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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
For the fiscal year ended December 31, 1999
Commission File No.
1-11476
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
(Exact name of the registrant as specified in its charter)
California 95-3977501
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Franklin Plaza
Burlington, New Jersey 08016-4907
(609) 386-2500
(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
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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 X No __
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB X .
As of March 14, 2000 there were 90,245,360 shares of Voice Powered
Technology International, Inc. Common Stock, $.001 par value, outstanding. The
aggregate market value of the issuer's Common Stock held by non-affiliates as of
March 1, 2000, based on the closing price on that date, was approximately
$6,395,000.
The registrant's Proxy Statement for its 2000 annual meeting of
stockholders is hereby incorporated by reference into Part III of this Form
10-KSB.
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PART I
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Except for the historical information contained herein, the matters discussed
throughout this report, including, but not limited to, those that are stated as
the Company's belief or expectation or preceded by the word "should" are forward
looking statements that involve risks to and uncertainties in the Company's
business, including, among other things, the timely availability and acceptance
of new electronic products, changes in technology, the impact of competitive
electronic products, the management of inventories, the Company's dependence on
third party component suppliers and manufacturers, including those that provide
Company -specific parts, and other risks and uncertainties that may be detailed
from time to time in the Company's reports filed with the Securities and
Exchange Commission.
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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 worldwide 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"), which is now licensed from its major shareholder, Franklin
Electronic Publishers, Inc. ("Franklin), is fully developed and in limited
commercial use. 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 and can
operate on microprocessors powered by only penlight or nicad batteries. The
Technology has been included in several consumer oriented products manufactured
for the Company under contract with third parties.
In October 1993, the Company introduced its first voice activated
electronic personal organizer. This product was the first personal organizer to
combine digital recording for data storage with voice recognition for easy input
and retrieval. The IQoVOICE(TM) Organizer was the Company's most successful
product. However, 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 IQoVOICE Organizer, failed launches of new products,
increased competition from lower priced digital recorders, and a general decline
in domestic retail sales of the hand-held electronics category.
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Through 1996 and the first nine months of 1997, the Company attempted to
improve its financial condition by reducing fixed operating costs, liquidating
inventories, streamlining operating departments, and entering into two
significant transactions. 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.
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 (the "Bankruptcy
Proceedings"). On January 21, 1998, the Company, in conjunction with Franklin,
the Company's largest secured creditor, filed a combined Amended Disclosure
Statement and Plan of Reorganization (the "Plan") with the Bankruptcy Court. The
Plan became effective on May 12, 1998 (the "Effective Date").
In accordance with the Plan, on or about the Effective Date, the following
occurred: 1) the Company received a loan of $350,000 from Franklin (the "Plan
Loan") to create a fund dedicated to the payment of creditor claims and certain
administrative expenses (the Plan Loan accrues interest at 8% per annum, with
interest only payable in arrears on a monthly basis and principal all due and
payable in a lump sum payment five years from the Effective Date); 2) the
500,000 shares of outstanding convertible preferred stock were converted into
2,000,000 shares of the Company's common stock; and 3) the Company's Articles of
Incorporation were amended to, among other things, increase the authorized
shares of common stock to 100,000,000. Pursuant to the Plan, Franklin was issued
72,196,288 shares of the Company's common stock, equal to an 80% equity interest
in the Company, in exchange for Franklin's pre-petition secured claim in the
amount of $1,733,990.
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Since the commencement of the Bankruptcy Proceedings, the Company
discontinued shipments of its IQoVOICE Organizer products to many of its major
domestic retail customers. For the years ended December 31, 1998 and December
31, 1999, the Company's domestic business activities consisted of sales of
IQoVOICE Organizer products to smaller retailers and wholesale accounts and
through various direct marketing programs. In March 1998, the Company expanded
its international marketing activities of its IQoVOICE Organizer products as a
result of a television direct marketing campaign, which began in Mexico.
RISK FACTORS
The Company may not be able to continue operating as a "going concern" without
additional capital through public or private offerings.
The Company is indebted to Franklin in the amount of $1,504,000. The
Company believes that currently available funds, including financing from
Franklin, will be sufficient to meet its anticipated working capital needs
through December 31, 2000. Thereafter, the Company will need to raise additional
funds. If the Company raises additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of current stockholders
will be reduced, stockholders may experience additional dilution and such
securities may have rights, preferences and privileges senior to those of the
Company's common stock. There can be no assurance that additional financing will
be available on terms favorable to the Company or at all. If adequate funds are
not available or are not available on acceptable terms, there could be a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company may not be able to compete effectively with its competitors.
The consumer electronics industry is highly competitive. Since commencement
of the Bankruptcy Proceedings, the Company has effectively terminated its
research and development activities, and has eliminated its full time
engineering and development personnel in order to conserve cash resources. Such
reduction has diminished and will continue to diminish the Company's ability to
keep pace with new technologies and developments, which could impede the
Company's ability to compete.
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
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more established channels of distribution and marketing capabilities than the
Company. There can be no assurance that this competition will not adversely
affect the Company's business results of operations and financial condition.
A Third party claims that the Company infringes on its intellectual
property rights.
The Company has been notified by a third party which alleges that the
Company's products infringe on the proprietary rights of such third party, but
no legal proceedings have been commenced. There can be no assurance that
proceedings claiming infringement by the Company with respect to its past,
current or future activities will not be initiated by that third party or
others. If such proceedings are initiated and the Company is unsuccessful in
defending such proceedings, there could be a material adverse effect on the
Company's business results, of operations and financial condition.
The Company's majority stockholder has the ability to effectively control
substantially all actions taken by stockholders.
Franklin owns 74,196,288 shares of the Company's common stock and controls
approximately 82.2% of the aggregate voting power of all outstanding shares.
Accordingly, Franklin can effectively control substantially all actions taken by
the Company's stockholders, including the election of directors. Such
concentration of ownership could also have the effect of delaying, deterring or
preventing a change in control of the Company that might otherwise be beneficial
to stockholders and may also discourage acquisition bids for the Company and
limit the amount certain investors may be willing to pay for shares of the
common stock.
The Company's products are manufactured by one factory.
In May 1997, the Company contracted for the manufacture of its IQ Voice
products 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. No assurance can be given that this manufacturer will continue to
produce products for the Company.
The Company may not be able to obtain parts for its products.
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Each of the Company's products typically utilizes a sole source for certain
critical components, including the microprocessor and certain other chips. The
Company has no agreement with suppliers of these chips, and any interruption of
such sources of supply could adversely affect the Company until an alternative
supplier is found. Certain chips utilized in the Company's products were sourced
approximately five years ago and because of changing technology, may cease to be
produced. No assurance can be given that components for such products will
continue to be available or that the Company will have the financial resources
to redesign its products to utilize substitute chips.
The Company has no present plans to improve the Technology.
The Technology was developed in the 1980's and has not been substantially
improved since prior to the Bankruptcy Proceedings. As the Company has not been
able to generate substantial earnings or cash, the Company has not been able to
devote financial resources towards further developing and updating the
Technology. The Company has no present plans to improve the Technology.
The price of the Company's common stock has been volatile and could continue to
fluctuate in the future.
The market price for shares of the Company's common stock has been volatile
and could fluctuate substantially based on a number of factors, including
quarter-to-quarter variations in our results of operations, news announcements,
changes in general market conditions for the Company's products, regulatory
actions, adverse publicity regarding the Company or the industry in general, and
other factors. In addition, broad market fluctuations and general economic and
political conditions may adversely affect the market price of the common stock,
regardless of the Company's actual performance.
The Company does not anticipate paying cash dividends on its common stock.
The Company does not anticipate paying any cash dividends on the common
stock in the foreseeable future.
The VoiceLogic Technology
The Technology is proprietary technology which, since May 1997, has been
licensed by the Company from Franklin. As of February 1996, the 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. In May
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1997, in conjunction with an omnibus transaction with Franklin which also
included sale of a portion of the Company's product line, licensing of the
Company's patent, and financing, the Company assigned ownership of the
Technology to Franklin and Franklin granted back to the Company a non-exclusive
license for the Technology. The Technology is speaker-dependent technology,
which, though requiring training, is adaptable for use in any language.
Products Currently Marketed
Prior to the commencement of the Bankruptcy Proceedings, the Company
developed a variety of voice activated consumer products, including the
Company's most successful product line, the IQoVOICE Organizer, as well as
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. To date, nearly all
of the Company's sales are derived from the IQoVOICE Organizer product line. In
addition to the IQoVOICE Organizers, in 1996 the Company marketed the IQoVOICE
Tell-It Phone, the IQoVOICE Message Pad and the IQoVoice Organizer/ Pager, all
of which were subsequently discontinued.
IQoVOICE Organizer. The IQoVOICE 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
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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.
In September 1997 the Company introduced its current line of the IQoVOICE
Organizer product. This line of products utilizes technology for compression of
voice data, which enables the units to store fifteen minutes of digitally
compressed audio data in 512 KB Flash memory. These models feature 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 IQoVOICE 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 IQoVOICE Organizer such as names of files, and names and for
telephone directory entries, as well as affording the user the ability to add
more detailed text, such as addresses, which are stored on the user's PC. 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. Also, international models of this product line
capable of displaying text information in five languages (English, German,
French, Spanish and Italian) were introduced in the second quarter of 1998.
Markets for the Company's Products
Domestic. Prior to the commencement of the Bankruptcy Proceedings the
Company had obtained distribution in 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 IQoVOICE Organizer
products to most of its major domestic retail customers. At present, the Company
is engaged in only limited domestic sales activities of its IQoVOICE Organizer
products consisting of various targeted direct marketing programs and internet
sales through the Company's web site www.vpti.com. The Company's does not intend
to reintroduce its products to major domestic retail and catalogue accounts.
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In June 1998, the Company purchased $457,000 of inventory from Franklin,
which included a variety of models of electronic organizers. The Company
utilized this inventory to generate additional sales and working capital. As of
December 31, 1998, sales which can be attributed to Franklin products amounted
to $370,000. During the fourth quarter of 1998, the Company had sales to one
customer of one item from the foregoing inventory, which totaled $266,000,
exceeding 10% of the Company's total sales for 1998.
In 1997, the Company had one domestic customer whose purchases, totaling
$418,000, exceeded 10% of the Company's net sales.
International. As the Company's VoiceLogic Technology is adaptable to other
languages, the Company has designed and manufactured its products to be marketed
on a worldwide basis. In March 1998, the Company entered into an distribution
agreement with a television marketing company headquartered in Mexico
("Distributor"), granting Distributor exclusive marketing rights for its
IQoVOICE Organizer products within the country of Mexico contingent upon
Distributor's achieving certain minimum sales objectives. Distributor's primary
method of marketing is via direct sales to end users through television
advertising. Distributor, at its sole cost and expense, produced a thirty minute
television program, known as an infomercial, featuring the IQoVOICE Organizer
(the "Infomercial"). This form of direct sales was successful in Mexico until
September 1998, at which time sales decreased significantly as a result of the
declining economic conditions in Mexico and their related impact on consumer
purchasing in that country. In September 1998, the Company entered into a
license agreement with Distributor pursuant to which the Company was granted the
worldwide right (excluding Mexico, Brazil and Chile) to license to unrelated
third parties the right to broadcast the Infomercial, including the right to
reproduce, edit, modify, add voice-overs, prepare derivative works and otherwise
alter the Infomercial. In consideration of the license granted by Distributor,
the Company agreed to pay royalties to Distributor based upon the Company's
sales of its IQ?VOICE Organizer products to licensees of the Infomercial.
For the year ended December 31, 1998, sales to the Distributor in Mexico
totaled $659,000, exceeding 10% of the Company's total sales, of which $605,000
occurred after May 12, 1998, the Effective Date of the Plan.
Market for the VoiceLogic Technology. The Company's efforts to obtain
licensing arrangements with manufacturers in product categories for the
Technology have not been successful and have been curtailed. While the Company
recorded $38,000 in other income in the September 1999 quarter from an
arbitration relating to a license
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agreement, the Company had no other licensing revenue in the 1999 fiscal year;
licensing revenues were $53,000 in the 1998 fiscal year, all of which related to
that license agreement. The Company has no present expectation of future
licensing revenues.
Competition
The consumer electronics industry is highly competitive. Since commencement
of the Bankruptcy Proceedings, the Company has effectively terminated its
research and development activities, and has eliminated 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 believes its IQoVOICE Organizer competes indirectly with
electronic personal organizers and paper bound personal organizers, both of
which have developed markets of substantial size. The Organizer also competes
with lower cost digital recorders and voice managers. The Company believes that
its PC compatible product line also competes with pocket electronic devices
designed to exchange data with a PC computer. No assurance can be given that
adequate financial and technical resources will be available to the Company in
order to compete in these markets.
Technology. The VoiceLogic Technology competes with other voice recognition
technologies currently available and new and improved technology that has been
developed by the Company's competitors over the past several years. 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. No assurance can be given that the Company will
be able to compete with new technologies in the future.
Manufacturing
In May 1997, the Company began manufacturing its IQ Voice products at a new
third party 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. All
goods purchased from this manufacturer are paid for in cash prior to shipment.
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Each of the Company's products typically utilizes a sole source for certain
critical components of such products including the microprocessor and certain
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. Certain chips utilized in the Company's
products were sourced approximately five years ago and because of changing
technology, may cease to be produced. No assurance can be given that the
Company's third party will continue to produce products for the Company or that
components for such products will be available for such manufacture.
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 was also a director of the Company through May 1998. The other
two license agreements were with a company to whom the Inventor had assigned
certain rights with respect to 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.
In February 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 under the terms of a Technology Transfer
Agreement. Under the
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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 was obligated to Franklin for the $60,000 per
year less royalties due and payable to the Inventor by Franklin. The Company has
been unable to make royalty payments to Franklin as required under the
Technology Transfer Agreement. Franklin has amended the agreement with the
Inventor to eliminate the annual minimum royalty commitment, but in
consideration therefor the Company has agreed to increase the royalty rate
payable to the Inventor.
The Company has a trademark registration in the United States on the mark
IQ Voice.
The Company has been granted a United States patent related to the
functionality of the Company's Voice Organizer. No assurance can be made that
the patent issued 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.
No assurance can be given that the Company's manufacture, 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 has received notice from the holder of U.S. Patent 5,696,496
entitled "Portable Messaging and Scheduling Device with Homebase Station"
stating that the holder had filed suit alleging infringement of that
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patent in December 1999 in United States District Court for the District of
Massachusetts (Civil Action No. 99-CV-12468) against certain companies (not
including the Company) and alleging that certain of the Company's Voice
Organizer products may also infringe that patent. The Company is reviewing the
status of the litigation and the claim. No assurance can be given with respect
to that patent or the Company's continued sale of Voice Organizer or other
products.
Given the fact that the Company has assigned its rights in the Technology
to Franklin, the Company has no continuing rights to control the disposition of
the Technology. The Company is in default of the Technology Transfer Agreement
under which it is licensed by Franklin for the development, manufacture, sale,
and distribution of Voice Organizer products.
Employees
Since August 1, 1999, the Company has not employed any persons. The Company
has entered into a contract with Franklin for its warehousing, distribution,
financial and manufacturing management operations. The Executive Officers of the
Company are employees of Franklin and are not paid any amounts by the Company in
connection with the services performed for the Company.
Research and Development Costs
For the year ended December 31, 1998, the Company spent $315,004 on
research and development of which $184,678 was spent subsequent to May 12, 1998,
the Effective Date of the Plan. On the commencement of the Bankruptcy
Proceedings, the Company had suspended development of new products. Subsequent
to the Effective Date, the Company resumed limited development activities
related to potential improvements to its IQ?VOICE Organizer products and the
VoiceLogic Technology. In August 1999, the Company curtailed all such
development activities. Research and development expenses for the year ended
December 31, 1999 were $154,273.
Certain Transactions
On August 1, 1999, the Company entered into a Fulfillment Services
Agreement with Web-Ideals, LLC ("Ideals") pursuant to which Ideals provides the
Company with order entry, order processing, technical support, distribution,
inventory management and web hosting services. Mitchell B. Rubin, the Company's
former President, is an executive officer of Ideals.
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In addition, the Company has subleased to Ideals approximately 6,175 square
feet of office space in Simi Valley, California.
Item 2. Description of Property
In August 1999, the Company's operations were relocated to Franklin's
facility in Burlington, New Jersey. The Company has subleased its former
facility in California.
Item 3. Legal Proceedings
The Company has received notice from the holder of U.S. Patent 5,696,496
entitled "Portable Messaging and Scheduling Device with Homebase Station"
stating that the holder had filed suit alleging infringement of that patent in
December 1999 in United States District Court for the District of Massachusetts
(Civil Action No. 99-CV-12468) against certain companies (not including the
Company) and alleging that certain of the Company's Voice Organizer products may
also infringe that patent. The Company is reviewing the status of the litigation
and the claim. No assurance can be given with respect to that patent or the
Company's continued sale of Voice Organizer or other products.
Item 4. Submission of Matters to a Vote of Security Holders - None
PART II
Item 5. Market for Common Equity and Related Stockholders Matters
The Company's Common Stock, "VPTI," is 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 on 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.
Bid Prices
High Low
Calendar 1998
First Quarter .07 .03
Second Quarter .21 .05
Third Quarter .11 .05
Fourth Quarter 1/16 .03
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Calendar 1999
First Quarter .04 .03
Second Quarter .18 .03
Third Quarter .07 .04
Fourth Quarter .06 .015
At March 14, 2000 there were 90,245,360 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.
Franklin owns 74,258,788 shares of the 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.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Since the calendar quarter ended December 31, 1995, the Company has
experienced sustained significant operating losses. Through 1996 and the first
nine months of 1997, the Company attempted to improve its financial condition by
reducing fixed operating costs, liquidating inventories, streamlining operating
departments, and entering into two significant transactions in an attempt to
strengthen the Company's financial position. 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.
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. The Company's Amended Plan
of Reorganization and Disclosure Statement was approved by the United States
Bankruptcy Court, Central District of California on April 29, 1998 and became
effective on May 12, 1998.
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Since the commencement of the Bankruptcy Proceedings, the Company's
domestic business activities have consisted primarily of sales of IQ.VOICE/TM/
Organizer products directly to consumers through various direct marketing
programs and to smaller retailers and wholesale accounts. In March 1998, the
Company entered into a distribution agreement with a television marketing
company headquartered in Mexico ("Distributor"). Distributor's primary method of
marketing is via direct sales to end users through television advertising.
Distributor, at its sole cost and expense, produced a thirty minute television
program, known as an infomercial, featuring the IQ.VOICE/TM/ Organizer (the
"Infomercial"). In September 1998, the Company entered into a license agreement
with Distributor pursuant to which the Company was granted the worldwide right
(excluding Mexico, Brazil and Chile) to license to unrelated third parties the
right to broadcast the Infomercial. In consideration of the license granted by
Distributor, the Company agreed to pay royalties to Distributor based upon the
Company's sales of its IQ.VOICE/TM/ Organizer products to licensees of the
Infomercial. For the year ended December 31, 1998, sales to the Distributor in
Mexico totaled $659,000, exceeding 10% of the Company's total sales, of which
$605,000 occurred after May 12, 1998, the Effective Date of the Plan. To date,
the Company has entered into agreements with television marketing companies in
Spain, France, Switzerland, Portugal and Belgium among others. In South American
markets, test airings of the Infomercial were not successful, potentially due to
the highly unstable economic conditions in those markets.
On May 14, 1999, the Company announced its intention to close its facility
in Simi Valley, California. As of July 31, 1999, the Company relocated to, and
entered into a contract with, Franklin Electronic Publishers, Inc. in
Burlington, New Jersey for its warehousing, distribution, financial and
manufacturing management operations. As of March 31, 1999, the Company had
recorded a reserve in the amount of $150,000 related to the costs associated
with the closure of the California facility, inclusive of severance for
employees, moving costs and other expenses. The Company anticipates this
decision will result in cost savings with respect to managing the Company's
operations.
Management of the Company is presently focused on its international sales
of the IQ.VOICE Organizer products and the targeted domestic direct marketing
channels for its current products. There can be no assurance that there will
continue to be demand for these products.
15
<PAGE>
Results of Operations
Sales for the year ended December 31, 1999 were $1,346,000, a decrease of
$873,000, or 39% from sales of $2,219,000 in the prior year. The decline in
sales is attributable to lower sales in the United States and lower sales of
Voice Organizer products in international markets.
Cost of Goods Sold decreased from $1,366,000, or 62% of sales for the year
ended December 31, 1998 to $812,000, or 60% of sales in the current year. Gross
profits for the years ended December 31, 1998 and 1999 were $853,000 (38%) and
$534,000 (40%) respectively. The increase in gross profit margins is the result
of changes in the mix of both products and sales by distribution channel.
Total operating costs for the twelve months ended December 31, 1999
decreased by $544,000 to $1,218,000 compared with $1,762,000 in the prior
year. In an effort to reduce its operating costs, the Company made significant
staff reductions during the year. In addition, commencing July 31, 1999, the
Company relocated to, and contracted out for, its warehousing, distribution,
financial and manufacturing management operations with Franklin. The
year-to-year reduction in operating expense is primarily the result of this
relocation and the reductions in staff.
Research and development expenses decreased to $154,000 for the year ended
December 31, 1999 from $315,000 in the prior year. The Company has substantially
suspended development of new and existing products.
Other income (expense) was ($101,000) for the twelve months ended December
31, 1999, primarily relating to a write-off of $88,000 for certain capitalized
patent costs and interest expense on the Company's loans payable to Franklin,
partially offset by a gain of $38,000 in the September quarter from the
favorable settlement of an arbitration related to a licensing fee. For the year
ended December 31, 1998 Other income (expense) of ($51,947) consisted mainly of
interest expense on the Company's loans payable to Franklin.
The Company's net loss for the year ended December 31, 1999 of $786,000
includes an expense provision of $150,000 related to the July relocation of the
company's headquarters.
16
<PAGE>
The following table summarizes the Company's historical results of
operations as a percentage sales for the post Effective Date seven and one half
month period ended December 31, 1998 and the pre Effective Date period ended May
12, 1998 and calendar year ended December 31, 1999.
For the year
Ended May 13 to January 1 to
December 31, December 31, May 12,
1999 1998 1998
---- ---- ----
Debtor in
Possession
-------------- ------------ ------------
Net sales 100.0% 100.0% 100.0%
Costs and expenses
Cost of goods sold 60.3% 63.2% 56.4%
Marketing 13.9% 10.3% 17.7%
General and administrative 45.1% 34.0% 76.9%
Research and development 11.5% 10.9% 24.5%
Warehouse 9.0% 7.1% 14.5%
Relocation expense 11.1% 0.0% 0.0%
-------------- ------------ ------------
Total costs and 150.8% 125.5% 190.1%
expenses
Operating loss -50.8% -25.5% -90.1%
Other expense -7.5% -2.9% -0.6%
Loss before reorganization
and extraordinary item -58.4% -28.4% -90.7%
Reorganization item 0.0% -0.2% -13.1%
-------------- ------------ ------------
Loss before extraordinary item -58.4% -28.6% -103.8%
Extraordinary item
Forgiveness of debt 0.0% 0.0% 242.5%
-------------- ------------ ------------
Net income (loss) -58.4% -28.6% 138.7%
============== ============ ============
Liquidity
Since the calendar quarter ended December 31, 1995, the Company has
incurred significant net losses. 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. On January 21, 1998, the
Company, in conjunction with Franklin Electronic Publishers, Inc., the Company's
largest secured creditor, filed a combined Amended Disclosure Statement and Plan
of Reorganization with the Bankruptcy Court. At a hearing held on April 23,
1998, the Company's motion for confirmation of the Plan was
17
<PAGE>
granted and the order confirming the Plan was entered by the Court on April
29,1998. The Plan became effective on May 12, 1998. The effect of the
transactions related to the implementation of the Plan which were effected as of
June 30, 1998 resulted in an increase to long term debt in the amount of
$570,000; a decrease to liabilities subject to compromise in the amount of
$3,240,000 as a result of the settlement of such liabilities in accordance with
the terms of the Plan; a decrease in accrued expenses of $135,000 as a result of
the payment of administrative expenses of the Bankruptcy Proceedings; a decrease
to preferred stock of $500,000 resulting from its conversion to common stock; an
increase to common stock of $74,000 and an increase to additional paid-in
capital of $2,160,000 resulting from the conversion of the preferred stock as
well as the new common stock issuance to Franklin; and a decrease to the
Company's accumulated deficit of $1,288,000 resulting from forgiveness of debt.
At the commencement of the Bankruptcy Proceedings, the Company entered
into a revolving $400,000 Loan and Security Agreement with Franklin
collateralized by all of the assets of the Company. This loan was due and
payable on the Effective Date. The agreement carried an interest rate of 12% per
annum on the average daily balance. 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. As of the Effective Date,
the Company renegotiated the terms of its post petition, secured revolving Loan
and Security Agreement with Franklin. As of the Effective Date, the Company had
borrowed $250,000 in accordance with the terms of the prior agreement. Under the
terms of the new agreement (the "Revolving Loan"), entered into as of the
Effective Date, interest accrues at 8% per annum payable monthly in arrears and
with the principal balance payable in two installments; 1) $50,000 on or before
May 12, 1999; and 2) the balance in a lump sum payment five years from the
Effective Date, which is May 12, 2003. As of December 31, 1999, the principal
balance due on this loan was $270,000.
As discussed above, the Company was to have made a principal payment of
$50,000 to Franklin on or before May 12, 1999. As the Company was unable make
this payment, the Company is in default on its loans from Franklin and the
entire balance of the loans has been classified as a current obligation on the
Company's December 31, 1999 balance sheet.
As of December 31, 1999, amounts due Franklin included the loans discussed
above of $620,000, inventory purchased from Franklin in 1998 for resale in the
amount of $457,088, royalties of $135,000, accrued interest of $95,320 and net
expenses paid by Franklin on the Company's behalf of approximately $157,000.
18
<PAGE>
As of December 31, 1999, the Company had an accumulated deficit of
$1,373,000 and negative working capital of $1,301,000. The Company's ability to
continue as a going concern is dependent, among other things, upon reaching a
satisfactory level of profitability and generating sufficient cash flow to meet
ongoing obligations. No assurance can be given that the Company will be able to
achieve such level of profitability and thereby obtain the required working
capital. Further, as of the Effective Date, the Company became an 82% controlled
subsidiary of Franklin, and therefore subject to Franklin's direction and
discretion regarding future business activities. Franklin has expressed its
present intention to provide certain financial support to the Company through at
least December 31, 2000 to allow the Company to continue as a going concern.
19
<PAGE>
Item 8. Financial Statements
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants 21
Statements of Operations for the years ended
December 31, 1998 and 1999 22
Balance Sheet at December 31, 1999 23
Statements of Cash Flows for the years ended
December 31, 1999 24
Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1998 and 1999 25
Summary of Significant Accounting Policies 26
Notes to the Financial Statements 28
20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Voice Powered Technology International, Inc
We have audited the accompanying balance sheets of Voice Powered Technology
International, Inc. (the "Company") as of December 31, 1999, 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 audit.
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 as of December
31, 1999, 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.
RADIN, GLASS & CO, LLP
Certified Public Accountants
New York, New York
February 15, 2000
21
<PAGE>
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
For the year
Ended May 13 to January 1 to
December 31, December 31, May 12,
1999 1998 1998
---- ---- ----
Debtor in
Possession
------------ ------------ ------------
Net sales (Note 9) $1,346,138 $1,688,000 $531,000
Costs and expenses
Cost of Goods Sold 812,313 1,066,806 299,231
Marketing 186,755 174,135 94,104
General and administrative 606,482 574,055 408,520
Research and development 154,273 184,678 130,326
Warehouse 120,710 119,585 76,994
Relocation expense 150,000 - -
------------ ------------ ------------
Total costs and 2,030,533 2,119,259 1,009,175
expenses
Operating loss (684,395) (431,259) (478,175)
Other expense
Interest Expense, net (50,336) (31,739) (2,076)
Other (51,025) (16,894) (1,238)
------------ ------------ ------------
Loss before reorganization
and extraordinary item (785,756) (479,892) (481,489)
Reorganization item:
Professional fees - (3,658) (69,768)
------------ ------------ ------------
Loss before extraordinary item (785,756) (483,550) (551,257)
Extraordinary item:
Forgiveness of debt
(Note 11) - - 1,287,721
------------ ------------ ------------
Net income (Loss) $ (785,756) $ (483,550) 736,464
============ ============ ============
Income (loss) per share:
Before Extraordinary item (0) $ (0.01) $ (0.03)
------------ ------------ ------------
Extraordinary item - $ - $ 0.08
------------ ------------ ------------
Net Income (loss) per share $ (0.01) $ (0.01) $ 0.05
------------ ------------ ------------
Weighted average common shares
outstanding 90,245,360 90,245,360 16,049,072
============ ============ ============
See accompanying summary of accounting policies and
the notes to financial statements.
22
<PAGE>
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
BALANCE SHEET
December 31,
1999
Assets
Current assets
Cash $ 134,166
Receivables, net allowance for
doubtful Accounts of $60,079 35,201
Inventory (Note 4) 130,851
Prepaid expenses 358
--------------
Total current assets 300,576
Property and equipment
Equipment 189,742
Less accumulated depreciation 189,742
--------------
Net property and equipment -
--------------
Patents and technology rights, net 2,081
--------------
Other assets 16,074
--------------
18,155
Total assets $ 318,731
==============
Liabilities and Stockholder's Equity
Current liabilities
Loans payable (Note 6) - Franklin $ 620,000
Accounts payable - other 75,571
Accrued expenses - other (Note 5) 22,066
Accounts payable and accrued expenses
- Franklin 883,774
--------------
Total current liabilities 1,601,411
Stockholders' Equity (deficit)
Common stock, $.001 stated value -
100,000,000 shares authorized; 90,245,360
shares issued and outstanding 90,246
Accumulated deficit (1,372,926)
--------------
Total stockholders' equity (1,282,680)
(deficit)
Total liabilities and stockholders' equity
(deficit) $ 318,731
==============
See accompanying summary of accounting policies and
the notes to financial statements.
23
<PAGE>
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Debtor in
For the Possession
year ended May 13 to January 1
December December to May
31, 1999 31, 1998 12, 1998
------------ ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net income (loss) $(785,756) $(483,550) $ 736,464
Adjustments to reconcile net loss to net
cash provided by (used in)
operating activities:
Depreciation and amortization 177,038 152,898
Write-off of patents and leaseholds 93,605 -
Gain on forgiveness of debt - (1,287,721)
Changes in operating assets and liabilities:
(Increase) decrease in receivables 158,680 (71,422) 25,769
(Increase) decrease in inventory 183,498 (166,759) 66,126
(Increase) decrease in prepaid expenses 7,094 (5,852) 8,900
Decrease in other assets 8,020 1,698 3,093
Increase in post-petition accounts 301,468 497,318 1,812
payable
Increase (decrease) in post-petition (41,984) 3,432 17,528
accrued expenses
Increase (decrease) in deferred income (64,229) (5,771) 70,000
Decrease in pre-petition liabilities - - (207,664)
subject to compromise
Loss on disposition of equipment 12,820 16,894 1,238
------------ ------------ ------------
Net cash provided by (used in) 50,254 31,438 (411,557)
operating activities
Cash flows from investing activities
Capital expenditures (4,891) (18,437) -
Proceeds from sale of equipment 17,500 - -
------------ ------------ ------------
Net cash provided by (used in) 12,609 (18,437) -
financing activities
Cash flows from financing activities
Proceeds from post-petition loans payable - 20,000 415,000
Proceeds from sale of common stock 300
------------ ------------ ------------
Net cash provided by financing 20,000 415,300
activities
Net increase in cash and cash equivalents 62,863 33,001 3,743
Cash and cash equivalents at the beginning of the
period 71,303 38,302 35
------------ ------------ ------------
Cash and cash equivalents at the end of the period $ 134,166 $ 71,303 $ 3,778
============ ============ ============
</TABLE>
See accompanying summary of accounting pol icies and
the notes to financial statements.
24
<PAGE>
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------------------- ---------------------------------
Shares Amount Shares Amount
----------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Balance January 1, 1998 500,000 $500,000 16,011,572 $16,012
Stock option exercised by prior officer (Note 9(a)) 37,500 38
Preferred stock converted to common stock (Note 9(c)) (500,000) (500,000) 2,000,000 2,000
Common stock issued to Franklin Electronic
Publishers, Inc. (Note 9(c)) 72,196,288 72,196
Net Income - January to May 12, 1998
Reclassification of accumulated deficit as of May 12, 1998
----------- ------------ -------------- --------------
Balance May 13, 1998 0 0 90,245,360 90,246
Net loss - May 13 to December 31, 1998
----------- ------------ -------------- --------------
Balance December 31, 1998 0 0 90,245,360 90,246
----------- ------------ -------------- --------------
Net loss
Balance December 31, 1999 0 0 90,245,360 $90,246
=========== ============ ============== ==============
<CAPTION>
Additional
Paid In Accumulated Stockholders'
Capital Deficit Equity (Deficit)
--------------- --------------- -----------------
<S> <C> <C> <C>
Balance January 1, 1998 $27,897,082 $(30,897,223) $(2,484,129)
Stock option exercised by prior officer (Note 9(a)) 263 301
Preferred stock converted to common stock (Note 9(c)) 498,000 -
Common stock issued to Franklin Electronic
Publishers, Inc. (Note 9(c)) 1,661,794 1,733,990
Net Income - January to May 12, 1998 736,464 736,464
--------------- --------------- -----------------
Reclassification of accumulated deficit as of May 12, 1998 (30,057,139) 30,057,139 -
Balance May 13, 1998 0 (103,620) (13,374)
Net loss - May 13 to December 31, 1998 (483,550) (483,550)
--------------- --------------- -----------------
Balance December 31, 1998 0 (587,170) (496,924)
Net loss (785,756) (785,756)
--------------- --------------- -----------------
Balance December 31, 1999 0 $ (1,372,926) $(1,282,680)
=============== =============== =================
</TABLE>
25
<PAGE>
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reorganization and Basis of Presentation
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. From September 1997 through May
12, 1998, the Company operated as a "Debtor-In-Possession" under such code. As
of May 12, 1998, in accordance with AICPA Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code", the Company
adopted "fresh-start reporting" and has reflected the effects of such adoption
in the financial statements for the seven and one half months ended December 31,
1998 (see note 2 to the financial statements). There was no change to the
carrying value of the assets or liabilities as a result of the adoption of fresh
start reporting, however, the balance of the deficit was offset against paid in
capital, to the extent available.
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 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.
26
<PAGE>
Loss Per Share
Loss per share is based on the weighted average number of common shares
outstanding during each period presented. There were no outstanding stock
options or warrants for the year ended December 31, 1999.
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.
Stock Based Compensation
Effective as of May 12, 1998 in conjunction with the confirmation of the
Company's Plan of Reorganization, all outstanding stock options were cancelled
and no new grants had been issued by the Company as of December 31, 1998.
Recent Accounting Pronouncements
There are no issued but not yet effective accounting standards that will
have a material effect on the Company's financial statements.
27
<PAGE>
Notes to the 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 worldwide basis, both directly and through
licensing agreements. From January 1990 until July 1992, the Company operated as
a development stage enterprise.
The Company's licensed voice-recognition VoiceLogic(TM) Technology (the
"Technology") is fully developed and in commercial use and has been included 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 and acquired, which are now licensed by the Company (Note 3). 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 and can operate on microprocessors
powered by only penlight or nicad batteries. The core Technology can also be
adapted for use in virtually any spoken language in the world, thus enabling it
to be used in virtually any country in the world.
The Company does not use business line reporting in its internal financial
reporting.
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
("Court"), under the provisions of Chapter 11 of the Bankruptcy Code. On January
21, 1998, the Company, in conjunction with Franklin Electronic Publishers, Inc.
("Franklin"), the Company's largest secured creditor, filed a combined Amended
Disclosure Statement and Plan of Reorganization (the "Plan") with the Bankruptcy
Court which became effective on May 12, 1998 (the "Effective Date"). The Plan
included a significant reduction of the Company's pre-petition obligations, in
addition to Franklin's waiving its pre-petition secured claim in the amount of
$1,733,990 in exchange for an additional 80% interest in the equity of the
Company.
In accordance with the Plan, on or about May 12, 1998, the following
occurred: 1) the Company received a loan of $350,000 from Franklin (the "Plan
Loan") to create a fund to be dedicated to the payment of creditor claims
28
<PAGE>
and certain administrative expenses (Note 6); 2) the 500,000 shares of
outstanding convertible preferred stock of the Company was converted into
2,000,000 shares of the Company's common stock (Note 11(c)); and 3) the
Company's Articles of Incorporation were amended to, among other things,
increase the authorized shares of common stock to 100,000,000. Pursuant to the
Plan, Franklin was issued 72,196,288 shares of the Company's common stock, which
equated to an additional 80% equity interest in the Company in exchange for
Franklin's pre-petition secured claim in the amount of $1,733,990.
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 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 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, collateralized by the assets of the
Company, with an interest rate of 10% per year. 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 for a non-refundable advance royalty of
$700,000; and 2) the Company assigned the rights to the 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's
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.
29
<PAGE>
4. Inventories
Inventories consisted of the following:
December 31, 1999
-----------------
Finished goods $96,588
Parts and collateral
materials 34,263
--------
Total Inventory $130,851
========
5. Accrued Expenses
Accrued expenses consisted of the following:
December 31, 1999
-----------------
Accrued commissions $2,319
Accrued restructuring 17,076
Accrued royalties 2,226
Other 445
-------
Total accrued expenses $22,066
=======
6. Loans Payable
As of September 22, 1997, in conjunction with the commencement of the
Bankruptcy Proceedings, the Company entered into a revolving $400,000 Loan and
Security Agreement with Franklin collateralized by all of the assets of the
Company. This loan was due and payable on the Effective Date. The agreement
carried an interest rate of 12% per annum on the average daily balance. 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. As of the Effective Date, the Company renegotiated the terms of its
post petition, secured revolving Loan and Security Agreement with Franklin. As
of the Effective Date, the Company had borrowed $250,000 in accordance with the
terms of the prior agreement. Under the terms of the new agreement (the
"Revolving Loan"), entered into as of the Effective Date, interest accrues at 8%
per annum payable monthly in arrears and with the principal balance payable in
two installments; 1) $50,000 on or before May 12, 1999 and; 2) the balance in a
lump sum payment five years from the Effective Date, which is May 12, 2003. As
of December 31, 1999, the principal balance due on this loan was $270,000.
In accordance with the Plan, on the Effective Date the Company received a
loan of $350,000 from Franklin (the "Plan Loan") to create a fund to be
dedicated to the payment of creditor claims and certain administrative expenses
of the Bankruptcy Proceedings. The Plan Loan accrues interest at 8% per annum,
with interest only
30
<PAGE>
payable in arrears on a monthly basis, with principal all due and payable in a
lump sum payment five years from the Effective Date which is May 12, 2003. As
discussed above, the Company was to have made a principal payment of $50,000 to
Franklin on or before May 12, 1999. As the Company was unable to make this
payment, the Company is in default on its loans from Franklin and the entire
balance of the loans has been classified as a current obligation on the
Company's December 31, 1999 balance sheet.
7. Commitments
(a) As of December 31, 1999, the Company has one operating lease that
requires future minimum rental payments with initial or remaining terms in
excess of one year:
Operating
Lease
------------
2000 $ 58,500
2001 17,062
---------
Total $ 75,562
=========
The operating lease pertains to a lease for the Company's prior office
facilities which are currently subleased at cost. The lease expires April 14,
2001. Franklin has provided a limited guaranty of the Company's performance
under this lease. Net rent expense was $33,980 and $73,086 for the years ended
December 31, 1999 and 1998, respectively.
(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's obtaining
unrestricted exclusive world wide ownership rights to the technology subject to
ongoing royalties for a total cost of $100,000 in cash and stock options which
were cumulatively $50,000 lower than market value. The royalties are subject to
a minimum of $60,000 per year, payable quarterly. In May 1997, this agreement
with the Inventor was assigned to Franklin (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. Royalty expense incurred in 1998
and 1999 amounted to $60,000 in each year. This agreement with the inventor has
been amended to eliminate the annual minimum royalty commitment, but in
consideration therefor the Company has agreed to increase the royalty rate
payable to the Inventor.
31
<PAGE>
8. Capital Stock
(a) Stock options
The Company's 1992 Stock Option Plan (the "1992 Plan") provided 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")
provided 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. Pursuant to the terms of the Plan of
Reorganization, all options unexercised as of the Effective Date of the Plan of
Reorganization were canceled.
Under the terms of a May 1997 termination agreement with the Company's
previous CEO, who, at the time, was Chairman of the Company's Board of
Directors, the Company 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). In April 1998, 37,500 of these stock options were
exercised.
(b) Stock issuance
In May 1998, in accordance with the Plan of Reorganization, the Company's
Articles of Incorporation were amended to increase, among other things, the
authorized shares of common stock to 100,000,000. Pursuant to the Plan, Franklin
was issued 72,196,288 shares of the Company's common stock, which equated to an
additional 80% equity interest in the Company in exchange for Franklin's
pre-petition secured claim in the amount of $1,733,990.
In April 1999, Franklin purchased 62,500 shares of the Company's common
stock at market value, $.027 per share, from its then president.
9. Major Customers and International Sales
For the seven and one half months ended December 31, 1998, the Company had
sales to one domestic customer of $266,000 and had sales to one international
customer of $605,000, representing 16% and 36% of the Company's sales for this
period, respectively. For the year ended December 31, 1999, the Company had
sales to two international customers of $257,000 and $244,000, representing 19%
and 18% of the Company's sales for this period, respectively.
32
<PAGE>
For the seven and one half months ended December 31, 1998, the Company's
international sales totaled $817,000, equal to 48% of total sales. For the year
ended December 31, 1999, the Company's international sales totaled $739,000 or
53% of total sales. Inasmuch as all international sales are in US dollars, the
Company does not incur any gains or losses on foreign currency fluctuations.
Further, the Company does not maintain any material inventory or other assets in
foreign countries and requires payment at the time of sale on the majority of
export sales. Accordingly, there are no material identifiable assets
attributable to international sales activities.
10. Forgiveness of Debt
In May 1998, The Company's Amended Plan of Reorganization and Disclosure
Statement became effective and the Company received the Plan Loan of $350,000
from Franklin to create a fund to be dedicated to the payment of creditor claims
and certain administrative expenses. After payment of the administrative
expenses of $133,000, the balance of the funds were disbursed in final
settlement of the remaining pre-petition claims resulting in a gain from
forgiveness of debt of $1,287,721.
11. Supplemental Cash Flow Information
For the years ended December 31, 1998 and 1999, interest expense due
Franklin totaling $44,943 and $49,600, respectively, was accrued and unpaid.
Supplemental non-cash financing and investing activities were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998
---- ----
<S> <C> <C>
Issuance of common stock in consideration of pre-petition loan payable - $1,733,990
Conversion of preferred stock to common stock - 500,000
Issuance of common stock to president (Note 9(c)) - --
Issuance of preferred stock to vendor (Note 9(c)) - (500,000)
Issuance of compensatory stock options (Note 9(a)) - --
Issuance of compensatory stock options to related party (Notes 8(b) and 9(a)) - --
Issuance of common stock to vendor (Note 9(c)) - --
</TABLE>
12. Income Taxes
Unused net operating losses of approximately $27,000,000 are available as
of December 31, 1999 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, 1999 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
33
<PAGE>
Company may restrict future utilization of these carry-forwards. In the event
the loss carry-forwards are fully utilizable, the Company has a deferred tax
asset of approximately $10,000,000 as of December 31, 1999. 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.
13. Related Party Transactions
As of the Effective Date, the Company became an 82% subsidiary of Franklin.
During 1998, the Company incurred interest expense on loans from Franklin in the
amount of $38,419 . In addition, during 1998 the Company incurred royalties
expenses in the amount of $60,000. Lastly, the Company purchased inventory from
Franklin for resale in the amount of $457,088. During 1999, the Company incurred
royalty expense due Franklin in the amount of $60,000 and accrued interest due
Franklin of $50,287. As of December 31, 1999, amounts due Franklin included
loans of $620,000, inventory purchased from Franklin in 1998 for resale in the
amount of $457,088, royalties of $135,000, accrued interest of $95,320 and net
expenses paid by Franklin on the Company's behalf of approximately $157,000.
34
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On September 3, 1998, the Company replaced BDO Seidman LLP as the principal
accountant to audit the Company's financials statements and engaged Radin, Glass
& Co., LLP as the principal accountant to audit the Company's financial
statements.
BDO's reports on the Company's financial statements for the two most recent
fiscal years did not contain an adverse opinion or disclaimer of opinion, nor
were such reports modified as to audit scope or accounting principles. However,
BDO's reports on the Company's financial statements for the two most recent
fiscal years did contain a modification as to uncertainty relating to the
Company's ability to continue as a going concern.
The decision to replace BDO as the principal accountant to audit the
Company's financial statements was recommended and approved by the Company's
Board of Directors.
During the Company's two most recent fiscal years and in the subsequent
interim period preceding the date of BDO's replacement, there were no
disagreements between the Company and BDO on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of BDO, would have caused
BDO to make a reference to the subject matter of the disagreement in connection
with BDO's reports on the Company's financial statements for such periods.
During the Company's two most recent fiscal years and the subsequent
interim period preceding the date of Radin's engagement, neither the Company nor
any person on the Company's behalf consulted Radin regarding the application of
accounting principles to a specific completed or contemplated transaction or the
type of audit opinion that might be rendered on the Company's financial
statements.
PART III
Item 9. Directors and Executive Officers of the Registrant
Information called for by Item 9 is set forth under the heading "Election
of Directors" in the Company's Proxy Statement for its 2000 annual meeting of
stockholders (the "2000 Proxy Statement"), which is incorporated herein by this
reference.
35
<PAGE>
Item 10. Executive Compensation
Information called for by Item 10 is set forth under the heading "Executive
Compensation" in the 2000 Proxy Statement, which is incorporated herein by this
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information called for by Item 11 is set forth under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the 2000 Proxy
Statement, which is incorporated herein by this reference.
Item 12. Certain Relationships and Related Transactions
Information called for by Item 12 is set forth under the heading "Certain
Relationships and Related Transactions" in the 2000 Proxy Statement, which is
incorporated herein by this reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits: See Exhibit Index
(b) Reports on Form 8-K. None
36
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
*3(a) Articles of Incorporation, as amended
3(aa) Certificate of Amendment of Articles of Incorporation dated
May 12, 1998
*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
37
<PAGE>
Exhibit Number Description
- -------------- -----------
(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
(1)+/-10(www) Amendment to Employment Agreement with Kenneth I. DeWitt
+/-10(w.4) Amendment to 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
(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
(3)10.7.1 Amendment Number One Lease for Executive Officers, Tarzana,
California
(3)10.7.2 Amendment Number Two to Lease for Executive Officers, Tarzana,
California
(3)10.8 Disclosure Statement and Plan of Reorganization for Voice
Powered Technology International, Inc. dated as of January 21,
1998
(3)10.8.1 Order confirming Amended Disclosure Statement and Plan of
Reorganization for Voice Powered Technology International,
Inc. dated as of April 29, 1998
!10.9.1 Promissory Note dated May 12, 1998 executed by Voice Powered
Technology International, Inc. in favor of Franklin Electronic
Publishers, Inc.
!10.9.2 Promissory Note dated May 12, 1998 executed by Voice Powered
Technology International, Inc. in favor of Franklin Electronic
Publishers, Inc.
!10.10.1 Management Services Agreement dated July 31, 1999 between
Voice Powered Technology International, Inc. and Franklin
Electronic Publishers, Inc.
!10.10.2 Amendment to Management Services Agreement dated March 15,
2000 between Voice Powered Technology International, Inc. and
Franklin Electronic Publishers, Inc.
(4)16 Letter, dated September 8, 1998, from BDO Seidman LLP to SEC
re Form 8-K Statements
21 Subsidiaries: None
(2)23 Consent of BDO Seidman LLP
(4)99 Voice Powered Technology International, Inc. Press Release,
dated September 11, 1998
38
<PAGE>
- ------------------------------------
! Filed herewith
* 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 herein by reference from
Registrant's Form 10-KSB for the year ended December 31, 1996.
(3) Previously filed with, and incorporated herein by reference from
Registrant's Form 10-KSB for the year ended December 31, 1997.
(4) Previously filed with, and incorporated herein by reference from
Registrant's Form 8-K filed on September 11, 1998.
39
<PAGE>
NOTE
$350,000 Burlington, NJ
May 12, 1998
FOR VALUE RECEIVED, VOICE POWERED TECHNOLOGY INTERNATIONAL, INC., a
California corporation (the "Company"), DOES HEREBY PROMISE to pay to the order
of FRANKLIN ELECTRONIC PUBLISHERS ("Franklin"), at the office of Franklin at One
Franklin Plaza, Burlington, NJ 08016, the principal amount of THREE HUNDRED AND
FIFTY THOUSAND DOLLARS ($350,000) in lawful money of the United States of
America, in immediately available funds on May 12, 2003. The Company also
promises to pay interest on the principal amount hereof, in like money, at such
office, and at the rate per annum equal to 8%.
The principal balance of this Note and any interest then accrued shall
be immediately due and payable on any default by Company of any obligations to
Franklin, including any obligations under any other note payable to Franklin.
This Note shall be governed by and construed in accordance with the
laws of the State of New Jersey.
VOICE POWERED TECHNOLOGY
INTERNATIONAL, INC.
By: /s/
------------------------
Authorized Officer
<PAGE>
NOTE
$400,000 Burlington, NJ
May 12, 1998
FOR VALUE RECEIVED, VOICE POWERED TECHNOLOGY INTERNATIONAL, INC., a
California corporation (the "Company"), DOES HEREBY PROMISE to pay to the order
of FRANKLIN ELECTRONIC PUBLISHERS ("Franklin"), at the office of Franklin at One
Franklin Plaza, Burlington, NJ 08016, the principal amount of up to FOUR HUNDRED
THOUSAND DOLLARS ($400,000) in lawful money of the United States of America, in
immediately available funds, in one initial installment of fifty thousand
dollars ($50,000) in principal amount on May 12, 1999, and a final installment
of the remaining principal in a balloon payment due May 12, 2003. The Company
also promises to pay interest on the principal amount hereof, in like money, at
such office, and at the rate per annum equal to EIGHT PERCENT (8%). The
principal amount of this Note shall not exceed $220,000 on or after May 12,
1998.
The principal balance of this Note and any interest then accrued should
be immediately due and payable on any default by Company of any obligations to
Franklin, including any obligations under any other note payable to Franklin.
This Note shall be governed by and construed in accordance with the
laws of the State of New Jersey.
VOICE POWERED TECHNOLOGY
INTERNATIONAL, INC.
By: /s/
------------------------
Authorized Officer
<PAGE>
July 31, 1999
Mr. Mitchell Rubin
Voice Powered Technology International, Inc.
21 W. Easy Street, Unit 106
Simi Valley, CA 93065
Re: Management Services Agreement
Dear Mr. Rubin:
This letter will memorialize the terms of the agreement between Franklin
Electronic Publishers, Inc. ("Franklin") and its subsidiary, Voice Powered
Technology International, Inc. ("VPTI"), whereby, beginning August 1, 1999,
Franklin will provide certain services to VPTI.
(1) Franklin agrees to manage the business of VPTI by providing services,
including, but not limited to financial management, accounting,
billing, warehousing, production, and payroll and benefits
administration in connection with the severance of present and former
VPTI employees.
(2) In consideration for the services described above, VPTI will pay to
Franklin $5,000 per month, payable on the 1st of each month.
If the foregoing terms are acceptable, kindly countersign both of these
original agreements and return them to me.
Very truly yours,
/s/ Gregory J. Winsky
------------------------
Gregory J. Winsky
Executive Vice President
ACCEPTED AND AGREED TO:
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
/s/ Mitchell Rubin, President
- ---------------------------------------------------
By: Mitchell Rubin, President
<PAGE>
March 15, 2000
Voice Powered Technology International, Inc.
C/o Franklin Electronic Publishers, Inc.
One Franklin Plaza
Burlington, NJ 08016
Re: Amendment of Management Services Letter Agreement dated July 31, 1999
To: Voice Powered Technology International Inc. (VPTI)
Because Mitchell Rubin's consulting agreement with VPTI will end on March
31, 2000, there is a need to amend the Letter Agreement captioned above.
Effective April 1, 2000, Franklin will provide additional services to VPTI, to
wit:
(1) Franklin agrees to assign one Franklin employee on a full-time basis
to manage the business of VPTI as well as to provide services
including, but not limited to financial management, accounting,
billing, warehousing and production for VPTI.
(2) In consideration for the services described above, VPTI will pay to
Franklin $11,715 per month, payable on the 1st of each month.
Very truly yours,
/s/ Gregory J. Winsky
------------------------
Gregory J. Winsky
Executive Vice President
ACCEPTED AND AGREED TO:
VOICE POWERED TECHNOLOGY INTERNATIONAL, INC.
/s/
- ---------------------------------------------------
By: Authorized Officer
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 134,166
<SECURITIES> 0
<RECEIVABLES> 95,280
<ALLOWANCES> (60,079)
<INVENTORY> 130,851
<CURRENT-ASSETS> 300,576
<PP&E> 189,742
<DEPRECIATION> (189,742)
<TOTAL-ASSETS> 318,731
<CURRENT-LIABILITIES> 1,601,411
<BONDS> 0
0
0
<COMMON> 90,246
<OTHER-SE> (1,372,926)
<TOTAL-LIABILITY-AND-EQUITY> 318,731
<SALES> 1,346,138
<TOTAL-REVENUES> 1,346,138
<CGS> 812,313
<TOTAL-COSTS> 812,313
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 38,502
<INTEREST-EXPENSE> 50,336
<INCOME-PRETAX> (785,756)
<INCOME-TAX> 0
<INCOME-CONTINUING> (785,756)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (785,756)
<EPS-BASIC> (0.01)
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