for the years
ended December 31, 1996 and 1997.
(b) In February 1996, the Company entered into an agreement with a related
party ("the inventor"), inventor of an integral part of the voice recognition
technology used by the Company, which resulted in the Company obtaining
unrestricted exclusive world wide ownership rights to the technology subject to
ongoing royalties. As a result of the agreement, the Company granted stock
options to the inventor at an exercise price per share which was cumulatively
$50,000 lower than market value (Note 9(a)), and paid $100,000 in cash to a
company in which the inventor is a 31% owner. Under the agreement, the Company
was obligated to pay royalties to the inventor equal to 1) $.50 per unit for
each unit of any product (other than computer chips) sold by the Company which
contains the technology; 2) 5% of net proceeds from sales of computer chips
which contain the technology, and 3) 15% of licensing revenues (excluding
licensing for computer chip only sales) received by the Company as a result of
licensing agreements relating to the technology. The foregoing royalties are
subject to a minimum of $60,000 per year, payable quarterly.
In May 1997, the agreement with the inventor was assigned to Franklin under
the terms of a Technology Transfer Agreement (Note 3). However, with respect to
the annual minimum royalty due to the inventor by Franklin, the Company remains
obligated to Franklin for the $60,000 per year less royalties due and payable by
Franklin to the inventor. Royalty expense incurred in 1996 and 1997 amounted to
$130,400 and $60,000, respectively.
F-12
<PAGE> 42
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(c) Also in May 1997, the Company entered into three agreements with Edward
M. Krakauer establishing the terms and conditions under which Mr. Krakauer
resigned as the Company's president and CEO. Under the first agreement, a
Termination Agreement, Mr. Krakauer's employment agreement was terminated and a
negotiated payment plan was established for accrued salaries of $52,000 owed to
the date of termination plus a discounted balance of the terminated employment
agreement of $190,000. At the time of the Company's Chapter 11 bankruptcy
filing, the Company defaulted under the terms of the Termination Agreement, thus
causing the discounted balance of the terminated employment agreement to revert
back to the full balance due of $380,000. Under the terms of the second
agreement, a Consulting Agreement, Mr. Krakauer would serve the Company as a
part-time consultant through June 30, 1998, at an annual rate of $60,000 per
year. Under the third agreement, Mr. Krakauer was granted 75,000 stock options
at an exercise price of $.008 per share (which was 20% of the fair market value
per share at the time of the grant in accordance with previous options granted
by the Company for non-employee directors)(Note 9(a)). Under the agreements, Mr.
Krakauer remained the Company's chairman of the board of directors. Payments
applicable to the foregoing agreements were to be made at various intervals
through June 30, 1998, and $31,000 in such payments had been made prior to the
commencement of Company's Bankruptcy Proceedings. The remaining balances due
under these agreements are included as pre-petition liabilities and will be
resolved in accordance with the Bankruptcy Proceedings (Note 7).
(d) Further in May 1997, the Company entered into agreements with Flextronics
(Malaysia) SDN. BHD. ("Flextronics") and GSS/Array Technology, Inc. ("GSS"), the
prior contract manufacturers of the Company's products, relating to the
resolution of outstanding liabilities and commitments. The Company entered into
a Settlement Agreement with Flextronics under which the Company made a cash
payment and assigned the proceeds due pursuant to a licensing agreement with
Kong Wah Video for a voice operated television remote control device to
Flextronics as full and final settlement for all outstanding liabilities and
commitments other than approximately $260,000 in inventory which had already
been manufactured by Flextronics. The Company committed to purchase such
inventory prior to June 30, 1997, but has only purchased $185,000 as of yet. The
Company also entered into a Discounted Payment and Adequate Assurance of
Performance Agreement with GSS under which the Company made a cash payment and
issued 500,000 shares of non-voting, non-cumulative, convertible preferred stock
(Note 9(c), with a $0.06 per share mandatory dividend payable annually in cash
or common stock at the option of the Company on the anniversary date of
issuance, as full and final settlement of outstanding liabilities. The preferred
stock carries a $1.00 per share liquidation preference and each share is
convertible into four (4) shares of the Company's common stock. Further, at the
option of GSS, for a one year period the Company will agree to either appoint a
representative of GSS to the Board of Directors of the Company or to allow a
representative to attend Board of Directors meetings as a non-voting observer.
Lastly, in May 1997, the Company entered into agreements with many of its other
trade creditors in which the trade creditors agreed to accept discounted lump
sum payments in full consideration of current obligations of the Company. As a
result of these agreements, the Company recognized a gain from forgiveness of
debt of $1,387,842.
(e) As of December 31, 1997, The Company had an employment agreement with one
of its officers which expired in February 1998. In February 1998, the Company
entered into employment agreements with this officer as well as with another
officer. These agreements expire December 31, 1998. The minimum aggregate
obligation pursuant to these agreements in 1998 is $250,000.
(f) On August 26, 1997, the Company was served with a civil action initiated
by Everen Securities Inc. and filed in the United states District Court,
Northern District of Illinois, asserting a claim against the Company in the
amount of $435,000. Everen Securities Inc. had been retained by the Company in
May 1996 to assist the Company in seeking out strategic alternatives, inclusive
of potential financing and merger candidates. The Company terminated its
agreement with Everen in February 1997. The suit asserted a claim against the
Company of $435,000 for fees allegedly due as a result of the aforementioned May
1997 Franklin transaction. Although the Company disputes this claim, it did not
have adequate cash resources to defend this suit. In conjunction with the
Bankruptcy Proceedings, the Company has entered into an agreement with Everen in
which the Company agreed not to object to an unsecured claim by Everen in the
amount of $300,000 which is included as pre-petition liabilities, and will be
resolved in accordance with the Bankruptcy Proceedings.
F-13
<PAGE> 43
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
In addition, the Company has been sued by several trade creditors for
balances due and owing such trade creditors prior to the commencement of the
Bankruptcy Proceedings. All of these actions have been stayed as a result of the
Bankruptcy Proceedings, and will be settled in accordance with the provisions of
the Plan if and when the Plan is successfully completed.
9. CAPITAL STOCK
(a) Stock options
The Company's 1992 Stock Option Plan (the "1992 Plan") provides for the
granting of non statutory stock options or incentive stock options to employees
to purchase up to an aggregate of 700,000 shares of common stock, subject to
anti-dilution provisions. The Company's 1994 Stock Option Plan (the "1994 Plan")
provides for the granting of non statutory stock options or incentive stock
options to employees to purchase up to an aggregate of 700,000 shares of common
stock, subject to anti-dilution provisions. The option price per share for non
statutory stock options granted under the 1992 Plan must be at least 85% of the
fair market value of the common stock on the date any such options are granted
or 100% for incentive stock options, except that in the case of a stockholder
owning more than 10% of the combined voting power of all classes of the
outstanding stock of the Company, the option price for any incentive stock
options shall be at least 110% of the fair market value on the date of grant.
Outstanding 1992 Plan options vest and are exercisable over a three year period
or less from the date of grant, as determined by the Board of Directors.
Outstanding 1994 Plan options vest over time periods from the date of grant, as
determined by the Board of Directors. Pursuant to the terms of the Plan of
Reorganization, all options unexercised as of the Effective Date of the Plan of
Reorganization will be canceled.
In June 1996, the Company granted 56,076 compensatory stock options to
Directors of the Company at an exercise price of $.27, which were below fair
market value. The options vest and are exercisable over a 1 year period. In
accordance with Accounting Principles Board Opinion No. 25, the Company has
recorded non-cash stock option compensation expense with a corresponding credit
to additional paid-in capital in the amount of 48,000 in 1996.
During 1996, 83,333 compensatory stock options were exercised by a former
employee at $.03 per share for the Company's common stock. In addition, vendors
exercised 7,500 stock options at $1.69 per share for the Company's common stock.
In the February 1996, the Company entered into an agreement with a related
party, the inventor of an integral part of the voice recognition technology used
by the Company, which resulted in the Company obtaining unrestricted exclusive
world wide ownership rights to the technology subject to ongoing royalties. In
accordance with this agreement, the Company granted stock options which were
cumulatively $50,000 lower than market value to the related party (Note 8(b)).
Under the terms of a May 1997 agreement with Edward M. Krakauer, the Chairman
of the Company's Board of Directors, the Company granted 75,000 stock options to
Mr. Krakauer at an exercise price of $.008 per share (which was 20% of the fair
market value per share at the time of the grant in accordance with previous
options granted by the Company for non-employee directors) (Note 8(c)).
F-14
<PAGE> 44
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The following table sets forth additional information with respect to common
stock options:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
----------- ----------------
<S> <C> <C>
Balance at January 1, 1996 1,843,861 $3.90
Options exercised (90,833) 1.78
Options granted 446,452 .87
Options canceled (356,173) 2.38
----------
Granted and outstanding at December 31, 1996 1,843,307 $3.78
Options granted 910,000 0.24
Options canceled (1,367,287) 2.27
----------
Granted and outstanding at December 31, 1997 1,386,020 $0.76
==========
Exercisable at December 31, 1997 1,013,528 $0.80
==========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$0.01 - $0.55 967,697 9.5 years $0.23 595,205 $0.28
$1.50 - $1.68 258,827 7.5 years $1.56 258,827 $1.56
$3.00 - $4.50 159,496 6.0 years $3.48 159,496 $3.48
------------- ---------- --------- ----- --------- -----
$0.01 - $4.50 1,386,020 8.0 years $0.76 1,013,528 $0.80
------------- --------- --------- ----- --------- -----
</TABLE>
(b) Warrants
With respect to warrants, the Company had a balance of 1,098,817 outstanding
and exercisable at December 31, 1996 with a weighted average exercise price of
$6.38. All of the warrants expired during 1997.
(c) Stock issuance
In February 1996, the Company executed an agreement with its prior contract
manufacturer which established the terms and conditions pursuant to which the
Company wound down its affairs with this manufacturer. The terms of this
agreement included the issuance to the manufacturer of 1,371,966 shares of the
Company's common stock at market value, valued at $1,955,052, which amount was
applied to the Company's outstanding debt to the manufacturer.
Included in a May 1997 agreement with Franklin (Note 3), the Company sold to
Franklin for $150,000 in cash 2,000,000 shares of the Company's common stock,
par value $.001 per share, representing the approximate market price of the
Company's common stock at the time of the transaction.
Also in May 1997, the Company issued to its president 62,500 shares of the
Company's common stock at market value, valued at $2,500, which was applied to
accrued salaries due to the president.
Finally in May 1997, the Company entered into an agreement with GSS, a
manufacturer of the Company's products (Note 8(d)), under which the Company paid
cash and issued 500,000 shares of non-voting, non-cumulative, convertible
preferred stock, with a $0.06 per share mandatory dividend payable annually in
cash or common stock at the option of the Company on the anniversary date of
issuance, as full and final settlement of outstanding liabilities. The preferred
stock has a $1.00 per share liquidation preference and each share is convertible
into four (4) shares of the Company's common stock. Pursuant to the Plan of
Reorganization, the 500,000 shares of outstanding preferred stock will be
converted into 2,000,000 shares of the Company's common stock.
F-15
<PAGE> 45
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
10. MAJOR CUSTOMERS AND INTERNATIONAL SALES
In 1996, the Company had two customers whose purchases, totaling $3,100,000,
each exceeded 10% of the Company's net sales. During 1996, approximately 15% of
the Company's net sales were international sales, primarily in Europe.
In 1997, the Company had one customer whose purchases, totaling $418,000,
exceeded 10% of the Company's net sales. During 1997, approximately 15% of the
Company's net sales were international sales, again primarily in Europe.
11. PRICE PROTECTION
During the first three quarters of 1997, the Company instituted programs to
reduce the retail price of two of its older product lines. Accordingly,
established retail accounts were issued credits for on-hand inventory equal to
the difference between the wholesale price at which they had purchased the
products and their new wholesale price, which was based on the reduced retail
price. The total cost to the Company for this 1997 program was $206,000.
12. DISCONTINUED MODEL COSTS
As of December 31, 1996, the Company decided to discontinue future production
of its IQ-VOICE Tell-It Phone as well as write off costs relating to its
Diary/Organizer product, previously capitalized. The Diary/Organizer was
designed for girls between the ages of seven to thirteen, and featured games and
activities which utilized the Company's VoiceLogic technology. Due to the high
marketing and start-up manufacturing costs associated with the introduction of
this product, the Company, due to the limitation of cash resources, was unable
to introduce this product and did not believe that sufficient cash resources
would be available. As a result, at December 31, 1996, the Company wrote off
$419,960, which was the book value of product development costs related to the
discontinued products.
As of December 31, 1997, the Company decided to discontinue future production
of its IQ-VOICE Organizer/Pagers, its low cost line of IQ-VOICE Organizers, and
its original battery operated IQ-VOICE Organizer. As a result, the Company wrote
down the inventory value of the related finished goods by $828,213 in accordance
with the lower of cost or market methodology. Also, the Company wrote off
$302,082, which was the book value of tooling and product development costs
related to the discontinued products. As such, the total cost charged to
operations in 1997 related to discontinued products was $1,130,295.
13. SUPPLEMENTAL CASH FLOW INFORMATION
During the years ended December 31, 1996 and 1997, the Company paid $228,000
and $140,000 in interest expense, and $800 in minimum state income taxes for
each year.
Supplemental non-cash financing and investing activities were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1996 1997
---------- --------
<S> <C> <C>
Issuance of compensatory stock options (Note 9(a)) $ 48,000 $ --
Issuance of compensatory stock options to related party (Notes 8(b) and 9(a)) 50,000 --
Issuance of common stock to vendor (Note 9(c)) 1,955,052 --
Issuance of common stock to president (Note 9(c)) -- 2,500
Issuance of preferred stock to vendor (Note 9(c)) -- 500,000
</TABLE>
F-16
<PAGE> 46
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
14. INCOME TAXES
Unused net operating losses of approximately $27,000,000 are available as of
December 31, 1997 to offset future years' federal taxable income, and expire
through 2012. Unused California net operating losses of approximately
$12,000,000 are available as of December 31, 1997 to offset future years'
California taxable income and expire through 2002. Under federal tax law IRC
Section 382, certain significant changes in ownership of the Company may
restrict future utilization of these carryforwards. In the event the loss
carryforwards are fully utilizable, the Company has a deferred tax asset of
approximately $10,000,000 as of December 31, 1997. In addition, the Company has
research and development tax credits of approximately $250,000 and $123,000 for
Federal and California tax purposes respectively. They will begin to expire in
2007. The Company has a valuation allowance equal to, and which offsets, the net
deferred tax asset as the Company cannot conclude that it is more likely than
not the net deferred tax asset will be realized.
15. RELATED PARTY TRANSACTIONS
During 1996 and 1997 the Company paid royalties of $98,000 and $82,000,
respectively, to a director of the Company. Further, during 1996 the Company
granted stock options which were cumulatively $50,000 lower than market value to
the same director (Notes 8(b) and 9(a)).
Also during 1997, the Company paid $31,000 to its former president/CEO
relating to agreements entered into in May 1997 (Note 8(c)).
Finally in 1997, the Company issued to its current president 62,500 shares of
the Company's common stock at market value, valued at $2,500, which was applied
to accrued salaries due to its president (Note 9(c)).
F-17
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<S> <C> <C>
* 3(a) Articles of Incorporation, as amended
* 3(b) Bylaws, as amended
* 4(a) Form of Warrant Agreement with U.S. Stock Transfer Corp.
* 4(b) Form of Representative's Unit Purchase Option
* 4(c) Specimen of Common Stock Certificate of Registrant
* 4(d) Form of Warrant Certificate
* 10(a) 1992 Stock Option Plan
*** 10(aa) 1994 Stock Option Plan
* 10(b) Employment Agreement with Michael Bissonnette
* 10(c) Employment Agreement with Edward M. Krakauer
* 10(d) Employment Agreement with Jerry Gutterman
**** 10(dd) 1994 Consulting Agreement between Registrant and Jerry Gutterman
* 10(e) Non-Qualified Stock Option Agreement with Edward M. Krakauer
* 10(f) Non-Qualified Stock Option Agreement with Jerry Gutterman
* 10(g) Agreement and Stock Option Agreement with Jerry Gutterman
* 10(h) Leases for Canoga Park, California
* 10(hh) Additional Leases for Canoga Park, California
*** 10(hhh) Additional Leases for Canoga Park and Chatsworth, California
**** 10(hhhh) Lease for Executive Offices, Sherman Oaks, California
* 10(i) License Agreement with ESSO Development, Inc.
* 10(j) Manufacturing and Warrant Agreements with Flextronics (Malaysia) SDN, BHD
* 10(l) Agreements with Regal Communications Corporation
**+ 10(m) Stock Option Agreement between Michael Bissonnette and Edward Krakauer
**+ 10(n) Escrow Agreement among Michael Bissonnette, Edward Krakauer and
U.S. Stock Transfer Corporation
**+ 10(o) Registration Rights Agreement between Registrant and Edward Krakauer
**+ 10(p) 1993 Employment Agreement between Registrant and Edward Krakauer
**+ 10(pp) Indemnity Agreement between Registrant and Edward Krakauer
(1)+ 10(ppp) Amendment to Employment Agreement with Edward M. Krakauer
+ 10(pppp) Amendment to Employment Agreement with Edward M. Krakauer
+ 10(ppppp) Termination Agreement with Edward M. Krakauer
+ 10(pppppp)Consulting Agreement with Edward M. Krakauer
**+ 10(q) Amendment to Employment Agreement between Michael Bissonnette and Registrant
*** + 10(qq) Indemnity Agreement between Registrant and Michael Bissonnette
***+ 10(qqq) 1994 Consulting Agreement between Registrant and Michael Bissonnette
***+ 10(r) Indemnity Agreement between Registrant and Jerry Gutterman
***+ 10(s) Employment Agreement between Registrant and Mitchell Rubin
***+ 10(ss) Indemnity Agreement between Registrant and Mitchell Rubin
**** 10(sss) Registration Rights Agreement and Amendment thereto between Registrant and Mitchell Rubin
(1)+ 10(ssss) Amendment to Employment Agreement with Mitchell B. Rubin
+ 10(sssss) Amendment to Employment Agreement with Mitchell B. Rubin
10(s.6) Amended Employment Agreement with Mitchell B. Rubin
****+ 10(t) Employment Agreement with Mark L. Frankel
(1)+ 10(tt) Amendment to Employment Agreement with Mark L. Frankel
**** 10(u) Employment Agreement with George H. Fischer
+ 10(uu) Amendment to Employment Agreement with George H. Fischer
***** 10(v) Flextronics Termination Agreement
(2) 10(vv) Settlement Agreement with Flextronics
(1)+ 10(w) Employment Agreement with Kenneth I. DeWitt
(1)+ 10(ww) Amendment to Employment Agreement with Kenneth I. DeWitt
+ 10(www) Amendment to Employment Agreement with Kenneth I. DeWitt
10(w.4) Amended Employment Agreement with Kenneth I. DeWitt
(1) 10(x) Business Cooperation Agreement with Hansol Electronics, Inc.
(2) 10(xx) Termination Agreement with Hansol Electronics, Inc.
(1) 10(y) Assignment Agreement for Technology with Myron Hitchcock
(1) 10(yy) Stock Option Agreement regarding Assignment Agreement for Technology with
Myron Hitchcock
</TABLE>
<PAGE> 48
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<S> <C> <C>
(1) 10(z) Loan Agreement with Manufacturers Bank
(1) 10(zz) Amendment to Loan Agreement with Manufacturers Bank
(2) 10.1 MobileComm Joint Purchase and Marketing Agreement
(2) 10.1.1 MobileComm Settlement Agreement
(2) 10.1.2 MobileComm Amended Settlement Agreement
(2) 10.2 Employment Agreement with Larry Kloman
(2) 10.3 Manufacturing Agreement with GSS/Array
(2) 10.3.1 Agreement for Discounted Payment and Adequate Assurance of Performance
with GSS/Array
(2) 10.4 Loan Agreement with KBK Financial
(2) 10.5 Letter of Intent from Voice It Worldwide, Inc.
(2) 10.5.1 Termination Letter from Voice It Worldwide, Inc.
(2) 10.6 Letter of Intent from Franklin Electronic Publishers, Inc.
(2) 10.6.1 Security Agreement with Franklin Electronic Publishers, Inc.
(2)@ 10.6.2 Purchase and Loan Agreement with Franklin Electronic Publishers, Inc.
(2)@ 10.6.3 Technology Transfer Agreement with Franklin Electronic Publishers, Inc.
10.6.4 Revised Loan and Security Agreement with Franklin Electronic Publishers,
Inc. dated September 22, 1997
10.6.5 Letter Agreement of October 7, 1997 Regarding Post Petition Financing
Agreement and Loan and Security Agreement
10.6.6 Amendment to Loan and Security Agreement with Franklin Electronic
Publishers, Inc. dated September 22, 1997
(2) 10.7 Lease for Executive Offices, Tarzana, California
10.7.1 Amendment Number One to Lease for Executive Officers, Tarzana, California
10.7.2 Amendment Number Two to Lease for Executive Officers, Tarzana, California
10.8 Disclosure Statement and Plan of Reorganization for Voice Powered
Technology International, Inc. dated as of January 21, 1998
21 Subsidiaries: None
(2) 23 Consent of BDO Seidman, LLP
</TABLE>
- ---------------
* Previously filed with, and incorporated herein by reference from,
Registrant's Registration Statement on Form SB-2, File No. 33-50506,
effective October 20, 1993.
** Previously filed with, and incorporated herein by reference from,
Registrant's Form 8-K/A filed with the Commission and dated December 22,
1993.
*** Previously filed with, and incorporated herein by reference from
Registrant's Form 10-KSB for the year ended December 31, 1993.
**** Previously filed with, and incorporated herein by reference from
Registrant's Form 10-KSB for the year ended December 31, 1994.
***** Previously filed with, and incorporated herein by reference from
Registrant's Form 8-K filed with the Commission and dated March 15,
1996.
+ Management contract or compensatory plan or arrangement.
(1) Previously filed with, and incorporated herein by reference from
Registrant's Form 10-KSB for the year ended December 31, 1995.
@ Filed separately with the Securities and Exchange Commission with a
request for confidential treatment.
(2) Previously filed with, and incorporated herin by reference from
Registrant's Form 10-KSB for the year ended December 31, 1996.
<PAGE> 49
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
there and to duly authorized.
VOICE POWER TECHNOLOGY
INTERNATIONAL, INC.
/s/ Mitchell B. Rubin
-----------------------------------
DATE: April 15, 1998 By: Mitchell B. Rubin
President and CEO
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Mitchell B. Rubin
- ------------------------
Mitchell B. Rubin President, CEO, and
Chairman of the Board April 15, 1998
/s/ Kenneth I. DeWitt
- ------------------------
Kenneth I. DeWitt Vice President and Director April 15, 1998
/s/ Myron Hitchcock
- ------------------------
Myron Hitchcock Director April 15, 1998
</TABLE>
<PAGE> 1
EXHIBIT 10(S-6)
EMPLOYMENT AGREEMENT
(Mitchell B. Rubin)
THIS AGREEMENT is entered into on __________________, 1998, between
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC., a California corporation (the
"Company"), and MITCHELL B. RUBIN ("Employee").
Employee and Company, in consideration of the covenants and
agreements hereinafter contained, agree as follows with respect to the
employment by the Company of Employee and Employee's future business activities:
1. Employment; Term of Employment. The Company hereby employs
Employee and Employee hereby accepts such employment upon the terms and
conditions hereinafter set forth, effective as of the "Commencement Date" (as
defined hereafter). Subject to the provisions for earlier termination as
hereinafter provided, Employee's term of employment by the Company pursuant to
this agreement shall commence February 13, 1998 ( the "Commencement Date"), and
shall continue thereafter until December 31,1998.
2. Services to be Rendered by Employee.
(a) On and subject to the terms and provisions hereof,
Employee shall be employed as the Company's President and Chief Executive
Officer, subject to the direction of the Board of Directors or a duly authorized
committee thereof . Subject to the foregoing, Employee's responsibilities shall
include management of all of the Company's activities, and, Employee shall have
such other powers and duties as may be prescribed by the By-laws, the Board of
Directors, or a duly authorized committee thereof, and shall perform such
executive duties as from time to time may be decided upon by the Board of
Directors, or a duly authorized committee thereof, of the
<PAGE> 2
Company. During the term of employment hereunder, Employee's primary employment
location shall be the greater Los Angeles, Orange, and Ventura County areas.
(b) Employee shall devote substantially all his productive time,
energy and ability to the proper and efficient conduct of the Company's business
during the term of this Agreement. Employee shall not directly or indirectly
render any substantial services of a business, commercial, or professional
nature to any person or organization, other than the Company, whether for
compensation or otherwise, without the prior written consent of the Board of
Directors, or a duly authorized committee thereof, of the Company.
3. Compensation.
(a) For the services to be rendered by Employee during his
employment by the Company, the Company shall pay Employee, commencing as of the
Commencement Date, a yearly Base Salary of One Hundred and Fifty Thousand
Dollars ($150,000). The yearly Base Salary shall be payable in equal
installments at such times as other employees are paid but in any case at least
monthly.
(b) The Company shall pay or reimburse Employee for all
expenses normally reimbursed by the Company and reasonably incurred by him in
furtherance of his duties hereunder and authorized by the Company, including,
without limitation, expenses for entertainment, traveling, meals, hotel
accommodations, cellular phone usage, and the like upon submission by him of
vouchers or an itemized list thereof as the Board of Directors may from time to
time adopt and authorize, and as may be required in order to permit such
payments as proper deductions to the Company under the Internal Revenue Code of
1986 and the rules and regulations adopted pursuant thereto now or hereafter in
effect.
-2-
<PAGE> 3
(c) The Company shall pay to Employee an automobile allowance
of $700 per month for all automobile expenses incurred by Employee, including
fuel, repairs, maintenance, insurance, and any other expenses. Employee shall
pay all such expenses directly, and shall not be accountable to the Company
therefor.
(d) Employee and his immediate family (i.e., spouse and
children under 21 years of age) shall be entitled to participate, at the
Company's expense, in the health insurance plan and other benefit plans and
arrangements the Company may have in effect from time to time for its employees
and executives with salaries and responsibilities comparable to Employee, in
accordance with any policies adopted by the Board of Directors of the Company
with regard thereto from time to time.
(e) During the term of his employment hereunder, Employee
shall be entitled to three (3) weeks paid vacation per annum. Use thereof shall
be in accordance with the Company's policies in effect from time to time.
4. Direct Competition. While employed by the Company and thereafter
(subject to the term described below in this paragraph regarding applicability
of the prohibition in this paragraph to periods after termination of
employment), Employee will neither permit his name to be used by, nor engage in
or carry on, directly or indirectly, either for himself or as a member of a
partnership, or as a stockholder (except as a stockholder of less than one
percent (1%) of the issued and outstanding stock of a publicly held
corporation), investor, officer or director of a corporation or as an employee,
agent, associate or consultant of any person, partnership or corporation, any
business in competition with any business carried on by the Company or a parent,
subsidiary, affiliate or successor of the Company, provided that for the period
after termination of employment,
-3-
<PAGE> 4
the provision of this Paragraph 4 shall only apply to the Company's voice
recognition technology, shall continue for a period of one (1) year after
termination of employee's employment hereunder, and shall be limited
geographically to those cities and counties in the United States and outside of
the United States where the Company's voice recognition technology was being
marketed and sold immediately prior to termination of Employee's employment
hereunder.
5. Termination of Employment.
(a) On and subject to the terms and provisions hereof, the
Company shall have the right at its option to terminate the employment of
Employee hereunder by giving written notice thereof to Employee in the event of
any of the following:
(1) Employee has materially breached any material
provision of this Agreement and does not cure such breach within 20 days after
the Company has given notice of such breach (specifying with particularity the
basis for such breach) to Employee, or Employee is convicted of fraud or
embezzlement, or has engaged in material misconduct in connection with his
material duties under this Agreement.
(2) If the Company gives Employee thirty (30) days
advance written notice of termination of employment, such notice not to be given
on or before April 1, 1998.
(3) If Employee dies (in which case except as otherwise
provided herein employment under this Agreement shall automatically terminate
upon such death).
(4) If Employee shall fail to carry out or to perform
the duties required of him because of mental or physical disability for thirty
(30) consecutive days or any thirty (30) days within a sixty (60) day period
during the term hereof, and does not resume his duties prior to the termination
date specified in the Company's written notice of termination by
-4-
<PAGE> 5
reason of such; provided, however, that in no event may any such notice provide
a termination date shorter than thirty (30) days from the date the notice is
delivered to Employee, and provided further, that if Employee's employment
hereunder is terminated because of Employee's mental or physical disability or
death, he or his estate shall be entitled to receive the Severance Compensation,
as hereinafter defined, he would otherwise be entitled to hereunder.
If Employee's employment is terminated by the Company pursuant to
Paragraph 5(a)(2) hereof after April 1, 1998, then Employee shall receive
severance payments equal to twenty five percent (25%) of the annual Base Salary
("Severance Compensation), such payments to be made to Employee in a lump sum
payment on the effective date of such termination.
(b) Except as specifically provided for in this Paragraph 5 or
by applicable law, Employee shall not be entitled to any severance compensation
upon termination of employment with the Company, whether at the Company's or
Employee's option. Except as specifically provided in this Paragraph 5, the
Company may not terminate Employee's employment for any reason.
(c) Employee shall have the right at his option to terminate
his employment hereunder at any time after April 1, 1998 by giving the Company
thirty (30) days advance written notice of such termination.
6. Soliciting Customers; Employees. Employee agrees that he will not
for a period of one (1) year immediately following the termination of his
employment with the Company, either directly or indirectly, make known to any
competing person, firm, or corporation the names or addresses of any of the
customers of the Company, including any prospective customers with whom the
Company or its agents or its representatives have had discussions or other
-5-
<PAGE> 6
communications concerning such persons or entities becoming customers of the
Company, or any other information pertaining to them. Employee also agrees that
following termination of employment hereunder, Employee shall not, directly or
indirectly, solicit any employees of the Company to leave the employ of the
Company for any reason, nor shall Employee assist or participate with, directly
or indirectly, any other person, organization or entity in so doing.
7. Trade Secrets of the Company. During the term of employment under
this Agreement, Employee will have access to and become acquainted with various
trade secrets, consisting of devices, secret inventions, processes, and
compilations of information, records, and specifications, and licensing
arrangements and potential uses and/or applications of the Company's technology,
which are owned by the Company and which are regularly used or to be used in the
operation of the business of the Company. Employee shall not disclose any of the
aforesaid trade secrets, directly or indirectly, or use them in any way, either
during the term of this Agreement or at any time thereafter, except as required
in the course of his employment. All files, records, documents, drawings,
specifications, equipment, and similar items relating to the business of the
Company prepared by Employee or otherwise coming into his possession during the
term of his employment, shall remain the exclusive property of the Company and
shall not be removed under any circumstances from the premises where the work of
the Company is being carried on without the prior written consent of the
Company, or consistent with the Company's normal business practices.
8. Inventions and Patents. Employee agrees that any inventions made
by him during the term of his employment, solely or jointly with others, which
are made with the equipment, supplies, facilities or trade secrets information
of the Company, or which relate at the
-6-
<PAGE> 7
time of conception or reduction to practice of the invention to the business of
the Company or the Company's actual or demonstrably anticipated research or
development, or which result from any work performed by Employee for the
Company, shall belong solely and exclusively to the Company, and Employee
promises to assign such inventions to the Company without additional payment or
consideration. Employee also agrees that the Company shall have the right to
keep such inventions as trade secrets, if the Company chooses. Employee agrees
to assign to the Company Employee's rights in any such inventions where the
Company is required to grant those rights to the United States government or any
agency thereof.
This Agreement does not apply to any inventions which are the
subject of Section 2870 of the California Labor Code.
In order to permit the Company to claim rights to which it may be
entitled, Employee agrees to disclose to the Company in confidence all
inventions which Employee makes arising out of Employee's employment, and all
patent applications filed by Employee within one (1) year after termination of
his employment. The Company agrees to maintain all information and documents
provided by Employee in strict confidence and to return any such information and
documents (including all copies thereof) to Employee within sixty (60) days of
Employee's request therefor which the Company does not obtain ownership of.
Employee shall, at the Company's expense, assist the Company in
obtaining patents on all inventions, designs, improvements, and discoveries
deemed patentable by the Company in the United States and in all foreign
countries, and shall execute all documents and do all things necessary to obtain
letters patent, to vest the company with full and exclusive title thereto, and
to protect the same against infringement by others, all at the Company's
expense.
-7-
<PAGE> 8
9. Confidential Data of Customers of the Company. Employee in the
course of his employment may be handling financial, accounting, statistical, and
personnel data of customers of the Company. All such data is confidential and
shall not be disclosed, directly or indirectly, or used by Employee in any way,
either during the term of this Agreement or at any time thereafter, except as
required in the course of his employment.
10. Severability. Each paragraph and subparagraph of this Agreement
shall be construed and considered separate and severable from the validity and
enforceability of any other provision contained in this Agreement.
11. Assignment. The rights of the Company (but not its obligations)
under this Agreement may, with the reasonable consent of Employee (which may be
withheld if, among other things, Employee's title or the scope or stature of
Employee's responsibilities within the Company would be substantially
diminished), be assigned by the Company to any parent, subsidiary, or successor
of the Company; provided that such parent, subsidiary or successor acknowledges
in writing that it is also bound by the terms and obligations of this Agreement.
Except as provided in the preceding sentence, the Company may not assign all or
any of its rights, duties or obligations hereunder without prior written consent
of Employee. Employee may not assign all or any of his rights, duties or
obligations hereunder without the prior written consent of the Company.
-8-
<PAGE> 9
12. Notices. All notices, requests, demands and other communications
shall be in writing and shall be deemed to have been duly given if delivered or
if mailed by registered mail, postage prepaid:
(a) If to Employee, addressed to him at the address set forth
below his name.
(b) If to the Company, addressed to:
Voice Powered Technology International, Inc.
18425 Burbank Blvd., Suite 506
Tarzana, California 91356
Attention: The Board of Directors
with a copy to:
Ronald J. Grant
Tilles, Webb, Kulla & Grant
433 North Camden Drive, Suite 1010
Beverly Hills, California 90210
or to such other address as any party hereto may request by notice given as
aforesaid to the other parties hereto.
13. Titles and Headings. Titles and headings to paragraphs hereof
are for purposes of reference only and shall in no way limit, define or
otherwise affect the provisions hereof.
14. Governing Law. This Agreement is being executed and delivered
and is intended to be performed in the State of California, and shall be
governed by and construed in accordance with the laws of the State of
California.
15. Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. It shall not be
necessary in making proof of this Agreement
-9-
<PAGE> 10
to produce or account for more than one counterpart. Facsimile signatures shall
be accepted by the parties as valid and binding in lieu of original signatures;
however, if facsimile signatures are presented by any party in lieu of original
signatures, within two (2) business days after execution of the Agreement such
party shall also deliver to counsel for the other party(ies) an original
signature page signed by that party (but failure to do so shall not affect the
validity of this Agreement).
16. Cumulative Rights. Each and all of the various rights, powers
and remedies of the Company in this Agreement shall be considered as cumulative,
with and in addition to any rights, powers or remedies of the Company and no one
of them as exclusive of the others or as exclusive of any other rights, powers
and remedies allowed by law. The exercise or partial exercise of any right,
power or remedy shall neither constitute the election thereof nor the waiver of
any other right, power or remedy.
17. Entire Agreement. This Agreement contains the entire agreement
of the parties hereto with respect to the subject matter hereof and may be
modified or amended only by a written instrument executed by both parties.
18. Good Faith. Each of the parties hereto agrees that he or it
shall act in good faith in all actions taken under this Agreement.
-10-
<PAGE> 11
19. Expenses of Proceedings. In the event that any party hereto
brings any type of proceeding to enforce the terms and conditions of this
Agreement, the prevailing party in such proceeding shall be entitled to recover
from the unsuccessful party all incidental costs and reasonable attorneys' and
paralegals' fees incurred by said prevailing party.
20. Dispute Resolution. Any dispute or disagreement concerning this
Agreement or any term or provision hereof shall be heard and determined by a
reference under and in accordance with the provision of sections 638 to 645.1 or
the California Code of Civil Procedure, and the prevailing party therein shall
be entitled to recover its reasonable attorneys' fees and litigation and court
costs and expenses (including the fees of the referee or temporary judge).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
VOICE POWERED TECHNOLOGY
INTERNATIONAL, INC.
By: /s/ Kenneth I. DeWitt
--------------------------------------
Its: Director
--------------------------------------
/s/ Mitchell B. Rubin
--------------------------------------------
Mitchell B. Rubin
-11-
<PAGE> 1
EXHIBIT 10(W.4)
EMPLOYMENT AGREEMENT
(Kenneth I. DeWitt)
THIS AGREEMENT is entered into on __________________, 1998, between
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC., a California corporation (the
"Company"), and KENNETH I. DEWITT ("Employee").
Employee and Company, in consideration of the covenants and
agreements hereinafter contained, agree as follows with respect to the
employment by the Company of Employee and Employee's future business activities:
1. Employment; Term of Employment. The Company hereby employs
Employee and Employee hereby accepts such employment upon the terms and
conditions hereinafter set forth, effective as of the "Commencement Date" (as
defined hereafter). Subject to the provisions for earlier termination as
hereinafter provided, Employee's term of employment by the Company pursuant to
this agreement shall commence February 1, 1998 ( the "Commencement Date"), and
shall continue thereafter until December 31,1998.
2. Services to be Rendered by Employee.
(a) On and subject to the terms and provisions hereof,
Employee shall be employed as the Company's Vice President of Manufacturing and
Development, subject to the direction of the Board of Directors or a duly
authorized committee thereof from time to time, and subject to the authority and
direction of the the President and Chief Executive Officer of the Company.
Subject to the foregoing, Employee's responsibilities shall include management
of all of the Company's manufacturing, development and quality control
activities, and, Employee shall have such other powers and duties as may be
prescribed by the By-laws, the Board of Directors, or a duly
<PAGE> 2
authorized committee thereof, and shall perform such executive duties as from
time to time may be decided upon by the Board of Directors, or a duly authorized
committee thereof or the President of the Company. During the term of employment
hereunder, Employee's primary employment location shall be the greater Los
Angeles, Orange, and Ventura County areas.
(b) Employee shall devote substantially all his productive time,
energy and ability to the proper and efficient conduct of the Company's business
during the term of this Agreement. Employee shall not directly or indirectly
render any substantial services of a business, commercial, or professional
nature to any person or organization, other than the Company, whether for
compensation or otherwise, without the prior written consent of the Board of
Directors, or a duly authorized committee thereof, of the Company.
3. Compensation.
(a) For the services to be rendered by Employee during his
employment by the Company, the Company shall pay Employee, commencing as of the
Commencement Date, a yearly Base Salary of One Hundred Thousand Dollars
($100,000). The yearly Base Salary shall be payable in equal installments at
such times as other employees are paid but in any case at least monthly.
(b) The Company shall pay or reimburse Employee for all
expenses normally reimbursed by the Company and reasonably incurred by him in
furtherance of his duties hereunder and authorized by the Company, including,
without limitation, expenses for entertainment, traveling, meals, hotel
accommodations, cellular phone usage, and the like upon submission by him of
vouchers or an itemized list thereof as the Board of Directors may from time to
time adopt and authorize, and as may be required in order to permit such
payments as proper
-2-
<PAGE> 3
deductions to the Company under the Internal Revenue Code of 1986 and the rules
and regulations adopted pursuant thereto now or hereafter in effect.
(c) The Company shall pay to Employee an automobile allowance
of $500 per month for all automobile expenses incurred by Employee, including
fuel, repairs, maintenance, insurance, and any other expenses. Employee shall
pay all such expenses directly, and shall not be accountable to the Company
therefor.
(d) Employee and his immediate family (i.e., spouse and
children under 21 years of age) shall be entitled to participate, at the
Company's expense, in the health insurance plan and other benefit plans and
arrangements the Company may have in effect from time to time for its employees
and executives with salaries and responsibilities comparable to Employee, in
accordance with any policies adopted by the Board of Directors of the Company
with regard thereto from time to time.
(e) During the term of his employment hereunder, Employee
shall be entitled to two (2) weeks paid vacation per annum. Use thereof shall be
in accordance with the Company's policies in effect from time to time..
4. Direct Competition. While employed by the Company and thereafter
(subject to the term described below in this paragraph regarding applicability
of the prohibition in this paragraph to periods after termination of
employment), Employee will neither permit his name to be used by, nor engage in
or carry on, directly or indirectly, either for himself or as a member of a
partnership, or as a stockholder (except as a stockholder of less than one
percent (1%) of the issued and outstanding stock of a publicly held
corporation), investor, officer or director of a corporation or as an employee,
agent, associate or consultant of any person, partnership or corporation, any
-3-
<PAGE> 4
business in competition with any business carried on by the Company or a parent,
subsidiary, affiliate or successor of the Company, provided that for the period
after termination of employment, the provision of this Paragraph 4 shall only
apply to the Company's voice recognition technology, shall continue for a period
of one (1) year after termination of employee's employment hereunder, and shall
be limited geographically to those cities and counties in the United States and
outside of the United States where the Company's voice recognition technology
was being marketed and sold immediately prior to termination of Employee's
employment hereunder.
5. Termination of Employment.
(a) On and subject to the terms and provisions hereof, the
Company shall have the right at its option to terminate the employment of
Employee hereunder by giving written notice thereof to Employee in the event of
any of the following:
(1) Employee has materially breached any material
provision of this Agreement and does not cure such breach within 20 days after
the Company has given notice of such breach (specifying with particularity the
basis for such breach) to Employee, or Employee is convicted of fraud or
embezzlement, or has engaged in material misconduct in connection with his
material duties under this Agreement.
(2) If the Company gives Employee thirty (30) days
advance written notice of termination of employment, such notice not to be given
on or before April 1, 1998.
(3) If Employee dies (in which case except as otherwise
provided herein employment under this Agreement shall automatically terminate
upon such death).
(4) If Employee shall fail to carry out or to perform
the duties required of him because of mental or physical disability for thirty
(30) consecutive days or any
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<PAGE> 5
thirty (30) days within a sixty (60) day period during the term hereof, and does
not resume his duties prior to the termination date specified in the Company's
written notice of termination by reason of such; provided, however, that in no
event may any such notice provide a termination date shorter than thirty (30)
days from the date the notice is delivered to Employee, and provided further,
that if Employee's employment hereunder is terminated because of Employee's
mental or physical disability or death, he or his estate shall be entitled to
receive the Severance Compensation, as hereinafter defined, he would otherwise
be entitled to hereunder.
If Employee's employment is terminated by the Company pursuant to
Paragraph 5(a)(2) hereof after April 1, 1998, then Employee shall receive
severance payments equal to twenty five percent (25%) of the annual Base Salary
("Severance Compensation"), such payments to be made to Employee in a lump sum
payment on the effective date of such termination.
(b) Except as specifically provided for in this Paragraph 5 or
by applicable law, Employee shall not be entitled to any severance compensation
upon termination of employment with the Company, whether at the Company's or
Employee's option. Except as specifically provided in this Paragraph 5, the
Company may not terminate Employee's employment for any reason.
(c) Employee shall have the right at his option to terminate
his employment hereunder at any time after April 1, 1998 by giving the Company
thirty (30) days advance written notice of such termination.
6. Soliciting Customers; Employees. Employee agrees that he will not
for a period of one (1) year immediately following the termination of his
employment with the Company, either directly or indirectly, make known to any
competing person, firm, or corporation the names
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<PAGE> 6
or addresses of any of the customers of the Company, including any prospective
customers with whom the Company or its agents or its representatives have had
discussions or other communications concerning such persons or entities becoming
customers of the Company, or any other information pertaining to them. Employee
also agrees that following termination of employment hereunder, Employee shall
not, directly or indirectly, solicit any employees of the Company to leave the
employ of the Company for any reason, nor shall Employee assist or participate
with, directly or indirectly, any other person, organization or entity in so
doing.
7. Trade Secrets of the Company. During the term of employment under
this Agreement, Employee will have access to and become acquainted with various
trade secrets, consisting of devices, secret inventions, processes, and
compilations of information, records, and specifications, and licensing
arrangements and potential uses and/or applications of the Company's technology,
which are owned by the Company and which are regularly used or to be used in the
operation of the business of the Company. Employee shall not disclose any of the
aforesaid trade secrets, directly or indirectly, or use them in any way, either
during the term of this Agreement or at any time thereafter, except as required
in the course of his employment. All files, records, documents, drawings,
specifications, equipment, and similar items relating to the business of the
Company prepared by Employee or otherwise coming into his possession during the
term of his employment, shall remain the exclusive property of the Company and
shall not be removed under any circumstances from the premises where the work of
the Company is being carried on without the prior written consent of the
Company, or consistent with the Company's normal business practices.
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<PAGE> 7
8. Inventions and Patents. Employee agrees that any inventions made
by him during the term of his employment, solely or jointly with others, which
are made with the equipment, supplies, facilities or trade secrets information
of the Company, or which relate at the time of conception or reduction to
practice of the invention to the business of the Company or the Company's actual
or demonstrably anticipated research or development, or which result from any
work performed by Employee for the Company, shall belong solely and exclusively
to the Company, and Employee promises to assign such inventions to the Company
without additional payment or consideration. Employee also agrees that the
Company shall have the right to keep such inventions as trade secrets, if the
Company chooses. Employee agrees to assign to the Company Employee's rights in
any such inventions where the Company is required to grant those rights to the
United States government or any agency thereof.
This Agreement does not apply to any inventions which are the
subject of Section 2870 of the California Labor Code.
In order to permit the Company to claim rights to which it may be
entitled, Employee agrees to disclose to the Company in confidence all
inventions which Employee makes arising out of Employee's employment, and all
patent applications filed by Employee within one (1) year after termination of
his employment. The Company agrees to maintain all information and documents
provided by Employee in strict confidence and to return any such information and
documents (including all copies thereof) to Employee within sixty (60) days of
Employee's request therefor which the Company does not obtain ownership of.
Employee shall, at the Company's expense, assist the Company in
obtaining patents on all inventions, designs, improvements, and discoveries
deemed patentable by the Company in
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<PAGE> 8
the United States and in all foreign countries, and shall execute all documents
and do all things necessary to obtain letters patent, to vest the company with
full and exclusive title thereto, and to protect the same against infringement
by others, all at the Company's expense.
9. Confidential Data of Customers of the Company. Employee in the
course of his employment may be handling financial, accounting, statistical, and
personnel data of customers of the Company. All such data is confidential and
shall not be disclosed, directly or indirectly, or used by Employee in any way,
either during the term of this Agreement or at any time thereafter, except as
required in the course of his employment.
10. Severability. Each paragraph and subparagraph of this Agreement
shall be construed and considered separate and severable from the validity and
enforceability of any other provision contained in this Agreement.
11. Assignment. The rights of the Company (but not its obligations)
under this Agreement may, with the reasonable consent of Employee (which may be
withheld if, among other things, Employee's title or the scope or stature of
Employee's responsibilities within the Company would be substantially
diminished), be assigned by the Company to any parent, subsidiary, or successor
of the Company; provided that such parent, subsidiary or successor acknowledges
in writing that it is also bound by the terms and obligations of this Agreement.
Except as provided in the preceding sentence, the Company may not assign all or
any of its rights, duties or obligations hereunder without prior written consent
of Employee. Employee may not assign all or any of his rights, duties or
obligations hereunder without the prior written consent of the Company.
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<PAGE> 9
12. Notices. All notices, requests, demands and other communications
shall be in writing and shall be deemed to have been duly given if delivered or
if mailed by registered mail, postage prepaid:
(a) If to Employee, addressed to him at the address set forth
below his name.
(b) If to the Company, addressed to:
Voice Powered Technology International, Inc.
18425 Burbank Blvd., Suite 506
Tarzana, California 91356
Attention: The Board of Directors
with a copy to:
Ronald J. Grant
Tilles, Webb, Kulla & Grant
433 North Camden Drive, Suite 1010
Beverly Hills, California 90210
or to such other address as any party hereto may request by notice given as
aforesaid to the other parties hereto.
13. Titles and Headings. Titles and headings to paragraphs hereof
are for purposes of reference only and shall in no way limit, define or
otherwise affect the provisions hereof.
14. Governing Law. This Agreement is being executed and delivered
and is intended to be performed in the State of California, and shall be
governed by and construed in accordance with the laws of the State of
California.
15. Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. It shall not be
necessary in making proof of this Agreement
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<PAGE> 10
to produce or account for more than one counterpart. Facsimile signatures shall
be accepted by the parties as valid and binding in lieu of original signatures;
however, if facsimile signatures are presented by any party in lieu of original
signatures, within two (2) business days after execution of the Agreement such
party shall also deliver to counsel for the other party(ies) an original
signature page signed by that party (but failure to do so shall not affect the
validity of this Agreement).
16. Cumulative Rights. Each and all of the various rights, powers
and remedies of the Company in this Agreement shall be considered as cumulative,
with and in addition to any rights, powers or remedies of the Company and no one
of them as exclusive of the others or as exclusive of any other rights, powers
and remedies allowed by law. The exercise or partial exercise of any right,
power or remedy shall neither constitute the election thereof nor the waiver of
any other right, power or remedy.
17. Entire Agreement. This Agreement contains the entire agreement
of the parties hereto with respect to the subject matter hereof and may be
modified or amended only by a written instrument executed by both parties.
18. Good Faith. Each of the parties hereto agrees that he or it
shall act in good faith in all actions taken under this Agreement.
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<PAGE> 11
19. Expenses of Proceedings. In the event that any party hereto
brings any type of proceeding to enforce the terms and conditions of this
Agreement, the prevailing party in such proceeding shall be entitled to recover
from the unsuccessful party all incidental costs and reasonable attorneys' and
paralegals' fees incurred by said prevailing party.
20. Dispute Resolution. Any dispute or disagreement concerning this
Agreement or any term or provision hereof shall be heard and determined by a
reference under and in accordance with the provision of sections 638 to 645.1 or
the California Code of Civil Procedure, and the prevailing party therein shall
be entitled to recover its reasonable attorneys' fees and litigation and court
costs and expenses (including the fees of the referee or temporary judge).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
VOICE POWERED TECHNOLOGY
INTERNATIONAL, INC.
By: /s/ Mitchell B. Rubin
---------------------------------------
Its: President and CEO
---------------------------------------
/s/ Kenneth I. DeWitt
--------------------------------------------
Kenneth I. DeWitt
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EXHIBIT 10.6.4
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LOAN AND SECURITY AGREEMENT
BETWEEN
VOICE POWERED TECHNOLOGY, INC.
AND
FRANKLIN ELECTRONIC PUBLISHERS, INC.
DATED AS OF SEPTEMBER 22, 1997
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<PAGE> 2
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT, is entered into as of September 22,
1997, between FRANKLIN ELECTRONIC PUBLISHERS, INC. ("Lender"), with a place of
business located at One Franklin Plaza, Burlington, New Jersey 08016, and VOICE
POWERED TECHNOLOGY INTERNATIONAL, INC. operating as a debtor-in-possession
("Borrower"), with its chief executive office located at 18425 Burbank
Boulevard, Suite 508, Tarzana, California 91356.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"Affiliate" means, as applied to any Person, any other Person directly
or indirectly controlling, controlled by, or under common control with, that
Person. For purposes of this definition, "control" as applied to any Person
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of that Person, whether through the
ownership of voting securities, by contract, or otherwise.
"Agreement" means this Loan and Security Agreement and any extensions,
riders, supplements, notes, amendments, or modifications to or in connection
with this Loan and Security Agreement.
"Approved Budget Expenditures" means (a) those proposed line-item
expenditures in a Forecasted Budget for the immediately following month with
respect to which Lender has not delivered written objection to Borrower within
five (5) business days of receipt thereof, and (b) any expenditure to which
Lender has specifically agreed in writing; provided, however, that in order to
be effective, any objection of Lender to a Forecasted Budget shall be specific
to the line item in question and shall specify what amount of expenditure, if
any, concerning such line item would be acceptable to Lender; and provided,
further, that Lender may not object prior to an Event of Default to any proposed
expenditure which (i) concerns the public health or safety, (ii) relates to
wages or monies owing for work, services or goods previously worked or rendered
or purchased without prior written objection by Lender, (iii) constitutes the
payment of taxes.
"Authorized Officer" means any officer of Borrower.
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<PAGE> 3
"Bankruptcy Case" means Borrower's Chapter 11 case (No. LA
_____________) in the Bankruptcy Court.
"Bankruptcy Code" means the United States Bankruptcy Code (11
U.S.C.Section101 et seq.), as amended, and any successor statute.
"Bankruptcy Court Order" means a final order and related findings
entered by the Bankruptcy Court approving Borrower's Motion, which order and
findings must be in form and substance acceptable to Lender and, without
limiting the generality of the foregoing, containing the following provisions in
form and substance satisfactory to Lender:
(a) the grant to Lender of a superpriority administrative expense
claim with a priority over any and all administrative expenses of the kind
specified in Sections 503(b) or 507(b) of the Bankruptcy Code subject to the
Carveout;
(b) a first priority lien in favor of Lender on the Collateral,
subject only to valid liens existing prior to the Petition Date;
(c) relief from the automatic stay to perform all acts attendant
to this Agreement and to exercise remedies in the event of any Event of Default
under this Agreement, including remedies in respect of the Prepetition Debt;
(d) a prohibition on restructuring or modifying any of Lender's
rights under this Agreement or the Bankruptcy Court Order in any plan of
reorganization concerning the Borrower absent the consent of Lender;
(e) that the Loan Documents and the Bankruptcy Court Order are
binding on the Borrower and any subsequently appointed chapter 11 or chapter 7
trustee with respect to Borrower or the assets of Borrower;
(f) that no costs or expenses of administration of the Borrower's
Case or any superseding chapter 7 case shall be imposed against Lender or the
Collateral;
(g) that the liens and security interests granted to Lender
pursuant to the Bankruptcy Court Order shall be deemed perfected and valid as of
the date of the Bankruptcy Court Order without the necessity of the filing of
any financing statement, deed of trust or mortgage by Lender;
(h) that Lender's security interests and liens granted under the
Bankruptcy Court Order may not be primed pursuant to Section 364(d) of the
Bankruptcy Code;
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<PAGE> 4
(i) that no request for an injunction or temporary restraining
order seeking to enjoin, restrain or stay Lender's exercise of remedies under
the Loan Documents will be considered or granted;
(j) that Borrower may pay Lender's pre- and post-Closing Date
reasonable attorneys' fees and other costs and expenses incurred in connection
with the Loan Documents without further order of the Court. Such amounts may be
paid by applying advances under this Agreement against the indebtedness owing to
Lender;
(k) that the loans made pursuant to the Loan Documents are exempt
from any applicable usury law; and
(l) that any action under Bankruptcy Code sections 545, 547, 548,
549 or 550 against Lender must be brought by December 15, 1997 or shall be
forever waived.
"Base Rate" has the meaning set forth in Section 2.4(a).
"Borrower" has the meaning set forth in the preamble to this Agreement.
"Borrower's Books" means all of Borrower's books and records including:
ledgers; records indicating, summarizing, or evidencing Borrower's properties or
assets (including the Collateral) or liabilities; all information relating to
Borrower's business operations or financial condition; and all computer
programs, disc or tape files, printouts, runs, or other computer prepared
information, and the equipment containing such information.
"Borrowing Base" means, as of any date of determination, an amount equal
to the sum of seventy-five percent (75%) of Eligible Accounts and fifty percent
(50%) of purchase orders held by Borrower which Lender believes in its absolute
discretion will result in Eligible Accounts minus such reserves as Lender in its
reasonable discretion may elect to establish.
"Business Day" means any day which is not a Saturday, Sunday, or other
day on which national banks are authorized or required to close.
"Carveout" means Lender's agreement to subordinate its right to
repayment of the Obligations to the payment of the post-petition fees owing to
Borrower's counsel in the Bankruptcy Case, up to a maximum amount of Thirty
Thousand Dollars ($30,000).
"Closing Date" means the date of the initial advance under this
Agreement.
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<PAGE> 5
"Code" means the California Uniform Commercial Code.
"Collateral" means each of the following:
(a) Instruments, Accounts, Intangibles, Contracts. All of
Borrower's instruments, accounts and accounts receivable, all rights to payment
for goods sold or leased or for services rendered that are not evidenced by an
instrument or chattel paper, and all of Borrower's general intangibles
(expressly including customer lists), instruments, securities, stock, credits,
documents, letters of credit, chattel paper, documents of title, warehouse
receipts, leases, deposit accounts, money, tax refund claims, contract rights,
and other rights (including all rights to the payment of money and partnership
interests);
(b) Goods, Inventory, Equipment. All of Borrower's goods,
inventory and equipment, including, without limitation, machinery, equipment,
office equipment and supplies, computers, tenant improvements, fixtures and
related equipment, furniture, furnishings, tools, tooling, jigs, dies, fixtures,
manufacturing implements, fork lifts, trucks, trailers, motor vehicles, and
other equipment;
(c) Intellectual Property. All of Borrower's intellectual
property, including, without limitation, patents, patent applications,
trademarks, trademark applications, tradenames, technical knowledge and
processes, formal or informal licensing arrangements, blueprints, technical
specifications, computer software, copyrights, copyright applications and other
trade secrets, and all embodiments thereof, and rights thereto, including
without limitation all of Borrower's rights to use the patents, trademarks or
other property of the aforesaid nature of other persons now or hereafter
licensed to Borrower, together with the goodwill of the business symbolized by
or connected with Borrower's trademarks, licenses and the other rights under
this subsection; and
(d) After-acquired Collateral, Proceeds. The Collateral
includes all items described in paragraphs (a), (b) and (c) above, whether now
owned or hereafter at any time acquired by Borrower and wherever located, and
includes all replacements, additions, accessions, substitutions, repairs,
proceeds and products relating thereto or therefrom, and all documents, ledger
sheets and files of Borrower relating thereto. The Collateral includes the
proceeds of all Collateral set forth herein. Proceeds hereunder include (i)
whatever is now or hereafter received by Borrower upon the sale, exchange,
collection or other disposition of any item of Collateral, whether such proceeds
constitute inventory, accounts, accounts receivable, general intangibles,
instruments, securities, credits, documents, letters of credit,
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<PAGE> 6
chattel paper, documents of title, warehouse receipts, leases, deposit accounts,
money, contract rights, goods or equipment; (ii) any such items which are now or
hereafter acquired by Borrower with any proceeds of Collateral hereunder; and
(iii) any insurance now or hereafter payable by reason of loss or damage to any
item of Collateral or any proceeds thereof.
"Compliance with Approved Budget Expenditures" means the expenditure of
not more than one hundred fifteen percent (115%) of the amount of an Approved
Budget Expenditure during a given calendar month.
"Daily Balance" means the amount of an Obligation owed at the end of a
given day.
"Eligible Accounts" means, as at any date of determination, the
aggregate of all accounts receivable that Lender, in its reasonable judgment,
deems to be eligible for borrowing purposes. Without limiting the generality of
the foregoing, unless otherwise agreed by Lender, the following Accounts are not
Eligible Accounts:
(1) Accounts which, at the date of issuance of the
respective invoice therefor, were payable more than sixty (60) days (or in the
case of Service Merchandise, Inc., ninety (90) days) after the date of issuance
of such invoice;
(2) Accounts which remain unpaid for more than thirty (30)
days after the due date specified in the original invoice or for more than sixty
(60) days after invoice date if no due date was specified;
(3) Accounts which are otherwise eligible with respect to
which the account debtor is owed a credit by Borrower, but only to the extent of
such credit;
(4) Accounts due from a customer whose principal place of
business is located outside the United States of America unless such Account is
backed by a letter of credit, in form and substance acceptable to Lender, and
issued or confirmed by a bank that is organized under the laws of the United
States of America or a State thereof, that is acceptable to Lender, provided
that such letter of credit has been delivered to Lender as additional
collateral;
(5) Accounts due from a customer which Lender has notified
Borrower does not have a satisfactory credit standing;
(6) Accounts with respect to which the customer is the
United States of America, any state or any municipality, or any department,
agency or instrumentality thereof;
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<PAGE> 7
(7) Accounts with respect to which the customer is an
Affiliate of Borrower or a director, officer, agent, stockholder or employee of
Borrower or any of its Affiliates;
(8) Accounts with respect to which there is any unresolved
dispute with the respective customer (but only to the extent of such dispute);
(9) Accounts evidenced by an "instrument" or "chattel
paper" (as defined in the UCC) not in the possession of Lender;
(10) Accounts with respect to which Lender does not have a
valid, first priority and fully perfected security interest;
(11) Accounts subject to any Lien except those in favor of
Lender;
(12) Accounts with respect to which the customer is the
subject of any bankruptcy or other insolvency proceeding;
(13) Accounts with respect to which the customer's
obligation to pay is conditional or subject to a repurchase obligation or right
to return or with respect to which the goods or services giving rise to such
Account have not been delivered (or performed, as applicable) and accepted by
such account debtor, including progress billings, bill and hold sales,
guarantied sales, sale or return transactions, sales on approval or consignment
sales;
(14) Accounts with respect to which the customer is
located in Indiana, New Jersey, or any other state denying creditors access to
its courts in the absence of a Notice of Business Activities Report or other
similar filing, unless Borrower has either qualified as a foreign corporation
authorized to transact business in such state or has filed a Notice of Business
Activities Report or similar filing with the applicable state agency for the
then current year;
(15) Accounts with respect to which the customer is a
creditor of Borrower, or which accounts are subject to credits of any kind,
provided, however, that any such Account shall only be ineligible as to that
portion of such Account which is less than or equal to the amount owed by
Borrower to such Person.
"Event of Default" has the meaning set forth in Section 8.
"FEIN" means Federal Employer Identification Number.
"Forecasted Budgets" has the meaning set forth in Section 6.2.
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<PAGE> 8
"Lender Expenses" means (a) all reasonable: costs or expenses (including
taxes, photocopying, notarization, telecommunication and insurance premiums)
required to be paid by Borrower under any of the Loan Documents that are paid or
advanced by Lender; (b) post-Closing Date documentation, filing, recording,
publication, appraisal (including periodic Collateral appraisals), real estate
survey, environmental audit, legal, accounting and search fees assessed, paid,
or incurred by Lender in connection with Lender's transactions with Borrower,
the amendment of any of the Loan Documents or the monitoring of the Bankruptcy
Cases; (c) out of pocket costs and expenses incurred by Lender in the
disbursement of funds to Borrower (by wire transfer or otherwise); (d) charges
paid or incurred by Lender resulting from the dishonor of checks; (e) costs and
expenses paid or incurred by Lender to correct any default or enforce any
provision of the Loan Documents, or in gaining possession of, maintaining,
handling, preserving, storing, shipping, selling, preparing for sale, or
advertising to sell the Collateral, or any portion thereof following an Event of
Default, irrespective of whether a sale is consummated; (f) costs and expenses
paid or incurred by Lender in examining Borrower's Books following an Event of
Default; (g) costs and expenses of third party claims or any other suit paid or
incurred by Lender in enforcing or defending the Loan Documents; and (h)
Lender's reasonable attorneys fees and expenses incurred in advising,
structuring, drafting, reviewing, administering, amending, terminating,
enforcing (including attorneys fees and expenses incurred in connection with a
"workout" or "restructuring"), defending, or concerning any Loan Documents
following an Event of Default, irrespective of whether suit is brought.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, consistently applied.
"Hazardous Materials" means all or any of the following: (a) substances
that are defined or listed in, or otherwise classified pursuant to, any
applicable laws or regulations as "hazardous substances," "hazardous materials,"
"hazardous wastes," "toxic substances," or any other formulation intended to
define, list, or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity,
or "EP toxicity"; (b) oil, petroleum, or petroleum derived substances, natural
gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and
other wastes associated with the exploration, development, or production of
crude oil, natural gas, or geothermal resources; (c) any flammable substances or
explosives or any radioactive materials; and (d) asbestos in any form or
electrical equipment which contains any oil or dielectric fluid containing
levels of polychlorinated biphenyls in excess of fifty (50) parts per million.
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<PAGE> 9
"Indebtedness" means: (a) all obligations of Borrower for borrowed
money; (b) all obligations of Borrower evidenced by bonds, debentures, notes, or
other similar instruments and all reimbursement or other obligations of Borrower
in respect of letters of credit, letter of credit guaranties, bankers
acceptances, interest rate swaps, controlled disbursement accounts, or other
financial products; (c) all obligations under capitalized leases; (d) all
obligations or liabilities of others secured by a lien or security interest on
any property or asset of Borrower, irrespective of whether such obligation or
liability is assumed; and (e) any obligation of Borrower guaranteeing or
intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or
sold with recourse to Borrower) any indebtedness, lease, dividend, letter of
credit, or other obligation of any other Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Lender" has the meaning set forth in the Preamble.
"Loan Documents" means this Agreement, any note or notes executed by
Borrower and payable to Lender, and any other agreement entered into in
connection with this Agreement.
"Maturity Date" has the meaning set forth in Section 3.3.
"Maximum Amount" has the meaning as set forth in Section 2.1.
"Motion" has the meaning set forth in Section 3.1.
"Obligations" means all loans, advances, debts, principal, interest,
premiums, liabilities (including all amounts charged to Borrower's loan account
pursuant to any agreement authorizing Lender to charge Borrower's loan account),
obligations, fees, lease payments, guaranties, covenants, and duties owing by
Borrower to Lender of any kind and description (whether pursuant to or evidenced
by the Loan Documents, by any note or other instrument, or pursuant to any other
agreement between Lender and Borrower, and irrespective of whether for the
payment of money), whether direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter arising, and including any debt,
liability, or obligation owing from Borrower to others that Lender may have
obtained by assignment or otherwise, and further including all interest not paid
when due and all Lender Expenses that Borrower is required to pay or reimburse
by the Loan Documents, by law, or otherwise; provided that, notwithstanding the
foregoing, the Obligations shall not include the Prepetition Debt.
"Old Lender" means KBK Financial, Inc.
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"Overadvance" has the meaning set forth in Section 2.3.
"Payment Account" has the meaning set forth in Section 2.5.
"PBGC" means the Pension Benefit Guaranty Corporation as defined in
Title IV of ERISA, or any successor thereto.
"Permitted Liens" means: (a) liens and security interests held by
Lender; (b) liens for unpaid taxes that are not yet due and payable; (c) liens
and security interests set forth on Schedule 7.2 attached hereto; (d) purchase
money security interests and liens of lessors under permitted capitalized leases
so long as the security interest or lien only secures the purchase price of the
asset; (e) easements, rights of way, reservations, covenants, conditions,
restrictions, zoning variances, and other similar encumbrances that do not
materially interfere with the use or value of the property subject thereto; (f)
obligations and duties as lessee under any lease existing on the date of this
Agreement; and (g) mechanics', materialmen's, warehousemen's, or similar liens.
"Person" means and includes natural persons, corporations, limited
partnerships, general partnerships, joint ventures, trusts, land trusts,
business trusts, or other organizations, irrespective of whether they are legal
entities, and governments and agencies and political subdivisions thereof.
"Petition Date" means September 22, 1997.
"Plan" means an employee benefit plan (as defined in Section 3(3) of
ERISA) which Borrower or any ERISA Affiliate sponsors or maintains or to which
Borrower or any ERISA Affiliate makes, is making, or is obligated to make
contributions, including any Multiemployer Plan or Qualified Plan.
"Prepetition Debt" means all amounts owing to Lender by Borrower as of
the Petition Date.
1.2 ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP. When used herein the
term "financial statements" shall include the notes and schedules thereto.
1.3 CODE. Any terms used in this Agreement which are defined in
the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.
1.4 CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the term "including" is not limiting, and the
term "or" has, except where
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otherwise indicated, the inclusive meaning represented by the phrase "and/or."
The words "hereof," "herein," "hereby," "hereafter," and similar terms in this
Agreement refer to this Agreement as a whole and not to any particular provision
of this Agreement. Section, subsection, clause, schedule, and exhibit references
are to this Agreement unless otherwise specified. Any reference in this
Agreement or in the Loan Documents to this Agreement or any of the Loan
Documents shall include all alterations, amendments, changes, extensions,
modifications, renewals, replacements, substitutions, and supplements, thereto
and thereof, as applicable.
1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits
attached to this Agreement shall be deemed incorporated herein by reference.
2. LOANS AND TERMS OF PAYMENT.
2.1 REVOLVING ADVANCES.
(a) Subject to the terms and conditions of this Agreement
and in reliance upon the representations and warranties of Borrower and in the
other Loan Documents, Lender agrees to lend to Borrower from time to time an
aggregate amount not to exceed at any time Four Hundred Thousand Dollars
($400,000) (the "Maximum Loan Amount"). Amounts borrowed under this subsection
2.1 may be repaid and reborrowed at any time prior to the Maturity Date. Lender
shall have no obligation to make an advance to the extent any requested advance
would cause total advances (after giving effect to any immediate application of
the proceeds thereof) to exceed the Maximum Loan Amount (as defined below);
provided that Lender may, in its sole discretion, elect from time to time to
make advances in excess of the Maximum Amount.
(b) Until such time as the Additional Loan Conditions (as
defined below) are satisfied, Lender agrees to lend to Borrower from time to
time an aggregate amount not to exceed Fifty Thousand Dollars ($50,000) (the
"Initial Loan Amount").
(c) Lender agrees to lend monies in excess of the Initial
Loan to Borrower in an amount not to exceed the lesser of the Borrowing Base or
the Maximum Loan Amount upon the satisfaction of each of the following
conditions (each of which is subject to waiver by Lender) (the "Additional Loan
Conditions"):
(i) Borrower shall have delivered to Lender an initial
Forecasted Budget in form and substance satisfactory to Lender. Without limiting
the foregoing in terms of the discretion of Lender to approve or disapprove of
such Forecasted Budget, such Forecasted Budget must demonstrate to Lender's
satisfaction that
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(a) Borrower will not suffer net operating losses excluding depreciation,
amortization, legal accounting and other professional fees associated with the
administration of the bankruptcy case, during the period covered by the
Forecasted Budget, (b) Borrower will not suffer negative cash flow during the
period covered by the Forecasted Budget, and (c) that Borrower will have the
capacity to repay all advances under this Agreement in full as of the Maturity
Date.
(ii) Borrower shall have filed a plan of
reorganization in the Bankruptcy Case in form and substance satisfactory to
Lender and which plan of reorganization Lender, in its reasonable judgement,
determines is likely to be confirmed prior to the Maturity Date.
(iii) The Bankruptcy Court Order shall have been
entered on a final basis.
(d) All advances under this Agreement shall be in the
minimum amount of Five Thousand Dollars ($5,000) and whole multiples of Five
Thousand Dollars ($5,000). Lender is authorized to make advances under this
Agreement based upon telephonic or other instructions received from anyone
purporting to be an Authorized Officer of Borrower, or without instructions if
pursuant to Section 2.5(d). Borrower agrees to establish and maintain a single
designated deposit account for the purpose of receiving by wire the proceeds of
the advances requested by Borrower and made by Lender hereunder. Unless
otherwise agreed by Lender and Borrower, any advance requested by Borrower and
made by Lender hereunder shall be made to such designated deposit account.
Amounts borrowed pursuant to this Section 2.1 may be repaid and, subject to the
terms and conditions of this Agreement, reborrowed at any time during the term
of this Agreement.
(e) Advances under this Agreement shall only be made by
wire transfer on Friday morning. Any request by Borrower for an advance must be
made in writing by an Authorized Officer and received by Lender not later than
5:00 p.m. New Jersey time three Business Days prior to the requested advance
date at the notice address set forth herein.
2.2 [Intentionally omitted]
2.3 OVERADVANCES. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Lender pursuant to Section 2.1 is greater than
the dollar limitations set forth in Section 2.1 (an "Overadvance"), Borrower
immediately shall pay to Lender, in cash, the amount of such Overadvance.
2.4 INTEREST: RATES, PAYMENTS, AND CALCULATIONS.
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(a) Interest Rate. All Obligations shall bear interest, on the
average Daily Balance, at twelve percent (12%) per annum (the "Base Rate").
(b) Default Rate. All Obligations shall bear interest, from and
after the occurrence and during the continuance of an Event of Default, at a per
annum rate equal to fourteen percent (14%). If an Overadvance is created by
Lender charging interest or fees to Borrower's loan account, Borrower shall have
a grace period of five (5) days within which to fully repay such Overadvances
before such Overadvance shall constitute an Event of Default.
(c) Payments. Interest hereunder shall be due and payable in
arrears on the last day of each month during the term hereof. Borrower hereby
authorizes Lender, at its option, without prior notice to Borrower, to charge
such interest, all Lender Expenses (as and when incurred), and all installments
or other payments due under any other Loan Document to Borrower's loan account,
which amounts shall thereafter accrue interest at the rate then applicable
hereunder. Any interest not paid when due shall be compounded by becoming a part
of the Obligations, and such interest shall thereafter accrue interest at the
rate then applicable hereunder.
2.5 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The receipt of any
wire transfer of funds, check, or other item of payment by Lender immediately
shall be applied to provisionally reduce the Obligations, but shall not be
considered a payment on account unless such wire transfer is of immediately
available federal funds and is made to the appropriate account of Lender or
unless and until such check or other item of payment is honored when presented
for payment. From and after the Closing Date, Lender shall be entitled to charge
Borrower for three (3) Business Days of "clearance" at the applicable rates set
forth in Sections 2.4(a) and 2.4(b) (applicable to advances under Section 2.1)
on all collections, checks, or other items of payment other than wire transfers
that are received by Lender. This three (3) Business Day clearance charge on all
receipts is acknowledged by the parties to constitute an integral aspect of the
pricing of Lender's facility to Borrower, and shall apply irrespective of the
characterization of whether receipts are owned by Borrower or Lender, and
irrespective of the level of Borrower's Obligations to Lender. Should any check
or item of payment not be honored when presented for payment, then Borrower
shall be deemed not to have made such payment, and interest shall be
recalculated accordingly. Anything to the contrary contained herein
notwithstanding, any wire transfer, check, or other item of payment shall be
deemed received by Lender only if it is received by Lender at
___________________ (the "Payment Account") on or before 11:00 a.m. New Jersey
time.
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If any wire transfer, check, or other item of payment is received into the
Payment Account after 11:00 a.m. New Jersey time it shall be deemed to have been
received by Lender as of the opening of business on the immediately following
Business Day.
2.6 STATEMENTS OF OBLIGATIONS. Lender shall render monthly
statements to Borrower of the Obligations, including principal, interest, fees,
and including an itemization of all charges and expenses constituting Lender
Expenses owing, including but not limited to a detailed description of any
services relating to professional fees included therein, and such statements
shall be conclusively presumed to be correct and accurate and constitute an
account stated between Borrower and Lender as to items properly set forth
therein, unless, within thirty (30) days after receipt thereof by Borrower,
Borrower shall deliver to Lender by registered or certified mail at its address
specified in Section 12, written objection thereto describing the error or
errors contained in any such statements.
2.7 FEES. Borrower shall pay to Lender the Lender Expenses,
payable within ten (10) days of receipt of invoice, without waiver of any right
to submit objection pursuant to Section 2.6 or to seek adjustment therefore.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 CONDITIONS PRECEDENT TO ADVANCES. The obligation of Lender to
make the Initial Loan and any Additional Loans is subject to the fulfillment, to
the satisfaction of Lender and its counsel, of each of the following conditions
on or before the Closing Date (in addition to any conditions set forth in
section 2.1 of this Agreement):
(a) The Bankruptcy Court Order shall have been entered on
or before October 5, 1997 on an interim basis; and the Closing Date shall occur
on or before October 5, 1997;
(b) Findings in support of the Bankruptcy Court Order in
form and substance acceptable to Lender shall have been entered including,
without limitation, (i) a finding pursuant to Bankruptcy Code Section 364(e)
that Lender has acted in good faith and (ii) a finding that notice of Borrower's
motion for approval of the financing (the "Motion") was adequate;
(c) The filing of the Motion reasonably acceptable in
form and substance to Lender shall have been on or prior to September 22, 1997;
(d) Notice of the Motion shall have been reasonably
satisfactory to Lender;
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(e) Lender shall have received searches reflecting the
filing of its financing statements;
(f) Lender shall have received each of the Loan Documents
and each such document shall be in full force and effect.
(g) Lender shall have received a certificate from the
Secretary of Borrower attesting to the resolutions of Borrower's Board of
Directors authorizing its execution and delivery of this Agreement and the other
Loan Documents to which Borrower is a party and authorizing specific officers of
Borrower to execute same;
(h) Lender shall have received copies of Borrower's
By-laws and Articles or Certificate of Incorporation, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary of Borrower;
(i) Lender shall have received a certificate of corporate
status with respect to Borrower, dated within forty five (45) days of the
Closing Date, by the Secretary of State of the state of incorporation of
Borrower, which certificate shall indicate that Borrower is in good standing in
such state;
(j) the representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all respects
on and as of the date of such advance, as though made on and as of such date
(except to the extent that such representations and warranties relate solely to
an earlier date);
(k) no Event of Default or event which the giving of
notice or passage of time would constitute an Event of Default shall have
occurred and be continuing on the date of such advance, nor shall either result
from the making of the advance;
(l) no injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the making of such
advance shall have been issued and remain in force by any governmental authority
against Borrower, Lender, or any of their Affiliates; and
(m) all other documents and legal matters in connection
with the transactions contemplated by this Agreement shall have been delivered
or executed or recorded and shall be in form and substance satisfactory to
Lender and its counsel.
3.2 TERM. This Agreement shall continue in full force and effect
for a term ending on the earliest to occur of: (a) the date that is five (5)
months from the Closing Date (unless such date is extended in writing by
Lender), (b) the effective date of
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an order confirming a plan of reorganization of Borrower; or (c) at the option
of Lender, immediately and without notice upon the occurrence or during the
continuation of an Event of Default (in any event, the "Maturity Date").
3.3 EFFECT OF TERMINATION. On the Maturity Date, all Obligations
immediately shall become due and payable without notice or demand. No
termination of this Agreement, however, shall relieve or discharge Borrower of
Borrower's duties, Obligations, or covenants hereunder, and Lender's continuing
security interests in the Collateral shall remain in effect until all
Obligations have been fully and finally discharged and Lender's obligation to
provide advances hereunder is terminated.
4. CREATION OF SECURITY INTEREST.
4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to Lender
a continuing security interest in all currently existing and hereafter acquired
or arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Lender's security interests in
the Collateral shall attach to all Collateral without further act on the part of
Lender or Borrower. Anything contained in this Agreement or any other Loan
Document to the contrary notwithstanding, and other than sales of inventory in
the ordinary course of business, Borrower has no authority, express or implied,
to dispose of any item or portion of the Collateral.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral,
including proceeds, is evidenced by or consists of negotiable instruments,
Borrower shall, immediately upon the request of Lender, endorse and assign such
negotiable Collateral to Lender and deliver physical possession of such
negotiable Collateral to Lender.
4.3 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time
upon the request of Lender, Borrower shall execute and deliver to Lender all
financing statements, continuation financing statements, fixture filings,
security agreements, chattel mortgages, pledges, assignments, endorsements of
certificates of title, applications for title, affidavits, reports, notices,
schedules of accounts, letters of authority and all other documents that Lender
may reasonably request, in form satisfactory to Lender, (a) to perfect and
continue perfected Lender's security interests in the Collateral, and (b) in
order to fully consummate all of the transactions contemplated hereby and under
the other Loan Documents.
4.4 POWER OF ATTORNEY. Borrower hereby irrevocably
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makes, constitutes, and appoints Lender (and any of Lender's officers,
employees, or agents designated by Lender) as Borrower's true and lawful
attorney, with power to: (a) if Borrower refuses to, or fails timely to execute
or deliver any of the documents described in Section 4.3(a), sign the name of
Borrower on any of the documents described in Section 4.3(a); (b) at any time
that an Event of Default has occurred and is continuing or Lender deems itself
insecure (in accordance with Section 1208 of the Code), sign Borrower's name on
any invoice or bill of lading relating to any account, drafts against account
debtors, schedules and assignments of accounts, verifications of accounts, and
notices to account debtors; (c) send requests for verification of accounts; (d)
endorse Borrower's name on any checks, notices, acceptances, money orders,
drafts, or other item of payment or security that may come into Lender's
possession; (e) at any time that an Event of Default has occurred and is
continuing or Lender deems itself insecure (in accordance with Section 1208 of
the Code), notify the post office authorities to change the address for delivery
of Borrower's mail to an address designated by Lender, to receive and open all
mail addressed to the Borrower, and to retain all mail relating to the
Collateral and forward all other mail to the Borrower; (f) at any time that an
Event of Default has occurred and is continuing or Lender deems itself insecure
(in accordance with Section 1208 of the Code), make, settle, and adjust all
claims under Borrower's policies of insurance and make all determinations and
decisions with respect to such policies of insurance; and (g) at any time that
an Event of Default has occurred and is continuing or Lender deems itself
insecure (in accordance with Section 1208 of the Code), settle and adjust
disputes and claims respecting the accounts directly with account debtors, for
amounts and upon terms which Lender determines to be reasonable, and Lender may
cause to be executed and delivered any documents and releases which Lender
determines to be necessary. The appointment of Lender as Borrower's attorney,
and each and every one of Lender's rights and powers, being coupled with an
interest, is irrevocable until all of the Obligations have been fully and
finally repaid and performed and Lender's obligations to extend credit hereunder
is terminated.
4.5 RIGHT TO INSPECT. Lender (through any of its officers,
employees, or agents) shall have the right: (a) at Borrower's expense, to have
an agent at Borrower's premises, on no more than a monthly basis, to inspect the
Collateral and Borrower's reporting thereof, and (b) from time to time hereafter
to inspect Borrower's Books and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, quality, value,
condition of, or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
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Borrower represents and warrants to Lender as follows:
5.1 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible
title to the Collateral, free and clear of liens, claims, security interests, or
encumbrances, except for Permitted Liens.
5.2 FINANCIAL DOCUMENTS. Each of the financial documents
delivered by Borrower to Lender fairly presents Borrower's financial condition
as of the date thereof and Borrower's results of operations for the period then
ended. There has not been a material adverse change in the financial condition
of Borrower since the date of the latest financial statements submitted to
Lender on or before the Closing Date.
5.3 ENVIRONMENTAL CONDITION. None of Borrower's properties or
assets has ever been used by Borrower or, to the best of Borrower's knowledge,
by previous owners or operators in the disposal of, or to produce, store,
handle, treat, release, or transport, any Hazardous Materials. None of
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a Hazardous Materials
disposal site, or a candidate for closure pursuant to any environmental
protection statute. No lien arising under any environmental statute has attached
to any revenues or to any real or personal property owned or operated by
Borrower. Borrower has never received a summons, citation, notice, or directive
from the Environmental Protection Agency or any other federal or state
governmental agency concerning any action or omission by Borrower resulting in
the releasing or disposing of Hazardous Materials into the environment.
5.4 RELIANCE BY LENDER; CUMULATIVE. Each warranty and
representation contained in this Agreement automatically shall be deemed
repeated with each advance and shall be conclusively presumed to have been
relied on by Lender regardless of any investigation made or information
possessed by Lender. The warranties and representations set forth herein shall
be cumulative and in addition to any and all other warranties and
representations that Borrower now or hereafter shall give, or cause to be given
to Lender.
5.5 AMOUNTS OWING TO OLD LENDER. Borrower owes Old Lender not
more than $275,000.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, and unless Lender shall otherwise consent in
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writing, Borrower shall do all of the following:
6.1 ACCOUNTING SYSTEM. Borrower shall maintain a standard and
modern system of accounting in accordance with GAAP with ledger and account
cards or computer tapes, discs, printouts, and records pertaining to the
Collateral which contain information as from time to time may be requested by
Lender. Borrower also shall keep proper books of account showing all sales,
claims, and allowances on its inventory.
6.2 REPORTS.
(a) Borrower shall deliver to Lender in a form
satisfactory to Lender, on the Friday of each week with (A) a rolling twelve
week forecast of cash receipts and expenses for the immediately following week,
and (B) a certification as to the cost basis of current saleable inventory owned
by Borrower as of such date (the "Forecasted Budget"). Borrower shall deliver to
Lender, as Lender may from time to time require, collection reports, sales
journals, invoices, original delivery receipts, customer's purchase orders,
shipping instructions, bills of lading, and other documentation respecting
shipment arrangements. Absent such a request by Lender, copies of all such
documentation shall be held by Borrower as custodian for Lender.
(b) On the twentieth day of each month, Borrower shall
deliver to Lender a certificate signed by its chief financial officer to that
effect that: (i) all reports, statements, or computer prepared information of
any kind or nature delivered or caused to be delivered to Lender hereunder
fairly present the financial condition of Borrower; (ii) Borrower is in timely
compliance with all of its covenants and agreements hereunder; (iii) the
representations and warranties of Borrower contained in this Agreement and the
other Loan Documents are true and correct in all material respects on and as of
the date of such certificate, as though made on and as of such date (except to
the extent that such representations and warranties relate solely to an earlier
date); and (iv) on the date of delivery of such certificate to Lender there does
not exist any condition or event that constitutes an Event of Default (or, in
each case, to the extent of any non-compliance, describing such non-compliance
as to which he or she may have knowledge and what action Borrower has taken, is
taking, or proposes to take with respect thereto).
(c) Borrower shall deliver to Lender copies of all
pleadings filed in the Bankruptcy Cases and the interim reports of Borrower
provided to the United States Trustee.
6.3 TAX RETURNS. Borrower agrees to deliver to Lender copies of
each of Borrower's future federal income tax returns, and
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any amendments thereto, within thirty (30) days of the filing thereof with the
Internal Revenue Service.
6.4 TAXES. All assessments and taxes, whether real, personal, or
otherwise, due or payable by, or imposed, levied, or assessed against Borrower
or any of its property have been paid, and shall hereafter be paid in full,
before delinquency or before the expiration of any extension period. Borrower
shall make due and timely payments or deposit of all federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute and
deliver to Lender, on demand, appropriate certificates attesting to the payment
thereof or deposit with respect thereto. Borrower will make timely payment or
deposit of all tax payments and withholding taxes required of it by applicable
laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and
local, state, and federal income taxes, and will, upon request, furnish Lender
with proof satisfactory to Lender indicating that Borrower has made such
payments or deposits.
6.5 INSURANCE.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks (including, without limitation, earthquake insurance,
where applicable), and in such amounts, as are ordinarily insured against by
other owners in similar businesses. Borrower also shall maintain business
interruption, public liability, product liability, and property damage insurance
relating to Borrower's ownership and use of the Collateral, as well as insurance
against larceny, embezzlement and criminal misappropriation.
(b) All such policies of insurance shall be in such form,
with such companies, and in such amount as may be reasonably satisfactory to
Lender. All such policies of insurance (except those of public liability and
property damage) shall contain a 438BFU lender's loss payable endorsement, or an
equivalent endorsement in a form satisfactory to Lender, showing Lender as
additional loss payee thereof, and shall contain a waiver of warranties, and
shall specify that the insurer must give at least ten (10) days prior written
notice to Lender before canceling its policy for any reason. Borrower shall
deliver to Lender copies of such policies of insurance and evidence of the
payment of all premiums thereof. Subject to any rights of Old Lender, or as
Lender otherwise elects, all proceeds payable under any such policy shall be
payable to Lender to be applied on account of the Obligations.
6.6 MAINTENANCE OF COLLATERAL. Borrower shall keep, protect,
preserve and maintain the Collateral from waste and
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deterioration (ordinary wear and tear excepted), and make all necessary
replacements thereto so that the value and operating efficiency thereof shall at
all times be maintained and preserved; provided, however, that Lender
acknowledges that Borrower intends to and shall segregate for the benefit of Old
Lender all Collateral which, pursuant to prepetition agreements between Lender
and Old Lender, are subject to a prior security interest in favor of Old Lender
(the "Old Lender Collateral"). Borrower shall not use the Old Lender Collateral
for any purpose other than the liquidation thereof for the benefit of Old
Lender.
6.7 NO SETOFFS OR COUNTERCLAIMS. All payments hereunder and under
the other Loan Documents made by or on behalf of Borrower shall be made without
setoff or counterclaim and free and clear of, and without deduction or
withholding for or on account of, any federal, state, or local taxes.
6.8 LOCATION OF INVENTORY AND EQUIPMENT. Borrower shall keep the
inventory only at the locations identified on Schedule 6.8; provided, however,
that Borrower may amend Schedule 6.8 so long as such amendment occurs by written
notice to Lender not less than thirty (30) days prior to the date on which the
inventory is moved to such new location and so long as such new location is
within the continental United States, and so long as, at the time of such
written notification, Borrower provides any financing statements or fixture
filings necessary to perfect and continue perfected Lender's security interests
in such assets and also provides to Lender a landlord's waiver in form and
substance satisfactory to Lender.
6.9 COMPLIANCE WITH LAWS. Borrower shall comply with the
requirements of all applicable laws, rules, regulations, and orders of any
governmental authority, including the Fair Labor Standards Act and the American
With Disabilities Act, other than laws, rules, regulations, and orders the
non-compliance with which, individually or in the aggregate, would not have and
could not reasonably be expected to have a material adverse effect on the
business, operations, condition (financial or otherwise), finances, or prospects
of Borrower or on the value of the Collateral to Lender.
6.10 POST-PETITION DEBT. Borrower will pay its material
post-petition trade debt obligations when due.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, Borrower will not do any of the following without Lender's prior
written consent:
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7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:
(a) Indebtedness created under this Agreement;
(b) Pre-petition Indebtedness set forth in the latest
financial statements of Borrower submitted to Lender on or prior to the Closing
Date;
(c) Pre-petition Indebtedness secured by Permitted Liens;
and
(d) Refinancings, renewals, or extensions of Indebtedness
permitted under clauses (b) and (c) of this Section 7.1 (and continuance or
renewal of any Permitted Liens associated therewith) so long as: (i) the terms
and conditions of such refinancings, renewals, or extensions do not materially
impair the prospects of repayment of the Obligations by Borrower, (ii) the net
cash proceeds of such refinancings, renewals, or extensions do not result in an
increase in the aggregate principal amount of the Indebtedness so refinanced,
renewed, or extended, (iii) such refinancings, renewals, refundings, or
extensions do not result in a shortening of the average weighted maturity of the
Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that
Indebtedness that is refinanced was subordinated in right of payment to the
Obligations, then the subordination terms and conditions of the refinancing
Indebtedness must be at least as favorable to Lender as those applicable to the
refinanced Indebtedness.
7.2 LIENS. Create, incur, assume, or permit to exist, directly or
indirectly, any security interest or lien on or with respect to any of its
property or assets, of any kind, whether now owned or hereafter acquired, or any
income or profits therefrom, except for Permitted Liens (including liens that
are replacements of Permitted Liens to the extent that the original Indebtedness
is refinanced under and in accordance with Section 7.1(d) and so long as the
replacement liens secure only those assets or property that secured the original
Indebtedness).
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Enter into any
acquisition, merger, consolidation, or recapitalization, or reclassify its
capital stock, or liquidate, wind up, or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, assign, lease, transfer, or
otherwise dispose of, in one transaction or a series of transactions, all or any
substantial part of its business, property, or assets, whether now owned or
hereafter acquired, or acquire by purchase or otherwise all or substantially all
of the properties, assets, stock, or other evidence of beneficial ownership of
any Person.
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7.4 CHANGE NAME. Change Borrower's name, FEIN, business
structure, or identity, or add any new fictitious name.
7.5 GUARANTEE. Guarantee or otherwise become in any way liable
with respect to the obligations of any third Person except by endorsement or
instruments or items of payment for deposit to the account of Borrower or which
are transmitted or turned over to Lender.
7.6 PREPAYMENTS. Pay any pre-petition Indebtedness owing to any
third Person other than Old Lender and as approved by Lender.
7.7 DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or in stock) on, or purchase, acquire, redeem, or retire any
of Borrower's capital stock, of any class, whether now or hereafter outstanding.
7.8 ACCOUNTING METHODS. Modify or change its method of
accounting.
7.9 INVESTMENTS. Directly or indirectly make or acquire any
beneficial interest in (including stock, partnership interest, or other
securities of), or make any loan, advance, or capital contribution to, any
Person.
7.10 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms, that are fully disclosed to Lender, and that are
no less favorable to Borrower than would be obtained in arm's length transaction
with a non-Affiliate.
7.11 USE OF PROCEEDS. Use the proceeds of the advances made
hereunder and the proceeds of the post-petition Collateral for any purpose other
than: (a) to pay transactional fees, costs and expenses incurred in connection
with this Agreement; and (b) for authorized corporate purposes in Compliance
with Approved Budget Expenditures.
7.12 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH Bailees. Borrower covenants and agrees that it will not, without
thirty (30) days prior written notification to Lender, relocate its chief
executive office to a new location and will not relocate unless, at the time of
such written notification, Borrower provides any financing statements
22
<PAGE> 24
or fixture filings necessary to perfect and continue perfected Lender's security
interests and also provides to Lender a landlord's waiver in form and substance
satisfactory to Lender. No inventory or equipment shall at any time now or
hereafter be stored with a bailee, warehouseman, or similar party without
Lender's prior written consent.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an event
of default (each, an "Event of Default") under this Agreement:
8.1 If Borrower fails to pay when due and payable or when
declared due and payable, any portion of the Obligations (whether of principal,
interest (including any interest which, but for the provisions of the Bankruptcy
Code, would have accrued on such amounts), fees and charges due Lender,
reimbursement of Lender Expenses, or other amounts constituting Obligations);
8.2 If Borrower fails or neglects to perform, keep, or observe
any term, provision, condition, covenant, or agreement contained in this
Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Lender;
8.3 If the Bankruptcy Case is converted to a case under Chapter 7
of the Bankruptcy Code, or dismissed;
8.4 If a trustee is appointed for Borrower in any of the
Bankruptcy Cases;
8.5 If any party (other than Old Lender in respect of its
Accounts collateral) obtains relief from the automatic stay under Section 362 of
the Bankruptcy Code if such relief might have a material adverse effect on the
Collateral or Borrower's business;
8.6 If Borrower makes any payment on account of Indebtedness that
has been subordinated by contract or pursuant to the Bankruptcy Court Order in
right of payment to the payment of the Obligations, except to the extent such
payment is (a) permitted by the terms of the subordination provisions applicable
to such Indebtedness (b) is approved by Lender in this Agreement or (c)
constitutes an Approved Budget Expenditure;
23
<PAGE> 25
8.7 If any material misstatement or misrepresentation exists now
or hereafter in any warranty, representation, statement, or report made to
Lender by Borrower or any officer, employee, agent, or director of Borrower, or
if any such warranty or representation is withdrawn;
8.8 The confirmation of any plan of reorganization which fails to
satisfy the Obligations on the effective date of such plan of reorganization.
8.9 The commencement of any action in respect of a Franklin
Avoidance Claim (as defined in the Bankruptcy Court Order).
9. LENDER'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence of an Event of
Default Lender may, at its election, without notice of its election and without
demand, do any one or more of the following, all of which are authorized by
Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable;
(b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement, under any of the Loan Documents,
or under any other agreement between Borrower and Lender.
(c) Terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of Lender, but without
affecting Lender's rights and security interests in the Collateral and without
affecting the Obligations;
(d) Settle or adjust disputes and claims directly with
account debtors for amounts and upon terms which Lender considers advisable, and
in such cases, Lender will credit Borrower's loan account with only the net
amounts received by Lender in payment of such disputed Accounts after deducting
all Lender Expenses incurred or expended in connection therewith;
(e) Cause Borrower to hold all returned inventory in
trust for Lender, segregate all returned inventory from all other property of
Borrower or in Borrower's possession and conspicuously label said returned
Inventory as the property of Lender; and
(f) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as
Lender determines is commercially reasonable. It is not necessary that the
Collateral be present at any such sale.
9.2 REMEDIES CUMULATIVE. Lender's rights and remedies under this
Agreement, the Loan Documents, and all other agreements
24
<PAGE> 26
shall be cumulative. Lender shall have all other rights and remedies not
inconsistent herewith as provided under the Code, the Bankruptcy Code, by law,
or in equity. No exercise by Lender of one right or remedy shall be deemed an
election, and no waiver by Lender of any Event of Default shall be deemed a
continuing waiver. No delay by Lender shall constitute a waiver, election, or
acquiescence by it.
10. TAXES AND EXPENSES REGARDING THE COLLATERAL.
If Borrower fails to pay any monies (whether taxes, rents,
assessments, insurance premiums, or otherwise) due to third Persons, or fails to
make any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Lender
determines that such failure by Borrower could have a material adverse effect on
Lender's interest in the Collateral, in its discretion and without prior notice
to the Borrower, Lender may do any or all of the following: (a) make payment of
the same or any part thereof; (b) set up such reserves in Borrower's loan
account as Lender deems necessary to protect Lender from the exposure created by
such failure; or (c) obtain and maintain insurance policies of the type
described in Section 6.5, and take any action with respect to such policies as
Lender deems prudent. Any such amounts paid by Lender shall constitute Lender
Expenses. Any such payments made by Lender shall not constitute an agreement by
Lender to make similar payments in the future or a waiver by Lender of any Event
of Default under this Agreement. Lender need not inquire as to, or contest the
validity of, any such expense, tax, security interest, encumbrance, or lien and
the receipt of the usual official notice for the payment thereof shall be
conclusive evidence that the same was validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 DEMAND; PROTEST; ETC. Borrower waives demand, protest,
notice of protest, notice of default or dishonor, notice of payment and
nonpayment, notice of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal in connection with accounts, documents,
instruments, chattel paper, and guarantees at any time held by Lender on which
Borrower may in any way be liable.
11.2 LENDER'S LIABILITY FOR COLLATERAL. So long as Lender
complies with its obligations, if any, under Section 9207 of the Code, Lender
shall not in any way or manner be liable or responsible for: (a) the safekeeping
of the Collateral; (b) any loss or damage thereto occurring or arising in any
manner or fashion from any cause; (c) any diminution in the value thereof; or
(d) any act or default of any carrier, warehouseman, bailee,
25
<PAGE> 27
forwarding agency, or other Person. All risk of loss, damage, or destruction of
the Collateral shall be borne by Borrower.
11.3 INDEMNIFICATION. Borrower agrees to defend, indemnify, save,
and hold Lender and its officers, employees, and agents harmless against: (a)
all obligations, demands, claims, and liabilities claimed or asserted by any
other Person arising out of or relating to the transactions contemplated by this
Agreement or any other Loan Document, and (b) all losses (including attorneys
fees an disbursements) in any way suffered, incurred, or paid by Lender as a
result of or in any way arising out of, following, or consequential to the
transactions contemplated by this Agreement or any other Loan Document not
caused by Lender's gross negligence or intentional misconduct. This provision
shall survive the termination of this Agreement.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other Loan Document shall
be in writing and (except for financial statements and other informational
documents which may be sent by first-class mail, postage prepaid) shall be
personally delivered or sent by registered or certified mail, postage prepaid,
return receipt requested, or by prepaid telex, TWX, telecopier, or telegram
(with messenger delivery specified) to Borrower or to Lender, as the case may
be, at its address set forth below:
If to Borrower: VOICE POWERED TECHNOLOGY, INC.
18425 Burbank Boulevard
Suite 508
Tarzana, California 91356
Telecopier No.: ________________
With copy to: ROBINSON, DIAMANT & BRILL
A Professional Corporation
1888 Century Park East
Suite 1500
Los Angeles, CA 90067
Attn: Martin Brill, Esq.
Telecopier No.: (310) 277-7584
If to Lender: FRANKLIN ELECTRONIC PUBLISHERS, INC.
One Franklin Plaza
Burlington, New Jersey 08016
Attn: Gregory J. Winsky, Esq.
Telecopier No.: (609) 387-2666
26
<PAGE> 28
With copy to: PACHULSKI, STANG, ZIEHL & YOUNG
10100 Santa Monica Boulevard
Suite 1100
Los Angeles, California 90067
Attn: Brad R. Godshall, Esq.
Telecopier No.: (310) 201-0760
The parties hereto may change the address at which they are to
receive notices hereunder, by notice in writing in the foregoing manner given to
the other. All notices or demands sent in accordance with this Section 12, other
than notices by Lender in connection with Sections 9504 or 9505 of the Code,
shall be deemed received on the earlier of the date of actual receipt or three
(3) days after the deposit thereof in the mail. Borrower acknowledges and agree
that notices sent by Lender in connection with Sections 9504 or 9505 of the Code
shall be deemed sent when deposited in the mail or transmitted by telecopier or
other similar method set forth above.
13. MISCELLANEOUS.
13.1 INVALIDITY. Each provision of this Agreement shall be
interpreted in such manner as to be valid under applicable law, but if any
provision hereof shall be invalid under applicable law, such provision shall be
ineffective to the extent of such invalidity, without invalidating the remainder
of such provision or the remaining provisions hereof.
13.2 CHOICE OF LAW. This Agreement shall be interpreted and the
rights and liabilities of the parties hereto determined in accordance with the
laws of the State of New Jersey and all other laws of mandatory application.
13.3 JURY TRIAL WAIVER. AS A SPECIFICALLY BARGAINED INDUCEMENT
FOR LENDER TO ENTER INTO THIS AGREEMENT AND EXTEND CREDIT TO Borrower, Borrower
AND LENDER EACH WAIVE TRAIL BY JURY WITH RESPECT TO ANY ACTION, CLAIM, SUIT OR
PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT AND/OR THE CONDUCT OF
THE RELATIONSHIP BETWEEN LENDER AND Borrower.
13.4 ONE LOAN; JOINT AND SEVERAL LIABILITIES. All of the
Obligations shall constitute one loan secured by all Collateral. Lender may, in
its sole discretion, (i) exchange, enforce, waive or release any such Collateral
or portion thereof, and (ii) apply such Collateral and direct the order or
manner of sale thereof as Lender may, from time to time, determine.
13.5 SUPER-PRIORITY STATUS OF THE OBLIGATIONS. The Obligations
shall constitute, in accordance with Section 364(c)(1) of the Bankruptcy Code,
an administrative expense claim having
27
<PAGE> 29
priority over any and all administrative expenses of the kind specified in
Section 503(b) or 507(b) of the Bankruptcy Code, subject to the Carveout.
13.6 WAIVER OF BANKRUPTCY CODE SECTION 506(C).Borrower hereby
waives any claim they otherwise might have under Section 506(c) of the
Bankruptcy Code and agree that the Collateral shall not be charged with any
costs or expenses under Section 506(c) of the Bankruptcy Code.
13.7 INDEPENDENCE OF COVENANTS. All covenants hereunder shall be
given independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitations of, another covenant shall
not avoid the occurrence of a Default or Event of Default if such action is
taken or condition exists.
13.8 INTEGRATION. This Agreement, together with the other Loan
Documents, reflect the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.
13.9 ASSIGNMENTS/PARTICIPATIONS. Lender shall have the right to
assign its rights hereunder or to sell participations on such terms as Lender
deems appropriate.
13.10 AMENDMENTS, ETC. No amendment or waiver of any provision of
any Loan shall in any event be effective unless the same shall be in writing and
signed by Lender.
28
<PAGE> 30
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in Los Angeles, California.
FRANKLIN ELECTRONIC PUBLISHERS, INC.
By /s/ GREGORY WINSKY
----------------------------------
Title: Vice President
VOICE POWERED TECHNOLOGY, INC.,
By /s/ MITCHELL RUBIN
----------------------------------
Title: President
29
<PAGE> 1
EXHIBIT 10.6.5
[Franklin Letterhead]
October 7, 1998
Mr. Mitchell R. Rubin, President
Voice Powered Technology, Inc.
18425 Burbank Blvd.
Suite 508
Tarzana, Cal. 91356
RE: Post Petition Financing Agreement
Loan and Security Agreement
Dear Mr. Rubin:
This Letter Agreement is provided to document our understanding
regarding Franklin's guarantee of purchase orders placed by Voice Powered
Technology, Inc. to its suppliers of finished goods, GSS or Wa Shing ("the
Suppliers"), and to preserve all the rights and remedies reserved under a
certain Loan and Security Agreement by and between Voice Powered Technology,
Inc. ("VPTI") and Franklin Electronic Publishers, Inc. ("Franklin") dated as of
September 22, 1997, authorized under a certain Emergency Motion approving loan
agreement, granting partial relief from the automatic stay and compromising
controversies, filed October 1, 1997 in Case No. LA97-4692VZ (in re: Voice
Powered Technology, Inc., Debtor). Under the terms and conditions of the
aforesaid documents (including the right to modify and amend said Loan and
Security Agreement), Franklin reserves the right to guarantee the payment to
VPTI's Suppliers of shipments pursuant to purchase orders for the manufacture
and purchase of products produced in the ordinary course of business (the
"Supply Orders") which are supported by firm orders of sale to existing
customers (the "Customer Orders") under such terms and conditions as Franklin
shall deem acceptable for such purpose. Franklin reserves the right to reject,
limit, and/or request reduction in the quantity of products produced which shall
be considered collateral of the purchase order guarantee and impose or request
such limitations, modifications or changes as Franklin shall deem prudent to
preserve its position as guarantor of the Supplier Orders and may demand that
sufficient and adequate documentation be rendered acknowledging and perfecting
the understanding of any agreement entered into under this document. Shipment
under purchase orders which are guaranteed by Franklin shall, to the extent of
the amount of such outstanding guarantee, be deducted from the amount otherwise
borrowable of any account receivable derived from shipments of such finished
goods for the purpose of determining or requesting a loan or advance under the
terms of the Loan and Security Agreement. Franklin reserves all rights and
remedies provided under law and/or equity including rights and remedies provided
and/or reserved under said Loan and Security Agreement. Any guarantee by
Franklin hereunder shall be an obligation of VPTI
<PAGE> 2
[FRANKLIN LETTERHEAD]
under the Loan and Security Agreement. To the extent that Franklin is called
upon to make payment under this reimbursement obligation, said payment shall be
an Obligation of VPTI as defined under the Loan and Security Agreement and
Franklin shall be entitled to all the rights provided thereunder. Franklin's
agreement to the terms of this letter Agreement shall not obligate Franklin to
enter into any guarantee arrangement which is unsatisfactory or unsuitable to
Franklin nor give rise to any rights and remedies to VPTI for Franklin's failure
to enter into any guarantee obligation that it deems unfit. Franklin reserves
the right to terminate this Letter Agreement at any time with or without prior
notice of termination.
Intending to be legally bound by the terms of the understanding provided
above, the parties hereto have executed this document as provided below.
Very truly yours,
FRANKLIN ELECTRONIC PUBLISHERS, INC.
BY: /s/ GREGORY J. WINSKY
---------------------------------
Gregory J. Winsky
Senior Vice President
GJW/jos
ACCEPTED AND AGREED TO:
VOICE POWERED TECHNOLOGY, INC.
BY: /s/ MITCHELL B. RUBIN
-------------------------
Mitchell R. Rubin
ITS: President
DATE: 10/7/97
cc: Mr. Michael R. Strange, Executive Vice President
Mr. Kenneth H. Lind, Vice President, Finance
Franklin Electronic Publishers, Inc.
Brad R. Godshall, Esq.
Pachulski Strange Ziehl & Young P.C.
Phillip Gasteier, Esq.
Martin Brill, Esq.
Robinson Diamant & Brill
<PAGE> 1
EXHIBIT 10.6.6
[VOICE POWERED LETTERHEAD]
March 2, 1998
Gregory J. Winsky, Esq.
Franklin Electronic Publishers, Inc.
One Franklin Plaza
Burlington, New Jersey 08016
Re: Amendment to Loan and Security Agreement
between Voice Powered Technology International, Inc.
and Franklin Electronic Publishers Inc.
dated as of September 22, 1997
Dear Mr. Winsky:
This letter, when executed by Franklin Electronic Publishers, Inc., will amend
the above referenced Loan and Security Agreement as follows:
"Section 3.2(a) is hereby amended to May 15, 1998."
All other terms and conditions of the Loan and Security Agreement remain
unchanged and in full force and affect.
Please acknowledge your agreement with the foregoing by executing a copy of this
letter in the space provided below.
Thank you for your assistance.
Very truly yours,
/s/ MITCHELL B. RUBIN
- ------------------------
Mitchell B. Rubin
President and CEO
MBR/ems
mitch.letters.wins0302
Acknowledged by: /s/ GREGORY J. WINSKY
----------------------------------
Name: Gregory J. Winsky
Title: Vice President
Date: 3/6/98
<PAGE> 1
EXHIBIT 10.7.1
[Moss Group Letterhead]
October 30, 1997
ADDENDUM NO. 1 TO THAT CERTAIN LEASE DATED MARCH 3, 1997, BETWEEN GEORGE E.
MOSS, LESSOR AND VOICE POWERED TECHNOLOGY, INC., A CALIFORNIA CORPORATION,
LESSEE
It is hereby agreed between Lessor and Lessee that said lease pertaining to
Suites 506 and 508 in the office building located at 18425 Burbank Boulevard,
Tarzana, California, will be amended in the following manner only:
1. Lessor and Lessee hereby acknowledge and reaffirm all their respective
rights, duties and obligations under the lease including this Addendum. Should
anything in this Addendum conflict with anything in the lease, the terms of this
Addendum shall control.
2. Commencing November 30, 1997, Lessee shall give up the physical possession of
Suite 508, as highlighted in red on the attached Exhibit D. Lessee shall remove
its furniture and leave the premises in a neat and orderly manner by no later
than December 8, 1997.
3. Commencing December 1, 1997, Lessee shall continue to occupy the premises
known as Suite 506 only, as highlighted in yellow on the attached Exhibit D.
4. Commencing December 1, 1997, Lessee's rent shall be decreased to $4,250.00
per month and continuing thereafter for the term of the lease, plus any other
amounts due hereunder.
5. Commencing December 1, 1997, Lessee's monthly parking shall be decreased from
twelve (12) car parking to seven (7) monthly car parking. Lessee's maximum
allowance of monthly car parking shall be decreased from twenty-one (21) to
eight (8).
6. Paragraphs 25.1, 25.2, 25.4, 25.5, 25.6 and 25.7 of the lease dated March 3,
1997, are hereby deleted.
7. Commencing December 1, 1997, Paragraph 25.3 is amended as follows: Provided
Lessee is not in default after receipt of written notice from Lessor of such
default, allowing ten (10) days to cure such default, Lessee shall have the
right to terminate said lease, effective March 31, 1998 through May 31, 1998,
provided Lessor is given at least a prior written notice of forty-five (45) day
notice of Lessee's intention to terminate said lease.
8. Lessee agrees to forfeit its security deposit of $28,887.00 upon execution of
this addendum. Said sum will be applied towards rent due for the premises known
as Suites 506 and 508 in the aforementioned office building for the time period
of September 1, 1997,
<PAGE> 2
Voice Powered Technology, Inc.
Addendum No. 1
October 30, 1997
Page 2
through November 30, 1997.
9. Upon execution of this addendum Lessee agrees to remit the sum of $8,500.00
representing the monthly rent for December, 1997, and a security deposit of
$4,250 for the premises Lessee is leasing known as Suite 506 in the
aforementioned office building.
The premises shall be leased in "as is" condition and all other terms and
conditions of the existing lease will remain the same. This addendum is subject
to final approval by the U.S. Bankruptcy Court.
LESSOR: LESSEE: Voice Powered Technology, Inc.
A California Corporation
/s/ GEORGE MOSS /s/ MITCHELL RUBIN
- ------------------------------ ---------------------------------
George E. Moss Mitchell Rubin, President
<PAGE> 1
EXHIBIT 10.7.2
[Moss Group Letterhead]
April 10, 1998
ADDENDUM NO. 2 TO THAT CERTAIN LEASE DATED MARCH 3, 1997, BETWEEN GEORGE E.
MOSS, LESSOR AND VOICE POWERED TECHNOLOGY, INC., A CALIFORNIA CORPORATION,
LESSEE
It is hereby agreed between Lessor and Lessee that said lease pertaining to
Suites 506 and 508 in the office building located at 18425 Burbank Boulevard,
Tarzana, California, will be amended in the following manner only:
1. Lessor and Lessee hereby acknowledge and reaffirm all their respective
rights, duties and obligations under the lease including this Addendum. Should
anything in this Addendum conflict with anything in the lease, the terms of this
Addendum shall control.
2. Paragraph 7 of Addendum No. 1 dated October 30, 1997, is hereby deleted.
3. Provided Lessee is not in default after receipt of written notice from Lessor
of such default, allowing ten (10) days to cure such default, Lessee shall have
the right to terminate said lease anytime after June 30, 1998, provided Lessor
is given at least a prior written notice of forty-five (45) day notice of
Lessee's intention to terminate said lease.
The premises shall be leased in "as is" condition and all other terms and
conditions of the existing lease will remain the same.
LESSOR: LESSEE: Voice Powered Technology, Inc.
A California Corporation
/s/ GEORGE E. MOSS /s/ MITCHELL RUBIN
- ------------------------- ------------------------------------
George E. Moss Mitchell Rubin, President
<PAGE> 1
MARTIN J. BRILL (State Bar No. 53220)
PHILIP A. GASTEIER (State Bar No. 130043)
ROBINSON, DIAMANT & BRILL
A Professional Corporation
1888 Century Park East, Suite 1500
Los Angeles, California 90067
Telephone: (310) 277-7400
Telecopier: (310) 277-7584
Attorneys for Debtor and Debtor in Possession
BRAD R. GODSHALL
PACHULSKI, STANG, ZIEHL & YOUNG PC
10100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90067
Telephone: (310) 277-6910
Attorneys for Franklin Electronic Publishing, Inc.
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
In re
VOICE POWERED TECHNOLOGY Bk. No. LA 97-46292-VZ
INTERNATIONAL, INC., a California Chapter 11
corporation,
Debtor.
- --------------------------------------------------------------------------------
1. ORDER APPROVING AMENDED DISCLOSURE STATEMENT AND FIXING TIME FOR FILING
ACCEPTANCES OR REJECTIONS OF PLAN, AND FIXING OTHER DATES, COMBINED WITH
NOTICE THEREOF ENTERED JANUARY 26, 1998
2. AMENDED DISCLOSURE STATEMENT AND PLAN OF REORGANIZATION FOR VOICE POWERED
TECHNOLOGY INTERNATIONAL, INC. DATED AS OF JANUARY 21, 1998
<PAGE> 2
MARTIN J. BRILL (State Bar No. 53220)
PHILIP A. GASTEIER (State Bar No. 130043)
ROBINSON, DIAMANT & BRILL
A Professional Corporation
1888 Century Park East, Suite 1500
Los Angeles, California 90067
Telephone: (310) 277-7400
Telecopier: (310) 277-7584
Attorneys for Debtor and Debtor in Possession
BRAD R. GODSHALL
PACHULSKI, STANG, ZIEHL & YOUNG PC
10100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90067
Telephone: (310) 277-6910
Attorneys for Franklin Electronic Publishing, Inc.
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
In re Bk. No. LA 97-46292-VZ
VOICE POWERED TECHNOLOGY Chapter 11
INTERNATIONAL, INC., a California
corporation, ORDER APPROVING AMENDED
DISCLOSURE STATEMENT AND FIXING
Debtor. TIME FOR FILING ACCEPTANCES OR
REJECTIONS OF PLAN, AND FIXING OTHER
DATES, COMBINED WITH NOTICE
THEREOF
HEARING ON CONFIRMATION OF PLAN:
Date: April 23, 1998
Time: 3:00 P.M.
Place: Courtroom "1368"
- -------------------------------------
AT LOS ANGELES, CALIFORNIA, IN SAID DISTRICT ON THIS 23RD DAY OF JANUARY, 1998:
The Amended Disclosure Statement and Plan of Reorganization for Voice
Powered Technology International, Inc. dated as of January 21, 1998 (the
"Disclosure Statement") having been filed by Voice Powered Technology
International, Inc. ("Debtor") and Franklin Electronic Publishing, Inc.
("Franklin, and collectively with Debtor, the "Proponents"), said Disclosure
Statement referring to the plan of reorganization contained therein (the
"Plan"); and
It having been determined after hearing on notice that the Disclosure
Statement contains adequate information under 11 U.S.C. Section 1125;
<PAGE> 3
IT IS ORDERED AND NOTICE IS HEREBY GIVEN that:
A. The Disclosure Statement is hereby approved;
B. March 9, 1998 is fixed as the last day for returning ballots
accepting or rejecting the Plan so that they are actually received at the
address specified in the ballots no later than 5:00 p.m. Pacific Standard Time,
on March 9, 1998. Any ballots received after that time and date shall not be
counted.
C. On or before February 9, 1998, copies of the Disclosure Statement
and Plan, and this Order and Notice shall be transmitted by first-class mail to
all creditors and equity security holders, including without limitation, record
holders of the Debtor's equity securities as of January 21, 1998, and shall be
transmitted to the United States Trustee as provided in Federal Rule of
Bankruptcy Procedure 3017(d), together with ballots for accepting or rejecting
the Plan conforming to Official Form 14, for each class voting on the Plan.
D. April 23, 1998, at 3:00 P.M. is fixed as the date and time for
the hearing on confirmation of the Plan, which hearing shall be held in
Courtroom 1368, Roybal Federal Building, 255 E. Temple Street, Los Angeles,
California 90012.
E. Any party wishing to object to confirmation of the Plan must file
a statement of preliminary objections, setting forth the grounds for such
objections, not later than March 9, 1998, and serve a copy on counsel for the
Proponents, whose names and addresses appear in the upper left hand corner of
the first page of this Notice, so that it is actually received not later than
March 9, 1998.
F. On or before March 16, 1998, the Proponents shall file their
Motion in support of confirmation of the Plan, and serve a copy on all parties
who have filed a preliminary statement of objections to confirmation, all
parties voting to reject the Plan, parties who have filed and served requests
for special notice and the United States Trustee. Objections to such Motion must
be filed and served on counsel for the Proponents not less than 11 days prior to
the hearing on confirmation of the Plan. Any objections not so filed and served
shall be deemed waived.
DATED: January 23, 1998
/s/
----------------------------------------------
VINCENT P. ZURZOLO
United States Bankruptcy Judge
DATED: January 26, 1998
<PAGE> 4
MARTIN J. BRILL (State Bar No. 53220)
PHILIP A. GASTEIER (State Bar No. 130043)
ROBINSON, DIAMANT & BRILL
A Professional Corporation
1888 Century Park East, Suite 1500
Los Angeles, California 90067
Telephone: (310) 277-7400
Telecopier: (310) 277-7584
Attorneys for Debtor and Debtor in Possession
BRAD R. GODSHALL
PACHULSKI, STANG, ZIEHL & YOUNG PC
10100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90067
Telephone: (310) 277-6910
Attorneys for Franklin Electronic Publishing, Inc.
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
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In re Bk. No. LA 97-46292-VZ
VOICE POWERED TECHNOLOGY
INTERNATIONAL, INC., a California Chapter 11
corporation,
AMENDED DISCLOSURE STATEMENT AND PLAN OF REORGANIZATION FOR
Debtor. VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. DATED AS OF
JANUARY 21, 1998
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TABLE OF CONTENTS
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I. INTRODUCTION................................................................................................ 1
II. GENERAL DISCLAIMER AND VOTING PROCEDURE..................................................................... 1
III. WHO MAY OBJECT TO CONFIRMATION OF THE PLAN.................................................................. 1
IV. WHO MAY VOTE TO ACCEPT OR REJECT THE PLAN................................................................... 1
V. VOTES NECESSARY TO CONFIRM THE PLAN......................................................................... 2
VI. INFORMATION REGARDING VOTING IN THIS CASE................................................................... 2
VII. DESCRIPTION OF DEBTOR'S PAST AND FUTURE BUSINESS AND EVENTS PRECIPITATING BANKRUPTCY FILING................. 3
VIII. CRITICAL PLAN PROVISIONS.................................................................................... 3
IX. DESCRIPTION AND TREATMENT OF CLAIMS......................................................................... 4
a. Overview of Plan Distributions..................................................................... 4
b. Administrative Expenses............................................................................ 5
c. Unsecured Tax Claims............................................................................... 6
d. CLASS ONE.......................................................................................... 6
e. CLASS TWO.......................................................................................... 7
f. CLASS THREE........................................................................................ 7
g. CLASS FOUR......................................................................................... 7
h. CLASS FIVE......................................................................................... 8
i. CLASS SIX.......................................................................................... 8
j. CLASS SEVEN........................................................................................ 9
X. SOURCE OF MONEY TO PAY CLAIMS AND INTEREST-HOLDERS.......................................................... 9
XI. FINANCIAL RECORDS CONCERNING DEBTOR......................................................................... 10
XII. ASSETS AND LIABILITIES OF THE ESTATE........................................................................ 10
a. Assets............................................................................................. 10
b. Liabilities........................................................................................ 10
c. Summary............................................................................................ 10
XIII. TREATMENT OF NONCONSENTING CLASSES.......................................................................... 10
XIV. TREATMENT OF NONCONSENTING MEMBERS OF CONSENTING CLASS (CHAPTER 7 LIQUIDATION ANALYSIS)..................... 10
XV. FUTURE DEBTOR............................................................................................... 11
a. Management of Debtor............................................................................... 11
b. Disbursing Agent................................................................................... 11
c. Future Financial Outlook........................................................................... 12
XVI. SALE OF PROPERTY; ASSUMPTION OF CONTRACTS AND LEASES; OTHER PROVISIONS...................................... 12
XVII. BANKRUPTCY PROCEEDINGS...................................................................................... 12
XVIII. TAX CONSEQUENCES OF PLAN.................................................................................... 13
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a. Tax Consequences To Holders Of Claims.............................................................. 13
1. Consideration Allocable To Interest........................................................ 13
2. Holders Of Claims Receiving Only Cash...................................................... 14
3. Secured Claims............................................................................. 14
b. Tax Consequences To Holder Of Interests............................................................ 14
c. Backup Withholding................................................................................. 14
XIX. EFFECT OF CONFIRMATION OF PLAN.............................................................................. 14
a. General comments................................................................................... 14
b. Discharge of liability for payment of debts; status of liens; equity security holders.............. 15
c. Applicability of Sections 1125 and 1145 of the Bankruptcy Code to Common
Stock and other Securities Issued Under the Plan, and to Subsequent Transfers...................... 15
d. Modification of the Plan........................................................................... 16
e. Post-Confirmation Causes of Action................................................................. 16
f. Final Decree....................................................................................... 16
g. Retention Of Jurisdiction.......................................................................... 16
h. Request For Confirmation........................................................................... 16
XX. DECLARATION IN SUPPORT OF DISCLOSURE STATEMENT AND PLAN..................................................... 17
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I. INTRODUCTION
On September 22, 1997, Voice Powered Technology International, Inc. ("Debtor")
filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code ("Code").
The document you are reading is both the Plan of Reorganization ("Plan") and the
Disclosure Statement. Debtor and Franklin Electronic Publishing, Inc.
("Franklin") (collectively, "Proponents") have proposed the Plan to treat the
claims of the Debtor's creditors and the interests of shareholders and to
reorganize the Debtor's business affairs. A disclosure statement describes the
assumptions that underlie the Plan and how the Plan will be executed. The
Bankruptcy Court ("Court") has approved the form of this document as an adequate
disclosure statement, containing enough information to enable parties affected
by the Plan to make an informed judgment about the Plan. The Court has not yet
confirmed the Plan, which means the terms of the Plan are not now binding on
anyone.
The Proponents have reserved April 23, 1998 in Courtroom 1368 for a hearing to
determine whether the Court will confirm the Plan.
Any interested party desiring further information should contact: Philip A.
Gasteier, Esq. at Robinson, Diamant & Brill, a Professional Corporation, at 1888
Century Park East, Suite 1500, Los Angeles, California 90067, (301) 277-7400,
FAX (310) 277-7584.
II. GENERAL DISCLAIMER AND VOTING PROCEDURE
PLEASE READ THIS DOCUMENT, INCLUDING THE ATTACHED EXHIBITS, CAREFULLY. IT
EXPLAINS WHO MAY OBJECT TO CONFIRMATION OF THE PLAN. IT EXPLAINS WHO IS ENTITLED
TO VOTE TO ACCEPT OR REJECT THE PLAN. IT ALSO TELLS ALL CREDITORS AND ANY
SHAREHOLDERS OR PARTNERS WHAT TREATMENT THEY CAN EXPECT TO RECEIVE UNDER THE
PLAN, SHOULD THE PLAN BE CONFIRMED BY THE COURT.
THE SOURCES OF FINANCIAL DATA RELIED UPON IN FORMULATING THIS DOCUMENT ARE SET
FORTH IN THE DECLARATION IN SECTION XX BELOW. ALL REPRESENTATIONS ARE TRUE TO
THE PROPONENTS' BEST KNOWLEDGE.
NO REPRESENTATIONS CONCERNING THE DEBTOR THAT ARE INCONSISTENT WITH ANYTHING
CONTAINED HEREIN ARE AUTHORIZED EXCEPT TO THE EXTENT, IF AT ALL, THAT THE COURT
ORDERS OTHERWISE.
THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE U.S.
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN.
After carefully reviewing this document and the attached exhibits, please vote
on the enclosed ballot and return it in the enclosed envelope.
The Proponents have reserved a hearing date for a hearing to determine whether
the Court will confirm the Plan. Please refer to Section I above for the
specific hearing date. If, after receiving the ballots, it appears that the
Proponents have the requisite number of votes required by the Code, the
Proponents will file a motion (the "Motion") for an order confirming the Plan.
The Motion shall at least be served on all impaired creditors and shareholders
who reject the Plan and on the Office of the United States Trustee. Any
opposition to the Motion shall be filed and served on the Proponents at the
address set forth on page 1 hereof no later than eleven days prior to the
hearing date. Failure to oppose the confirmation of the Plan may be deemed
consent to the Plan's confirmation.
III. WHO MAY OBJECT TO CONFIRMATION OF THE PLAN
Any party in interest may object to confirmation of the Plan, but as explained
below not everyone is entitled to vote to accept or reject the Plan.
IV. WHO MAY VOTE TO ACCEPT OR REJECT THE PLAN
It requires both an allowed and impaired claim or interest in order to vote
either to accept or reject the Plan. A claim is defined by the Code to include a
right to payment from the Debtor. An interest represents an ownership stake in
the Debtor.
In order to vote a creditor or interest-holder must first have an allowed claim
or interest. With the exceptions explained below, a claim is allowed if proof of
the claim or interest is properly filed before any bar date and no party in
interest has objected, or
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if the court has entered an order allowing the claim or interest. Please refer
to Section VI below for specific information regarding bar dates in this case.
Under certain circumstances a creditor may have an allowed claim even if a proof
of claim was not filed and the bar date for filing a proof of claim has passed.
A claim is deemed allowed if the claim is listed on the Debtor's schedules and
is not scheduled as disputed, contingent, or unliquidated. Exhibit "A" contains
a list of claims that are not scheduled as disputed, contingent, or
unliquidated, unless otherwise indicated.
Similarly, an interest is deemed allowed if it is shown on the list of equity
security holders filed by the Debtor with the court and is not scheduled as
disputed.
In order to vote, an allowed claim or interest must also be impaired by the
Plan.
Impaired creditors include those whose legal, equitable, and contractual rights
are altered by the Plan, even if the alteration is beneficial to the creditor.
The claims of all unsecured creditors (Classes 3 and 4) are impaired under the
Plan. A contract provision that entitles a creditor to accelerated payment upon
default does not, however, necessarily render the claimant impaired, even if the
Debtor defaulted and the Plan does not provide the creditor with accelerated
payment. The creditor is deemed unimpaired so long as the Plan cures the
default, reinstates the maturity of such claim as it existed before default, and
compensates for any damages incurred as a result of reasonable reliance upon the
acceleration clause.
Impaired interest-holders include those whose legal, equitable, and contractual
rights are altered by the Plan, even if the alteration is beneficial to the
interest holder. Class 5 and Class 7 interest holders are impaired under the
Plan. Class 6 interest holders are not impaired under the Plan although such
interest holders will find their equitable interest in the Debtor substantially
diluted in that the Plan provides for the conversion of Franklin's secured claim
against the estate into common stock in the Debtor sufficient to give Franklin
an eighty percent (80%) equity interest in Debtor (on a fully diluted basis
following conversion of all of Debtor's outstanding convertible preferred stock
into common stock in accord with this Plan) (the "Stock Issuance").
There are also some types of claims which the Code requires be treated a certain
way. For that reason they are considered unimpaired and therefore holders of
these claims cannot vote.
To summarize, there are two prerequisites to voting: a claim or interest must be
both allowed and impaired under the Plan.
If a creditor or interest-holder has an allowed and impaired claim or interest,
then he or she may vote either to accept or reject the Plan (unimpaired
claimants or interest-holders are deemed to have accepted the Plan). Impaired
claims or interests are placed in classes and it is the class that must accept
the Plan. Members of unimpaired classes do not vote, although as stated above,
they may object to confirmation of the Plan. Even if all classes do not vote in
favor of the Plan, the Plan may nonetheless be confirmed if the dissenting
classes are treated in a manner prescribed by the Code. Please refer to Section
VI below for information regarding impaired and unimpaired classes in this case.
Section IX sets forth which claims are in which class. Secured claims are placed
in separate classes from unsecured claims. Fed. R. Bankr. P. 3018(d) provides:
"A creditor whose claim has been allowed in part as a secured claim and in part
as an unsecured claim shall be entitled to accept or reject a plan in both
capacities."
V. VOTES NECESSARY TO CONFIRM THE PLAN
The Court may confirm the Plan if at least one noninsider impaired class of
claims has accepted and certain statutory requirements are met as to both
nonconsenting members within a consenting class and as to dissenting classes. A
class of claims has accepted the Plan when more than one-half in number and at
least two-thirds in amount of the allowed claims actually voting, vote in favor
of the Plan. A class of interests has accepted the Plan when at least two-thirds
in amount of the allowed interests of such class actually voting have accepted
it. It is important to remember that even if the requisite number of votes to
confirm the Plan are obtained, the Plan will not bind the parties unless and
until the Court makes an independent determination that confirmation is
appropriate. That is the subject of any upcoming confirmation hearing.
VI. INFORMATION REGARDING VOTING IN THIS CASE
The bar date for filing a proof of claim in this case was November 17, 1997.
Exhibit "A" lists claims filed and identifies likely objections to claims
identified to date. The Proponents anticipate filing objections to claims in
January or February, 1998.
In this case the Proponents believe that classes 1, 3, 4 and 5 are impaired and
therefore entitled to vote. Classes 2 and 6 are unimpaired and therefore do not
vote. Class 7 interests are impaired but not entitled to vote because they are
canceled under the
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Plan. A party that disputes the Proponents' characterization of its claim or
interest as unimpaired may request a finding of impairment from the Court in
order to obtain the right to vote.
Ballots must be received by the Proponents, addressed to Marina Fineman at
Robinson, Diamant & Brill, A Professional Corporation, at 1888 Century Park
East, Suite 1500, Los Angeles, California 90067, by 5:00 p.m. Pacific Time on
March 9, 1998.
VII. DESCRIPTION OF DEBTOR'S PAST AND FUTURE BUSINESS AND EVENTS PRECIPITATING
BANKRUPTCY FILING
The Debtor is a California corporation. The Debtor has not elected to be treated
as a small business under 11 U.S.C. Section 1121(e).
Debtor conducted the majority of its business activity in Los Angeles since its
inception.
What follows is a brief summary of the dates and circumstances that led Debtor
to file bankruptcy. Since the calendar quarter ended December 31, 1995, the
Debtor has sustained significant net operating losses. The losses were due to a
decline in sales of the Debtor's main product line as well as several new
product launches which were not accepted in the consumer marketplace. The Debtor
continued its efforts to restructure operations by reducing operating costs,
seeking additional equity capital and pursuing other merger alternatives.
In May, 1997, the Debtor concluded a transaction with Franklin which included
the selling of a portion of the Debtor's product line to Franklin as well as
obtaining $1.7 million in long-term debt from Franklin and using the proceeds to
settle then existing obligations to various trade creditors (see notes 2 and 3
of Exhibit "C" attached hereto). Despite these efforts, the Debtor continued to
be unable to generate sufficient revenues and gross profit to sustain its
ongoing costs of operations, further depleting working capital. In August, 1997,
Debtor was unable to timely launch its new line of products due to delays in the
start-up manufacturing for these products. Lastly, in August, 1997, the Debtor
was sued by Everen Securities, Inc., a company which the Debtor had retained in
May, 1996, to assist in seeking out strategic alternatives, and which the Debtor
terminated in February, 1997. This suit filed in Federal District Court in
Illinois asserted a claim against the Debtor of $435,000 for fees allegedly due
Everen as a result of the aforementioned transaction the Debtor consummated in
May, 1997. The Debtor disputes this claim but did not have adequate cash
resources to defend this suit. The stock of the Debtor is publicly held, and
traded on NASDAQ until April of 1997. It has been eligible for trade on the OTC
Bulletin Board since that time.
What follows is a brief description of the Debtor's business and future business
plans. Further details relating to the Debtor's financial condition and
post-confirmation operation of the Debtor are found in sections X, XI, XII, XIV
and XV.
Before bankruptcy, Debtor manufactured and sold the following types of products:
portable voice recognition based consumer electronic products. Debtor will
continue this business activity following confirmation of the Plan.
Additionally, however, following confirmation of the Plan Debtor will become an
eighty percent (80%) subsidiary of Franklin (or of Franklin's nominee) pursuant
to the Stock Issuance. As such, Franklin may well elect to engage Debtor in
Franklin's existing business lines. (See Section X below.)
Franklin is one of the world's largest designers, developers, and publishers of
electronic books, having sold more than 15 million units since 1986. The
company's electronic books are hand-held, battery-powered devices that
incorporate the text of a reference work or data base and permit the user to
read selected portions on a display screen.
Franklin owns or has licenses to publish in electronic hand-held format more
than 200 titles, including monolingual and bilingual dictionaries, the Bible,
encyclopedias, entertainment-oriented publications, educational publications,
and medical publications. Franklin has recently begun to sell a line of personal
information management electronic products, such as data banks and organizers,
under its recently licensed ROLODEX(R) Electronics Trademark.
VIII. CRITICAL PLAN PROVISIONS
Listed below are the sources of money earmarked to pay creditors and
interest-holders.
a. The sole source for the payment of all claims of unsecured creditors
against Debtor shall be a loan of $350,000 by Franklin to Debtor (the "Plan
Loan") to create a fund to be dedicated to the payment of creditor claims (the
"Creditor Fund"). Certain administrative and other priority claims (and,
theoretically, potential secured claims) will be paid from the Creditor Fund
before the remainder is distributed to Class 4 general unsecured claims, as
described below.
b. Secured creditors other than Franklin will be satisfied out of their
collateral. Treatment of Franklin's claims is described in Section IX.
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c. Future earnings for the benefit of interest holders may come from
continued operations of the Debtor.
d. Post-petition liabilities arising in the ordinary course of the
Debtor's business (specifically including, without limitation, payroll expenses,
commissions, rent and accounts payable for inventory purchases and other
incidental operating expenses; but specifically excluding professional fees and
expenses) will be paid by the Reorganized Debtor in the ordinary course and will
not be paid from the Creditor Fund.
Most likely, general unsecured creditors can expect payment on or before: July
1, 1998. Creditors will only receive one payment under the Plan unless the
resolution of claims is significantly delayed and a partial distribution is
made. The precise amount of this distribution depends upon (a) the amount of
ultimately allowed claims against the estate; (b) the efficiency of Disbursing
Agent in administering the Creditor Fund; and (c) whether general unsecured
creditors will support the Plan (in which case Franklin's large unsecured claim
will be deemed satisfied solely by the Stock Issuance). Proponents estimate that
general unsecured creditors will receive approximately 12 cents on each dollar
of claim, if general unsecured creditors vote to accept the Plan. Otherwise, the
dilutive effect of the Franklin general unsecured claim could reduce the
recovery to general unsecured creditors to approximately 7 cents on each dollar
of claim.
IX. DESCRIPTION AND TREATMENT OF CLAIMS
a. Overview of Plan Distributions
Below is a summary of who gets paid what and when and from what source. This
summary reflects, in part, Debtor's estimate of claims which will ultimately be
allowed in various classes. It therefore does not contemplate that all presently
asserted claims will ultimately be allowed. The identity of members within a
particular class is explained beginning below. The second column may list two
amounts. First, the amount of each distribution, or if only one is to be made,
then that amount; second, the total amount that will be distributed. The
Proponent is usually not required by law to pay an unsecured creditor or
interest holder everything it would otherwise be entitled to had a bankruptcy
case not commenced. The "Payment Due Date" column states the frequency with
which payments will be made and the starting and ending dates. Look at the
starting date to figure out who will be paid before and after you and in what
amount. The "Source of Payment" column describes the expected source of payment.
Further details regarding the source of payment are found in sections X and XI.
The timing of payments to many creditors is determined by the "Effective Date."
Administrative claims, unless otherwise stated, must be paid by the Effective
Date. The timing of payments to impaired creditors is measured from the
Effective Date, but could be affected by delays in determining the allowed
amount of a claim. In this case, the Effective Date is the eleventh day after
the entry of the order confirming the Plan.
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AMOUNT OF EACH PAYMENT
PAYMENT RECIPIENT (TOTAL AMOUNT TO BE PAID) PAYMENT DUE DATE SOURCE OF PAYMENT
----------------- ------------------------- ---------------- -----------------
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1. Robinson, Diamant & Brill $ 80,000 Effective Date $20,000.00 retainer
A Professional Corporation (est. in addition to the Creditor Fund
retainer)
2. Tillis, Webb, Kulla and Grant $ 10,000 Effective Date $5,000 retainer Creditor
(est.) Fund
3. BDO Seidman LLP $ 25,000 Effective Date Creditor Fund
(est.)
4. Franklin-Administrative Claim $250,000 Quarterly or as Cash Flow of Debtor
collateral liquidated Post-Effective Date
5. Executory Contract Assumption Cure Payments See Section XVI Effective Date Cash on Hand
$45,000
(est.)
6. Class "1" -- Secured Claim of Franklin 80% of Debtor's Equity Effective Date Debtor
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AMOUNT OF EACH PAYMENT
PAYMENT RECIPIENT (TOTAL AMOUNT TO BE PAID) PAYMENT DUE DATE SOURCE OF PAYMENT
----------------- ------------------------- ---------------- -----------------
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7.A Class "2A" -- Secured Claim of KBK $-0- Previously Satisfied Proceeds of Collateral
Financial, Inc.
7.B Class "2B" -- Other Allowed Secured Claims No Allowed Claims Expected Effective Date, if Return of Collateral or
applicable Payment by Debtor from
Creditor Fund
8. Class "3" -- Allowed Priority Unsecured $ 17,000 Effective Date Creditor Fund
Claims, and Priority Tax Claims
9. Class "4" -- Allowed General Unsecured $218,000 (estimate) 90 days from Remaining amounts in
Claims Effective Date Creditor Fund
10. Class "5" -- Equity-Preferred Stock $-0- N/A Conversion to Common and
GSS/Array Technology, Inc. Retention of Common
Interest
11. Class "6" -- Equity Common Stock $-0- N/A Retain Interest
12. Class "7" -- Options or Other Rights to $-0- N/A Canceled if not Exercised
Acquire Stock of Debtor Prior to Effective Date
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All claims listed below are undisputed unless it is otherwise stated or the
claims are stated to remain subject to allowance by the Court. On the Effective
Date, Franklin will make the Plan Loan of $350,000 by paying such amount to the
Disbursing Agent. On the Effective Date, or as soon as practicable thereafter,
the Disbursing Agent will deposit into a segregated account ("Reserve Account")
the balance of the Creditor Fund remaining after payments to holders of allowed
claims eligible for payments from such fund on the Effective Date. The Reserve
Account, together with interest thereon will be held in trust for the benefit of
holders of any disputed or not yet allowed administrative, tax and other
priority claims, and general unsecured claims.
When such an administrative, tax or other priority claim becomes allowed, the
Disbursing Agent will distribute to the holder thereof an amount equal to the
sum to which such holder is then entitled. The balance remaining less fees and
expenses of the Disbursing Agent will be distributed to unsecured creditors when
all claims are resolved. Distributions not claimed within one (1) year will be
returned to the Reorganized Debtor.
No claimant or interest holder is an affiliate of the Debtor. The treatment
provided herein shall be in full and complete satisfaction of all claims.
Below is a detailed description and treatment of claims and interests.
b. Administrative Expenses
1. These include the "actual, necessary costs and expenses of
preserving the estate" as determined by the Court after notice to creditors of a
request for payment and after a hearing thereon.
2. The Code requires that allowed administrative expenses be
paid on the Effective Date unless the party holding the administrative expense
agrees otherwise. The claimants other than Franklin have not agreed otherwise.
Administrative Claim #1.
Claimant: Franklin Electronic Publishing, Inc.
Approximately $250,000 pursuant to post-petition financing. To
be paid through collection, liquidation of post-petition
collateral, and post-Effective Date cash flow. Franklin has
agreed to defer payment if necessary pursuant to the Plan.
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Administrative Claim # 2.
Claimant: Robinson, Diamant & Brill, A Professional
Corporation.
Approximately $100,000 (prior to application of $20,000
retainer), subject to court approval. To be paid on Effective
Date, or as allowed, to extent not previously paid from
retainer.
Administrative Claim # 3.
Claimant: Tillis, Webb, Kulla & Grant.
Approximately $10,000, subject to court approval. To be paid
on Effective Date or as allowed.
Administrative Claim # 4.
Claimant: BDO Seidman LLP
Approximately $25,000, subject to court approval. To be paid
on Effective Date or as allowed.
TOTAL $385,000 (est.)
c. Unsecured Tax Claims
1. These include certain types of property, sales, and income
taxes.
2. The Code requires that the holders of such claims receive
cash payments over a period not exceeding six years after the date of assessment
of such claim, unless agreed otherwise. The claimants have not agreed otherwise.
The total cash payments must have a present value equal to the amount of the
allowed claim. Any such allowed claim will be paid in full in cash from the
Creditor Fund on the Effective Date.
Tax Claim # 1.
Claimant: Los Angeles County Tax Collector
Date of Assessment: July 1997 (Unsecured Property Tax)
Total amount of claim as of September 30, 1997: $5,451.19
Treatment: Paid on Effective Date
Claimant: Los Angeles County Tax Collector
Date of Assessment: June 4, 1997 (Late Payments of Business
License Renewal)
Total amount of claim as of June 30, 1997: $428.60
Treatment: Paid on Effective Date.
TOTAL UNSECURED TAX CLAIMS $5,879.65
d. CLASS ONE
Secured Claim of Franklin (security interest subject to KBK
Class 2 secured claim in pre-petition assets) Total amount of
allowed claim: With interest, Franklin's pre-petition claim
exceeds $1.75 million. For the purposes hereof, Franklin is
assumed to have a secured claim of $823,000 (based on
management's estimated value of the collateral securing
Franklin's pre-petition claim following the satisfaction of
the KBK Class 2 claim).
Total amount of payments (over time) to satisfy the secured
claim: the Stock Issuance (as defined in Section IV above,
common stock of Debtor providing Franklin an eighty percent
(80%) equity interest, on a fully diluted basis)
Interest rate (to compensate creditor because claim is paid
over time): None
Impaired
Payment date: Effective Date
Amount of each installment: N/A
Frequency of payments: N/A
Total yearly payment: N/A
Final payment date: N/A
Lien is eliminated by the Plan.
Description of Collateral: All assets
Additional comments: N/A
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e. CLASS TWO
A. Secured Claim of KBK Financial, Inc. ("KBK")
Total amount of allowed secured claim: $233,000 at petition
date, reduced to $0.00 as of December 31, 1997
Total amount of payments (including prior to Effective Date)
to satisfy the secured claim: $233,000 Interest rate: per
contract
Unimpaired
Payment date: Paid
Amount of each installment: N/A
Frequency of payments: N/A
Total yearly payments: N/A
Final payment due: N/A
Lien is not eliminated by the Plan.
Description of Collateral: Accounts Receivable and Inventory
Additional comments: All claims of KBK have been satisfied as
of the filing of this Amended Plan and Disclosure Statement.
B. Each other allowed secured claim, if any, shall constitute
its own subclass. Debtor believes that other claims filed as
secured claims are mistakenly or improperly filed as such,
superseded due to payment or return of collateral, or
otherwise subject to disallowance. If necessary, Debtor
intends to object to such claims and estimates that all such
claims will be disallowed.
To the extent other allowed secured claims exist, they are not
impaired under this Plan. Each holder of a claim in any
subclass of Class 2B shall receive one of the following, at
the option of Franklin:
(i) cash from the Creditor Fund in an amount equal to the
allowed amount of such allowed claim payable on the latest of
(a) the Effective Date, (b) as soon as practicable after the
Effective Date, or (c) as soon as practicable after the order
allowing the claim becomes a final order, if the claim is
allowed after the Effective Date; or (ii) the lien to which
the holder of such claim is entitled remaining in place and
unaltered by this Plan; or (iii) the claim being cured and
reinstated pursuant to Section 1124(2) of the Bankruptcy Code.
f. CLASS THREE
Unsecured Priority Claims in 11 U.S.C. Sections 507(a)(3)
and (4)
See Exhibit "A" for list of claimants and amount owed each.
See discussion of Class 4, below, concerning possible
objections to listed claims.
Total amount allowed claims: $11,658.89 (estimate)
Total amount of payments (over time) to satisfy claims: 100%
of allowed amount of class 3 priority unsecured claims
Interest rate: N/A
Impaired
Payment date: Later of Effective Date or date claim is
allowed.
Amount of each installment: N/A
g. CLASS FOUR
Unsecured Claims
See Exhibit "A" for list of claimants and amount owed each.
The amount presently asserted by the creditor is shown in the
"Allowed Subject to Objection" column, while the Debtor's
estimate is shown in the "Estimated" column unless the Debtor
does not intend to file an objection. Thus, each claim listed
in an identical amount as asserted and estimated is likely to
be allowed in that amount for purposes of distribution.
Total amount allowed claims: Estimated at $2,700,000 (This
amount is estimated and assumes inclusion of $930,000
unsecured claim of Franklin and allowance of approximately
$600,000 on presently disputed claims. See Additional Comments
below re Franklin.) As of the filing of this Amended
Disclosure Statement and Plan, Debtor has calculated that
total unsecured claims filed or deemed filed, and not yet
disallowed, approximate $3.9 million. Debtor believes that
total properly allowable unsecured claims, excluding Franklin,
approximate $1.19 million. These amounts are reflected on
Exhibit A, Class 4. Debtor's estimate contemplates significant
reductions as a result of objections to claims. However,
Debtor may not prevail in full in all objections to claims, or
may determine not to pursue objections for other reasons such
as a cost/benefit analysis. To attempt to provide creditors
with estimates which are as realistic as possible, Debtor has
based its estimates of possible
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distribution on the above estimated allowed amount (i.e.,
approximately $1,770,000, or with the Franklin unsecured
claim, a total of $2,700,000), which assumes a significant
reduction in presently asserted claims, but more than the
Debtor's lowest estimate. However, there can be no assurance
that the middle ground estimate used by Debtor will be
achieved, and this could impact the actual distribution on
each Class 4 Claim (as could any increase in senior claims to
be paid from the Creditor Fund). Most of the difference
between total presently asserted claims and total estimated
claims is due to four claims or categories. First,
approximately $301,000 in unsecured claims were incorrectly
filed by shareholders. Second, approximately $561,000 of the
filed unsecured claims are duplicates. Finally, Debtor
disputes the validity of a $1.2 million claim filed by Tala'at
Ellami Trading and Contracting in connection with an expired
Saudi Arabia distribution agreement, which was apparently
filed in an amount equal to the entire sales volume with that
entity; and, a $435,000 claim filed by Everen Securities,
Inc., which is discussed in Section VII above.
Total amount of payments (over time) to satisfy claims:
Creditor Fund minus (a) distributions on administrative
claims, possible Class 2B secured claims, and priority
unsecured claims (including tax claims) and (b) costs of
administration of Creditor Fund in liquidating and making
distribution on claims. Interest rate: 0 Impaired Payment date
and Amount of each installment: Within 90 days following
effective date unless significant delay in date claim is
allowed. Pro rata payment of all claims when disputed claims
are resolved unless resolution of claims will delay initial
distribution unreasonably in judgment of Disbursing Agent.
Additional comments:
(i) Franklin shall waive any distribution in respect of its
Class 4 general unsecured claim if Class 4 votes in favor of
the Plan. To the extent Class 4 does not vote in favor of the
Plan, Franklin will share in distributions on Class 4 general
unsecured claims to the extent of Franklin's Class 4 general
unsecured claim.
(ii) After the Effective Date, the Disbursing Agent shall have
the authority to object to Class 4 claims, as well as to
prosecute, withdraw, or settle any pending objections.
However, any objections to claims filed by the Bar Date must
be filed not later than confirmation of the Plan. Any
objections to claims filed after the Bar Date must be filed
not later than ninety (90) days after Debtor's receipt of
actual notice of the filing of such proof of claim. The
Disbursing Agent shall not object to any proof of claim which
seeks an amount which is not greater than that acknowledged as
due by Debtor as set forth on Exhibit "A" hereto.
(iii) After all objections to disputed claims are withdrawn or
determined by a final order, the distributions due on account
of general unsecured claims shall be paid pro rata to the
claim holders from remaining amounts in the Creditor Fund.
(iv) Until such time as all disputed Class 4 claims have been
resolved by agreement or by final order, no distribution shall
be made in respect of any Class 4 claim unless the Disbursing
Agent shall determine that the resolution of any claim will
unreasonably delay final distribution, in which event an
interim, partial distribution may be made.
(v) The amount of any expenses incurred by the Disbursing
Agent in objecting to any claim shall be payable from the
Creditor Fund. As such, the amount of any distribution payable
in respect of Class 4 claims is dependent, in part, on the
amount of litigation necessary to liquidate the amount of
Class 4 claims against the Debtor's bankruptcy estate.
h. CLASS FIVE
Preferred Shareholder Interests - GSS/Array Technology, Inc.
("GSS")
Under the Plan, holders of convertible preferred stock,
including GSS or any assignee, shall be deemed to have
exercised their right to convert such stock to common shares.
In complete satisfaction of their rights under such preferred
stock, such holders shall receive and retain their common
shares subject to dilution by new stock issued to Franklin by
reason of the Stock Issuance. Stock to which GSS is entitled
pursuant to this Plan shall be issued at the same time the
Stock Issuance to Franklin is implemented.
i. CLASS SIX
Common Shareholder Interests
Under the Plan, common shareholders simply retain their shares
of stock, subject to dilution by the Stock Issuance and
conversion of Class 5 preferred stock. The Debtor's Articles
of Incorporation shall be amended
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<PAGE> 15
to include a provision prohibiting the issuance of nonvoting
equity securities, as required by Section 1123(a)(6) of the
Bankruptcy Code.
The additional common stock to be issued will be of the same class
(under applicable corporate law) as the existing common stock, and
there will be no change in the terms of the existing common stock
following the Effective Date. Franklin does not anticipate taking steps
to cause the listing of Debtor's stock on any securities exchange or
market system following the Effective Date. There can be no assurance
that the common stock of the Debtor will be traded on any established
market, or at what price such stock may trade or be sold, whether on
any established market or otherwise. The future value of such stock, if
any, to the individual holders will likely be dependent on a number of
factors, including, but not limited to, the Debtor's future business.
(See discussion in Section X below.)
The Debtor and the Reorganized Debtor shall be entitled to recognize
and to deal for all purposes concerning Debtor's common stock with only
those holders of record stated in the transfer ledgers for Debtor's
common stock, and any proof of interest or other assertion inconsistent
with such transfer ledger shall not constitute a Class Six interest
under this Plan. It shall be the responsibility of any interest holder
to see that its interest is properly reflected in the transfer ledger
if it wishes to be treated as the record holder. (Nothing herein shall
require any beneficial holder of common stock who holds such stock
through a broker, dealer or other nominee (collectively, "nominee") to
take any action to become the record holder if it is content to
continue to hold such stock through its nominee, as the record holder.)
j. CLASS SEVEN
Unexercised Rights To Acquire Stock
This Class consists of all unexercised rights (other than
rights pursuant to this Plan or Class 5 preferred stock) to
acquire shares of common stock of the Debtor whether by way of
option, warrant or other legal or contractual right. Any of
such rights which remain unexercised on the Effective Date
shall be void and unenforceable thereafter.
X. SOURCE OF MONEY TO PAY CLAIMS AND INTEREST-HOLDERS
The Plan cannot be confirmed unless the Court finds that it is "feasible," which
means that the Proponent has timely submitted evidence establishing that the
Debtor will have sufficient funds available to satisfy all expenses, including
the scheduled creditor payments discussed above. "Feasibility" should not be an
issue with respect to the Plan, however, because Franklin will advance the money
necessary to consummate the Plan (through the Plan Loan). Debtor's future cash
flow is therefore irrelevant to the consummation of the Plan.
Franklin has yet to determine how it will fund the operations of the Debtor
following the consummation of the Plan. The Debtor will be obligated to repay
the Plan Loan. The Plan Loan will accrue interest at 8% per annum. Interest only
shall be payable monthly, in arrears. Principal shall be due and payable in a
lump sum payment five (5) years from the Effective Date. Obviously, the value of
shareholders' interests in the Debtor (including the newly acquired interest of
Franklin) is wholly dependent upon Franklin recapitalizing the Debtor and
operating the Debtor in a profitable manner. Under the Plan, however, Franklin
is essentially waiving $1.75 million in pre-petition claims against the Debtor
(i.e., the satisfaction of the secured claim and waiver of the unsecured
balance, assuming that Class 4 general unsecured creditors vote in favor of the
Plan) in return for an eighty percent (80%) equity interest in Debtor. Franklin
therefore has every incentive to operate Debtor in a profitable manner following
the Effective Date of the Plan. Franklin's most recent annual financial
statements, which reflect Franklin's ability to fund the Plan, are attached
hereto as Exhibit "B."
Franklin is the worldwide leader in the design, development and publishing of
electronic books, having sold more than fifteen million electronic books since
1986. Franklin is the exclusive producer and distributor of ROLODEX(R)1
Electronics brand personal information management products. In the second half
of 1997, Franklin began to sell personal information management products using
the Debtor's voice recognition technology pursuant to license successfully
through its worldwide distribution system. With that distribution system in
place over the past ten years, Franklin has achieved a high degree of goodwill,
a good reputation, and a favorable relationship with resellers of hand-held
electronic products. Franklin has an experienced sales staff administering a
worldwide network of sales subsidiaries (in the United Kingdom, France, Germany,
Australia, Mexico, Canada, and other countries), third party distributors in the
United States and other countries, and product representatives around the world.
Franklin's electronic products are sold in over 45,000 retail outlets worldwide
including large chains such as Radio Shack and Sears, and in catalogs. Its
products are sold in over fifty foreign countries. Franklin intends to broaden
the Debtor's product lines by adding new personal information management
products and developing new products based on Debtor's technology.
- -------------
(1) ROLODEX(R) is a registered trademark of Sterling Plastics Co., a division
of Newell Co.
-9-
<PAGE> 16
Franklin will sell those products through its large existing customer base.
Franklin will use its strategically located packaging and warehousing facilities
as well as a direct marketing staff and customer relations hotline service to
reach the public and answer questions and resolve concerns of existing and
potential customers for Debtor's products. Through Franklin's distribution
network the Debtor gains the ability to further leverage its technological
experience. The companies expect to develop new voice technology products using
Debtor's existing technology and Franklin's software and hardware expertise in
hand-held products. Franklin's funding will be provided through working capital,
its $29M in cash and cash equivalent (as of September 30, 1997), and its $20M
credit line with Chase Manhattan Bank and Summit Bank. Franklin's market
dominance, leadership and reputation in the field of electronic products give
the Debtor an ability to increase its volume of sales and enter new markets
around the world with enhanced products and product lines as well as the ability
to sell and distribute through an existing worldwide network.
XI. FINANCIAL RECORDS CONCERNING DEBTOR
Attached as Exhibit "C" are three types of financial documents, including
balance sheets, cash flow statements and income and expense statements for the
period including the most recent twelve-month calendar year and all months
subsequent thereto.
XII. ASSETS AND LIABILITIES OF THE ESTATE
a. Assets
The identity and fair market value of the estate's assets are listed in Exhibit
"D" so that the reader can assess what assets are at least theoretically
available to satisfy claims and to evaluate the overall worth of the bankruptcy
estate. Whether the Plan proposes to sell any of these assets is discussed in
Section XVI.
b. Liabilities
Exhibit "A" shows the allowed claims against the estate, claims whose treatment
is explained in detail by Section VIII.
c. Summary
The estimated fair market value of all assets as of the filing of the Petition
was $1,027,000 and is currently estimated to be $1,008,000 (subject to
post-petition liens of $185,000). Total estimated liabilities equal $2,953,000,
excluding disputed claims which could exceed $600,000, and excluding
post-petition obligations.
XIII. TREATMENT OF NONCONSENTING CLASSES
As stated above, even if all classes do not consent to the proposed treatment of
their claims under the Plan, the Plan may nonetheless be confirmed if the
dissenting classes are treated in a manner prescribed by the Code. The process
by which dissenting classes are forced to abide by the terms of a plan is
commonly referred to as "cramdown." The Code allows dissenting classes to be
crammed down if the Plan does not "discriminate unfairly" and is "fair and
equitable." The Code does not define discrimination, but it does provide a
minimum definition of "fair and equitable." The term can mean that secured
claimants retain their liens and receive cash payments whose present value
equals the value of their security interest. For example, if a creditor lends
the Debtor $100,000 and obtains a security interest in property that is worth
only $80,000, the "fair and equitable" requirement means that the claimant is
entitled to cash payments whose present value equals $80,000 and not $100,000.
The term means that unsecured claimants whose claims are not fully satisfied at
least know that no claim or interest that is junior to theirs will receive
anything under the Plan. "Fair and equitable" means that each holder of an
interest must receive the value of such interest or else no junior interest is
entitled to receive anything.
Therefore, if a class of general unsecured claims votes against the plan, the
plan cannot be confirmed where the debtor or a class of interest holders (e.g.
shareholders or partners) will receive or retain any property under the plan,
unless the plan provides that the class of general unsecured claims shall be
paid in full with interest. Similarly, if a class of interest holders votes
against the plan, the plan cannot be confirmed where the debtor will receive or
retain any property under the plan, unless the plan provides that the class of
interest holders shall be paid in full with interest. These are complex
statutory provisions and the preceding paragraphs do not purport to state or
explain all of them.
XIV. TREATMENT OF NONCONSENTING MEMBERS OF CONSENTING CLASS (CHAPTER 7
LIQUIDATION ANALYSIS)
The Plan must provide that a nonconsenting impaired claimant or interest holder
of a consenting class receive at least as much as would be available had the
Debtor filed a Chapter 7 petition instead.
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<PAGE> 17
In a Chapter 7 case the general rule is that the Debtor's assets are sold by a
trustee. Unsecured creditors share in the proceeds of sale only after secured
creditors and administrative claimants are paid. Certain unsecured creditors get
paid before other unsecured creditors do. Unsecured creditors with the same
priority share in proportion to the amount of their allowed claim in
relationship to the total amount of allowed claims.
A creditor would recover from the assets of the bankruptcy estate less under
Chapter 7 than under Chapter 11 for a fundamental reason: the liquidation value
of Debtor's assets is far less than the amount of secured claims against the
estate. In addition, in a chapter 7 case a trustee would be appointed and would
be entitled to compensation from any assets which were not encumbered by liens
or super priority claims in favor of secured creditors. A chapter 7 trustee
would be entitled to a fee in an amount not more than twenty-five percent (25%)
of the first $5,000 of all moneys disbursed, ten percent (10%) on any amount
over $5,000 but no more than $50,000, five percent (5%) on all amounts over
$50,000 but no more than $1,000,000, and reasonable compensation no more than
three percent (3%) of moneys over $1,000,000. As such, in a chapter 7
liquidation, there is no reason to believe that unsecured creditors would
receive any recovery from the estate.
<TABLE>
<CAPTION>
CHAPTER 7 CHAPTER 11
--------------------------- ---------------------------
<S> <C> <C>
1. value of assets 1,008,000 1,008,000
2. administrative exp. 100,000 100,000
secured claims 1,935,000 185,000
priority unsecured claims 17,000 17,000
3. chapter 7 trustee fee 54,490
TOTAL AVAILABLE FOR DISTRIBUTION TO GENERAL UNSECURED $0.00 Net Creditor's Fund
CREDITOR
unsecured creditors receive unsecured creditors receive
0% of total claims payment of 12% of total
allowed claims under Plan
(assuming class 4 votes to
accept Plan)
</TABLE>
XV. FUTURE DEBTOR
a. Management of Debtor
1. Names of persons who will manage the Debtor's
business affairs:
President: Gregory Winsky
Treasurer: Kenneth Lind
Secretary: James D. Wallace
Directors: Gregory Winsky, Kenneth Lind, and Michael Strange
2. Proposed compensation to persons listed above: No officer
or director will be compensated for performing services for the Reorganized
Debtor.
3. Qualifications: All of the above except Mr. Wallace are
currently officers of Franklin and their positions and qualifications are
further described in Franklin's Annual Report. See Exhibit "B".
4. Affiliation of persons to Debtor: No present affiliation
with Debtor.
5. Job description: Specific management responsibilities
remain to be determined.
b. Disbursing Agent
The Disbursing Agent is responsible for receiving and holding money intended for
distribution to claimants and transmitting it to them. Robert Berger has agreed
to be employed by the Debtor as Disbursing Agent for the purpose of distributing
the proceeds of the Creditor Fund in accordance with the Plan and objecting to
claims. If the proposed Disbursing Agent is unable to serve,
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<PAGE> 18
the Proponents will mutually agree on a successor of similar qualifications. The
Disbursing Agent's address and telephone number is: Robert Berger & Associates,
17525 Ventura Boulevard, Suite 200, Encino, California 91316, telephone (818)
906-8300.
1. Proposed compensation to Disbursing Agent:
Reimbursement of expenses and three percent (3%) of
funds distributed, plus $150.00 per hour for
administrative time spent on any claim objections.
2. Qualifications: Mr. Berger regularly serves as a
disbursing agent in insolvency matters.
3. Affiliation of person to Debtor: Mr. Berger has no
affiliation with the Debtor.
4. Job description: The Disbursing Agent will pay all
amounts due under the Plan from the Creditor Fund in
accord with the provisions of this Plan regarding
treatment of claims. He may pursue objections to
claims, if timely and necessary, and may employ
counsel for that purpose. The Creditor Fund shall be
maintained in a segregated, interest-bearing account
in a depository approved by the United States Trustee
for the Central District of California, for deposits
of funds by trustees.
c. Future Financial Outlook
The Proponent believes that the Debtor's economic health will improve from its
pre-bankruptcy state because of Franklin's operation of the company. See Section
X.
XVI. SALE OF PROPERTY; ASSUMPTION OF CONTRACTS AND LEASES; OTHER PROVISIONS
The Plan provides for the rejection of all executory contracts and leases of the
Debtor other than the following: (a) contracts and leases assumed or rejected
pursuant to order of the Court prior to entry of the order confirming the Plan;
(b) contracts and leases which are the subject of motions to assume to reject or
reject filed by the Debtors prior to the entry of the order confirming the Plan;
and (c) the contracts listed on Exhibit "E" hereto, as it may be amended by the
Proponents at any time prior to the Effective Date, which contracts will be
assumed upon the Effective Date of the Plan.
The amounts set forth in the "Pre-Petition Amounts Due" column on Exhibit "E"
shall be deemed to be a binding determination of the amount of any "cure"
payment required pursuant to 11 U.S.C. Section 365(b)(1) and any other grounds
for objecting to the proposed assumption of the contract shall be deemed waived,
unless the non-Debtor party to such contract files and serves an objection
contesting such amount, or raising other objections to assumption, within the
later of (a) time for filing objections to confirmation of the Plan, or (b) ten
(10) days from service of an amendment to Exhibit "E" which changes the
treatment of such contract. The cure payment will be made from the Creditor Fund
on the later of the Effective Date, or the resolution by the bankruptcy court of
any objection which is timely filed and served.
Any claims arising under contracts or leases rejected pursuant to the Plan, or
as a consequence of such rejection, must be filed within thirty days after the
date of entry of the order confirming the Plan, or shall be forever barred and
deemed waived. The Disbursing Agent may object to such claims on any appropriate
ground including, but not limited to, any objection that a contract was not
executory or that a lease was expired. Rejection pursuant to the Plan shall
apply only to the extent a contract is executory or a lease is unexpired, as of
the appropriate date, and nothing in the Plan or the Debtor's schedule of
executory contracts and leases shall be construed as or deemed binding on the
Disbursing Agent, as an admission that such contract or lease is or was
executory or unexpired on the appropriate date.
The Court must make certain findings of fact before approving the aforementioned
provisions as part of the Plan. The Proponents will request that the Court make
the appropriate findings at the confirmation hearing, based upon evidence
submitted in support of the confirmation motion.
The Debtor may liquidate certain property in the course of this case, but has no
present intention of selling assets pursuant to the Plan.
XVII. BANKRUPTCY PROCEEDINGS
Debtor filed its voluntary chapter 11 petition on September 22, 1997. On October
1, 1997, the Bankruptcy Court entered its order approving a post-petition
financing agreement with Franklin on an interim basis. Final approval of the
post-petition financing agreement with Franklin was granted following a hearing
before the Bankruptcy Court on October 14, 1997. Under the post-petition
financing agreement, Debtor was authorized to borrow up to $400,000 from
Franklin. Among other things, Franklin was granted a perfected, post-petition
security interest in all of the Debtor's assets, a super-priority claim (with
priority over all other claims) as additional protection, and relief from stay
without further order of the Bankruptcy Court in the event the Debtor
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<PAGE> 19
defaulted in its post-petition obligations. In addition, the Debtor waived any
right to contest Franklin's claim or any right to bring actions against Franklin
such as actions to avoid or attack Franklin's pre-petition security interest,
unless such actions were commenced not later than December 1, 1997. As of the
date of this disclosure statement, the Debtor has not and does not intend to
commence any such actions. As of December 31, 1997, the Debtor's post-petition
indebtedness to Franklin was approximately $185,000.
On or about October 14, 1997, the Court entered its order establishing November
17, 1997 as the date by which all claims must be filed or be forever barred.
Pursuant to order of the Bankruptcy Court, the Debtor has employed Robinson,
Diamant & Brill, A Professional Corporation, as bankruptcy counsel to the debtor
in possession; Tillis, Webb, Kulla & Grant as corporate counsel for the Debtor,
and BDO Seidman LLP as the accountants for the debtor in possession.
In December, 1997, the Bankruptcy Court entered three orders granting motions
filed by the Debtor. The Court approved the Debtor's assumption of its lease for
its principal offices, as modified. Pursuant to the modification, the lease is
terminable from April 1, 1998 to May 31, 1998 on 45 days written notice. The
Court authorized the Debtor to sell certain excess office furnishings and
inventory to non-insiders, at prices equal to or exceeding certain specified
base prices. The sale of the excess furnishings has been consummated in
connection with the reduction of the size of Debtor's premises under the amended
lease. The sale of the excess inventory was consummated for an amount equal to
the base price. The Court also granted the Debtor's motion to extend the time
within which the Debtor must assume or reject its remaining leases.
In January, 1998, the Debtor agreed to seek authority to enter into new
employment agreements with its officers, Mitchell B. Rubin and Kenneth I.
Dewitt, due to the pending expiration of Rubin's contract and the need to retain
these officers through the confirmation of the Plan. The agreements are
terminable on thirty days' notice by the Debtor at any time after April, 1998.
The Debtor continued to operate on a cashflow positive basis through December
31, 1997.
XVIII. TAX CONSEQUENCES OF PLAN
THE FOLLOWING DISCUSSION IS A SUMMARY OF CERTAIN MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE PLAN TO THE DEBTORS AND TO HOLDERS OF CLAIMS AND INTERESTS
IN THE DEBTOR, BUT IS NOT A COMPLETE DISCUSSION OF ALL SUCH CONSEQUENCES.
CERTAIN OF THE CONSEQUENCES DESCRIBED BELOW ARE SUBJECT TO SUBSTANTIAL
UNCERTAINTY DUE TO THE UNSETTLED STATE OF THE TAX LAW GOVERNING BANKRUPTCY
REORGANIZATIONS. NO RULINGS HAVE BEEN OR WILL BE REQUESTED FROM THE INTERNAL
REVENUE SERVICE (THE "IRS") WITH RESPECT TO ANY OF THE TAX ASPECTS OF THE PLAN.
FURTHER, THE TAX CONSEQUENCES OF THE PLAN TO THE HOLDERS OF CLAIMS AND INTERESTS
MAY VARY BASED UPON THE INDIVIDUAL CIRCUMSTANCES OF EACH HOLDER, AND MAY BE
AFFECTED BY MATTERS NOT DISCUSSED BELOW, SUCH AS THE SPECIAL RULES APPLICABLE TO
CERTAIN TYPES OF HOLDERS (INCLUDING PERSONS SUBJECT TO SPECIAL RULES, SUCH AS,
FOR EXAMPLE, NONRESIDENT ALIENS, LIFE INSURANCE COMPANIES AND TAX-EXEMPT
ORGANIZATIONS). IN ADDITION, THERE MAY BE STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF THE PLAN APPLICABLE TO THE DEBTORS AND TO PARTICULAR HOLDERS OF
CLAIMS OR INTERESTS, NONE OF WHICH ARE DISCUSSED BELOW. THEREFORE, THE FOLLOWING
SUMMARY IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE BASED UPON THE
INDIVIDUAL CIRCUMSTANCES OF EACH HOLDER OF A CLAIM OR INTEREST, AND EACH HOLDER
OF A CLAIM OR INTEREST IN THE DEBTOR IS URGED TO CONSULT HIS, HER OR ITS TAX
ADVISORS CONCERNING THE INDIVIDUAL TAX CONSEQUENCES OF THE TRANSACTIONS
CONTEMPLATED BY THE PLAN, INCLUDING STATE, LOCAL AND FOREIGN TAX CONSEQUENCES.
a. Tax Consequences To Holders Of Claims.
A portion of the consideration received pursuant to the Plan in payment of a
Claim may be allocated to unpaid interest, and the remainder of the
consideration will be allocated to the principal amount of the Claim. The tax
consequences of the consideration allocable to the portion of a Claim related to
interest differ from the tax consequences of the consideration allocable to the
portion of a Claim related to principal.
1. Consideration Allocable To Interest.
Holders of Claims will recognize ordinary income to the extent that any
consideration received pursuant to the Plan is allocable to interest, and such
income has not already been included in such Holder's taxable income. The
determination as to what portion of the consideration received will be allocated
to interest is unclear, and may be affected by, among other things, rules in the
Internal Revenue Code (the "Tax Code") relating to original issue discount and
accrued market discount. Holders of Claims
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<PAGE> 20
should consult their own tax advisors as to the amount of any consideration
received under the Plan that will be allocated to interest.
In the event amounts allocable to interest are less than amounts previously
included in the Holder's taxable income, the difference will result in a loss.
Any amount not allocable to interest will be allocated to the principal amount
of the Claim paid and discharged pursuant to the Plan, and will be treated as
discussed below.
2. Holders Of Claims Receiving Only Cash.
Holders of Claims receiving only cash generally will recognize gain or loss on
the exchange equal to the difference between the Holder's basis in the Claim and
the amount of cash received that is not allocable to interest. The character of
any recognized gain or loss will depend upon the status of the Holder, the
nature of the Claim in its hands and the holding period of such Claim.
If a Holder of a Claim has treated a Claim as wholly or partially worthless and
been allowed a bad debt deduction, the Holder will include the amount of cash
received in income to the extent such cash exceeds the Holder's remaining tax
basis in the Claim.
Holders of Claims may be entitled to installment sales treatment or other
deferral with respect to the distribution they receive subsequent to the
Effective Date. Holders of Claims may already have claimed partial bad debt
deductions with respect to their Claims. The Internal Revenue Service may take
the position that Holders of Allowed Claims cannot claim an otherwise allowable
further loss in the year in which their Claim is allowed because such claimants
could receive further distributions. Thus, a Holder of a Claim could be
prevented from recognizing a loss until the time when its Claim has been
liquidated and distributions have been completed. If a Holder of a Claim is
permitted to recognize a loss in the year of the Effective Date by treating the
transaction as a "closed transaction" at such time, such Holder may recognize
income on any subsequent distribution.
3. Secured Claims.
The tax consequences in respect to treatment of Class 1 and 2 Claims are not
described herein.
b. Tax Consequences To Holder Of Interests.
Whether any Holder of an interest will recognize a gain or a loss as a result of
the treatment of such interest under the Plan may be dependent on factors
including whether such treatment constitutes a recognizable event, the basis in
the stock, the status of the Holder, the nature of the interest in his hands and
the holding period of such stock.
c. Backup Withholding.
Interest, dividends and other "reportable payments" made to a Holder of a Claim
or an Interest may, under certain circumstances, be subject to "backup
withholding" at a 31% rate. The backup withholding tax is not an additional tax,
and is creditable against the Holder's federal income tax liability. In
addition, certain other payments to non-U.S.
persons may be subject to withholding at a 30% rate.
PERSONS CONCERNED WITH THE TAX CONSEQUENCES OF THIS PLAN SHOULD CONSULT THEIR
OWN ACCOUNTANTS, ATTORNEYS AND/OR ADVISORS. THE PROPONENTS MAKE THE
AFOREMENTIONED DISCLOSURE OF POSSIBLE TAX CONSEQUENCES FOR THE SOLE PURPOSE OF
ALERTING READERS OF TAX ISSUES THEY MAY WISH TO CONSIDER. THE PROPONENTS CANNOT
AND DO NOT REPRESENT THAT THE TAX CONSEQUENCES MENTIONED ABOVE ARE COMPLETELY
ACCURATE BECAUSE THE TAX LAW EMBODIES MANY COMPLICATED RULES, WHICH MAKE IT
DIFFICULT TO ACCURATELY STATE WHAT THE TAX IMPLICATIONS OF ANY ACTION MIGHT BE.
XIX. EFFECT OF CONFIRMATION OF PLAN
a. General comments
The provisions of a confirmed Plan bind the Debtor, any entity acquiring
property under the Plan, and any creditor, interest holder, or general partner
of the Debtor, even those who do not vote to accept the Plan.
The confirmation of the Plan vests all property of the estate in the Debtor.
The automatic stay is lifted upon confirmation as to property of the estate.
However, the stay continues to prohibit collection or enforcement of
pre-petition claims against the debtor or the debtor's property until the date
the debtor receives a discharge, if any. If the Debtor does not seek a
discharge, the discharge is deemed denied, and the stay as to the Debtor and the
Debtor's property terminates upon entry of the order confirming the Plan.
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<PAGE> 21
b. Discharge of liability for payment of debts; status of liens;
equity security holders
Unless the Debtor is not entitled to receive a discharge pursuant to Code
Section 1141(d)(3), the debtor may obtain a discharge only upon specific order
of the Court. However, the treatment provided in this Plan to holders of claims
shall constitute full satisfaction of such claims.
c. Applicability of Sections 1125 and 1145 of the Bankruptcy Code
to Common Stock and other Securities Issued Under the Plan,
and to Subsequent Transfers.
The protection afforded by Section 1125 of the Bankruptcy Code with regard to
the solicitation of acceptances or rejections of the Plan, and with regard to
the offer, issuance, sale, or purchase of the Common Stock issued to holders of
Class 1 Claims and Class 5 Interests and any other securities under the Plan,
and distributed pursuant to the Plan, shall apply to the full extent provided by
law. In addition, the exemption provided in Section 1145 of the Bankruptcy Code
from the requirements of Section 5 of the Securities Act of 1933 (the
"Securities Act"), 15 U.S.C. Section 77e, and any state or local law requiring
registration for the offer or sale of a security shall apply to the offer, sale
and issuance by the Debtor of such common stock or other securities issued under
the Plan.
The following discussion is intended as a brief overview of certain issues
raised by the Plan under applicable state and Federal securities laws. This
discussion is not, and is not intended to be, an exhaustive discussion of
securities issues. All holders of allowed claims and allowed interests are
strongly advised to consult with legal counsel in order to assess the
significance of the holder's treatment under the Plan.
The new shares of common stock to be issued as part of the Plan will be issued
under the exemption from the registration requirements of the Securities Act
(and of equivalent state securities or "blue sky" laws) provided by Section
1145(a)(1) of the Code with respect to the issuance of such securities.
Generally, section 1145(a)(1) of the Code exempts the issuance of securities
from the registration requirements of the Securities Act and equivalent state
securities and "blue sky" laws if the following conditions are satisfied: (1)
the securities are issued by a debtor or a successor to the debtor under a plan
of reorganization; (ii) the recipients of the securities hold a claim against,
an interest in, or a claim for an administrative expense in the case concerning,
the debtor; and (iii) the securities are issued entirely in exchange for the
recipient's claim against or interest in the debtor, or are issued "principally"
in such exchange and "partly" for cash or property. The Proponents believe that
the issuance of shares pursuant to the Plan will satisfy the aforementioned
requirements.
After consummation of the Plan and the distributions of the securities
contemplated therein, securities qualifying under section 1145(a)(1) generally
will be freely transferrable without restriction and will not be subject to
further registration under the Securities Act, except by holders who are deemed
to be "affiliates" of Debtor under the Securities Act (or under equivalent state
securities or "blue sky" laws), or who are deemed to be "underwriters" with
respect to such securities, as defined in section 1145(b)(1) of the Code.
To the extent a holder of any of the securities issued pursuant to the Plan is
deemed to be an "affiliate" of Debtor within the meaning of the Securities Act
(or under equivalent state securities or "blue sky" laws), the securities issued
to such holder pursuant to the Plan may not be resold by such holder unless the
sale is registered under the Securities Act or the sale is effected pursuant to
an applicable exemption from registration. In addition, to the extent a holder
of the securities is deemed to be an "underwriter" of such securities within the
meaning of section 1145(b) of the Code, such securities will also, upon their
issuance, be subject to the resale limitations described in the immediately
preceding sentence.
Generally, section 1145(b) of the Code defines an "underwriter" as any person
who (A) purchases a claim against, interest in, or claim for an administrative
expense in the case concerning, the debtor with a view to distribution of any
security received or to be received in exchange for such claim or interest, (B)
offers to sell securities offered or sold under the plan for the holders of such
securities, (C) offers to buy securities offered or sold under the plan from the
holders of such securities if such offer to buy is (i) under an agreement made
in connection with the plan, with the consummation of the plan, or with the
offer or sale of securities under the plan, or (D) is an issuer, as used in
section 2(11) of the Securities Act, with respect to such securities. The
reference in section 1145(b)(1)D) of the Code to section 2(11) of the Securities
Act would include as "underwriters" all persons who, directly or indirectly,
through one or more intermediaries, control, are controlled by, or are under
common control with, an issuer of securities. "Control" (as such term is defined
in Rule 405 of Regulation C under the Securities Act) means the possession,
direct or indirect, of the power to direct or cause the direction of the
policies of a person, whether through the ownership of voting securities, by
contract or otherwise. Accordingly, an officer or director of a reorganized
debtor (or its affiliate or successor) under a plan of reorganization may be
deemed to "control" such debtor, particularly if such management position is
coupled with the ownership of a significant position of the debtor's (or
affiliates' or successor's) voting securities. Pursuant to the Plan, Franklin
will hold or control at least 80% of the Debtor's common stock following the
Effective Date.
-15-
<PAGE> 22
The foregoing summary discussion is general in nature and has been included in
this Disclosure Statement solely for informational purposes. The Proponents do
not make any representations concerning, and do not hereby provide an opinion or
advice with respect to the securities law and bankruptcy law matters described
above. In light of the complex and subjective interpretive nature of whether a
particular recipient of the securities to be issued under the Plan may be deemed
to be an "affiliate" under applicable federal and state securities laws or an
"underwriter" under the Code and, consequently, the uncertainty concerning the
availability of exemptions from the registration requirements of the Securities
Act and equivalent state securities and "blue sky" laws, recipients of stock
under the Plan are encouraged to carefully consider and consult with their own
legal advisor(s) with respect to such (and any related) matters.
THE DISCUSSION ABOVE IS A SUMMARY OF THE GENERAL EFFECT OF THE REGISTRATION
PROVISIONS OF THE SECURITIES LAWS UPON THE ISSUANCE AND RESALE OF SECURITIES
RECEIVED UNDER THE PLAN. THE EFFECTS MAY VARY BASED ON THE INDIVIDUAL
CIRCUMSTANCES OF EACH HOLDER OF A CLAIM OR INTEREST WHO RECEIVES SECURITIES
UNDER THE PLAN. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT REVIEWED OR
PASSED UPON ANY ASPECT OF THESE MATTERS. EACH RECIPIENT OF SECURITIES UNDER THE
PLAN IS URGED TO CONSULT WITH ITS OWN LEGAL COUNSEL WITH RESPECT TO THE EFFECT
OF FEDERAL, STATE AND FOREIGN SECURITIES LAW, INCLUDING BUT NOT LIMITED TO
WHETHER OR NOT IT IS AN UNDERWRITER AS DEFINED IN SECTION 1145(b) OF THE
BANKRUPTCY CODE (WHETHER BY VIRTUE OF BEING AN AFFILIATE OF THE ISSUER OR
OTHERWISE), AND THE EFFECT OF ANY APPLICABLE FOREIGN OR STATE LAW AND THE
RESTRICTIONS ON RESALES OF SECURITIES.
d. Modification of the Plan
The Proponent may modify the Plan at any time before confirmation. The Proponent
may modify the Plan at any time after confirmation and before substantial
consummation, but only if circumstances warrant and after notice and hearing.
e. Post-Confirmation Causes of Action
To the best knowledge of the Proponents, the estate has the following causes of
action: miscellaneous collection actions. The Debtor shall have the right to
assert any or all of the above causes of action post-confirmation in accordance
with applicable law. All avoidance actions under Bankruptcy Code Sections 547
and 548 shall be deemed waived by the Debtor, however, on the Effective Date.
f. Final Decree
Once the Plan has been consummated, a final decree may be entered upon motion of
the Proponent. The effect of the final decree is to close the bankruptcy case.
After such closure, a party seeking any type of relief relating to a Plan
provision can seek such relief in a state court of general jurisdiction.
g. Retention Of Jurisdiction
After Confirmation of the Plan, the Court will retain such jurisdiction as is
legally permissible.
h. Request For Confirmation
If all of the applicable requirements for Confirmation of the Plan are met as
set forth in Section 1129(a) of the Code except Section (8) thereof, Debtors
request Confirmation of the Plan pursuant to Section 1129(b) of the Code,
notwithstanding the requirements of such subsection (8), on the basis that the
Plan is fair and equitable and does not discriminate unfairly with respect to
any dissident, impaired Class or Classes.
-16-
<PAGE> 23
XX. DECLARATION IN SUPPORT OF DISCLOSURE STATEMENT AND PLAN
I, Mitchell Rubin, declare under penalty of perjury under the laws of
the United States of America that the following statements are true and based
upon personal knowledge.
1. Mitchell Rubin, Brad R. Godshall (counsel for Franklin) and Philip
A. Gasteier (counsel for Debtor) are the individuals who prepared this document.
2. I and the Debtor's books and records are the source of all financial
data (other than Franklin's financial statements).
3. All facts and representations in the Plan and Disclosure Statement
are true to the best of my knowledge.
4. To the best of my knowledge and belief no fact material to a
claimant or equity security holder in voting to accept or reject the proposed
Plan has been omitted.
5. The name of the accountant who prepared the financial documents
relating to the Debtor is Mitchell Rubin.
6. The accounting method(s) used to prepare the financial documents is
consistent with historical practice.
/s/
----------------------------------------
MITCHELL RUBIN
-17-
<PAGE> 24
PROPONENTS:
DATED: April 21, 1998 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
By: /s/
----------------------------------------
MITCHELL RUBIN
President
DATED: April 21, 1998 FRANKLIN ELECTRONIC PUBLISHERS, INC.
By: /s/
----------------------------------------
BRAD R. GODSHALL
Attorney
-18-
<PAGE> 25
================================================================================
EXHIBIT "A"
LISTING OF CLAIMS
================================================================================
<PAGE> 26
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
LISTING OF CLAIMS
<TABLE>
<CAPTION>
AMOUNT OF CLAIM AS ORIGINALLY SCHEDULED
------------------------------------------- ALLOWED
UNSECURED UNSECURED AMOUNT CLAIM
NONPRIORITY PRIORITY OF CLAIM SUBJECT TO ESTIMATED
VENDOR/EMPLOYEE BALANCE BALANCE TOTAL FILED OBJECTION CLAIM
- ------------------- --------------- ---------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
FRANKLIN ELECTRONIC 14,239.58 -- 14,239.58 1,753,367.34 1,753,367.34 --
--------------- ---------- -------------- -------------- --------------- --------------
CLASS 1 TOTAL 14,239.58 -- 14,239.58 1,753,367.34 1,753,367.34 --
--------------- ---------- -------------- -------------- --------------- --------------
KBK FINANCIAL 233,290.88 233,290.88 --
--------------- ---------- -------------- -------------- --------------- --------------
CLASS 2a TOTAL -- -- -- 233,290.88 233,290.88 --
--------------- ---------- -------------- -------------- --------------- --------------
ANGELO ALLIO 1,987.50 1,987.50 --
B.G. BALMER & CO., INC. 7,953.42 7,953.42 --
BARBARA COOK 130.00 130.00 --
BETTY T SMITH 775.00 775.00 --
CHARLES GREEN 250.22 250.22 --
DIANE L STANLEY 324.25 324.25 --
E L MATTSON & M E MATTSON TEN COM 15,000.00 15,000.00 --
HANS MUELLER 750.00 750.00 --
HAROLD R JOHNSON 3,325.00 3,325.00 --
IAN LIVOCK 119.00 119.00 --
JAMES A MURRAY 7,500.00 7,500.00 --
JAMES A. MURRAY 7,500.00 7,500.00 --
KATALINA A GUZMAN 1,354.00 1,354.00 --
RICHAD W. THOMPSON 1,372.50 1,372.50 --
ROY E STONER JR. 1,330.00 1,330.00 --
SARA AXELROD 737.00 737.00 --
SONDRA LEE LOBEL 4,005.57 4,005.57 --
SUSAN V WHITE 1,257.81 1,257.81 --
TELOGY, INC. 2,364.40 2,364.40 --
VIRGINIA J SHAW 425.00 425.00 --
--------------- ---------- -------------- -------------- --------------- --------------
CLASS 2b TOTAL -- -- -- 58,460.67 58,460.67 --
--------------- ---------- -------------- -------------- --------------- --------------
ALEXANDER D SANDERSON 78,288.25 78,288.25 --
BERBARIAN & ASSOCIATES 15,599.43 15,599.43 --
BERBERIAN & ASSOCIATES, INC. 15,599.43 15,599.43 --
BSS MANAGEMENT/NOW MESSENGER 1,224.95 1,224.95 --
CARMEN AMAYA -- 161.54 161.54 161.54 161.54
CAROL GAUVREAU -- 129.62 129.62 129.62 129.62
CHYERRELLE HARRISON -- 360.58 360.58 360.58 360.58
DAVID LERNER -- 769.23 769.23 4,000.00 4,000.00 769.23
EDWARD KRAKAUER -- -- -- 4,000.00 4,000.00 --
EDWARD KRAKAUER 4,000.00 4,000.00 --
ELLIE SHAMS -- 408.65 408.65 408.65 408.65
GEORGE E. MOSS 9,629.00 -- 9,629.00 19,835.74 19,835.74 --
GEORGE FISCHER -- 961.54 961.54 961.54 961.54 961.54
HENRY DURAN -- 253.85 253.85 253.85 253.85
JOSE SALAZAR -- 70.00 70.00 70.00 70.00
KEN DEWITT -- 4,000.00 4,000.00 4,000.00 4,000.00
L.A. COUNTY TAX COLLECTOR -- 4,955.63 4,955.63 5,525.52 5,525.52 5,525.52
LARRY F. CORNELL 404.54 404.54 --
LARRY KLOMAN -- 865.39 865.39 865.39 865.39 865.39
LIGAYA KELLY -- 215.39 215.39 3,416.66 3,416.66 215.39
LIGHTHOUSE MARKETING 14.94 -- 14.94 1,875.22 1,875.22 --
LISA DURAN -- 259.62 259.62 259.62 259.62
MAGGIE CHAMBERS -- 432.69 432.69 432.69 432.69
</TABLE>
<TABLE>
<CAPTION>
CLAIM
VENDOR/EMPLOYEE CLASS NO. COMMENTS
- ------------------- ------- ------- --------------------------
<S> <C> <C> <C>
FRANKLIN ELECTRONIC 1 115 SEE PLAN OF REORGANIZATION
------- ------- --------------------------
CLASS 1 TOTAL
------- ------- --------------------------
KBK FINANCIAL 2a 76 PAID POST PETITION
------- ------- --------------------------
CLASS 2a TOTAL
------- ------- --------------------------
ANGELO ALLIO 2b 38 SH
B.G. BALMER & CO., INC. 2b 135 MOVED TO UNSECURED
BARBARA COOK 2b 87 SH
BETTY T SMITH 2b 68 SH
CHARLES GREEN 2b 70 SH
DIANE L STANLEY 2b 184 SH
E L MATTSON & M E MATTSON TEN COM 2b 156 SH
HANS MUELLER 2b 73 SH
HAROLD R JOHNSON 2b 154 SH
IAN LIVOCK 2b 195 SH
JAMES A MURRAY 2b 53 SH
JAMES A. MURRAY 2b 103 DUPLICATE
KATALINA A GUZMAN 2b 157 SH
RICHAD W. THOMPSON 2b 178 SH
ROY E STONER JR. 2b 82 SH
SARA AXELROD 2b 66 SH
SONDRA LEE LOBEL 2b 49 SH
SUSAN V WHITE 2b 176 SH
TELOGY, INC. 2b 74 MOVED TO UNSECURED
VIRGINIA J SHAW 2b 67 SH
------- ------- --------------------------
CLASS 2b TOTAL
------- ------- --------------------------
ALEXANDER D SANDERSON 3 105 SH
BERBARIAN & ASSOCIATES 3 29 MOVED TO NON-PRIORITY
BERBERIAN & ASSOCIATES, INC. 3 62 DUPLICATE
BSS MANAGEMENT/NOW MESSENGER 3 12 MOVED TO NON-PRIORITY
CARMEN AMAYA 3 NOC
CAROL GAUVREAU 3 NOC
CHYERRELLE HARRISON 3 NOC
DAVID LERNER 3 131 VPTI DISPUTES AMOUNT
EDWARD KRAKAUER 3 46 VPTI DISPUTES AMOUNT
EDWARD KRAKAUER 3 116 DUPLICATE
ELLIE SHAMS 3 NOC
GEORGE E. MOSS 3 104 RESOLVED POST PETITION
GEORGE FISCHER 3 111 NOC
HENRY DURAN 3 NOC
JOSE SALAZAR 3 NOC
KEN DEWITT 3 NOC
L.A. COUNTY TAX COLLECTOR 3 150 NOC
LARRY F. CORNELL 3 124 SH
LARRY KLOMAN 3 91 NOC
LIGAYA KELLY 3 194 MOVED TO NONPRIORITY
LIGHTHOUSE MARKETING 3 88 MOVED TO NON-PRIOR/DISP
LISA DURAN 3 NOC
MAGGIE CHAMBERS 3 NOC
</TABLE>
Exhibit A-1
<PAGE> 27
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
LISTING OF CLAIMS
<TABLE>
<CAPTION>
AMOUNT OF CLAIM AS ORIGINALLY SCHEDULED
------------------------------------------- ALLOWED
UNSECURED UNSECURED AMOUNT CLAIM
NONPRIORITY PRIORITY OF CLAIM SUBJECT TO ESTIMATED
VENDOR/EMPLOYEE BALANCE BALANCE TOTAL FILED OBJECTION CLAIM
- ------------------- --------------- ---------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
MITCHELL RUBIN -- 1,442.31 1,442.31 1,442.31 1,442.31
NEIL HICKOX -- 384.62 384.62 384.62 384.62
ROSA SANCHEZ -- 193.85 193.85 193.85 193.85
SCOTT HEMMELGARN -- 384.62 384.62 800.00 800.00 384.62
THREE STAR MARKETING -- -- 1,937.15 1,937.15 --
VIRGINIA KELLEY -- 365.39 365.39 365.39 365.39
--------------- ---------- -------------- -------------- --------------- --------------
CLASS 3 TOTAL 9,643.94 16,614.52 26,258.46 158,333.82 166,796.54 17,184.41
--------------- ---------- -------------- -------------- --------------- --------------
A PACK DESIGN CO. 1,482.00 -- 1,482.00 1,482.00 1,482.00
ABC WAREHOUSE 2,933.30 -- 2,933.30 2,933.30 2,933.30
ABF FREIGHT SYSTEM, INC. 1,559.58 -- 1,559.58 2,334.84 2,334.84 2,334.84
ADAM EGAZARIAN 5,812.50 5,812.50 --
ADLER & RING LAW OFFICES 5,494.05 -- 5,494.05 5,950.50 5,950.50 5,950.50
ADM GROUP 4,600.00 4,600.00 --
ADWEEK MAGAZINE 393.00 -- 393.00 393.00 393.00
AFFORDABLE PORTABLES 668.00 -- 668.00 668.00 668.00
AIRBORNE EXPRESS 83.46 -- 83.46 83.46 83.46
AIRGATE 9,063.00 -- 9,063.00 9,063.00 9,063.00
ALFRED A MCCORQUODALE 681.50 681.50 --
ALLIED OREGON INVESTORS 18.40 -- 18.40 18.40 18.40
AMERICAN EXPRESS 10.00 -- 10.00 10.00 10.00
AMERICAN TV 469.00 -- 469.00 469.00 469.00
AMILIE AND ARTHUR FELTEN 1,600.00 1,600.00 --
AMREP 9,694.31 -- 9,694.31 9,694.31 9,694.31 9,694.31
ANN S TROUP 1,462.50 1,462.50 --
ARGENE MAHONE 835.00 835.00 --
ARMY/AIR FORCE EXCHANGE 211.00 -- 211.00 211.00 211.00
ARTHUR & MARIE PETRELLA -- -- --
ASTRO OFFICE PRODUCTS INC 407.00 -- 407.00 407.00 407.00
AT&T 8.93 -- 8.93 8.93 8.93
B.G. BALMER & CO., INC. 7,867.80 -- 7,867.80 -- -- 7,953.42
BARBARA SCHOOLS 15,000.00 15,000.00 --
BDO SEIDMAN 12,394.00 -- 12,394.00 12,394.00 12,394.00
BELL INDUSTRIES 5,599.95 -- 5,599.95 7,026.68 7,026.68 7,026.68
BERBARIAN & ASSOCIATES 15,599.43 -- 15,599.43 -- -- 15,599.43
BETTY C. CONNORS TRUSTEE 30,000.00 30,000.00 --
BETTY C. CONNORS, TRUSTEE 30,000.00 30,000.00 --
BILL E. MAHANEY 4,167.50 4,167.50 --
BNY INFORMATION SERVICES 17.15 -- 17.15 17.15 17.15
BOWNE OF LOS ANGELES, INC. 14,675.90 -- 14,675.90 14,675.90 14,675.90
BRENNAN & HOWARD INC. 14,774.18 -- 14,774.18 14,774.18 14,774.18
BROOKSTONE 8,412.00 -- 8,412.00 8,412.00 8,412.00
BRUCE G. STOREY 95.63 95.63 --
C.R. MCMULLEN CO INC 345.80 345.80 345.80
CALIBRATION & REPAIR SERVICE 114.00 -- 114.00 114.00 114.00 114.00
CARLSON MARKETING 860.00 -- 860.00 860.00 860.00
CARMEN AMAYA 484.62 -- 484.62 484.62 484.62
CAROL GAUVREAU 130.00 -- 130.00 130.00 130.00
CENTRAL TELEPHONE-NEVADA 15.43 -- 15.43 15.43 15.43
</TABLE>
<TABLE>
<CAPTION>
CLAIM
VENDOR/EMPLOYEE CLASS NO. COMMENTS
- ------------------- ------- ------- --------------------------
<S> <C> <C> <C>
MITCHELL RUBIN 3 NOC
NEIL HICKOX 3 NOC
ROSA SANCHEZ 3 NOC
SCOTT HEMMELGARN 3 45 VPTI DISPUTES AMOUNT
THREE STAR MARKETING 3 71 MOVED TO NON-PRIORITY
VIRGINIA KELLEY 3 NOC
------- ------- --------------------------
CLASS 3 TOTAL
------- ------- --------------------------
A PACK DESIGN CO. 4 NOC
ABC WAREHOUSE 4 NOC
ABF FREIGHT SYSTEM, INC. 4 169 NOC
ADAM EGAZARIAN 4 119 SH
ADLER & RING LAW OFFICES 4 22 NOC
ADM GROUP 4 114 VPTI DISPUTES CLAIM
ADWEEK MAGAZINE 4 NOC
AFFORDABLE PORTABLES 4 NOC
AIRBORNE EXPRESS 4 NOC
AIRGATE 4 NOC
ALFRED A MCCORQUODALE 4 69 SH
ALLIED OREGON INVESTORS 4 NOC
AMERICAN EXPRESS 4 NOC
AMERICAN TV 4 NOC
AMILIE AND ARTHUR FELTEN 4 109 SH
AMREP 4 37 NOC
ANN S TROUP 4 161 SH
ARGENE MAHONE 4 185 SH
ARMY/AIR FORCE EXCHANGE 4 NOC
ARTHUR & MARIE PETRELLA 4 64 SH
ASTRO OFFICE PRODUCTS INC 4 NOC
AT&T 4 NOC
B.G. BALMER & CO., INC. 4 135 MOVED FROM SECURED
BARBARA SCHOOLS 4 106 SH
BDO SEIDMAN 4 NOC
BELL INDUSTRIES 4 18 NOC
BERBARIAN & ASSOCIATES 4 29 MOVED FROM PRIORITY
BETTY C. CONNORS TRUSTEE 4 43 SH
BETTY C. CONNORS, TRUSTEE 4 33 DUPLICATE
BILL E. MAHANEY 4 80 SH
BNY INFORMATION SERVICES 4 NOC
BOWNE OF LOS ANGELES, INC. 4 NOC
BRENNAN & HOWARD INC. 4 NOC
BROOKSTONE 4 NOC
BRUCE G. STOREY 4 102 SH
C.R. MCMULLEN CO INC 4 143 NOC
CALIBRATION & REPAIR SERVICE 4 23 NOC
CARLSON MARKETING 4 NOC
CARMEN AMAYA 4 NOC
CAROL GAUVREAU 4 NOC
CENTRAL TELEPHONE-NEVADA 4 NOC
</TABLE>
Exhibit A-2
<PAGE> 28
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
LISTING OF CLAIMS
<TABLE>
<CAPTION>
AMOUNT OF CLAIM AS ORIGINALLY SCHEDULED
------------------------------------------- ALLOWED
UNSECURED UNSECURED AMOUNT CLAIM
NONPRIORITY PRIORITY OF CLAIM SUBJECT TO ESTIMATED
VENDOR/EMPLOYEE BALANCE BALANCE TOTAL FILED OBJECTION CLAIM
--------------- ---------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
CERTIFIED SECURITY SYSTEMS 66.00 -- 66.00 66.00 66.00
CHALLENGE PRINTING INC. 4,128.64 -- 4,128.64 4,837.20 4,837.20 4,837.20
CHI HANG MOULD 29,329.20 -- 29,329.20 29,329.20 11,579.20
CHYERRELLE HARRISON 1,081.73 -- 1,081.73 1,081.73 1,081.73
CITY CLERK 428.60 -- 428.60 428.60 428.60
CLIFF 13,714.06 -- 13,714.06 13,714.06 13,714.06
COLOURCRAFT PRINTING, INC. 1,340.00 -- 1,340.00 1,508.84 1,508.84 1,508.84
COMPUARTIST 2,535.37 -- 2,535.37 2,535.37 2,535.37
COMPUSA 1,973.00 -- 1,973.00 1,973.00 1,973.00
COMPUTER SOLUTIONS 900.00 -- 900.00 900.00 900.00 900.00
COMPUTER SUPPLIES 1,274.00 -- 1,274.00 1,274.00 1,274.00
CONSUMER ELECTRONICS SHOWS 3,240.00 -- 3,240.00 3,240.00 3,240.00 3,240.00
CONTEMPORARY CONSUMER PRODUCTS 352.50 -- 352.50 300.00 300.00 300.00
CONTINENTAL RESOURCES, INC. 682.11 -- 682.11 682.11 682.11
COX, CASTLE & NICHOLSON 29,506.28 -- 29,506.28 29,435.19 29,435.19 29,435.19
CREDIT MANAGERS ASSOC. OF CALIF 680.00 -- 680.00 680.00 680.00
CRYSTAL LAUGHTON 200.00 200.00 --
DAMARK 2,090.00 -- 2,090.00 2,090.00 2,090.00
DANIEL J AND CELESTINA A WOOTEN -- -- --
DARREN JAMES NOLAN -- -- --
DARRY L PETERS 907.00 907.00 --
DATA COMM WAREHOUSE 499.85 -- 499.85 499.85 499.85
DAVID LERNER 2,307.70 -- 2,307.70 24,076.93 24,076.93 2,307.70
DAVID P. TUPAJ 1,500.00 1,500.00 --
DAYWEST EXPRESS 994.21 -- 994.21 994.21 994.21
DBA ANDERSON TROPHY CO 66.41 -- 66.41 66.41 66.41
DEAN WITTER REYNOLDS INC. 550.53 -- 550.53 550.53 550.53
DELORIS C. GIES -- -- --
DEPT. OF WATER & POWER, CITY OF LA 683.62 683.62 683.62
DHL WORLDWIDE EXPRESS 813.66 -- 813.66 813.66 813.66
DIANE LOHMAN 125.00 125.00 --
DICK ORKIN'S RADIO RANCH 1,991.31 -- 1,991.31 1,991.31 1,991.31
DIGI-KEY 157802 2,835.48 -- 2,835.48 2,835.48 2,835.48 2,835.48
DIGITAL IMAGING PLUS 180.24 180.24 180.24
DNB ENGINEERING 3,900.00 -- 3,900.00 3,900.00 3,900.00 3,900.00
DOUGLAS F LINDSEY -- -- --
DOUGLAS LAUGHTON -- -- --
DOUGLAS REITH 439.45 439.45 --
DUANE VITZHUM -- -- --
DUN & BRADSTREET 32.48 -- 32.48 32.48 32.48
DURACELL USA 3,658.07 -- 3,658.07 3,658.07 3,658.07 3,658.07
EDGE 1,774.00 -- 1,774.00 1,774.00 1,774.00
EDITH NELLIE HENNEBURY 46,452.12 46,452.12 --
EDNA F SPRINKLE 383.50 383.50 --
EDWARD & VALERIE LAUGHTON -- -- --
EDWARD E. LONGO 12,000.00 12,000.00 --
EDWARD F PAWLOWSKI -- -- --
EDWARD JONES CUST FBO 5,713.76 5,713.76 --
</TABLE>
<TABLE>
<CAPTION>
CLAIM
VENDOR/EMPLOYEE CLASS NO. COMMENTS
------- ------- --------------------------
<S> <C> <C> <C>
CERTIFIED SECURITY SYSTEMS 4 NOC
CHALLENGE PRINTING INC. 4 126 NOC
CHI HANG MOULD 4 $17,750 ASSUMED CONTRACT
CHYERRELLE HARRISON 4 NOC
CITY CLERK 4 NOC
CLIFF 4 NOC
COLOURCRAFT PRINTING, INC. 4 7 NOC
COMPUARTIST 4 NOC
COMPUSA 4 NOC
COMPUTER SOLUTIONS 4 8 NOC
COMPUTER SUPPLIES 4 NOC
CONSUMER ELECTRONICS SHOWS 4 90 NOC
CONTEMPORARY CONSUMER PRODUCTS 4 84 NOC
CONTINENTAL RESOURCES, INC. 4 NOC
COX, CASTLE & NICHOLSON 4 5 NOC
CREDIT MANAGERS ASSOC. OF CALIF 4 NOC
CRYSTAL LAUGHTON 4 188 SH
DAMARK 4 NOC
DANIEL J AND CELESTINA A WOOTEN 4 85 SH
DARREN JAMES NOLAN 4 54 SH
DARRY L PETERS 4 94 SH
DATA COMM WAREHOUSE 4 NOC
DAVID LERNER 4 131 VPTI DISPUTES AMOUNT
DAVID P. TUPAJ 4 27 SH
DAYWEST EXPRESS 4 NOC
DBA ANDERSON TROPHY CO 4 NOC
DEAN WITTER REYNOLDS INC. 4 NOC
DELORIS C. GIES 4 101 SH
DEPT. OF WATER & POWER, CITY OF LA 4 2 NOC
DHL WORLDWIDE EXPRESS 4 NOC
DIANE LOHMAN 4 50 SH
DICK ORKIN'S RADIO RANCH 4 NOC
DIGI-KEY 157802 4 25 NOC
DIGITAL IMAGING PLUS 4 117 NOC
DNB ENGINEERING 4 28 NOC
DOUGLAS F LINDSEY 4 48 SH
DOUGLAS LAUGHTON 4 153 SH
DOUGLAS REITH 4 99 SH
DUANE VITZHUM 4 151 SH
DUN & BRADSTREET 4 NOC
DURACELL USA 4 145 NOC
EDGE 4 NOC
EDITH NELLIE HENNEBURY 4 65 SH
EDNA F SPRINKLE 4 59 SH
EDWARD & VALERIE LAUGHTON 4 122 SH
EDWARD E. LONGO 4 170 SH
EDWARD F PAWLOWSKI 4 180 SH
EDWARD JONES CUST FBO 4 187 SH
</TABLE>
Exhibit A-3
<PAGE> 29
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
LISTING OF CLAIMS
<TABLE>
<CAPTION>
AMOUNT OF CLAIM AS ORIGINALLY SCHEDULED
------------------------------------------- ALLOWED
UNSECURED UNSECURED AMOUNT CLAIM
NONPRIORITY PRIORITY OF CLAIM SUBJECT TO ESTIMATED
VENDOR/EMPLOYEE BALANCE BALANCE TOTAL FILED OBJECTION CLAIM
--------------- ---------- -------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
EDWARD KRAKAUER 234,599.00 -- 234,599.00 470,172.00 470,172.00 415,507.00
EDWARD KRAKAUER 470,172.00 470,172.00 --
EIRE PARTNERS 100.00 -- 100.00 100.00 100.00
ELAINE COCKRELL -- -- --
ELASTOMERIC TECHNOLOGIES, INC. 1,491.19 -- 1,491.19 1,491.19 1,491.19
ELEANOR B DANGELO 10,480.17 10,480.17 --
ELIZABETH ANDREWS -- -- --
ELLIE SHAMS 1,225.96 -- 1,225.96 1,225.96 1,225.96
ENGSERV. 4,930.00 -- 4,930.00 4,930.00 4,930.00
EVEREN SECURITIES Disputed 435,000.00 435,000.00 --
EXACT STAFF 11,045.57 11,045.57 --
EXACT STAFF, INC. 11,045.57 -- 11,045.57 11,045.57 11,045.57 11,045.57
EXPRESS CARGO FORWARDING LTD 361.14 -- 361.14 361.14 361.14
FEDCO, INC. 890.00 -- 890.00 890.00 890.00
FEDERAL EXPRESS 1,229.24 -- 1,229.24 1,229.24 1,229.24
FERRT ANNE NEAL 1,654.14 1,654.14 --
FIDELITY PRODUCTS CO 525.00 -- 525.00 525.00 525.00
FIRST CHOICE 217.87 -- 217.87 217.87 217.87
Contingent and
FLEXTRONICS Unliquidated -- --
FRALOCK 104.00 -- 104.00 104.00 104.00
FRANK EDWARD HARRIS TTEE 1,334.95 1,334.95 --
FUTURE GENERATIONS 30,139.97 -- 30,139.97 30,339.97 30,339.97 30,339.97
G-TEK ELECTRONICS SDN BHD Disputed -- --
G. WILLIAMS & ASSOCIATES 784.33 -- 784.33 835.89 835.89 835.89
G.P. COLOR 1,455.51 -- 1,455.51 1,455.51 1,455.51
GARRETT ELECTRONICS 31.09 -- 31.09 31.09 31.09
GARY S AND KATHRYN A. WOLFE 37,500.00 37,500.00 --
GE CAPITAL 4,745.93 -- 4,745.93 4,745.93 4,745.93 4,745.93
GENCO/FEDRATED 1,469.00 -- 1,469.00 1,469.00 1,469.00
GEORGE FISCHER 2,884.61 -- 2,884.61 2,884.61 2,884.61 2,884.61
GEORGE H. OTTMAN 2,450.00 2,450.00 --
GERALD T GRANT -- -- --
GLOBAL COMPUTER SUPPLIES 3,636.00 -- 3,636.00 3,636.00 3,636.00
GLOBAL TRADING AND LEASING 336.00 -- 336.00 336.00 336.00
GOOD GUYS 1,253.00 -- 1,253.00 1,253.00 1,253.00
GOOD GUYS Disputed -- --
GORDON LUNDENE 14,543.74 14,543.74 --
GSS ARRAY 6,224.80 -- 6,224.80 9,825.14 9,825.14 9,825.14
HAMILTON HALLMARK 9,283.75 -- 9,283.75 9,283.75 9,283.75
HAMMACHER SCHLEMMER 6,997.00 -- 6,997.00 22,194.00 22,194.00 6,997.00
HARRY M LANGREHR 762.50 762.50 --
HEARTLAND AMERICA 7,555.00 -- 7,555.00 7,555.00 7,555.00
HELEN V MCKEE -- -- --
HELLO DIRECT 2,514.00 -- 2,514.00 2,514.00 2,514.00
HENRY DURAN 761.54 -- 761.54 761.54 761.54
HERBERT RENSTROM 647.50 647.50 --
HERMAN BENNETT 1,582.00 -- 1,582.00 1,582.00 1,582.00
HIAN TECH 10,135.40 -- 10,135.40 10,135.00 10,135.00 10,135.00
</TABLE>
<TABLE>
<CAPTION>
CLAIM
VENDOR/EMPLOYEE CLASS NO. COMMENTS
------- ------- --------------------------
<S> <C> <C> <C>
EDWARD KRAKAUER 4 46 VPTI DISPUTES AMOUNT
EDWARD KRAKAUER 4 116 DUPLICATE
EIRE PARTNERS 4 NOC
ELAINE COCKRELL 4 160 SH
ELASTOMERIC TECHNOLOGIES, INC. 4 NOC
ELEANOR B DANGELO 4 158 SH
ELIZABETH ANDREWS 4 142 SH
ELLIE SHAMS 4 NOC
ENGSERV. 4 NOC
EVEREN SECURITIES 4 75 VPTI DISPUTES CLAIM
EXACT STAFF 4 193 DUPLICATE
EXACT STAFF, INC. 4 24 NOC
EXPRESS CARGO FORWARDING LTD 4 NOC
FEDCO, INC. 4 NOC
FEDERAL EXPRESS 4 NOC
FERRT ANNE NEAL 4 34 SH
FIDELITY PRODUCTS CO 4 NOC
FIRST CHOICE 4 NOC
FLEXTRONICS 4 NOC
FRALOCK 4 NOC
FRANK EDWARD HARRIS TTEE 4 167 SH
FUTURE GENERATIONS 4 17 NOC
G-TEK ELECTRONICS SDN BHD 4 NOC
G. WILLIAMS & ASSOCIATES 4 133 NOC
G.P. COLOR 4 NOC
GARRETT ELECTRONICS 4 NOC
GARY S AND KATHRYN A. WOLFE 4 162 SH
GE CAPITAL 4 4 NOC
GENCO/FEDRATED 4 NOC
GEORGE FISCHER 4 111 NOC
GEORGE H. OTTMAN 4 172 SH
GERALD T GRANT 4 171 SH
GLOBAL COMPUTER SUPPLIES 4 NOC
GLOBAL TRADING AND LEASING 4 NOC
GOOD GUYS 4 NOC
GOOD GUYS 4 NOC
GORDON LUNDENE 4 31 SH
GSS ARRAY 4 123 NOC
HAMILTON HALLMARK 4 NOC
HAMMACHER SCHLEMMER 4 57 VPTI DISPUTES AMOUNT
HARRY M LANGREHR 4 174 SH
HEARTLAND AMERICA 4 NOC
HELEN V MCKEE 4 152 SH
HELLO DIRECT 4 NOC
HENRY DURAN 4 NOC
HERBERT RENSTROM 4 55 SH
HERMAN BENNETT 4 NOC
HIAN TECH 4 13 NOC
</TABLE>
Exhibit A-4
<PAGE> 30
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
LISTING OF CLAIMS
<TABLE>
<CAPTION>
AMOUNT OF CLAIM AS ORIGINALLY SCHEDULED
------------------------------------------- ALLOWED
UNSECURED UNSECURED AMOUNT CLAIM
NONPRIORITY PRIORITY OF CLAIM SUBJECT TO ESTIMATED
VENDOR/EMPLOYEE BALANCE BALANCE TOTAL FILED OBJECTION CLAIM
--------------- --------------- ---------- -------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
HIAN TECH 10,135.00 10,135.00 --
HINCKLEY & SCHMITT 65.30 -- 65.30 65.30 65.30
HOME CONTROL CONCEPTS 149.00 -- 149.00 149.00 149.00
HOME SHOPPING NETWORK 1,913.00 -- 1,913.00 3,361.00 3,361.00 3,361.00
I.N. INCORPORATED 1,537.50 -- 1,537.50 1,537.50 1,537.50 1,537.50
IMPORT SPECIALTIES 7,340.00 7,340.00 --
INCREDIBLE UNIVERSE 8,186.00 -- 8,186.00 8,186.00 8,186.00
INFINITY ENGINEERING INC 3,195.00 -- 3,195.00 3,195.00 3,195.00 3,195.00
INTERNATIONAL CRYSTAL 259.35 -- 259.35 259.35 259.35 259.35
INTERNATIONAL IMAGE TECH. 878.00 -- 878.00 878.45 878.45 878.45
INTEX TRANSLATIONS 3,565.00 -- 3,565.00 3,565.00 3,565.00
INTL COMMUNICATIONS GROUP, INC 1,385.40 -- 1,385.40 1,385.40 1,385.40
IRENE L SMITH & STEVEN C. SMITH 1,487.95 1,487.95 --
J.D. OFFICE PRODUCTS 1,944.71 -- 1,944.71 1,935.04 1,935.04 1,935.04
JACK C. LONG 2,276.86 2,276.86 --
JACK KERN 13,500.00 13,500.00 --
JAMES B BURT & SUSAN B BURT JT TEN -- -- --
JAMES E GUYTON AND MARY J GUYTON 1,609.50 1,609.50 --
JAMES T. HOPKINS 3,250.00 3,250.00 --
JD OFFICE PRODUCTS 1,935.04 1,935.04 --
JEAN K HEINTZ 1,374.65 1,374.65 --
JENNINGS & THOMAS 53.30 -- 53.30 53.30 53.30
JENNY HOWARD, BRETT HOWARD 2,000.00 2,000.00 --
JEROME E. TATER 3,500.00 3,500.00 --
JO ANNE B. BARROW 1,845.00 1,845.00 --
JO ANNE B. BARROW 1,845.00 1,845.00 --
JOHN S FELDMAN 10,000.00 10,000.00 --
JOSEPH HICKEY -- -- --
JOSEPH J. FAVAZZA, JR. 800.00 800.00 --
JOSEPH P KRACH -- -- --
JOSEPH TIBERI 712.33 712.33 --
JUDY RALSTON 600.00 600.00 --
KELLY J BRINKMAN -- -- --
KEN DANIELSON - CFO SOUND ADVICE 915.00 915.00 915.00
KEN DEWITT 9,846.15 -- 9,846.15 9,846.15 9,846.15
KEN METZLER 7,500.00 -- 7,500.00 7,500.00 7,500.00 7,500.00
KENT H. LANDSBERG CO. 497.11 -- 497.11 497.11 497.11
KINKO'S 1,181.94 -- 1,181.94 1,181.94 1,181.94
L.A. MUNICIPAL SERVICES 605.29 -- 605.29 605.29 605.29
L.A. RECORDS MANAGEMENT 162.50 -- 162.50 214.75 214.75 214.75
LA NETWORK 9,165.00 -- 9,165.00 9,165.00 9,165.00
LARRY KLOMAN 2,596.16 -- 2,596.16 2,596.16 2,596.16 2,596.16
LASER EXPRESS 180.24 -- 180.24 180.24 180.24
LDDS/WORLDCOM 311.52 -- 311.52 311.52 311.52
LEADING PLASTIC MFG. PTE LTD 4,035.00 -- 4,035.00 4,035.00 4,035.00 4,035.00
LECHMERE/MONTGOMERY WARDS 803.00 -- 803.00 803.10 803.10 803.10
LEE G TROY -- -- --
LEESURE DESIGN 50.00 -- 50.00 50.00 50.00
</TABLE>
<TABLE>
<CAPTION>
CLAIM
VENDOR/EMPLOYEE CLASS NO. COMMENTS
--------------- ------- ------- --------------------------
<S> <C> <C> <C>
HIAN TECH 4 36 DUPLICATE
HINCKLEY & SCHMITT 4 NOC
HOME CONTROL CONCEPTS 4 NOC
HOME SHOPPING NETWORK 4 77 NOC
I.N. INCORPORATED 4 10 NOC
IMPORT SPECIALTIES 4 140 VPTI DISPUTES CLAIM
INCREDIBLE UNIVERSE 4 NOC
INFINITY ENGINEERING INC 4 148 NOC
INTERNATIONAL CRYSTAL 4 15 NOC
INTERNATIONAL IMAGE TECH. 4 3 NOC
INTEX TRANSLATIONS 4 NOC
INTL COMMUNICATIONS GROUP, INC 4 NOC
IRENE L SMITH & STEVEN C. SMITH 4 58 SH
J.D. OFFICE PRODUCTS 4 9 NOC
JACK C. LONG 4 141 SH
JACK KERN 4 155 SH
JAMES B BURT & SUSAN B BURT JT TEN 4 182 SH
JAMES E GUYTON AND MARY J GUYTON 4 128 SH
JAMES T. HOPKINS 4 79 SH
JD OFFICE PRODUCTS 4 35 DUPLICATE
JEAN K HEINTZ 4 183 SH
JENNINGS & THOMAS 4 NOC
JENNY HOWARD, BRETT HOWARD 4 144 SH
JEROME E. TATER 4 129 SH
JO ANNE B. BARROW 4 26 SH
JO ANNE B. BARROW 4 40 DUPLICATE
JOHN S FELDMAN 4 11 SH
JOSEPH HICKEY 4 113 SH
JOSEPH J. FAVAZZA, JR. 4 197 SH
JOSEPH P KRACH 4 72 SH
JOSEPH TIBERI 4 159 SH
JUDY RALSTON 4 120 SH
KELLY J BRINKMAN 4 181 SH
KEN DANIELSON - CFO SOUND ADVICE 4 130 NOC
KEN DEWITT 4 NOC
KEN METZLER 4 30 NOC
KENT H. LANDSBERG CO. 4 NOC
KINKO'S 4 NOC
L.A. MUNICIPAL SERVICES 4 NOC
L.A. RECORDS MANAGEMENT 4 14 NOC
LA NETWORK 4 NOC
LARRY KLOMAN 4 91 NOC
LASER EXPRESS 4 NOC
LDDS/WORLDCOM 4 NOC
LEADING PLASTIC MFG. PTE LTD 4 107 NOC
LECHMERE/MONTGOMERY WARDS 4 137 NOC
LEE G TROY 4 175 SH
LEESURE DESIGN 4 NOC
</TABLE>
Exhibit A-5
<PAGE> 31
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
LISTING OF CLAIMS
<TABLE>
<CAPTION>
AMOUNT OF CLAIM AS ORIGINALLY SCHEDULED
------------------------------------------- ALLOWED
UNSECURED UNSECURED AMOUNT CLAIM
NONPRIORITY PRIORITY OF CLAIM SUBJECT TO ESTIMATED
VENDOR/EMPLOYEE BALANCE BALANCE TOTAL FILED OBJECTION CLAIM
---------------- --------------- ---------- -------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
LEGAL DEPT/STAPLE INC -- -- --
LEONARD D JULOS -- -- --
LEONARD SABALA -- -- --
LET'S TALK CELLULAR 9,524.00 -- 9,524.00 9,524.00 9,524.00 9,524.00
LIGAYA KELLY 200.00 -- 200.00 0.00 0.00 3,201.27
LIGHTHOUSE MARKETING 14.94 -- 14.94 -- -- 14.94
LILEA MEEH TR -- -- --
LINDA M. KOZLOWSKI 125.00 125.00 --
LISA DURAN 778.85 -- 778.85 778.85 778.85
LISA M BRESKY 1,750.00 1,750.00 --
LNC ASSOCIATES 174.58 -- 174.58 174.58 174.58
LOEB & LOEB LLP ATTY AT LAW 37,741.21 -- 37,741.21 40,154.47 40,154.47 40,154.47
LOIS M HANSEN 232.45 232.45 --
LOREN B. MARK -- -- --
LUCENT TECHNOLOGIES, INC. 70,251.86 -- 70,251.86 70,251.86 70,251.86
LURIA & SON 2,375.00 -- 2,375.00 2,375.00 2,375.00
LYNN SCHIFF -- -- --
M BUSSARAKUM MD INC 7,911.22 7,911.22 --
MAC WAREHOUSE 629.95 -- 629.95 629.95 629.95
MACOLA INCORPORATED 1,425.21 -- 1,425.21 1,425.21 1,425.21
MAGGIE CHAMBERS 1,298.08 -- 1,298.08 1,298.08 1,298.08
MARFRED INDUSTRIES 2,305.92 -- 2,305.92 1,775.12 1,775.12 1,775.12
MARTIN J. & ELEANOR C. GRUBER -- -- --
MFS/WORLDCOMM 20,190.59 -- 20,190.59 20,190.59 20,190.59
MICHAEL ANTHONY GIANNELLI -- -- --
MICRO WAREHOUSE 64.90 -- 64.90 64.90 64.90
MICRO/SYS 881.08 -- 881.08 881.08 881.08 881.08
MILLAR COMPANY 6,832.34 -- 6,832.34 10,450.00 10,450.00 6,832.34
MILLAR COMPANY 10,450.00 10,450.00 --
MINILEC SERVICE 84.00 -- 84.00 84.00 84.00
MISCO 2,366.00 -- 2,366.00 2,366.00 2,366.00
MITCHELL RUBIN 4,326.92 -- 4,326.92 4,326.92 4,326.92
MOBILCOMM Disputed -- --
MOBILECOMM 46.00 -- 46.00 46.00 46.00
MONTE CARLO RESORT & CASINO 450.88 -- 450.88 450.88 450.88 450.88
MONTGOMERY WARD & CO., INC. 3,545.00 -- 3,545.00 5,661.49 5,661.49 5,661.49
MOULTON DATA SERVICES, INC. 15,972.63 -- 15,972.63 13,728.62 13,728.62 13,728.62
MOUSER ELECTRONICS 89.77 -- 89.77 89.77 89.77
MR JOSEPH RUYZAM 800.00 800.00 --
MRS ARTHUR BARRON 550.00 550.00 --
MYRON HITCHCOCK 7,550.50 -- 7,550.50 7,550.50 7,550.50
NEIL HICKOX 1,153.85 -- 1,153.85 1,153.85 1,153.85
NEILSEN DILLINGHAM BUILDERS 172.85 -- 172.85 172.85 172.85
NEW HORIZONS 5,148.62 -- 5,148.62 5,148.62 5,148.62
NEW HORIZONS 140.00 -- 140.00 140.00 140.00
NICHOLAS E. WHITNEY JR 5,620.00 5,620.00 --
NICHOLAS E. WHITNEY JR 5,620.00 5,620.00 --
NORTHERN LIGHTS (CREDIT BAL) 296.16 -- 296.16 296.16 296.16
</TABLE>
<TABLE>
<CAPTION>
CLAIM
VENDOR/EMPLOYEE CLASS NO. COMMENTS
--------------- ------- ------- --------------------------
<S> <C> <C> <C>
LEGAL DEPT/STAPLE INC 4 110 VPTI DISPUTES CLAIM
LEONARD D JULOS 4 98 SH
LEONARD SABALA 4 147 SH
LET'S TALK CELLULAR 4 121 NOC
LIGAYA KELLY 4 194 MOVED FROM PRIORITY
LIGHTHOUSE MARKETING 4 88 FROM PRIORITY/ VPTI DISPUT
LILEA MEEH TR 4 100 SH
LINDA M. KOZLOWSKI 4 173 SH
LISA DURAN 4 NOC
LISA M BRESKY 4 192 SH
LNC ASSOCIATES 4 NOC
LOEB & LOEB LLP ATTY AT LAW 4 1 NOC
LOIS M HANSEN 4 86 SH
LOREN B. MARK 4 32 SH
LUCENT TECHNOLOGIES, INC. 4 NOC
LURIA & SON 4 NOC
LYNN SCHIFF 4 56 SH
M BUSSARAKUM MD INC 4 93 SH
MAC WAREHOUSE 4 NOC
MACOLA INCORPORATED 4 NOC
MAGGIE CHAMBERS 4 NOC
MARFRED INDUSTRIES 4 19 NOC
MARTIN J. & ELEANOR C. GRUBER 4 44 SH
MFS/WORLDCOMM 4 NOC
MICHAEL ANTHONY GIANNELLI 4 132 SH
MICRO WAREHOUSE 4 NOC
MICRO/SYS 4 21 NOC
MILLAR COMPANY 4 20 VPTI DISPUTES AMOUNT
MILLAR COMPANY 4 51 DUPLICATE
MINILEC SERVICE 4 NOC
MISCO 4 NOC
MITCHELL RUBIN 4 NOC
MOBILCOMM 4 NOC
MOBILECOMM 4 NOC
MONTE CARLO RESORT & CASINO 4 63 NOC
MONTGOMERY WARD & CO., INC. 4 139 NOC
MOULTON DATA SERVICES, INC. 4 52 NOC
MOUSER ELECTRONICS 4 NOC
MR JOSEPH RUYZAM 4 112 SH
MRS ARTHUR BARRON 4 189 SH
MYRON HITCHCOCK 4 NOC
NEIL HICKOX 4 NOC
NEILSEN DILLINGHAM BUILDERS 4 NOC
NEW HORIZONS 4 NOC
NEW HORIZONS 4 NOC
NICHOLAS E. WHITNEY JR 4 127 SH
NICHOLAS E. WHITNEY JR 4 179 DUPLICATE
NORTHERN LIGHTS (CREDIT BAL) 4 NOC
</TABLE>
Exhibit A-6
<PAGE> 32
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
LISTING OF CLAIMS
<TABLE>
<CAPTION>
AMOUNT OF CLAIM AS ORIGINALLY SCHEDULED
------------------------------------------- ALLOWED
UNSECURED UNSECURED AMOUNT CLAIM
NONPRIORITY PRIORITY OF CLAIM SUBJECT TO ESTIMATED
VENDOR/EMPLOYEE BALANCE BALANCE TOTAL FILED OBJECTION CLAIM
--------------- --------------- ---------- -------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
NOW MESSENGER SERVICE 1,224.95 -- 1,224.95 -- 1,224.95
ON-SITE LASERMEDIC 511.04 -- 511.04 511.04 511.04 511.04
ORKIN PEST CONTROL 110.00 -- 110.00 110.00 110.00
PACIFIC BELL 406.79 -- 406.79 365.20 365.20 365.20
PAINE WEBBER INCORPORATED 567.44 -- 567.44 567.44 567.44
PANASONIC INDUSTRIAL COMPANY 6,000.00 -- 6,000.00 6,000.00 6,000.00
PATRICIA MARTIN 20,000.00 20,000.00 --
PATRICIA MARTIN 20,000.00 20,000.00 --
PAUL L. & DONNA R. BROWN 5,503.00 5,503.00 --
PHLLIS BOLAND -- -- --
PINNACLE MARKETING GROUP 989.42 -- 989.42 989.42 989.42
PITNEY BOWES 374.48 -- 374.48 374.48 374.48
PLAN I INSTALLATIONS, INC. 1,856.25 -- 1,856.25 1,856.25 1,856.25
PLASTIC MART 183.00 -- 183.00 183.00 183.00 183.00
POLLET & WOODBURY 877.25 -- 877.25 877.25 877.25
PR NEWSWIRE INC. 4,460.25 -- 4,460.25 4,704.00 4,704.00 4,704.00
PRECISION FULFILLMENT SERVICES 7,250.00 -- 7,250.00 7,250.00 7,250.00
PRECISION TRADING 2,413.00 -- 2,413.00 2,413.00 2,413.00
PROTECTION ONE 256.00 -- 256.00 256.00 256.00
PUBLIC STORAGE - CHTSWRTH 262.00 -- 262.00 262.00 262.00
PUBLIC STORAGE- TARZANA 544.00 -- 544.00 544.00 544.00
PUBLIC STORAGE- VAN NUYS 512.00 -- 512.00 512.00 512.00
PURCHASE POWER 275.29 -- 275.29 275.29 275.29
RELIABLE CONTAINER CORP. 800.00 -- 800.00 800.00 800.00
RICHARD R. TOPIELEC 244.00 244.00 --
RIEMER REPORTING SERVICE, INC. 796.60 -- 796.60 796.60 796.60
ROLLAND E KARLEN -- -- --
ROSA SANCHEZ 581.54 -- 581.54 581.54 581.54
S&A DISTRIBUTORS 2,250.00 -- 2,250.00 2,250.00 2,250.00
SAM BOROFSKY ASSOCIATES 3,650.24 -- 3,650.24 3,650.24 3,650.24
SAM'CLUB 3,195.00 -- 3,195.00 3,195.00 3,195.00
SCOTT HEMMELGARN 1,153.85 -- 1,153.85 0.00 0.00 1,153.85
SCOTT WINNEKER -- -- --
SEAN A KANOV 800.00 800.00 --
SELECT CIRCUITS 6,182.45 -- 6,182.45 6,182.45 6,182.45
SERVICE MERCHANDISE COMPANY INC 71,481.10 71,481.10 --
SEVENTH AVENUE 2,496.00 -- 2,496.00 2,496.00 2,496.00
SHARPER IMAGE 40,241.00 -- 40,241.00 45,360.71 45,360.71 45,360.71
SHOPKO STORES/COMMONWEALTH 6,500.00 -- 6,500.00 6,500.00 6,500.00
SOUND ADVICE 915.00 -- 915.00 915.00 915.00
SOURCE SERVICES CORP 6,750.00 -- 6,750.00 13,304.67 13,304.67 6,750.00
SPECIAL OPERATIONS ASSOC., INC 116.00 -- 116.00 116.00 116.00
SPIEGEL, INC 2,890.00 -- 2,890.00 2,890.00 2,890.00
SPRINT 23.53 -- 23.53 23.53 23.53
STANDARD & POOR'S 925.00 -- 925.00 925.00 925.00
STANDARD PLUS INC. 4,676.70 -- 4,676.70 4,676.70 4,676.70
STAT HOUSE GRAFIX COLORTONE HS 394.54 -- 394.54 394.54 394.54
STEPHEN T AND PENNY L RICHARDSON 8,174.50 8,174.50 --
</TABLE>
<TABLE>
<CAPTION>
CLAIM
VENDOR/EMPLOYEE CLASS NO. COMMENTS
-------------- ------- ------- --------------------------
<S> <C> <C> <C>
NOW MESSENGER SERVICE 4 MOVED FROM PRIORITY
ON-SITE LASERMEDIC 4 16 NOC
ORKIN PEST CONTROL 4 NOC
PACIFIC BELL 4 89 NOC
PAINE WEBBER INCORPORATED 4 NOC
PANASONIC INDUSTRIAL COMPANY 4 NOC
PATRICIA MARTIN 4 168 SH
PATRICIA MARTIN 4 190 DUPLICATE
PAUL L. & DONNA R. BROWN 4 41 SH
PHLLIS BOLAND 4 95 SH
PINNACLE MARKETING GROUP 4 NOC
PITNEY BOWES 4 NOC
PLAN I INSTALLATIONS, INC. 4 NOC
PLASTIC MART 4 6 NOC
POLLET & WOODBURY 4 NOC
PR NEWSWIRE INC. 4 177 NOC
PRECISION FULFILLMENT SERVICES 4 NOC
PRECISION TRADING 4 NOC
PROTECTION ONE 4 NOC
PUBLIC STORAGE - CHTSWRTH 4 NOC
PUBLIC STORAGE- TARZANA 4 NOC
PUBLIC STORAGE- VAN NUYS 4 NOC
PURCHASE POWER 4 NOC
RELIABLE CONTAINER CORP. 4 NOC
RICHARD R. TOPIELEC 4 81 SH
RIEMER REPORTING SERVICE, INC. 4 NOC
ROLLAND E KARLEN 4 163 SH
ROSA SANCHEZ 4 NOC
S&A DISTRIBUTORS 4 NOC
SAM BOROFSKY ASSOCIATES 4 NOC
SAM'CLUB 4 NOC
SCOTT HEMMELGARN 4 45 NOC
SCOTT WINNEKER 4 92 SH
SEAN A KANOV 4 164 SH
SELECT CIRCUITS 4 NOC
SERVICE MERCHANDISE COMPANY INC 4 136 VPTI DISPUTES CLAIM
SEVENTH AVENUE 4 NOC
SHARPER IMAGE 4 134 NOC
SHOPKO STORES/COMMONWEALTH 4 NOC
SOUND ADVICE 4 NOC
SOURCE SERVICES CORP 4 191 VPTI DISPUTES AMOUNT
SPECIAL OPERATIONS ASSOC., INC 4 NOC
SPIEGEL, INC 4 NOC
SPRINT 4 NOC
STANDARD & POOR'S 4 NOC
STANDARD PLUS INC. 4 NOC
STAT HOUSE GRAFIX COLORTONE HS 4 NOC
STEPHEN T AND PENNY L RICHARDSON 4 186 SH
</TABLE>
Exhibit A-7
<PAGE> 33
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
LISTING OF CLAIMS
<TABLE>
<CAPTION>
AMOUNT OF CLAIM AS ORIGINALLY SCHEDULED
------------------------------------------- ALLOWED
UNSECURED UNSECURED AMOUNT CLAIM
NONPRIORITY PRIORITY OF CLAIM SUBJECT TO ESTIMATED
VENDOR/EMPLOYEE BALANCE BALANCE TOTAL FILED OBJECTION CLAIM
--------------- --------------- ---------- -------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STERLING COMMERCE NSG 2,659.87 -- 2,659.87 2,659.87 2,659.87
STERN'S DEPT STORE, INC 2,367.41 2,367.41 2,367.41
SUNCLIPSE, INC. 497.11 497.11 497.11
SUNSET TO SUNRISE 450.00 -- 450.00 450.00 450.00
SUSAN M. CABLE 742.00 742.00 --
TALA'AT ELLAMI TRADING & CONTRACTING 1,200,000.00 1,200,000.00 --
TELEDYNAMICS 1,512.71 1,512.71 1,512.71
TELOGY, INC. 874.64 -- 874.64 -- -- 2,364.40
TERRY & NANCY CAMPBELL 2,362.88 2,362.88 --
THAI PACKAGING 2,630.00 -- 2,630.00 2,630.00 2,630.00
THE ASM GROUP 115.00 -- 115.00 115.00 115.00
THE WINWARD GROUP 825.00 -- 825.00 825.00 825.00
THREE STAR MARKETING 1,018.55 -- 1,018.55 -- -- 1,937.15
THURSLEY GROUP 510.00 -- 510.00 510.00 510.00
TMX INTERNATIONAL 4,599.02 -- 4,599.02 30,000.00 30,000.00 4,599.02
TNT SKYPAC INC. 236.42 -- 236.42 242.41 242.41 242.41
TOWER GROUP INT'L 14.50 -- 14.50 14.50 14.50
TRIWAYS LOGISTICS 70.00 -- 70.00 70.00 70.00
TWICE 94.90 -- 94.90 94.90 94.90
ULTIMATE ELECTRONICS 473.00 -- 473.00 473.00 473.00
UNITED AUDIO CENTER 2,243.00 -- 2,243.00 2,243.00 2,243.00
UNITED PARCEL SERVICE 5,250.39 -- 5,250.39 5,250.39 5,250.39
UNITED PROMOTIONS 1,380.00 -- 1,380.00 1,380.00 1,380.00
US LABEL 1,077.65 -- 1,077.65 1,077.65 1,077.65 1,077.65
VENTURE NETWORK RESOURCES 3,120.22 -- 3,120.22 3,120.22 3,120.22
VERA L. MINER -- -- --
VICTOR E. APLOZAN -- -- --
VICTOR SCHWEER 1,400.00 1,400.00 --
VINCENT SICA JR AND JOAN E SICA 4,750.00 4,750.00 --
VIRGINIA KELLEY 1,096.16 -- 1,096.16 1,096.16 1,096.16
VITO DE GAETANO -- -- --
VOJISLAY PEJIC 351.88 351.88 --
VOLT 2,384.41 -- 2,384.41 2,384.41 2,384.41 2,384.41
VORTEX INDUSTRIES 358.95 -- 358.95 358.95 358.95
WACE THE IMAGING NETWORK 1,435.00 -- 1,435.00 1,435.00 1,435.00
WAH SHING ELECTRONICS CO., LTD. 23,730.00 -- 23,730.00 23,730.00 11,000.00
WELLS FARGO BANK 4,835.53 4,835.53 --
WILTEL TELECOMMUNICATIONS SYS 1,581.00 -- 1,581.00 1,581.00 1,581.00
WINFIELD MARKETING 3,860.00 -- 3,860.00 9,956.39 9,956.39 --
XEROX CORPORATION 854.69 -- 854.69 854.69 854.69
ZEON TECH Contingent and -- --
Unliquidated
ZILOG, INC. 2,900.00 -- 2,900.00 4,300.00 4,300.00 4,300.00
--------------- ---------- -------------- -------------- --------------- -------------
4 TOTAL 1,010,242.72 -- 1,010,242.72 3,475,303.45 3,905,717.98 1,186,045.54
--------------- ---------- -------------- -------------- --------------- -------------
GRAND TOTAL 1,034,126.24 16,614.52 1,050,740.76 5,678,756.16 6,117,633.41 1,203,229.95
=============== ========== ============== ============== =============== =============
</TABLE>
<TABLE>
<CAPTION>
CLAIM
VENDOR/EMPLOYEE CLASS NO. COMMENTS
--------------- ------- ------- --------------------------
<S> <C> <C> <C>
STERLING COMMERCE NSG 4 NOC
STERN'S DEPT STORE, INC 4 78 NOC
SUNCLIPSE, INC. 4 198 NOC
SUNSET TO SUNRISE 4 NOC
SUSAN M. CABLE 4 146 SH
TALA'AT ELLAMI TRADING & CONTRACTING 4 125 VPTI DISPUTES CLAIM
TELEDYNAMICS 4 83 NOC
TELOGY, INC. 4 74 MOVED FROM SECURED
TERRY & NANCY CAMPBELL 4 42 SH
THAI PACKAGING 4 NOC
THE ASM GROUP 4 NOC
THE WINWARD GROUP 4 NOC
THREE STAR MARKETING 4 71 MOVED FROM PRIORITY
THURSLEY GROUP 4 NOC
TMX INTERNATIONAL 4 196 VPTI DISPUTES AMOUNT
TNT SKYPAC INC. 4 166 NOC
TOWER GROUP INT'L 4 NOC
TRIWAYS LOGISTICS 4 NOC
TWICE 4 NOC
ULTIMATE ELECTRONICS 4 NOC
UNITED AUDIO CENTER 4 NOC
UNITED PARCEL SERVICE 4 NOC
UNITED PROMOTIONS 4 NOC
US LABEL 4 47 NOC
VENTURE NETWORK RESOURCES 4 NOC
VERA L. MINER 4 97 SH
VICTOR E. APLOZAN 4 39 SH
VICTOR SCHWEER 4 118 SH
VINCENT SICA JR AND JOAN E SICA 4 165 SH
VIRGINIA KELLEY 4 NOC
VITO DE GAETANO 4 108 SH
VOJISLAY PEJIC 4 96 SH
VOLT 4 60 NOC
VORTEX INDUSTRIES 4 NOC
WACE THE IMAGING NETWORK 4 NOC
WAH SHING ELECTRONICS CO., LTD. 4 $12,730 ASSUMED CONTRACT
WELLS FARGO BANK 4 138 VPTI DISPUTES CLAIM
WILTEL TELECOMMUNICATIONS SYS 4 NOC
WINFIELD MARKETING 4 149 VPTI DISPUTES CLAIM
XEROX CORPORATION 4 NOC
ZEON TECH 4 NOC
ZILOG, INC. 4 61 NOC
------- ------- --------------------------
4 TOTAL
------- ------- --------------------------
GRAND TOTAL
======= ======= ==========================
</TABLE>
Exhibit A-8
<PAGE> 34
EXHIBIT "B"
FRANKLIN ELECTRONIC PUBLISHERS, INC.
FINANCIAL INFORMATION
FRANKLIN ELECTRONIC PUBLISHERS, INC. MARCH 31, 1997 ANNUAL REPORT AND
10-K AVAILABLE AS A PUBLIC DOCUMENT.
-1-
<PAGE> 35
================================================================================
EXHIBIT C
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
FINANCIAL INFORMATION
================================================================================
<PAGE> 36
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Balance Sheets at December 31, 1996 and September 30, 1997 C-2
Statements of Operations for the year ended December 31, 1996
and the nine months ended September 30, 1997 C-3
Statements of Stockholders' Equity for the year ended December 31, 1996
and the nine months ended September 30, 1997 C-4
Statements of Cash Flows for the year ended December 31, 1996
and the nine months ended September 30, 1997 C-5
Summary of Significant Accounting Policies C-6
Notes to the Financial Statements C-8
Other Financial Information
Debtor in Possession Monthly Operating Reports
October 1997 C-10
November 1997 C-13
</TABLE>
C-1
<PAGE> 37
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
BALANCE SHEETS
ASSETS (NOTE 8)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
(AUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 226,615 $ 35,886
Restricted cash 150,000 --
Receivables, net of allowance for doubtful accounts 323,409 66,110
Receivables sold to financial institution 3,367,772 246,624
Less initial payments received from financial institution 1,889,052 233,171
------------ ------------
Net amount due from (to) financial institution 1,478,720 13,453
Inventory 1,831,217 715,062
Prepaid expenses 101,495 43,446
------------ ------------
Total current assets 4,111,456 873,957
------------ ------------
Property and equipment
Equipment 1,882,569 1,778,634
Other 142,512 135,677
------------ ------------
2,025,081 1,914,311
Less accumulated depreciation 1,376,449 1,487,270
------------ ------------
Net property and equipment 648,632 427,041
Patents and technology rights, net of amortization 267,241 220,343
Deferred costs, net 620,749 350,303
Other assets 127,496 58,050
------------ ------------
Total assets $ 5,775,574 $ 1,929,694
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 4,340,981 $ 587,653
Accrued expenses 857,922 740,618
Current obligations under long term debt (Note 3) -- 400,000
------------ ------------
Total current liabilities 5,198,903 1,728,271
Long term debt (Note 3) -- 1,308,750
------------ ------------
Total liabilities 5,198,903 3,037,021
Commitments and contingencies (Note 9)
Stockholders' equity (deficit)
Preferred stock, 10,000,000 shares authorized; $1.00 stated value,
0 and 500,000 shares issued and outstanding -- 500,000
Common stock, 50,000,000 shares authorized; $.001 stated value,
13,949,072 and 16,011,572 shares issued and outstanding 13,949 16,012
Additional paid-in capital 27,746,645 27,897,082
Accumulated deficit (27,183,923) (29,520,421)
------------ ------------
Total stockholders' equity (deficit) 576,671 (1,107,327)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 5,775,574 $ 1,929,674
============ ============
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
C-2
<PAGE> 38
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
(AUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
Sales $ 10,813,447 $ 2,459,475
Less price protection costs -- (205,500)
------------ ------------
Net sales 10,813,447 2,253,975
Costs and expenses
Cost of goods sold 7,620,465 2,186,538
Discontinued model costs (Note 6) 419,960 790,295
Marketing 2,803,361 974,412
General and administrative 2,567,782 1,719,939
Research and development 1,061,885 547,669
Warehouse 1,005,901 456,383
------------ ------------
Total costs and expenses 15,479,354 6,675,236
------------ ------------
Operating loss (4,665,907) (4,421,261)
Other income (expense)
Gain on sale of assets (Note 3) -- 141,527
Sale of technology license (Note 3) -- 700,000
Forgiveness of debt (Note 4) -- 1,387,842
Interest expense (227,841) (130,246)
Other 59,508 (14,360)
------------ ------------
Net loss $ (4,834,240) $ (2,336,498)
============ ============
Net loss per share $ (0.35) $ (.16)
============ ============
Weighted average common
shares outstanding 13,720,414 14,980,320
============ ============
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
C-3
<PAGE> 39
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1996 (AUDITED) AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 -- -- 12,486,273 $ 12,486
Vendors/employees exercised stock options -- -- 90,833 91
Stock options issued to Board of Directors members -- -- -- --
Stock options issued to related party -- -- -- --
Shares of common stock issued to manufacturer -- -- 1,371,966 1,372
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1996 -- -- 13,949,072 $ 13,949
Preferred stock issued to GSS Array (Note 4) 500,000 500,000 -- --
Stock issued to Franklin Electronics (Note 3) -- -- 2,000,000 2,000
Stock issued to Mitch Rubin -- -- 62,500 63
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, September 30, 1997 500,000 $ 500,000 16,011,572 $ 16,012
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Additional Stockholders'
Paid In Accumulated Equity
Capital Deficit (Deficit)
------------ ------------ ------------
<S> <C> <C> <C>
Balance, January 1, 1996 $ 25,679,900 $(22,349,683) $ 3,342,703
Vendors/employees exercised stock options 15,065 -- 15,156
Stock options issued to Board of Directors members 48,000 -- 48,000
Stock options issued to related party 50,000 -- 50,000
Shares of common stock issued to manufacturer 1,953,680 -- 1,955,052
Net loss -- (4,834,240) (4,834,240)
------------ ------------ ------------
Balance, December 31, 1996 $ 27,746,645 $(27,183,923) $ 576,671
Preferred stock issued to GSS Array (Note 4) -- -- 500,000
Stock issued to Franklin Electronics (Note 3) 148,000 -- 150,000
Stock issued to Mitch Rubin 2,437 -- 2,500
Net loss -- (2,336,498) (2,336,498)
------------ ------------ ------------
Balance, September 30, 1997 $ 27,897,082 $(29,520,421) $ (1,107,327)
============ ============ ============
</TABLE>
See accompanying summary of accounting policies and notes
to financial statements.
C-4
<PAGE> 40
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (AUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,834,240) $ (2,336,498)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 832,415 468,911
Compensatory stock options 48,000 2,400
Gain on sale of assets -- (141,527)
Gain on forgiveness of debt -- (1,387,842)
Discontinued model costs 419,960 790,295
Writedown of inventory 150,000 400,000
Reserve for parts commitments 729,000 --
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash (150,000) 150,000
Decrease in receivables, net 3,260,987 1,722,566
Decrease in inventory 980,613 640,371
Decrease in prepaid expenses 37,386 58,049
Increase in patents and technology rights (100,000) --
Increase in deferred costs (494,509) (139,375)
(Increase) decrease in other assets (155,918) 69,446
Increase (decrease) in accounts payable 2,394,383 (1,865,486)
Decrease in accrued expenses (747,458) (387,767)
------------ ------------
Net cash provided by (used in) operating activities 1,641,619 (1,956,457)
------------ ------------
Cash flows from investing activities:
Capital expenditures (259,569) (160,101)
Proceeds from the sale of property and equipment -- 64,579
------------ ------------
Net cash used in investing activities (259,569) (95,522)
------------ ------------
Cash flows from financing activities:
Payments on loan payable (3,265,439) --
Proceeds from the exercise of stock options and warrants 15,156 --
Proceeds from note payable -- 1,708,750
Proceeds from sale of common stock -- 152,500
------------ ------------
Net cash provided by (used in) financing activities (3,250,283) 1,861,250
------------ ------------
Net decrease in cash and cash equivalents (1,868,233) (190,729)
------------ ------------
Cash and cash equivalents at the beginning of the year 2,094,848 226,615
------------ ------------
Cash and cash equivalents at the end of the year $ 226,615 $ 35,886
============ ============
</TABLE>
See summary of accounting policies and notes to financial statements.
C-5
<PAGE> 41
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of product.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORY
Inventory consists of finished goods and is valued at the lower of cost
or market. Cost is determined by the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on a
straight-line basis using estimated useful lives which range from 3-7 years.
PATENTS AND TECHNOLOGY RIGHTS
Patents are stated at cost less amortization, which is provided on a
straight-line basis over 15 years. Technology rights are stated at cost less
amortization, which is provided on a straight-line basis over 3 years. Patents
and technology rights are expensed when management believes they provide no
future benefit.
DEFERRED COSTS
Deferred costs include capitalized product development, product
improvement, and user manual design and development costs, less amortization,
which is provided on a straight-line basis over 2-3 years. Such costs are
periodically reviewed each year based upon management's estimates of sales of
the related products. Deferred costs are written off when management believes
they provide no future benefit.
INCOME (LOSS) PER SHARE
Net income (loss) per common share is calculated by dividing net income
(loss) applicable to common stock by the weighted average number of shares of
common stock and common stock equivalent shares outstanding during each year.
Common stock equivalents have not been included since their effect would be
anti-dilutive.
INCOME TAXES
The Company utilizes Statement of Financial Accounting Standards No.
109, 'Accounting for Income Taxes' (SFAS No. 109). This standard employs an
asset and liability approach in accounting for income taxes, the objective of
which is to recognize the amount of current and deferred taxes payable or
receivable at the date of the financial statements using the provisions of
enacted tax laws.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses at the date that the financial statements are prepared. Actual
results could differ from those estimates.
C-6
<PAGE> 42
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, cash equivalents, restricted cash,
accounts receivable, accounts payable, and loan payable approximate their fair
values because of the short maturity of these instruments.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) establishes guidelines regarding when impairment losses on
long-lived assets, which include plant and equipment, and certain identifiable
intangible assets, should be recognized and how impairment losses should be
measured. The adoption of this standard did not have a material effect on the
Company's financial position or results of operations.
STOCK BASED COMPENSATION
As of January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), which establishes a fair value method of accounting for stock-based
compensation plans. In accordance with SFAS 123, the Company has chosen to
continue to account for employee stock-based compensation utilizing the
intrinsic value method prescribed in APB 25. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the fair market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.
Also, in accordance with SFAS 123, the Company is to make a footnote
disclosure with respect to stock-based employee compensation. The cost of
stock-based employee compensation is measured at the grant date based on the
value of the award and recognized over the service period. The value of the
stock based award is determined using a pricing model whereby compensation cost
is the excess of the fair value of the stock as determined by the model at grant
date or other measurement date over the amount an employee must pay to acquire
the stock. For the year ended December 31, 1996 and the period ended September
30, 1997, additional compensation cost as measured pursuant to SFAS 123 for
options granted in 1997, 1996, and 1995 was not material. Accordingly, pro forma
net loss and net loss per share is not applicable.
RECLASSIFICATION
Reclassification of certain prior year amounts have been made to
conform to current year classification.
C-7
<PAGE> 43
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. For further
information, refer to the financial statements, and footnotes thereto, included
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
1996. Operating results for the nine month period ended September 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
NOTE 2 -- On September 22, 1997, the Company filed a petition with the United
States Bankruptcy Court, Central District of California, under the provisions of
Chapter 11 of the Bankruptcy Code. The Company is continuing to operate as a
"Debtor in Possession" under such code. The Company is in the process of
preparing a plan of reorganization to file with the Bankruptcy Court in
conjunction with Franklin Electronic Publishers, Inc. ("Franklin"), the
Company's largest secured creditor. No assurance can be given that such plan
will be completed, filed, and/or approved by the court, or other interested
parties of the bankruptcy case.
NOTE 3 -- In May 1997, the Company consummated a transaction involving two
agreements with Franklin Electronic Publishers, Inc. The first agreement was a
Purchase and Loan Agreement in which the two companies entered into the
following transactions: 1) The Company transferred and sold to Franklin for
$450,000 in cash its inventory, rights to work in process, manufacturing assets,
marketing assets, and software and hardware design assets for the Company's
IQoVOICE(TM) Organizer Models 5150 and 5160 (IQoVOICE Pocket Organizers); 2) The
Company sold to Franklin for $150,000 in cash 2,000,000 shares of the Company's
common stock, par value $.001 per share, representing the approximate market
price of the Company's common stock at the time of the transaction; and 3)
Franklin loaned the Company cash equal to $1,200,000, in addition to $500,000
previously loaned to the Company in the first quarter of 1997, and restructured
the previous payment terms into a new $1,700,000 promissory note. The new note
carries interest at a rate of 10% per year. The interest is payable monthly,
with principal payments of $400,000 due on April 30 of each year commencing
April 30, 1998 and ending April 30, 2001, with the final installment in the
amount necessary to repay the full balance of the loan. The second agreement was
a Technology Transfer Agreement in which the two companies entered into the
following transactions: 1) The Company granted to Franklin a non-exclusive
perpetual license for technology rights evidenced by the Company's patent
related to operation of Voice Organizer products as well as other technology and
software developed by the Company related to or used in the Model 5150 and 5160
for a non-refundable advance royalty of $700,000; and 2) the Company assigned
the rights to VoiceLogic(TM) Technology to Franklin, and Franklin granted back
to the Company a non-exclusive perpetual license of the VoiceLogic Technology,
including the right to sublicense, for the development, manufacture, sale and
distribution of Voice Organizer products with recording times in excess of four
minutes and any other electronic products that are not Voice Organizers, subject
to the Company remaining obligated to pay royalties to Franklin at the same
rates for which the Company was obligated to the inventor of the VoiceLogic
Technology prior to its assignment to Franklin. As a result of the completion of
these transactions, the Company recognized $141,000 as a gain on the sale of
assets, and $700,000 as income from the sale of the technology license.
NOTE 4 -- Also in May 1997, the Company entered into agreements with Flextronics
(Malaysia) SDN. BHD. ("Flextronics") and GSS/Array Technology, Inc. ("GSS"), the
manufacturers of the Company's products, relating to the resolution of
outstanding liabilities and commitments. The Company entered into a Settlement
Agreement with Flextronics under which the Company made a cash payment and
assigned the proceeds due pursuant to a licensing agreement with Kong Wah Video
for a voice operated television remote control device to Flextronics as full and
final settlement for all outstanding liabilities and commitments other than
approximately $260,000 in inventory which had already been manufactured by
Flextronics. The Company committed to purchase such inventory prior to June 30,
1997, but has only purchased $185,000 as of yet. Flextronics continues to work
with the Company regarding the continuing efforts to purchase the remaining
inventory. The Company also entered into a Discounted Payment and Adequate
Assurance of Performance Agreement with GSS under which the Company made a cash
payment and issued 500,000 shares of non-voting, non-cumulative, convertible
preferred stock, with a $0.06 per share mandatory dividend payable annually in
cash or common stock at the option of the Company on the anniversary date of
issuance, as full and final settlement of outstanding liabilities. The preferred
stock carries a $1.00 per
C-8
<PAGE> 44
share liquidation preference and each share is convertible into four (4) shares
of the Company's common stock. Further, at the option of GSS, for a one year
period the Company has agreed to either appoint a representative of GSS to the
Board of Directors of the Company or to allow a representative to attend Board
of Directors meetings as a non-voting observer. Also under the Discounted
Payment and Adequate Assurance of Performance Agreement, GSS has agreed to
continue to manufacture pursuant to the terms of the original Manufacturing
Agreement for a period of not less than six months. Lastly, on or about May 22,
1997, the Company entered into agreements with many of its other trade creditors
in which the trade creditors agreed to accept discounted lump sum payments in
full consideration of current obligations of the Company. As a result of these
agreements, the Company recognized a gain from forgiveness of debt of
$1,388,000.
NOTE 5 -- As of May 1, 1997, the Company entered into three agreements with
Edward M. Krakauer establishing the terms and conditions under which Mr.
Krakauer resigned as the Company's president and CEO. Under the first agreement,
a Termination Agreement, Mr. Krakauer's employment agreement was terminated and
a negotiated payment plan was established for accrued salaries of $52,000 owed
to the date of termination plus a discounted balance of the terminated
employment agreement of $190,000. Payments applicable to the foregoing will be
made at various intervals through June 30, 1998. Under the terms of the second
agreement, a Consulting Agreement, Mr. Krakauer would serve the Company as a
consultant through June 30, 1998, at an annual rate of $60,000 per year. Under
the third agreement, Mr. Krakauer was granted 75,000 stock options at an
exercise price of $.008 per share (which was 20% of the fair market value per
share at the time of the grant in accordance with previous options granted by
the Company for non-employee directors). Mr. Krakauer will remain The Chairman
of the Company's Board of Directors.
NOTE 6 -- As of June 30, 1997 the Company elected to discontinue future
production of two of its product lines: the low cost version of the IQoVOICE
Organizer, originally introduced in the fourth quarter of 1995, and the IQoVOICE
Organizer/Pager, originally introduced in the fourth quarter of 1996. As a
result, the Company wrote off $88,000 and $215,000 which, respectively, was the
book value of the tooling and product development costs associated with the
discontinued products. Further, the Company wrote down the inventory value of
the related finished goods by $217,000, and established a reserve of $270,000
relating to a program to promote sales of the two product lines and maintain
existing retail shelf space. As such, the total cost charged to operations as of
June 30, 1997 related to discontinued products was $790,000
NOTE 7 -- The Company had entered into a letter agreement dated May 2, 1996 with
Everen Securities Inc. ("ESI") regarding the retention of ESI's services as
financial advisor and agent. This agreement was terminated by the Company
February 3, 1997. ESI has subsequently asserted a claim against the Company for
fees due as a result of the Franklin transactions in the amount of $450,000. The
Company and ESI are presently in a dispute as to the validity of this claim. The
Company intends to vigorously defend its position on this matter, however no
assurances can be made as to the outcome. The Company has not made any accruals
relating to this matter at the present time.
NOTE 8 -- As of September 22, 1997, with letter amendment dated October 7, 1997,
the Company entered into a revolving $400,000 Loan and Security Agreement with
Franklin which had not been borrowed against as of September 30, 1997. The term
of the agreement is the earliest of (a) March 3, 1998; (b) the effective date of
an order confirming a plan of reorganization of the Company; or (c) at the
option of Lender, immediately and without notice upon the occurrence or during
the continuation of an Event of Default as defined in the agreement. The
agreement is collateralized by all of the assets of the Company, subordinate
only to the security interest of KBK Financial Corporation in pre-petition
accounts receivable and inventory of the Company. Borrowings under the agreement
are permitted up to 75% of accounts receivable and 50% of open purchase orders
held by the Company. Accounts receivable and purchase orders to be borrowed
against must be approved by Franklin for eligibility. The agreement carries an
interest rate of 12% per annum on the average daily balance. The agreement, as
amended, also provides for Franklin to guarantee payment to the Company's
suppliers for shipments pursuant to purchase orders, which have been approved by
Franklin, for the manufacture of products. The amounts of such guarantees are
deducted from the amount otherwise borrowable based on approved accounts
receivable and purchase orders.
NOTE 9 -- The Company's financial statements have been prepared assuming that
the Company will continue as a going concern. At September 30, 1997, current
liabilities exceeded current assets by $853,000, and the Company's accumulated
deficit aggregated $29,520,000. Further, as stated in Note 2, the Company has
filed a Chapter 11 bankruptcy petition. Accordingly, there is substantial doubt
regarding the Company's ability to continue as a going concern. The Company's
ability to continue operations is dependent upon completing a plan of
reorganization, filing said plan with the Bankruptcy Court, having the Court and
other interested parties approve the plan, and then implementing the plan.
Success of the plan is dependent, among other things, on reaching a satisfactory
level of profitability and generating sufficient cash flow resources to meet
ongoing obligations. The accompanying financial statements do not include any
adjustments that might result from the outcome of these uncertainties. There is
no assurance given that the Company will continue as a going concern.
C-9
<PAGE> 45
OFFICE OF THE UNITED STATES TRUSTEE
<TABLE>
<S> <C>
- ------------------------------------------------ ----------------------------------------------------------
In re: VOICE POWERED TECHNOLOGY DEBTOR IN POSSESSION OPERATING REPORT
INTERNATIONAL, INC.
Report Number : 2 Page 1 of 3
-
Debtor.
For the period FROM: 10/1/97
- -----------------------------------------------
Chapter 11 Case No.: LA-97-46292-VZ TO: 10/31/97
- ------------------------------------------------ ----------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
1. Profit and Loss Statement (Accrual Basis Only)
A. Related to Business Operations:
Gross Sales $250,564
----------
Less: Sales Returns and Discounts 9,101
----------
Net Sales 241,463
--------
Less: Cost of Goods Sold
Beginning Inventory at Cost 490,300
----------
Add: Purchases 147,352
----------
Less: Ending Inventory at Cost 460,340
----------
Cost of Goods Sold 177,312
--------
Gross Profit 64,151
---------
Other Operating Revenues (Specify) 0
---------
Less: Operating Expenses:
Officer Compensation 36,668
----------
Salaries and Wages - Other Employees 39,072
----------
Total Salaries and Wages 75,740
--------
Employee Benefits and Pensions 5,218
--------
Payroll Taxes 3,601
----------
Real Estate Taxes 0
----------
Federal and State Income Taxes 0
----------
Total Taxes 3,601
--------
Rent and Lease Exp. (Real Property and Personal Property) 11,211
----------
Interest Expense (Mortgage, Loan, etc.) 4,871
----------
Insurance 7,519
----------
Automobile Expense 3,100
----------
Utilities (Gas, Electric, Water, Telephone, etc.) 2,556
----------
Depreciation and Amortization 53,045
----------
Repairs and Maintenance 291
----------
Advertising 0
----------
Supplies, Office Expense, Photocopies, etc. 5,346
----------
Bad Debts 0
----------
Sales Commissions 1,950
----------
Royalty 2,095
----------
Parts for repairs 9,881
----------
Freight 7,972
----------
Miscellaneous Operating Expenses - (Specify) 0
----------
Total Operating Expenses 194,396
--------
Net Gain/Loss from Business Operations (130,245)
---------
B. Not Related to Business Operations:
Income:
Interest Income 115
--------
Other Non-Operating Revenues (Specify) -
Rental of customer list 1,071
--------
Gross Proceeds on Sale of Assets 2,500
----------
Less: Original Cost of Assets plus Expenses of Sale 2,500
----------
Net Gain/Loss on Sale of Assets 0
--------
Total Non-Operating Income 1,186
---------
Expenses Not Related to Business Operations:
Legal and Professional Fees (Specify) -
Robinson, Diamant 33,287
--------
Other Non-Operating Expenses (Specify) 0
--------
Total Non-Operating Expenses 33,287
---------
NET INCOME/LOSS FOR PERIOD ($162,346)
---------
</TABLE>
Revised April 1989 OPERATING REPORT UST-4
C-10
<PAGE> 46
DEBTOR IN POSSESSION OPERATING REPORT NO.: 1 Page 2 of 3
2. Aging of Accounts payable and Accounts Receivable (exclude pre-petition
accounts payable):
<TABLE>
<CAPTION>
Accounts Payable Accounts Receivable
---------------- -------------------
<S> <C> <C> <C>
Current Under 30 days $66,500 $278,297
Overdue 31-60 days 1,688 44,045
Overdue 61-90 days 0 90,089
Overdue 91-120 days 0 123,777
Overdue Over 121 Days 0 98,250
------- --------
TOTAL $68,188 $634,458
------- --------
</TABLE>
3. Statement of Status of Payment to Secured Creditors and Lessors:
<TABLE>
<CAPTION>
Frequency Post-Petition
of Payments per Amount Next Payments Not Made
Creditor/ Contract/Lease of Each Payment --------------------
Lessor (i.e., mo. qtr.) Payment* Due Number Amount
------------- ---------------- -------- ------- --------------------
<S> <C> <C> <C> <C> <C>
KBK Financial n/a $ 38,923 n/a
</TABLE>
* Payments of pre-petition receivables made directly from customers to KBK
Financial via lock box deposit.
4. Tax Liability:
<TABLE>
<S> <C>
Gross Payroll Expense for Period: $75,740
Gross Sales for Period Subject to Sales Tax: $ 0
</TABLE>
<TABLE>
<CAPTION>
Post-Petition
Taxes Still
Date Paid Amount Paid* Owing
--------- ------------ -------------
<S> <C> <C> <C>
Federal Payroll and Withholding Taxes $21,520 $0
State Payroll and Withholding Taxes $3,988 0
State Sales and Use Taxes 0 0
Real Property Taxes 0 0
</TABLE>
* Amounts paid through ADP payroll services.
<TABLE>
<CAPTION>
5. Insurance Coverage: Carrier/ Amount Policy Premium
Agent of Expiration Paid Through
Name Coverage Date Date
----------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Workers Compensation B.G. BALMER 1,000,000 6/1/98 10/31/97
Liability B.G. BALMER 1,000,000 6/1/98 10/31/97
Fire and Extended Coverage B.G. BALMER 300,000 6/1/98 10/31/97
Property B.G. BALMER 1,000,000 6/1/98 10/31/97
Theft B.G. BALMER 100,000 6/1/98 10/31/97
Life (Beneficiary: _______) B.G. BALMER 0 6/1/98 10/31/97
Vehicle B.G. BALMER 1,000,000 6/1/98 10/31/97
Other (Specify):Ocean Cargo B.G. BALMER 100,000.00 6/1/98 10/31/97
</TABLE>
C-11
<PAGE> 47
DEBTOR IN POSSESSION OPERATING REPORT NO.: 1 Page 3 of 3
6. Questions:
A. Has the Debtor In Possession provided compensation to any officers,
directors, shareholders, or other principals without the approval of
the Office of the United States Trustee?
: Yes Explain:
------------------------------------------------
------
X : No
------
B. Has the Debtor In Possession, subsequent to the filing of the
petition, made any payments on its pre-petition unsecured debt,
except as have been authorized by the Court?
: Yes Explain:
------------------------------------------------
------
X : No
------
7. Statement of Unpaid Professional Fees (Post-Petition Amounts Only)
<TABLE>
<CAPTION>
State Type of Total Post-
Professional Petition Amount
Name of Professional (Atty,/Acct./etc.) Unpaid
--------------------------- ------------------ ---------------
<S> <C> <C>
Robinson, Diamant, & Brill Attorney $15,000
</TABLE>
8. Narrative Report of Significant Events and Events out of the Ordinary
Course of Business: (Attach Separate sheet if necessary)
None
9. Quarterly Fees: (This Fee must be paid to the United States Trustee every
calendar quarter)
<TABLE>
<CAPTION>
Quarterly Total Quarterly
Period Disbursements Quarterly Date Amount Check Fee Still
Ending for Quarter Fee Paid Paid No. Owing
---------- ------------- --------- -------- ------ ----- ---------
<S> <C> <C> <C> <C> <C> <C>
9/30/97 $0 $250 10/27/97 $250 1040 $0
</TABLE>
I, Mitchell Rubin, President, declare under penalty of perjury that the
information contained in the above Debtor in Possession Operating Report is true
and complete to the best of my knowledge.
Dated: November 14, 1997
/s/ Mitchell B. Rubin, President
------------------------------------------
Debtor in Possession or Trustees
C-12
<PAGE> 48
OFFICE OF THE UNITED STATES TRUSTEE
<TABLE>
<S> <C>
- ------------------------------------------------ ----------------------------------------------------------
In re: VOICE POWERED TECHNOLOGY DEBTOR IN POSSESSION OPERATING REPORT
INTERNATIONAL, INC.
Report Number : 3 Page 1 of 3
-
Debtor.
For the period FROM: 11/1/97
- -----------------------------------------------
Chapter 11 Case No.: LA-97-46292-VZ TO: 11/30/97
- ------------------------------------------------ ----------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
1. Profit and Loss Statement (Accrual Basis Only)
A. Related to Business Operations:
Gross Sales $350,768
-------------
Less: Sales Returns and Discounts 2,142
-------------
Net Sales 348,626
----------
Less: Cost of Goods Sold
Beginning Inventory at Cost 460,340
-------------
Add: Purchases 435,251
-------------
Less: Ending Inventory at Cost 644,375
-------------
Cost of Goods Sold 251,216
----------
Gross Profit 97,410
----------
Other Operating Revenues (Specify) 0
----------
Less: Operating Expenses:
Officer Compensation 32,501
-------------
Salaries and Wages - Other Employees 29,935
-------------
Total Salaries and Wages 62,436
----------
Employee Benefits and Pensions 5,295
----------
Payroll Taxes 2,515
-------------
Real Estate Taxes 0
-------------
Federal and State Income Taxes 0
-------------
Total Taxes 2,515
----------
Rent and Lease Exp. (Real Property and Personal Property 11,211
-------------
Interest Expense (Mortgage, Loan, etc.) 3,100
-------------
Insurance 7,905
-------------
Automobile Expense 2,650
-------------
Utilities (Gas, Electric, Water, Telephone, etc.) 4,099
-------------
Depreciation and Amortization 53,045
-------------
Repairs and Maintenance 0
-------------
Advertising 3,242
-------------
Supplies, Office Expense, Photocopies, etc. 5,932
-------------
Bad Debts 0
-------------
Sales Commissions 2,343
-------------
Royalty 3,432
-------------
Parts for repairs 2,452
-------------
Freight and postage 8,773
-------------
Miscellaneous Operating Expenses - (Specify) 0
-------------
Total Operating Expenses 178,430
----------
Net Gain/Loss from Business Operations (81,020)
----------
B. Not Related to Business Operations:
Income:
Interest Income 190
----------
Other Non-Operating Revenues (Specify) - Rental of customer list 0
----------
Gross Proceeds on Sale of Assets 0
-------------
Less: Original Cost of Assets plus Expenses of Sale 0
-------------
Net Gain/Loss on Sale of Assets 0
----------
Total Non-Operating Income 190
----------
Expenses Not Related to Business Operations:
Legal and Professional Fees (Specify) - Robinson, Diamant 18,671
----------
Other Non-Operating Expenses (Specify) 0
----------
Total Non-Operating Expenses 18,671
----------
NET INCOME/LOSS FOR PERIOD ($99,501)
----------
</TABLE>
- -------------------------------------------------------------------------------
Revised April 1989 OPERATING REPORT UST-4
- -------------------------------------------------------------------------------
C-13
<PAGE> 49
DEBTOR IN POSSESSION OPERATING REPORT NO.: 1 Page 2 of 3
2. Aging of Accounts payable and Accounts Receivable (exclude pre-petition
accounts payable):
<TABLE>
<CAPTION>
Accounts Payable Accounts Receivable
---------------- -------------------
<S> <C> <C> <C>
Current Under 30 days $96,543 $316,406
Overdue 31-60 days 45,512 91,269
Overdue 61-90 days 152 20,962
Overdue 91-120 days 0 0
Overdue Over 121 Days 0 307,050
-------- --------
TOTAL $142,207 $735,687
-------- --------
</TABLE>
3. Statement of Status of Payment to Secured Creditors and Lessors:
<TABLE>
<CAPTION>
Frequency Post-Petition
of Payments per Amount Next Payments Not Made
Creditor/ Contract/Lease of Each Payment ---------------------
Lessor (i.e., mo. qtr.) Payment Due Number Amount
- --------------- ---------------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
KBK Financial n/a $8,311* n/a
Franklin ** n/a n/a n/a
H. Bennett*** mo. $1,582 12/4/97
</TABLE>
* Payments of pre-petition receivables made directly from customers to KBK
Financial via lock box deposit.
** Operating under post-petition financing agreement with Franklin Electronic
Publishers, Inc.
*** Month to month rental agreement for warehouse facilities.
4. Tax Liability:
<TABLE>
<S> <C>
Gross Payroll Expense for Period: $62,436
Gross Sales for Period Subject to Sales Tax: $ 0
</TABLE>
<TABLE>
<CAPTION>
Post-Petition
Taxes Still
Date Paid Amount Paid* Owing**
---------- ----------- -------------
<S> <C> <C> <C>
Federal Payroll and Withholding Taxes $7,424 $5,420
State Payroll and Withholding Taxes $1,507 $1,147
State Sales and Use Taxes 0 0
Real Property Taxes 0 0
</TABLE>
* Amounts paid through ADP payroll services.
** Amounts paid through ADP payroll services on 12/1/97
5. Insurance Coverage:
<TABLE>
<CAPTION>
Carrier/ Amount Policy Premium
Agent of Expiration Paid Through
Name Coverage Date Date
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Workers Compensation B.G. BALMER 1,000,000 6/1/98 11/30/97
Liability B.G. BALMER 1,000,000 6/1/98 11/30/97
Fire and Extended Coverage B.G. BALMER 300,000 6/1/98 11/30/97
Property B.G. BALMER 1,000,000 6/1/98 11/30/97
Theft B.G. BALMER 100,000 6/1/98 11/30/97
Life (Beneficiary: _______) B.G. BALMER 0 6/1/98 11/30/97
Vehicle B.G. BALMER 1,000,000 6/1/98 11/30/97
Other (Specify):Ocean Cargo B.G. BALMER 100,000.00 6/1/98 11/30/97
</TABLE>
C-14
<PAGE> 50
DEBTOR IN POSSESSION OPERATING REPORT NO.: 1 Page 3 of 3
6. Questions:
A. Has the Debtor In Possession provided compensation to any officers,
directors, shareholders, or other principals without the approval of
the Office of the United States Trustee?
: Yes Explain:
------
X : No
------
B. Has the Debtor In Possession, subsequent to the filing of the
petition, made any payments on its pre-petition unsecured debt,
except as have been authorized by the Court?
: Yes Explain:
------
X : No
------
7. Statement of Unpaid Professional Fees (Post-Petition Amounts Only)
<TABLE>
<CAPTION>
State Type of Total Post-
Professional Petition Amount
Name of Professional (Atty,/Acct./etc.) Unpaid
-------------------------- ------------------ ---------------
<S> <C> <C>
Robinson, Diamant, & Brill Attorney $30,000
</TABLE>
8. Narrative Report of Significant Events and Events out of the Ordinary
Course of Business: (Attach Separate sheet if necessary)
Filed plan of reorganization and disclosure statement on November 12,
1997.
9. Quarterly Fees: (This Fee must be paid to the United States Trustee every
calendar quarter)
<TABLE>
<CAPTION>
Quarterly Total Quarterly
Period Disbursements Quarterly Date Amount Check Fee Still
Ending for Quarter Fee Paid Paid No. Owing
--------- ------------- --------- -------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
9/30/97 $0 $250 10/27/97 $250 1040 $0
</TABLE>
I, Mitchell Rubin, President, declare under penalty of perjury that the
information contained in the above Debtor in Possession Operating Report is true
and complete to the best of my knowledge.
Dated: December 15, 1997
/s/ Mitchell B. Rubin, President
----------------------------------------
Debtor in Possession or Trustees
C-15
<PAGE> 51
================================================================================
EXHIBIT D
FAIR MARKET VALUE OF ESTATE'S ASSETS
================================================================================
<PAGE> 52
EXHIBIT D
FAIR MARKET VALUE OF ASSETS
<TABLE>
<S> <C>
Cash $ 33,000
Security Deposits 25,000
Accounts Receivable--net of reserves and
allowances for uncollectible accounts 250,000
Inventory (Liquidation Value)(Note 1) 150,000
Office Furniture and Equipment 50,000
Manufacturing Equipment and Tooling (Note 1) 145,000
Patents, Trademarks, Software
Technology and other intangible assets (Note 1) 355,000
----------
Total Fair Market Value of Assets $1,008,000
==========
</TABLE>
Note 1. The above amounts are based upon liquidation values for existing
non-manufacturing assets and values the assets related to manufacturing
the Company's IQ-VOICE(TM) Organizer product line at $500,000.
Note 2. The above assets are subject to a post petition security interest of
Franklin Electronic Publishers Inc. of $185,000 as of December 31,
1997.
<PAGE> 53
================================================================================
EXHIBIT E
================================================================================
<PAGE> 54
EXHIBIT "E"
<TABLE>
<CAPTION>
PRE-PETITION
PARTY DESCRIPTION OF CONTRACT AMOUNTS DUE
- ------------------------------------- --------------------------------------- ------------
<S> <C> <C>
Wah Shing Electronics Co., Ltd. Debtor is purchaser. Purchase orders $12,730
9th Floor, Lea Him Ind. Bld. (4) for tooling dated July 15, August
41-43 Wong Chuk Hang Road 4, and (2) September 10, 1997
Aberdeen, Hong Kong
Chi Hang Mould (H.K.) Ltd. Debtor is purchaser. Purchase orders $17,750
Unit 7-8, 12/F Block B (2) for tooling dated June 5, and July
Hoi Luen Ind. Centre 24, 1997
55 Hoi Yuen Road
Kwun Tong, Kowloon, Hong Kong
Franklin Electronic Publishers, Inc. Debtor's licensee. Technology Transfer $15,000
One Franklin Plaza Agreement dated May 21, 1997 mutually
Burlington, New Jersey 08016-4907 granting licenses of technology to the
other party inclusive of voice
recognition technology utilized in
Debtor's products
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 34,559
<SECURITIES> 0
<RECEIVABLES> 148,228
<ALLOWANCES> 0
<INVENTORY> 213,717
<CURRENT-ASSETS> 407,004
<PP&E> 473,744
<DEPRECIATION> 230,611
<TOTAL-ASSETS> 1,132,085
<CURRENT-LIABILITIES> 386,838
<BONDS> 0
0
500,000
<COMMON> 16,012
<OTHER-SE> 27,897,082
<TOTAL-LIABILITY-AND-EQUITY> 1,132,085
<SALES> 3,327,777
<TOTAL-REVENUES> 3,122,277
<CGS> 2,798,344
<TOTAL-COSTS> 8,868,529
<OTHER-EXPENSES> 13,670
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (140,447)
<INCOME-PRETAX> (5,101,142)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,101,142)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,387,842
<CHANGES> 0
<NET-INCOME> (3,713,300)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
