-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NBmJw80zzyUJQ2bSNr0oFApvIu0eBpgviJrSatrFqzFRPl1yQsH0A9I4m4XD/c9I UcIMTso8yzqe0XqCNTexKA== 0000950148-97-001637.txt : 19970610 0000950148-97-001637.hdr.sgml : 19970610 ACCESSION NUMBER: 0000950148-97-001637 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970609 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VOICE POWERED TECHNOLOGY INTERNATIONAL INC CENTRAL INDEX KEY: 0000890447 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 953977501 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11476 FILM NUMBER: 97621198 BUSINESS ADDRESS: STREET 1: 18425 BURBANK BLVD STE 508 CITY: TARZANA STATE: CA ZIP: 91356 BUSINESS PHONE: 8187571100 10KSB 1 FORM 10-KSB 1 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------- FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1996 or [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 (No Fee Required) For the transition period from ______ to _______ Commission File No. 1-11476 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. (Name of small business issuer in its charter) California 95-3977501 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 18425 Burbank Boulevard, Suite 508 Tarzana, California 91356 (818) 757-1100 (Address and telephone number of principal executive offices) Securities registered under Section 12(b) of the Exchange Act: Name of each exchange Title of each class: on which registered: -------------------- -------------------- Common Stock $.001 par value None Warrants expiring October 1997 Securities registered under Section 12(g) of the Exchange Act: None Check whether the issuer (l) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X -- -- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB___. State issuer's revenues for its most recent fiscal year: $10,813,447. The aggregate market value of the issuer's Common Stock held by non-affiliates as of April 30, 1997 (assuming for this purpose that only directors and officers of registrant are affiliates of registrant), based on the closing price on that date, was approximately $976,435.04. As of April 30, 1997 there were 13,949,072 shares of Voice Powered Technology International, Inc. Common Stock, $.001 par value, outstanding. ================================================================================ 2 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL Voice Powered Technology International, Inc. (the "Company"), incorporated in California in June 1985, began active operations in January 1990. The Company was formed to develop, market, and distribute low-cost voice recognition and voice activated products on a world-wide basis, both directly and through licensing agreements. From January 1990 until July 1992, the Company operated as a development stage enterprise. The Company's voice-recognition VoiceLogic(TM) Technology (the "Technology") is fully developed and in commercial use in a variety of consumer oriented products manufactured for the Company under contract with third parties. Additional products are scheduled for commercial release during 1997, and the Company intends to pursue, subject to availability of adequate financial resources, distribution, licensing, and other arrangements for the manufacture, use, and sale of the Technology in consumer, business, and electronic products in the United States and worldwide. The Technology can be used in a variety of products with only limited modifications to the application software for adaptation to the specific product. The core Technology can also be adapted easily for use in virtually any spoken language in the world, thus enabling it to be used in virtually any country in the world. The Technology consists of a combination of exclusive rights developed and acquired by the Company for advanced low-cost voice recognition technology called VoiceLogic, which can operate on penlight or nicad batteries. This Technology permits utilization of the human voice as a replacement for manual controls, such as buttons, switches, and dials in activating and controlling everyday consumer and business products. In addition to products which are based upon the VoiceLogic Technology, the Company has developed additional voice activated products which utilize digital speech compression and other state-of-the-art voice technologies which the Company has developed or licensed. It is the intent of the Company to continue to dedicate resources when available to the improvement of the Technology as well as to investigate new developments in voice technology and, where appropriate, seek to obtain exclusive or nonexclusive licenses for such technologies in order to maintain its competitive position in the market for voice activated consumer products. The Company presently employs a two-pronged strategy in its approach to the marketplace for voice activated products: PROPRIETARY PRODUCTS. The Company dedicates significant resources to the conceptualization, research, and development of consumer product applications of the Technology and other voice technologies. Such applications seek to provide: a high level of consumer benefit through simplification of use and enhancement of functionality of existing consumer products; a unique solution to everyday consumer problems for which no product presently exists; a low barrier to entry for manufacturing such products; and potential profit margins as a result of anticipated retail price as compared to manufacturing costs. In addition, the Company adopted a brand strategy utilizing its IQoVOICE(TM) trademark for all of its proprietary products. The Company's proprietary products include the IQoVOICE Organizer(TM) and the IQoVOICE Organizer/Pager(TM). The Company has developed other products including the IQoVOICE Tell-It Phone(TM) and the IQoVOICE MessagePad which are no longer being marketed. The Company markets its proprietary products through retail distribution channels in the United States and through international distributors. Certain of the Company's proprietary products are also suited to consumer direct marketing through targeted direct response advertising, particularly during the product's introductory stage. Direct marketing, when successful, can provide revenue and profits to the Company during a product's initial launch, as well as create consumer awareness for the products, which can accelerate sales when retail distribution is achieved. TECHNOLOGY. In product categories where the Company believes it advantageous, the Company seeks development and/or licensing opportunities with major manufacturers in product categories which include office business equipment, home appliances, video and audio, wireless communications, and toys. The Company believes that the level of consumer acceptance of the Technology generated by the Company's own products, combined with other companies' promotion of voice activation products and services such as telephone dialing and computer software operation, should, in time, broaden and increase interest in voice activation from many 2 3 original equipment manufacturers ("O.E.M.'s") and, in turn, create additional licensing and development opportunities for the Company. SUBSEQUENT EVENTS. Subsequent to year end, in May 1997, the Company consummated a transaction involving two agreements with Franklin Electronic Publishers, Inc. ("Franklin"), a Pennsylvania corporation. 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 Organizer Models 5150 and 5160 (IQoVOICE Pocket Organizers); 2) The Company sold to Franklin for $150,000 in cash 2,000,000 shares of the Company's common stock, par value $.001 per share, representing the approximate market price of the Company's common stock at the time of the transaction; and 3) Franklin loaned the Company cash equal to $1,200,000, in addition to $500,000 previously loaned to the Company, and restructured the payment terms of a new $1,700,000 note over a four year period. The second agreement was a Technology Transfer Agreement in which the two companies entered into the following transactions: 1) The Company granted to Franklin a non-exclusive perpetual license for technology rights evidenced by the Company's patent related to operation of Voice Organizer products as well as other technology and software developed by the Company related to or used in the Model 5150 and 5160 for an advance royalty of $700,000 against an agreed upon per unit royalty; and 2) the Company assigned the rights to the VoiceLogic Technology to Franklin, and Franklin granted back to the Company a non-exclusive perpetual license of the VoiceLogic Technology, including the right to sublicense, for the development, manufacture, sale and distribution of Voice Organizer products with recording times in excess of four minutes and any other electronic products that are not Voice Organizers, subject to the Company remaining obligated to pay royalties to Franklin at the same rates for which the Company was obligated to the inventor of the VoiceLogic Technology prior to its assignment to Franklin. (See also "Item 1. Description of Business - Manufacturing/Subsequent Events" for a discussion of further transactions entered into by the Company utilizing a portion of the proceeds from the transaction with Franklin.) THE VOICELOGIC TECHNOLOGY The Technology is proprietary technology which was owned by the Company and as a result of the transactions described under "Item 1. Description of Business - General/Subsequent Events" above, is now licensed by the Company. The Company modified the basic Technology to improve upon it and to adapt it to specific applications in product categories for which the Company had exclusive rights. As of February 1996, the Company acquired from the inventor of the Technology all right, title, and interest, and any future improvements in and to the Technology, subject to payment of ongoing royalties, thereby eliminating any and all limitations as to the Company's use of the Technology. The Technology is protected by copyrights, patent applications, and trade secrets (see "Item 1. Description of Business - General/Subsequent Events"). The low-cost, low-power consumption, portable, and compact features of the Technology were designed for use in conjunction with everyday mass-marketed consumer and business electronic products. The Technology incorporates a proprietary voice recognition algorithm capable of operating on many low-cost eight-bit microprocessors. This contrasts with more expensive voice recognition technologies based on Digital Signal Processor ("DSP") chips -- i.e., high-speed microprocessors which generally require more power to operate. The DSP dependent technology is better suited to applications where price, size, power, and portability are not of primary concern, in contrast with the Technology, which is preferable in small, low-cost, hand held applications. Further, the Technology is speaker-dependent technology, which, though requiring training, is easily adaptable for use in any language. The Company believes that its Technology provides accurate voice recognition at lower cost, and with less power required than can be provided by present DSP based technology. As stated, subsequent to year end the Company entered into a Technology Transfer Agreement with Franklin Electronic Publishers, Inc. in which the above mentioned February 1996 acquisition of technology by the Company from the inventor was assigned to Franklin (see "Item 1. Description of Business - General/Subsequent Events" above). 3 4 PRODUCTS CURRENTLY MARKETED The Company has developed a variety of voice activated consumer products which include the Company's most successful product line, the IQoVOICE Organizer. Nearly all of the Company's sales are derived from the IQoVOICE Organizer product line, and the Company intends to launch a new line of Organizers in 1997. In October 1996, the Company introduced an IQoVOICE Organizer/Pager which was originally intended to be marketed in conjunction with MobileComm Nationwide Operations, Inc., subsequently acquired by MobileMedia Corporation ("MMC"). As a result of the merger, MMC became the nation's second largest provider of paging services. In November 1996, the Company and MMC reached an agreement whereby MMC was relieved of its commitment to market and distribute the Organizer/Pager. MobileComm will, however, continue to provide paging service to consumers purchasing the product. In addition to the IQoVOICE Organizers, in 1996 the Company marketed the IQoVOICE Tell-It Phone, and engaged in on-going exploratory development activities of various other voice activated products which the Company believes will provide enhanced consumer benefits as a result of the inclusion of voice technologies. 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 current Organizer can store and play back up to approximately ninety-nine messages. Larger capacity Organizers are in development. The Organizer also functions as an appointment calendar. Appointments are entered by voice, and are arranged chronologically by date and time, automatically. 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 current Organizer also stores up to 100 names and 400 telephone numbers entirely by voice. Numbers are then recalled and displayed on the LCD screen by simply speaking the person's name into the Organizer. The Organizer also verbally states the person's name to ensure that the correct number has been recalled. The Organizer is only slightly larger than a credit card, fits easily into a shirt pocket, purse, notebook, or briefcase, and weighs three ounces, including batteries. During 1996, the Company continued to market a 128 KB model of the IQoVOICE Organizer which had been developed in 1995 to retail at lower prices than the previous models. This model provides approximately one hundred seconds of digital audio storage, performs many of the same functions as the previous models, and is also available in a multi-language version capable of displaying information in five languages. This model also featured a simplified design which enabled the Company to reduce manufacturing costs. The Company anticipates the model will be discontinued in 1998. During 1996, the Company introduced two new models of the IQoVOICE Organizer, both based upon its new Flash memory technology. This new technology significantly reduced the manufacturing costs of the Organizer, improved reliability and responsiveness, and eliminated the need for backup power required by the previous memory technology. The first model, introduced in June 1996, is the IQoVOICE Pocket Organizer (see "Item 1. Description of Business - General/Subsequent Events" for information regarding the sale of the Pocket Organizers to Franklin). This model features a very compact size and simplified operation, while maintaining most of the functionality of the existing Organizers. The IQoVOICE Pocket Organizer is capable of storing up to 2.5 minutes of total audio recording, will store up to forty (40) names and phone numbers, and up to sixty (60) reminders/appointments for up to a full year in advance. The second model was a redesign of the Company's most popular 512 KB Voice Organizer, which had been in distribution since the fourth quarter of 1994. This new design features, in addition to the benefits of Flash memory technology, an improved outer case, as well as two new features. First, the user can define up to twenty categories (or files) under which recorded memos can be stored, thereby allowing easier access and retrieval. Second, the Organizer is capable of storing voice data regarding fifteen categories of business expenses, each time and date stamped, for the easy compiling of expense reports. The new model also incorporates a simplified user interface featuring easily identifiable icons for each 4 5 operating function. An international version of this new design will be made available in the second quarter of 1997. IQoVOICE ORGANIZER/PAGER. In January 1996, the Company entered into an agreement with MobileComm (subsequently acquired by MobileMedia Corporation) pursuant to which the Company would develop, and both the Company and MobileMedia would market and distribute, a new product which would combine the features of the Company's IQoVOICE Organizer with the functionality of a numeric pager. The product was initially introduced in September 1996. Features of the IQoVOICE Organizer/Pager include announcing of incoming pages, announcement of up to ten user programmable voice messages that are activated by a code appended to the incoming page telephone number, as well as other features which integrate the functionality of a pager and IQoVOICE Organizer. The introduction of this product was negatively impacted by financial problems experienced by MobileMedia. In January 1997, these financial problems resulted in MobileMedia's filing for Chapter 11 protection in the U.S. Bankruptcy Court in Delaware. As a result of these problems, in November 1996 MobileMedia sought to obtain, and the Company granted, a termination of MobileMedia's commitment to distribute the IQoVOICE Organizer/Pager in exchange for MobileMedia's agreement to pay the Company a $100,000 cancellation fee, as well as to provide paging services and marketing support for the product. Lastly, MobileMedia agreed to continue to pay continuing fees to the Company based upon airtime revenue received by MobileMedia from end users of the IQoVOICE Organizer/Pager. As part of the subsequent settlement in January 1997, the Company, after MobileMedia defaulted on its payment obligations under the November 1996 agreement, waived the $100,000 cancellation fee, as well as an additional $100,000 in penalties as a result of MobileMedia's default in exchange for payment in full of MobileMedia's trade balance of $252,400. By reason of all of the foregoing, the Company is seeking to obtain an alternative service provider for the IQoVOICE Organizer/Pager, and failure to obtain such a provider may result in the Company's discontinuing further production of this product. ADDITIONAL PRODUCTS PLANNED FOR COMMERCIAL MARKETING IN 1997 IQoVOICE ORGANIZER (PC COMPATIBLE). The Company is developing a new line of the IQoVOICE Organizer product. This line of products will utilize a state-of-the-art technology for compression of voice data which enables the units to store fifteen (15) minutes of digitally compressed audio data in the same 512 KB Flash memory that previously allowed only four (4) minutes of audio data. These new models will feature, in addition to all of the features currently contained in the IQoVOICE Organizer, a proprietary personal computer interface which will allow the user to archive all of the voice memos, reminders and telephone numbers stored in the IQoVOICE Organizer. The computer interface will also permit 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 addresses for telephone directory entries. These units will also feature a backlit display. During 1997, the Company plans to introduce models within this product line with recording capacities of 15, 30 and 60 minutes, phone directories for up to 800 phone numbers for 200 names, and storage of up to 250 memos and reminders. Retail prices for these new products will range between $99 and $169. The Company also plans to develop international models of the product line capable of displaying text information in five languages. OTHER PRODUCTS RECENTLY DISCONTINUED IQoVOICE TELL-IT PHONE. The IQoVOICE Tell-It Phone ("Phone") is a voice activated telephone into which the user is able to enter as many as 40 names and 120 telephone numbers (three for each name) by voice command. To call a number, the user needs only to lift the handset and speak the person's name. The Phone also includes Caller ID technology which enables the Phone to recognize the telephone number from all incoming calls when the end-user is a subscriber to Caller ID service from their regional telephone company. As a result of the limited distribution obtained by the Company for this product in the domestic retail market, combined with the redesign cost necessitated by the obsolescence of a key component, the Company has decided to cease further production of this product, and has written off the remaining tooling and other deferred costs associates with the product as of December 31, 1996. IQoVOICE MESSAGEPAD AND VCR VOICE PROGRAMMER. The IQoVOICE Home MessagePad is a digital recording device designed to leave audio messages for others, thereby eliminating the need for handwritten notes. In addition, the Company has developed a version of this product tailored for use in office environments, however, 5 6 this model was never introduced due to less than anticipated retail interest, as well as limited availability of a critical component. The VCR VOICE Programmer is a hand-held, voice-activated, universal remote controller that allows a user to operate the functions of a VCR, including timed recordings, with simple voice commands, and to control the functions of a television and cable box. The Company decided to discontinue further production of these products at the end of 1995 as a result of consumer resistance at retail price points which would enable the Company to generate future profits. The Company had written down at December 31, 1995 and again at December 31, 1996, its remaining inventory of these products in accordance with lower of cost of market valuation method, and has substantially completed liquidation of the remaining inventory of these items as of February 28, 1997. DAISY. Daisy was a voice activated interactive diary, organizer, and game system designed for preteen and teenage girls. Combining electronics and paper, the product was designed to engage the girl in a dialogue. Once trained to recognize the girl's voice and key words spoken by her, Daisy asked the girl a series of questions about the events of her day, her thoughts, and her feelings. Responding to key words, Daisy engaged the girl in conversation and encouraged her creativity. The Company had intended to introduce Daisy in fall, 1996. The lack of funds needed to build product inventories and market the product forced the Company to alter its strategy. Efforts were made to license Daisy to major toy companies. A high degree of interest was shown in Daisy; however, the cost of the product has proven to be an obstacle to licensing. While cost reduction alternatives continue to be studied, the Company has written off the costs associated with this product as of December 31, 1996. MARKETS FOR THE COMPANY'S PRODUCTS DOMESTIC. The Company's products are designed to enable consumers and business people to control the operation of electronic products by voice. As such, the markets for the Company's products include all distribution channels where potential customers are likely to shop for such electronic products. These channels include specialty electronic retailers, catalogs, office superstores, department stores, warehouse clubs, and mass merchandisers. The Company may utilize direct response marketing to advertise and promote its products directly to consumers through various media, including magazines, newspapers, in-flight magazines and other periodicals. The Company may also utilize other forms of direct response media, including television and radio, for products whose target customer is demographically suited to mass media advertising. INTERNATIONAL. Inasmuch as the Company's VoiceLogic Technology is adaptable to virtually any language, the Company designs and manufactures its products to be marketed on a worldwide basis. The Company believes its products have significant potential in markets outside the United States and, accordingly, devotes management and other resources to the identification and development of distributors in other countries capable of marketing and distributing the Company's products. IQoVOICE ORGANIZER. The IQoVOICE Organizer, introduced by the Company in October 1993, was sold initially on a limited basis through targeted direct marketing efforts, such as in-flight magazines, newspapers, and direct mail advertising on a selected basis. During the first and second quarters of 1994, the Company significantly expanded its direct marketing efforts, as well as obtained distribution in several major catalog retailers. Beginning in the fourth quarter of 1994, the Company significantly expanded its distribution of the Organizer into retail stores in the United States, as well as launched an international version of the Organizer through its own direct marketing efforts and licensed distributors in Europe, Mexico, Korea and other countries. This expansion continued throughout 1995 and 1996, both domestically and internationally, and included introduction of new models developed to achieve targeted retail price points. The Company plans to introduce additional models of its Organizer product line in 1997, which will continue to improve the price/feature/value relationship for this product and thereby broaden the potential distribution and target market. The Company believes that both retail and international distribution will represent the majority of the Company's revenues for the IQoVOICE Organizer in the future. IQoVOICE ORGANIZER/PAGER. The Company introduced the IQoVOICE Organizer/Pager in the third quarter of 1996. As referenced earlier, the agreement with MobileMedia (MobileComm) was, with the exception of MobileMedia's requirement to provide paging service to purchasers of the IQoVOICE Organizer/Pager, terminated in January 1997. While the MobileMedia termination eliminates the immediate potential of OEM sales, the Company is continuing to market the current version of the IQoVOICE Organizer/Pager to major 6 7 retailers. Concurrently, the Company is exploring two additional opportunities: one, modification of the paging frequency that is currently used to enable expansion of the product into international markets, particularly Asia, where the incidence of pager usage is high; and two, the interest in the IQoVOICE Pager/Organizer with other major U.S. paging companies. Preliminarily, there appears to be potential interest in a IQoVOICE Organizer/Pager that would have functionality similar to the current product, but would use a newer Flex paging protocol, rather than the POCSAG protocol currently being employed. The decision to pursue both the international and domestic opportunities will depend on the commitments that can be gained from interested parties to participate in the funding of the required incremental development costs, and to OEM purchases of the product. No assurances can be given that the Company will be successful in obtaining such commitment, and failure to do so may result in the Company's discontinuing this product. MARKETS FOR THE VOICELOGIC TECHNOLOGY The Company continues its efforts to seek use of the VoiceLogic Technology by major manufacturers in product categories for which the Company believes the Technology would be advantageous. These categories include, but are not limited to, telecommunications, personal electronics, video and audio, wireless communications, and toys. The Company believes that voice recognition could provide value-added differentiation to products in these categories with a relatively low incremental manufacturing cost. These efforts are usually accomplished in two phases. The first phase involves a joint development between the Company and the manufacturer of the intended product to identify, evaluate, and test the performance of the Company's Technology in a specific application (the "Development Phase"). This phase is funded, in most instances, by the manufacturer. The second phase involves the implementation of the voice recognition features in the actual production for commercial distribution of the product after which the Company receives royalties based upon sales (the "Production Phase"). The Company currently has a single licensing agreement, described below, which is currently generating revenues. VIDEO AND AUDIO - The Company has developed a voice operated one-button remote control which is designed to be sold with original equipment VCR's, televisions, cable boxes, satellite receivers and audio equipment. The Company currently has in force a licensing agreement with Kong Wah Video Company Limited, a Hong Kong company. This project has completed its Development Phase and is in the Production Phase. The agreement requires the payment of guaranteed minimum royalty through 1999; however, no assurances can be given that this agreement will result in additional future revenues to the Company beyond the guaranteed minimum (See "Item 1. Description of Business - General/Subsequent Events"). The Company will continue to seek other licensing opportunities in this product category. Subsequent to year end, in accordance with a settlement agreement with one of the Company's former manufacturers, the Company assigned the future proceeds of the licensing agreement with Kong Wah Video to said manufacturer. (See "Item 1. Description of Business - Manufacturing/Subsequent Events.") Two other licensing agreements that the Company had entered into were terminated as of January 1997. The first was an agreement with Max Zapf Puppen-und Spielwarenfabrik GmbH & Co. ("Zapf"), a German company, for an interactive voice activated talking doll; the second was with Hansol Electronics, Inc. ("Hansol"), a South Korean company, for the right to use the Company's VoiceLogic Technology in products manufactured by Hansol. The former was terminated by Zapf due to lower than projected sales of the doll, which did not justify the continuing payment of the required minimum royalties. The latter was terminated due to a change in Hansol's business strategy. Payments required under both licensing agreements have been made in full. COMPETITION The consumer electronics industry is highly competitive. The Company believes, however, that it has a technological head start on its competition in adapting voice recognition technology for use in consumer products. The Company's 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 strives to compete effectively in the marketplace emphasizing voice-recognition uniqueness, low cost, and ease of use of its products. The Company further believes that its existing 7 8 know-how, issued patent, current patent pending applications, existing copyrights, and potential future patents and copyrights, will be significant in enabling it to compete successfully. IQoVOICE ORGANIZER. The Company believes its IQoVOICE Organizer is a unique product which competes indirectly with electronic personal organizers and paper bound personal organizers, both of which have developed markets of substantial size. The Company believes that the Organizer's unique voice data entry distinguishes it from other electronic and paper based organizer products. The Organizer also competes with lower cost digital recorders and voice managers, neither of which have the capability to retrieve data by voice command. These devices are capable of performing only a memo recording function by voice. The Company believes that the lower cost of its new product line will be effective in narrowing the price gap between the Organizer and these digital recorder products, thereby lessening their competitive impact. IQoVOICE ORGANIZER/PAGER. The Company believes its IQoVOICE Organizer/Pager offers a unique combination of features and benefits unavailable in pagers at present. The product allows the user to carry a single device capable of receiving numeric pages integrated with all of the features of the Organizer. The retail price of this product is comparable to other high end pagers, which offer added features such as alpha-numeric paging. TECHNOLOGY. The VoiceLogic Technology competes with other voice recognition technologies currently available, as well as others that are in development. Among the companies that have developed and are marketing these technologies, several are larger and have stronger financial resources, name recognition and marketing capabilities than the Company. The Company is aware of two new voice recognition technologies that are capable of operating on an eight-bit microprocessor. These technologies are being offered in the form of chips for potential licensing applications. Neither technology is believed to be as cost effective as the Company's VoiceLogic Technology. No assurance can be given that the Company will maintain its technological advantage in the future. MARKETING AND DISTRIBUTION OF THE COMPANY'S PRODUCTS During 1994, the Company adopted a strategy, which it has continued, for the marketing of its proprietary products that emphasizes three channels of distribution. One, during the initial introduction of a product, the Company utilizes, as appropriate, direct marketing via targeted print advertising or other direct response advertising media in conjunction with strategic catalog placement in order to generate consumer awareness for the product. Two, the Company establishes its own retail distribution in the United States to maximize exposure and sales of its products in the marketplace. Three, the Company develops a worldwide network of distributors, each being responsible for marketing and distribution of the Company's products in their respective countries. During 1996, the Company continued to expand on this strategy, resulting in the Company's obtaining distribution in approximately 6,000 storefronts in the United States and distributorships in approximately 15 countries worldwide by the end of 1996. The Company plans to continue to expand its distribution in 1997. Further, the Company filed an application to register as a trademark "IQoVOICE." While the application is still pending, the Company believes it will be granted for all purposes except telecommunications products and services. The Company has adopted this trademark as its brand name for most products. The Company believes that by establishing a common brand name, it will be able to build consumer confidence, loyalty and acceptance for future product introductions. Subject to availability of funds, the Company intends to increase its advertising and promotion activities related to its products and brand name. DIRECT MARKETING DISTRIBUTION. The Company contracts with third party companies for most of the operational activities related to the Company's direct marketing activities including media placement, inbound telemarketing, order fulfillment, shipping, warehousing and credit card processing. In so doing, the Company is able to significantly reduce fixed expenditures related to these activities. The Company maintains its own toll-free customer hot line which provides technical support for both direct marketing and domestic retail customers. The Company also maintains its own service and repair facility to manage repairs of its products as well as product quality control for all domestic sales. 8 9 RETAIL DISTRIBUTION. The Company has now established its own retail distribution capability. Sales are generated through a network of third party sales representative organizations, each with a specific territory within the United States. Warehousing and shipping services were provided by a third party company under contract with the Company. The Company's products are now distributed through retailers including OfficeMax, Office Depot, Staples, The Sharper Image, Circuit City, Service Merchandise, and others. Subsequent to year end, the Company terminated its relationships with the third parties associated with its direct response and retail warehousing and shipping activities, and is fulfilling those requirements through in-house operations. INTERNATIONAL DISTRIBUTION. During 1994, the Company began to establish a network of distributors for its products in countries outside the United States. To date, the Company has agreements with such distributors covering approximately 15 countries in Europe, Mexico, and the Middle East. These agreements provide for the distributors to purchase products from the Company at wholesale prices with the distributors assuming all marketing and distribution costs in their respective territories. The agreements also provide for minimum sales levels that the distributors must achieve to maintain the distribution rights for their markets. International sales in 1995 were equal to $4.9 million (21% of net sales), and in 1996, declined to $1.7 million (15% of net sales). In 1996, the Company entered into a Business Cooperation Agreement with a South Korean Company, Hansol Electronics, Inc. ("Hansol"). This agreement granted Hansol exclusive marketing, manufacturing and distribution rights, subject to Hansol achieving agreed performance criteria for certain countries in the Far East, including China, Hong Kong and India. As consideration to the Company for granting these rights, Hansol had agreed to pay the Company $1.0 million in six installments during the initial two years of the agreement. A total of approximately $600,000 was paid by Hansol in 1996. In January 1997, Hansol advised the Company that it wished to terminate the agreement as a result of a change in Hansol's business strategy. The Company and Hansol agreed to a termination on mutually satisfactory terms, whereby Hansol paid to the Company all amounts due and owing, and the Company agreed to purchase the finished goods inventory of the IQoVOICE Organizers that Hansol had produced. The Company is currently actively seeking distribution arrangements for its product in the Far East. The Company has established, through contract with a third party company, a distribution center in Holland to service distributors in Europe. Other distributors are serviced by the Company through either the Company's manufacturer or the Company's service facility in the United States. MANUFACTURING The VCR VOICE Programmer and the IQoVOICE Organizer products had been manufactured for delivery by the Company under an agreement, which had been due to expire June 30, 1996, with Flextronics (Malaysia) SDN BHD ("Flextronics"). Since the inception of this relationship, the Company has been able to import its products from Malaysia without duty as a result of Malaysia having status as a Generalized System of Preferences ("GSP") country. The Company correctly anticipated that Malaysia would lose its GSP status as of January 1997. On February 23, 1996, the Company executed a Termination Agreement with Flextronics which established the terms and conditions pursuant to which the Company is winding down its relationship with Flextronics. The terms of this agreement include: 1) the issuance to Flextronics of 1,371,966 shares of the Company's' common stock at market value, the proceeds of which were applied to the Company's trade debt to Flextronics as of December 31, 1995; 2) a payment schedule through October 1996 for the remaining balance of the related trade debt as of December 31, 1995; 3) terms and conditions related to the Company's obligation regarding component parts purchased or committed to Flextronics for manufacture of the Company's products; and 4) purchasing and payment terms for the remaining products to be manufactured and shipped to the Company. The Company filed a registration statement with regard to the shares issued to Flextronics. The Company did not make payments due on various dates pursuant to this agreement (see "Item 1. Description of Business - Manufacturing/Subsequent Events" for a discussion of the settlement reached by the Company with respect to Flextronics). 9 10 During 1996, the Company entered into agreements with two new sources of manufacturing for the Company's products. In February 1996, the Company entered into an agreement with GSS/Array Technology Inc. ("GSS"), a U.S. manufacturer with manufacturing facilities in the United States, China, and Thailand for the manufacture of the Company's products on a non-exclusive basis. This agreement has an initial one-year term and provides for the Company to receive from GSS /Array 30-day payment terms for all goods manufactured and shipped These payment terms were modified in May 1997 (see "Item 1. Description of Business - Manufacturing/Subsequent Events"). In addition, on February 23, 1996, the Company entered into a Business Cooperation Agreement with Hansol Electronics, Inc., a South Korean based company. This agreement, which was terminated in January 1997, granted to Hansol, among other rights, the right to manufacture products for the Company, subject to certain requirements, including competitive price and terms. This agreement was terminated in January 1997. Currently, GSS/Array is the Company's sole source of manufacturing. The Company had not been current in its payments to GSS/Array. An agreement was reached in May 1997 resolving the outstanding balance with GSS, as well as revised payment terms for future orders (See "Item 1. Description of Business - Manufacturing/Subsequent Events"). Each of the Company's products typically utilize a sole source for certain critical components of such products including the microprocessor and memory chips. The Company has no agreement with such suppliers of these chips and interruption of such source of supply could adversely affect the Company until an alternative supplier could be found. Alternative sources are available, and the Company believes it could make alternative arrangements, although potentially at some increase in component cost. SUBSEQUENT EVENT. In May 1997, the Company entered into agreements with Flextronics (Malaysia) SDN. BHD. ("Flextronics") and GSS/Array Technology, Inc. ("GSS"), the manufacturers of the Company's products, relating to the resolution of outstanding liabilities and commitments. The Company entered into a Settlement Agreement with Flextronics under which the Company made a cash payment and assigned the proceeds due pursuant to a licensing agreement with Kong Wah Video for a voice operated television remote control device to Flextronics as full and final settlement for all outstanding liabilities and commitments other than approximately $260,000 in inventory which has already been manufactured by Flextronics. The Company has committed to purchase such inventory prior to June 30, 1997. The Company also entered into a Discounted Payment and Adequate Assurance of Performance Agreement with GSS under which the Company made a cash payment and issued 500,000 shares of non-voting, non-cumulative, convertible preferred stock, with a $0.06 per share mandatory dividend payable annually in cash or common stock at the option of the Company on the anniversary date of issuance, as full and final settlement of outstanding liabilities. The preferred stock will have a $1.00 per share liquidation preference and each share will be convertible into four (4) shares of the Company's common stock. Further, at the option of GSS, for a one year period the Company will agree to either appoint a representative of GSS to the Board of Directors of the Company or to allow a representative to attend Board of Directors meetings as a non-voting observer. Also under the Discounted Payment and Adequate Assurance of Performance Agreement, GSS has agreed to continue to manufacture pursuant to the terms of the original Manufacturing Agreement for a period of not less than six months, and the Company has agreed to provide GSS with a standby letter of credit to secure the Company's payments. Lastly, on or about May 22, 1997, the Company entered into agreements with many of its other trade creditors in which the trade creditors agreed to accept discounted lump sum payments in full consideration of current obligations of the Company. PATENTS AND COPYRIGHTS Prior to February 1996, the Company was the licensee under three license agreements with respect to the Technology, which together aggregated the foundation of the Company's exclusive rights to the Technology. One of the license agreements was with the original inventor ("Inventor") of the Technology, who is also a director of the Company. The other two license agreements were with a Company ("Licensor") to whom the Inventor had assigned certain rights with respect to the Technology. Under these agreements, the Company was obligated to pay royalties of varying amounts to the Inventor and Licensor for units of products sold by the Company which contained the Technology, as well as royalties applicable to the Company's licensing activities of the Technology. These agreements also had annual minimum royalties payable by the Company to retain exclusivity which varied depending upon the agreement and the product category. 10 11 On February 20, 1996, the Company entered into a new agreement with the Inventor which effectively replaced the three prior licensing agreements, the result of which was that the Company acquired all right, title, interest, and any future improvements in and to the Technology, inclusive of an assignment of all intellectual property rights associated with the Technology. In consideration of this transfer, the Company agreed to pay $100,000 in two installments to the Inventor, $50,000 of which was paid at the execution of the agreement and $50,000 of which was paid in July 1996. In addition, the Company granted an option to purchase 33,333 shares of the Company's common stock to the Inventor of the Technology at an exercise price per share which was cumulatively $50,000 lower than the current market value as a means of paying the balance of the purchase price for the rights. In addition, the agreement requires payments of royalties by the Company to the Inventor equal to: 1) $0.50 per unit for each unit of any product sold by the Company which contains the Technology; 2) 5% of net proceeds from the sales of computer chips which contain the Technology; and 3) 15% of licensing revenues (excluding licensing revenues for computer chips) received by the Company as a result of licensing agreements relating to the Technology. The foregoing royalties are subject to a minimum of $60,000 per year payable quarterly. Subsequent to year end, the agreement with Mr. Hitchcock, the Inventor, was assigned to Franklin Electronic Publishers, Inc. under the terms of the Technology Transfer Agreement (see "Item 1. Description of Business - General/Subsequent Events"). The Company had also entered into an agreement with the initial manufacturer of the IQoVOICE Tell-It Phone for certain technologies applicable to the Caller ID functions of the product. This agreement requires that the Company pay $50,000 if the Company commences manufacturing at an alternative source utilizing the licensed Caller ID technology. The Company will also be required to pay an additional $0.50 per unit for each unit sold up to a maximum of 100,000 units. The existence of patents and copyrights may be important to the Company's future operations. The Company intends to pursue and protect its copyrights and any patents which may be granted, but no assurances can be given that any patents will be issued or that the extent of coverage will be adequate. The Company has been granted two United States patents for its products, one related to the functionality of the Company's Voice Organizer, and the other a design patent for the VCRoVOICE Programmer. The Company is currently prosecuting one patent and several trademark applications with the United States Patent and Trademark Office. The Company does not know whether its application will result in the issuance of a patent, or, for any patents issued, whether they will provide significant proprietary protection or will be circumvented or invalidated. Additionally, since issuance of a patent does not guarantee the right to practice the claimed invention, there can be no assurance that others will not obtain patents that the Company would need to license or design around in order to practice its patented technologies, or that licenses that might be required to practice these technologies due to patents of others would be available on reasonable terms. Further, there can be no assurance that any unpatented manufacture, use, or sale of the Company's Technology, processes, or products will not infringe on patents or proprietary rights of others. The Company also relies on trade secret laws for the protection of its intellectual property, and there can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its rights to unpatented trade secrets. From time to time the Company receives notices from other companies with respect to patents. During calendar 1994, a United States Patent was brought to the Company's attention relative to its IQoVOICE Organizer product, and a license was offered thereunder. The Company is continuing its investigation of this patent (which is currently the subject of a reissue proceeding in the United States Patent and Trademark Office), and evaluating whether a patent license is needed or otherwise desirable; however, no assurance can be given as to the outcome of the foregoing or the impact thereof on the business of the Company. The Company has received other such notices during the past year and believes such notices are irrelevant to the Company's products or, to the extent relevant, the noticed patents are not infringed and/or valid. However, no assurance can be given that the Company's use or sale of its products will not result in challenges from other third parties claiming patents, copyrights or other rights to such products or parts thereof in the future. The Company may find it advantageous, or may be required, to purchase additional licenses in the future. Given the fact that the Company has assigned its rights in the Technology to Franklin (see "Item 1. Description of Events - General/Subsequent Events"), the Company may be unable to protect its proprietary rights 11 12 in the VoiceLogic Technology. The Company will continue to seek to obtain protection of its other proprietary rights in its products or processes, whether through patents, trade secrets or otherwise, however, no assurance can be given that the Company will be able to obtain such protection and therefore competitors may be able to market competing products. As stated, under the Technology Transfer Agreement with Franklin Electronic Publishers, Inc., the Company transferred to Franklin certain rights evidenced by patent and copyright, and assigned certain rights to the VoiceLogic Technology in exchange for a non-refundable royalty advance, with Franklin granting back to the Company a non-exclusive license to the Technology to utilize in Voice Organizer products with recording times in excess of four minutes in duration, as well as to use and/or sublicense the Technology in any other product category. With respect to the annual minimum royalty due the Inventor by Franklin, the Company remains obligated to Franklin for the $60,000 per year less royalties due and payable to the Inventor by Franklin (see "Item 1. Description of Business - General/Subsequent Events"). EMPLOYEES As of February 28, 1997, the Company had 24 employees, of which 5 were research and development, 8 were general and administrative, 4 were warehousing, 4 were customer service, and 3 were marketing. None of the Company's employees are represented by a labor union, and the Company is not aware of any current efforts to unionize the employees. Management of the Company considers the relationship between the Company and its employees to be good. Subsequent to April 30, 1997, the Company down-sized to 19 employees, of which 4 were research and development, 6 were general and administrative, 3 were warehousing, 3 were customer service, and 3 were marketing. RESEARCH AND DEVELOPMENT COSTS For the years ended December 31, 1995 and 1996, the Company spent $1,264,000 and $1,062,000, respectively, on research and development. The Company will continue to devote substantial resources to research and development activities to the extent sufficient financial resources are available. ITEM 2. PROPERTY Through March 31, 1997, the Company was renting facilities for its main offices and service operations from unrelated parties, consisting of approximately 14,000 square feet of space in the Los Angeles, California, metropolitan area for an aggregate annual rental of approximately $252,000. A lease for new facilities has been signed which expires in March 31, 2000; however, the lease contains provisions for cancellation by the Company, at no penalty to the Company, between October 31, 1997 and March 31, 1998. The lease for the service operations is renewable on a month-to-month basis. ITEM 3. LEGAL PROCEEDINGS No legal proceedings are pending against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote by the Company's security holders during the fourth quarter of the year ended December 31, 1996. 12 13 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS The Company's Common Stock, "VPTI," and Warrants, "VPTIW," have been quoted on NASDAQ since the Company's initial public offering on October 20, 1992. The Company's Stock and Warrants were delisted from NASDAQ on April 9, 1997, however, the Company's Common Stock and Warrants continue to trade on the OTC Bulletin Board. The following table sets forth, for the periods indicated, the high and low closing bid prices for the Company's Common Stock and Warrants, as reported on NASDAQ, 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 ----------------------- CALENDAR 1995 High Low ---- --- First Quarter Common Stock 3 3/8 1 13/16 Warrants 3/4 3/8 Second Quarter Common Stock 3 7/8 2 1/4 Warrants 1 7/16 Third Quarter Common Stock 4 3 Warrants 7/8 7/16 Fourth Quarter Common Stock 3 7/16 1 1/2 Warrants 5/8 1/4 CALENDAR 1996 First Quarter Common Stock 3 1/16 1 13/16 Warrants 1/2 5/16 Second Quarter Common Stock 1 5/8 1 1/8 Warrants 1/2 1/4 Third Quarter Common Stock 1 1/2 1 Warrants 5/16 1/8 Fourth Quarter Common Stock 13/16 5/32 Warrants 3/32 1/32 CALENDAR 1997 First Quarter Common Stock 17/32 1/8 Warrants 1/32 1/32
13 14 The Common Stock ("VPR"), and Warrants ("VPRW") were also traded on the Boston Stock Exchange through April 26, 1995, at which time the Company elected to discontinue such listing. At April 30, 1997, there were 13,949,072 shares of Common Stock outstanding, which were held by approximately 7,000 shareholders of record, including approximately 100 broker/dealers in street name on behalf of shareholders. As of such date, there were warrants outstanding to purchase 1,033,517 shares of the Company's common stock at any time through October 19, 1997, at $6.375 per share, subject to adjustment in certain circumstances. Certain of these warrants were issued simultaneously with the Company's initial public offering in October 1992 and are not publicly traded, while others of these warrants were issued privately before the 1992 initial public offering but have been registered with the Securities and Exchange Commission for public sale by the owners. These warrants are redeemable by the Company at a price of $0.05 per warrant upon 30 days prior written notice in the event the average closing price of the common stock exceeds $8.50 for 30 consecutive trading days. There is also outstanding the Drake Capital Securities, Inc. Unit Purchase Option for the purchase of up to 130,000 units at an exercise price of $5.525 per unit (each unit consists of one share of the Company's common stock and a warrant to purchase a half share of such common stock at the same price as the warrants which were issued in the Company's initial public offering in October 1992). This was issued to Drake in October 1992 in connection with Drake's underwriting of the Company's initial public offering at that time. The option is exercisable through October 1997. 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. Subsequent to year end, the following stock transactions occurred: 1) Under the Purchase and Loan Agreement with Franklin Electronic Publishers, Inc., the Company sold for cash 2,000,000 shares of the Company's common stock, par value $.001 per share; and 2) Under the Discounted Payment and Adequate Assurance of Performance Agreement with GSS/Array, the Company issued 500,000 shares of non-voting, non-cumulative convertible preferred stock, with a $0.06 per share mandatory dividend payable annually in cash or common stock at the option of the Company on the anniversary date of the issuance. The preferred stock will have a $1.00 per share liquidation preference and each share will be convertible into four (4) shares of the Company's Common Stock. 14 15 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company was considered to be a development stage company from its inception in January 1990 through June 30, 1992, at which time, coinciding with the sale of its first product, it became an operating company. In the following years, the Company expanded its product lines and distribution channels, and entered into joint development and licensing agreements with certain manufacturing companies relating to its proprietary VoiceLogic technology. In 1994 the Company recognized its first profitable year as a result of the successful introduction of its products into distribution through domestic retail channels and international distributors, in addition to existing distribution through domestic catalog sales, targeted direct response print advertising, and various other income items. In 1995, however, while the Company continued to increase its base of retail and international distribution channels, it recognized significant losses in the fourth quarter resulting from the unsuccessful launch of a new product line and inventory writedowns and other reserves associated therewith. Adding to the Company's losses in the fourth quarter of 1995 were charges related to the establishment of reserves for price reduction programs. These programs were established to accelerate unit sales through the first half of 1996 of the Company's primary product line, the IQoVOICE Organizer. These price reduction programs were established in an attempt to reduce the high inventory levels existing at both the Company and its retail customers at December 31, 1995, and thus facilitate the planned introduction of new, lower cost products in the second half of 1996. In 1996 the Company's performance continued to reflect the effects noted in 1995. The Company's sales were adversely affected by the 1995 year end high inventory levels at retail stores, and lower than anticipated retail sell-through despite the initial price reductions. The Company found it necessary to further reduce pricing on its older, higher cost products and to increase advertising expenditures in order to reduce retailer inventories. The Company also accepted returns from customers of unsold older products in exchange for purchase commitments for new products which were fulfilled in the fourth quarter of 1996. These actions resulted in the Company maintaining distribution of its product line at its major customers; however, these actions also resulted in reduced net sales, lower gross profit margins, and higher expenses as a percentage of sales. The Company has liquidated significant quantities of the older inventory items at book value, which further depressed gross margins in 1996, and anticipates substantially completing liquidation of the older products in the first half of 1997. The Company's efforts to stimulate sales and gross profit in the second half of 1996 with its new, lower cost products were hindered by delays in the initial production of these models, which delayed sales originally planned for the middle of the third quarter until October 1996. Lastly, the introduction of the Company's new IQoVOICE Organizer/Pager, developed pursuant to a Purchase and Joint Marketing Agreement with MobileComm (subsequently acquired by MobileMedia Corporation), was negatively impacted due to financial problems experienced by MobileMedia, which resulted in MobileMedia's seeking termination of its commitment to distribute the IQoVOICE Organizer/Pager in exchange for continued assurance to provide paging services to end-users of the product, the payment of continuing royalties to the Company based upon service fees collected by MobileMedia from IQoVOICE Organizer/Pager customers, and the payment of MobileMedia's outstanding balance for products purchased from the Company of $252,400. In 1996 the Company began using a new memory technology in the manufacture of its existing products and its new product lines. The new technology is more responsive, more reliable, and significantly lower in cost than the previous memory storage technology. The Company incorporated this new technology into its current IQoVOICE Organizers with enhanced features, along with a new design and appearance at a lower cost. Further in 1996, the Company launched two new models of the IQoVOICE Organizer. One new model is a lower priced and more compact product, the IQoVOICE Pocket Organizer (see "Item 1. Description of Business - General/Subsequent Events"). The other new model is the IQoVOICE Organizer/Pager, which combines the features of the IQoVOICE Organizer with the functionality of a numeric pager. The Company reported a net loss of $4,834,000 for the year ended December 31, 1996, resulting in a $0.35 net loss per outstanding common share. The 1996 amounts included $570,000 in charges related to decisions to discontinue certain products ($420,000), and writedown inventory ($150,000) in accordance with lower of cost or market methodology. The Company reported a net loss of $2,819,000 for the year ended December 31, 1995, resulting in a $0.22 net loss per outstanding common share. The 1995 amounts included 15 16 $2,816,000 in charges related to price protection programs for the Company's retail accounts, decisions to discontinue certain products, and reserves established for obsolete components resulting from the Company's conversion of ongoing products to lower cost memory components. Sales for the year ended December 31, 1996 were $10,813,000 while sales for the year ended December 31, 1995 were $23,444,000. After reduction of price protection costs of $1,100,000 charged against sales, net sales in 1995 were $22,344,000. The decrease in sales, as noted above, primarily related to the high levels of inventory at retail stores at December 31, 1995, which limited trade reorders during the first nine months of 1996, the decrease in selling prices of older models by the Company, and the start-up manufacturing delays resulted in late introduction of the new lower cost products to the market. The 1995 price protection costs relate to a program that the Company instituted to reduce the retail price of two of its product lines. Accordingly, established retail accounts were issued credits for on-hand inventory equal to the difference between the wholesale price at which they had purchased the products and their new wholesale price which is based on the reduced retail price. Total costs and expenses for the years ended December 31, 1996 and 1995 were $15,479,000 and $25,126,000, respectively. The decrease in expenses in 1996 as compared to 1995 is the result of decreased costs associated with the Company's decreased sales volume, efforts made by the Company to significantly reduce its fixed costs, as well as costs associated with the discontinuation of certain products in 1995 in excess of similar costs required in 1996. These decreases in costs were partially offset by additional advertising expenditures incurred by the Company in order to stimulate sales of its older products. Cost of goods sold decreased to $7,620,000 in 1996 from $13,504,000 in 1995 due to the Company's decreased sales. As a percentage of sales, costs of goods sold increased to 69% from 60% primarily due to the decreased sales prices of older products, the Company selling off certain older products at book value, and the delays in production of the Company's newer product lines which carry a lower cost as a percentage of sales. Included in cost of goods sold in 1996 is $150,000 in inventory writedown in accordance with lower of cost or market methodology. In 1996 the Company charged $420,000 to operations relating to discontinued model costs. The Company elected to discontinue future production of its IQoVOICE Tell-It Phone product line as well as write off costs relating to its Diary/Organizer product, previously capitalized. Due to the high marketing and start-up manufacturing costs associated with the introduction of the Diary/Organizer, the Company, due to the limitation of cash resources, was unable to introduce this product in 1996 and does not believe that sufficient cash resources will be available in the near future for such introduction. As a result, at December 31, 1996, the Company wrote off $420,000, which was the book value of product development costs related to the two products. In 1995 the Company charged $1,716,000 to operations relating to discontinued model costs. The Company had elected to discontinue future production of two of its product lines. In addition, the Company's plan to use a memory storage technology in the IQoVOICE Organizer products, implemented in 1996, rendered certain component parts committed to by the Company obsolete. As a result, the Company established a reserve of $729,000 to include the difference between the cost and the net realizable value of components purchased, or committed to be purchased, by the Company for inclusion in the discontinued products. Further, the Company wrote down the inventory value of the related finished goods by $587,000 in accordance with the lower of cost or market methodology. Finally the Company wrote off $400,000, which was the book value of tooling and product development costs related to the discontinued products. Marketing expenses decreased to $2,803,000 in 1996 from $4,183,000 in 1995. The decrease is associated with the Company's lower volume of sales and the related lower distribution costs, as well as lower fixed costs, offset by advertising expenditures incurred by the Company in order to stimulate sales of its older models. Decreased media expense of $1,030,000 relating to the Company's de-emphasis of direct response print advertising to generate sales, plus decreases in international sales expenses of $400,000, commissions of $380,000, and salaries of $100,000, were offset by an increase in retail advertising allowances of $610,000. As a proportion of sales, marketing expenses increased to 26% in 1996 from 18% in 1995. General and administrative expenses decreased to $2,568,000 in 1996 from $3,295,000 in 1995. The decrease resulted primarily from decreases in fixed costs such as salaries of $230,000, consulting fees of $175,0000, and public costs of $80,000. Further, in 1995 a bad debt charge of $160,000 was incurred by the 16 17 Company relating to an international sale of $1,200,000 which did not recur in 1996. As a proportion of sales, general and administrative expenses increased to 24% in 1996 as compared to 14% in 1995. Research and development expenses decreased in 1996 to $1,062,000 from $1,264,000 in 1995. The decrease is primarily related to decreased salaries of $210,000. The Company is continuing development of new products. Warehouse expenses were $1,006,000 in 1996, and $1,163,000 in 1995. The decrease is directly related to the decreased sales and related shipping costs, as well as decreases in fixed costs, offset by significant costs associated with the processing of returned goods. While returned goods, including the retail returns accepted in exchange for future purchase commitments, contributed to a reduction in net sales, expenses to both process such returns and to repackage the returned goods for sale were incurred. As such, decreases to freight expenses of $160,000, salaries of $85,000, travel of $50,000, and third party fulfillment costs of $30,000 were offset by increases in warranty/parts expenses of $110,000 and temporary labor costs of $90,000. As a percentage of sales, warehouse expenses increased to 9% in 1996 from 5% in 1995. Interest expense for the year ended 1996 was $228,000 as compared to $129,000 in 1995, and was related to higher interest expense associated with the Company's current accounts receivable transfer and purchase agreement which replaced the Company's prior loan payable. FUTURE PLANS The VoiceLogic technology is now in use in a variety of products manufactured for the Company under contract with third parties. The IQoVOICE Organizer product lines, having initially been marketed directly to the consumer through targeted print advertising efforts, such as magazines, newspapers, and in-flight magazines, are now distributed both nationally and internationally, through catalog and retail channels. The Company is seeking to expand its domestic and international sales channels for these product lines as well as its new product lines. In 1996 the Company began using a new memory technology in the manufacture of its existing products and its new product lines. The new technology is more responsive, more reliable, and significantly lower in cost than the previous memory storage technology. Using this new technology, the Company introduced its IQoVOICE Organizers with enhanced features, a new design and appearance, and a lower cost. In the third quarter of 1997, the Company intends to launch a new line of the IQoVOICE Organizer. These new models will feature a PC interface compatible with Windows 95(TM) allowing the user to archive data as well as upload and download data to modify and/or add records and other information. These models are being designed to feature extended recording capabilities(15, 30 and 60 minutes in length) and a backlit display. The Company is continuing to seek distribution, licensing, development, and other arrangements for the manufacture, use, and sale of the VoiceLogic technology in consumer, business, and electronic products in the United States and worldwide. The Company will continue to explore development opportunities which may include both products that are funded completely by the Company to the extent financial resources are available, as well as those that are developed through joint development agreements with major electronics and/or equipment manufacturing companies where the funding is partially or completely provided by these other companies. It is the intent of the Company to continue to dedicate resources when available to the improvement of the VoiceLogic technology as well as to investigate all new developments in voice technologies and maintain its competitive position in the market for voice activated consumer products. LIQUIDITY AND CAPITAL RESOURCES The Company has incurred losses from operations for the past two years, and had negative working capital of approximately $1,087,000 at December 31, 1996, down from a positive working capital of $1,486,000 at December 31, 1995. The Company has also been slow and is delinquent in paying certain of its accounts payable inclusive of the Company's primary contract manufacturers. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any 17 18 adjustments that might result from the outcome of these uncertainties. The Company's independent certified public accountants have included an explanatory paragraph in their report with respect to this matter. In August 1996, the Company entered into a $3,000,000 accounts receivable transfer and purchase agreement with a financial institution which was used to pay off and replace the Company's $4,000,000 working capital line of credit agreement. Under the terms of the new agreement, the Company may sell certain accounts receivable to the financial institution thus enabling the Company to increase its cash availability. Net payments on the working capital line of credit in 1996 were $3,265,000. At December 31, 1996, the Company had $3,367,772 in accounts receivable which had been sold to the financial institution, with the Company receiving funds to establish a $300,000 reserve and cash equal to $1,889,052 which, in the aggregate represents the initial 65% advance under the agreement. Included in the 1996 statement of cash flows as an adjustment to reconcile net loss to net cash used in operating activities are charges of $420,000 relating to discontinued model costs. The Company elected to discontinue future production of its IQoVOICE Tell-It Phone product line as well as write off costs relating to its Diary/Organizer product, previously capitalized. Due to cash flow limitations start-up marketing and manufacturing cost issues, the Company was unable to introduce the Diary/Organizer in 1996, and the Company does not believe that it will realize a benefit in the near future as a result of having incurred these costs. Further included as an adjustment to reconcile net loss in 1996 is $150,000 relating to writedown of inventory in accordance with lower of cost or market methodology. The decrease in accounts receivable of $3,261,000 reflects the Company's overall decreased sales levels in 1996, including fourth quarter 1996 sales, of which $3,368,000 were sold to a financial institution, and initial payments of $1,889,000 were received. The decrease in inventory of $981,000 is primarily attributable to the Company's efforts to reduce inventory levels from December 31, 1995 through the means previously noted. The increase in deferred costs of $495,000 is primarily attributable to lower costs associated with the extensions of the Organizer product lines, including the IQoVOICE Pocket Organizer and the IQoVOICE Organizer/Pager. In 1997, management plans to incur $250,000 in deferred costs for the start-up of new products. The net increase in accounts payable and accrued expenses of $1,647,000 primarily relates to increased payables to the Company's manufacturer, primarily due to cash flow shortages incurred by the Company. Unused net operating losses of approximately $22,000,000 are available as of December 31, 1996 to offset future years' federal taxable income, and expire through 2011. Unused California net operating losses of approximately $11,200,000 are available as of December 31, 1996 to offset future years' California taxable income and expire through 2001. Under federal tax law IRC Section 382, certain significant changes in ownership of the Company may restrict future utilization of these carryforwards. In the event the loss carryforwards are fully utilizable, the Company has a deferred tax asset of approximately $8,680,000 as of December 31, 1996. In addition, the Company has research and development tax credits of approximately $237,000 and $111,500 for Federal and California tax purposes respectively. These credits will begin to expire in 2007. The Company has a valuation allowance equal to, and which offsets, the net deferred tax asset as the Company cannot conclude that it is more likely than not the net deferred tax asset will be realized. Capital expenditures for the year ended December 31, 1996 amounted to $260,000. The primary components of these expenditures were IQoVOICE Pocket Organizer and IQoVOICE Organizer/Pager tooling purchases. In 1997, management plans to incur approximately $75,000 for capital expenditures, primarily for tooling purchases relating to new products. The Company's sales are subject to seasonal variations. Customer orders and sales are greatest in the third and fourth quarters of the Company's fiscal year in anticipation of and during the holiday months. Accordingly, revenues and operating income tend to be relatively higher in the third and fourth fiscal quarters. This seasonality typically results in reduced earnings for the Company's first and second fiscal quarters because a significant portion of operating expenses are fixed throughout the year. 18 19 Inflation has not had a significant impact on the Company's costs and prices during the past two years. In February 1997, the Company entered into a Letter of Intent to merge with Franklin Electronic Publishers, Inc., and under that letter of intent, received a loan of $500,000 to fund operational cash flow shortages. The Letter of Intent was subsequently terminated, however the loan remained outstanding. Subsequent to year end, in May 1997, the Company consummated a transaction involving two agreements with Franklin Electronic Publishers, Inc. ("Franklin"), a Pennsylvania corporation. 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 Organizer Models 5150 and 5160 (IQoVOICE Pocket Organizers); 2) The Company sold to Franklin for $150,000 in cash 2,000,000 shares of the Company's common stock, par value $.001 per share, representing the approximate market price of the Company's common stock at the time of the transaction; and 3) Franklin loaned the Company cash equal to $1,200,000, in addition to $500,000 previously loaned to the Company, and restructured the payment terms of a new $1,700,000 note over a four year period. The second agreement was a Technology Transfer Agreement in which the two companies entered into the following transactions: 1) The Company granted to Franklin a non-exclusive perpetual license for technology rights evidenced by the Company's patent related to operation of Voice Organizer products as well as other technology and software developed by the Company related to or used in the Model 5150 and 5160 for an advance royalty of $700,000 against an agreed upon per unit royalty; and 2) the Company assigned the rights to the VoiceLogic Technology to Franklin, and Franklin granted back to the Company a non-exclusive perpetual license of the VoiceLogic Technology, including the right to sublicense, for the development, manufacture, sale and distribution of Voice Organizer products with recording times in excess of four minutes and any other electronic products that are not Voice Organizers, subject to the Company remaining obligated to pay royalties to Franklin at the same rates for which the Company was obligated to the inventor of the VoiceLogic Technology prior to its assignment to Franklin. Also in May 1997, the Company entered into agreements with Flextronics (Malaysia) SDN. BHD. ("Flextronics") and GSS/Array Technology, Inc. ("GSS"), the manufacturers of the Company's products, relating to the resolution of outstanding liabilities and commitments. The Company entered into a Settlement Agreement with Flextronics under which the Company made a cash payment and assigned the proceeds due pursuant to a licensing agreement with Kong Wah Video for a voice operated television remote control device to Flextronics as full and final settlement for all outstanding liabilities and commitments other than approximately $260,000 in inventory which has already been manufactured by Flextronics. The Company has committed to purchase such inventory prior to June 30, 1997. The Company also entered into a Discounted Payment and Adequate Assurance of Performance Agreement with GSS under which the Company made a cash payment and issued 500,000 shares of non-voting, non-cumulative, convertible preferred stock, with a $0.06 per share mandatory dividend payable annually in cash or common stock at the option of the Company on the anniversary date of issuance, as full and final settlement of outstanding liabilities. The preferred stock will have a $1.00 per share liquidation preference and each share will be convertible into four (4) shares of the Company's common stock. Further, at the option of GSS, for a one year period the Company will agree to either appoint a representative of GSS to the Board of Directors of the Company or to allow a representative to attend Board of Directors meetings as a non-voting observer. Also under the Discounted Payment and Adequate Assurance of Performance Agreement, GSS has agreed to continue to manufacture pursuant to the terms of the original Manufacturing Agreement for a period of not less than six months, and the Company has agreed to provide GSS with a standby letter of credit to secure the Company's payments. Lastly, on or about May 22, 1997, the Company entered into agreements with many of its other trade creditors in which the trade creditors agreed to accept discounted lump sum payments in full consideration of current obligations of the Company. As a result of the foregoing settlements with Flextronics, GSS and other trade creditors, the Company settled approximately $4.3 million of obligations for cash payments aggregating $1.9 million plus the issuance of the preferred stock and other commitments described above. The effect of the transactions with Franklin, Flextronics, and GSS have improved the Company's working capital position and its Shareholders' Equity. However, the Company anticipates continued losses from operations through the first nine months of 1997, and believes that such losses will continue unless the Company is successful in its efforts to increase sales from its current distribution channels and diversify its product line. As a result, management continues to seek a strategic relationship including merger opportunities, product 19 20 development joint ventures, and distribution agreements in order to grow and strengthen the Company's financial base. The Company also continues to seek additional equity funding of approximately $1,500,000 in order to satisfy cash requirements for the remainder of 1997, inclusive of planned product development activities and to further strengthen its working capital position. At present, no definitive agreements exist, and failure to either consummate a merger or other strategic relationship agreement or obtain additional funding could result in the Company's having insufficient cash resources to meet its obligations in 1997. Except for the historical information contained herein, the matters discussed herein are forward looking statements that involve risks to and uncertainties in the Company's business, including, among other things, the availability of adequate working capital, changes in technology, the impact of competitive products, the Company's dependence on third party component supplies and manufacturers, and other risks and uncertainties that may be detailed from time to time in this and other of the Company's SEC reports. ITEM 7. INDEX TO FINANCIAL STATEMENTS The response to this item is submitted in a separate section of this report, see page 30. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 20 21 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY As of December 31, 1996, the directors and executive officers of the Company were as follows:
Positions and Offices Director Name* Age Held with Company Since - ----- --- ----------------- ----- Edward M. Krakauer*** 64 President, CEO, Director, Chairman of the Board 1992 Mitchell B. Rubin*** 41 Vice President, CFO, Director 1994 Myron H. Hitchcock 56 Director 1990 Ernest W. Townsend ** 51 Director 1994 George H. Fischer 49 Vice President n/a Kenneth I. DeWitt 61 Vice President n/a Larry R. Kloman 50 Vice President n/a
* Table does not include Dr. Jack Steele, who became a director in 1994, and resigned as a director in October 1996 in order to devote more time to personal business. ** Mr. Townsend resigned as a director effective March 24, 1997. *** See "Item 9. Directors and Executive Officers of the Company - Subsequent Events." Edward M. Krakauer became a director of the Company upon joining it in November 1991, was appointed chairman of the board in July 1994, and has been the Company's president and chief executive officer since August 1993. From November 1991 to August 1993, Mr. Krakauer served as the Company's chief operating officer. From 1985 to November 1991, Mr. Krakauer was a managing director of The Oxford Group, a management consulting firm. Mr. Krakauer's areas of concentration with The Oxford Group were management, marketing, and new product development. From 1985 to 1991, Mr. Krakauer was actively involved with, and was founder, chairman of the board, and chief executive officer, of Rabbit Systems, Inc., a developer, marketer, and manufacturer of innovative consumer electronic products. From 1980 to 1985, Mr. Krakauer founded and served as president and chief executive officer of General Consumer Electronics ("GCE"), a marketer of video games, which was acquired by the Milton Bradley Company in 1982. Before starting GCE, from 1975 to 1980, Mr. Krakauer served as president and chief executive officer of Mattel Electronics, where he was responsible for founding, developing, and managing Mattel's consumer electronics business. Earlier, he was group vice president of Hunt Wesson Foods with responsibility for all marketing, sales, and new product development. Mr. Krakauer holds a Bachelors Degree in marketing and economics from New York University, 1953. In addition, he has been a lecturer in marketing at Johns Hopkins University. (See "Item 9. Directors and Executive Officers of the Company - Subsequent Event.") Mitchell B. Rubin joined the Company as vice president and general manager in January 1994, and was elected a director in July 1994. In December 1994, Mr. Rubin assumed the newly created position of vice president, finance and operations, which includes the responsibilities of chief financial officer; and in January 1995 Mr. Rubin was also appointed secretary of the Company. Previously, from July 1991 through 1993, Mr. Rubin held various positions (including executive vice president and chief operating officer from April 1992 through 1993) with Regal Group, Inc., a television direct-response company with which the Company did business. In late 1994, when Mr. Rubin was no longer associated with Regal, Regal filed a petition for protection under Chapter 11 of the U.S. Bankruptcy Code. From 1990 to 1991, Mr. Rubin was senior vice president and chief financial officer of Quantum Marketing International, where he was responsible for operations, systems, and finance. From 1984 to 1990, Mr. Rubin was treasurer and chief financial officer at Chase Financial Management Corporation, a holding company, where he had responsibility for negotiation of all business and real estate acquisitions and sales, finance 21 22 and operations. Prior to 1984, Mr. Rubin was a partner in Margolis & Company, Certified Public Accountants, in Pennsylvania. Mr. Rubin holds a B.S. degree in Business Administration/Accounting from Drexel University, 1977, and became licensed as a certified public accountant in the State of Pennsylvania in 1978. (See "Item 9. Directors and Executive Officers of the Company - Subsequent Event.") Myron H. Hitchcock became a director of the Company in December 1990. He has been associated with the Company since July of 1990. He is vice president engineering, chief financial officer, treasurer, and a principal shareholder of Voice Control Products Inc., which develops and licenses speech recognition technology principally to toy manufacturers and previously to the Company. During the previous six years, he was also president and the owner of ESSO Development Inc., which had developed speech recognition related microprocessor-based products from design to implementation. In the past, Mr. Hitchcock has licensed, and more recently he sold, to the Company certain of the VoiceLogic technology utilized by the Company. Prior to ESSO, he was employed by various divisions of Figgie International in the area of voice and speech product research and development. Mr. Hitchcock holds a B.S. degree in Mathematics with a minor in Electrical Engineering from the University of Massachusetts, and has engaged in graduate studies in computer science, engineering management and linguistics. Ernest W. Townsend became a director of the Company in July 1994. From 1993 to 1995 he served as president of Dole Food Company, North America. He was also an executive vice president and member of the Office of the Chairman of Dole Food Company, Inc. He was responsible for all Dole Food Company operations and sales and marketing activities in North America. Mr. Townsend is a twenty year veteran in the food industry. From 1992 to 1993, he served as president of Dole Fresh Fruit and Vegetable Company. During 1989 to 1992, he was president and CEO of All American Gourmet, a subsidiary of Kraft/General Foods, a subsidiary of Philip Morris Companies. During 1987 to 1989, Mr. Townsend was president of Kraft/General Foods Frozen Food Group. Mr. Townsend holds a B.A. degree in Economics from California State University, Sacramento. He has attended Harvard Business School's Program for Management Development. In March 1997, Mr. Townsend resigned as a director due to personal commitments that would have limited his future availability to the Company. George H. Fischer became vice president, engineering of the Company in November 1993. He originally joined the Company in 1991 as director of engineering and manufacturing. From 1987 to 1991 he was vice president of operations for Speech Systems, Inc., a developer of large-vocabulary speaker-independent speech recognition equipment. From 1984 to 1987 he was director of systems engineering for Perceptronics, Inc., a manufacturer of simulators and other products. Mr. Fischer holds a B.S. degree in Electrical Engineering from California State Polytechnic University, Pomona, 1974. Kenneth I. DeWitt joined the Company as vice president of manufacturing in July 1995. In this capacity he assumed responsibility for all of the manufacturing activities and quality assurance of the Company's products. Prior to joining the Company, Mr. DeWitt was vice president of engineering for Universal Security Instruments, a consumer electronics company which designs and manufactures telephones, answering machines and other related technical consumer products. In 1989 and 1990, Mr. DeWitt was senior vice president of Rabbit Systems, Inc., directing the development and manufacture of innovative consumer electronics products. From 1978 to 1989, and again from 1991 to 1995, Mr. DeWitt was director of research and development and vice president of engineering at Universal Security Instruments. Mr. DeWitt has over twenty-five years of experience developing and manufacturing high volume consumer electronics products both domestically and off-shore. He holds a B.S. degree in Electrical Engineering from the University of Pennsylvania, Moore School, has taught Engineering courses at Penn State University, and holds various patents in electronics products. Larry R. Kloman joined the Company as vice president of sales and marketing in July 1996. Mr. Kloman was with Phone-Mate Inc. from 1972 to 1993 where he served as vice president of sales and marketing, as well as a director, from 1985 to 1993. Mr. Kloman had been an independent marketing consultant from 1993 to 1996. In addition, Mr. Kloman has served as a key executive of the National Consumer Council for Business Excellence and holds a Jurist Doctor degree from the U.C.L.A. School of Law and a Bachelor of Arts Degree also from U.C.L.A. No director or executive officer of the Company has any family relationship with any other director or executive officer of the Company. SUBSEQUENT EVENTS. Subsequent to year end, the Company entered into three agreements with Edward M. Krakauer establishing the terms and conditions under which Mr. Krakauer resigned as the Company's president and CEO. Under the first agreement, a Termination Agreement, Mr. Krakauer's employment agreement was 22 23 terminated and a negotiated payment plan was established for accrued salaries owed to the date of termination plus a discounted balance of the terminated employment agreement (see "Item 9. Directors and Executive Officers of the Company - Employment Agreements"). Under the terms of the second agreement, a Consulting Agreement, Mr. Krakauer agreed to serve as a part-time consultant through June 30, 1998, at an annual rate of $60,000 per year. Under the third agreement, Mr. Krakauer was granted 75,000 stock options at an exercise price of $.008 per share (which was 20% of the fair market value per share at the time of the grant in accordance with previous options granted by the Company for non-employee directors). Simultaneously, Mr. Krakauer voluntarily terminated his rights in previous option agreements granted by the Company which covered 648,825 shares at exercise prices ranging from $1.6875 to $3.00. Mr. Krakauer remains Chairman of the Company's Board of Directors. Further, subsequent to year end Mitchell B. Rubin was appointed by the Board of Directors to fill the positions of president and CEO. In connection with Mr. Rubin's appointment and his agreement to assume the responsibilities of this position, the Company agreed to pay Mr. Rubin $5,000.00 in deferred salary owed Mr. Rubin as of the date of his appointment. This payment was in the form of $2,500.00 in cash, and 62,500 shares of Common Stock of the Company at market value ($0.04 per share) as of the date of his appointment. Furthermore, the Company agreed to reinstate Mr. Rubin's full salary pursuant to his original employment agreement. Following successful negotiation and conclusion of the transactions with Franklin and the Company's manufacturers and trade creditors (as described in "Note 1. Description of Business - General/Subsequent Events" and "Note 1. Description of Business - Manufacturing/Subsequent Events"), the Board of Directors, in order to incentivise and reward the remaining executive management and employees of the Company, granted options to purchase Common Stock at a price per share of $0.26, representing the market value of the Common Stock one week subsequent to the Company's announcement of the completion of the aforementioned transactions, as follows:
NAME AND SECURITIES UNDERLYING PRINCIPAL POSITION NEW OPTION GRANTED - ------------------ ------------------ Mitchell Rubin 400,000 (1) President and CEO Kenneth I. DeWitt 75,000 (2) Vice President, Manufacturing George H. Fischer 60,000 (2) Vice President, Engineering All other employees 275,000 (2)
(1) Non-qualified options granted by the Board of Directors. Mr. Rubin simultaneously agreed to cancellation of his prior option grants aggregating to 150,000 shares at an exercise price of $1.69 per share. (2) Granted pursuant to the 1992 and 1994 Employee Stock Option Plans. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equities securities ("10% Holders"), to file reports of ownership and changes in ownership of equity securities of the Company with the Securities and Exchange Commission (the "SEC"). Officers, directors, and 10% Holders are required by regulation to furnish the Company with copies of all Section 16(a) forms that they file with the SEC. To the Company's knowledge, based solely on the Company's review of the copies of such forms received by the Company, the Company believes that all reports required to be filed under Section 16(a) of the Exchange Act and the related rules were timely filed by all officers, directors, and 10% Holders except for a Form 4 relating to Stock Options granted to Mr. Hitchcock in partial consideration of Mr. Hitchcock's assignment of the Technology to the Company in February 1996, a Form 4 relating to Stock Options granted to Mr. DeWitt as employment incentive in February 1996, a Form 4 relating to the cancellation of unvested Directors Stock Options 23 24 for Mr. H. Ben Taub upon his resignation from the Company's Board of Directors in February 1996, Form 4's relating to Directors Stock Options granted to Messrs. Hitchcock, Steele and Townsend upon their election to the Board in June 1996, a Form 4 relating to the cancellation of unvested Stock Options upon the resignation of Mr. Frankel in July 1996, an initial Form 3 relating to Stock Options granted to Mr. Larry Kloman upon his entry into an employment contract with the Company in July 1996, a Form 4 relating to the cancellation of unvested Directors Stock Options for Mr. Steele upon his resignation from the Company's Board of Directors in October 1996, a Form 4 relating to the cancellation of vested Stock Options for Mr. Frankel in October 1996, Form 4's for Stock Options granted to Messrs. DeWitt and Fischer as employment incentive in December 1996, a Form 4 relating to the cancellation of vested Directors Stock Options for Mr. Taub, and a Form 4 relating to the cancellation of unvested Directors Stock Options for Mr. Townsend upon his resignation from the Company's Board of Directors in March 1997. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth the cash compensation paid by the Company for services rendered during the year ended December 31, 1996 to each executive officer whose aggregate cash compensation exceeded $100,000: SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION:
LONG-TERM COMPENSATION ---------------- ANNUAL COMPENSATION AWARDS ------------------------- ---------------- (A) (B) (C) (G) (L) NAME AND SECURITIES ALL OTHER PRINCIPAL UNDERLYING OPTIONS COMPENSATION POSITION YEAR SALARY ($) (#)(1) ($) ------------------------------------------------------------------------------------------------------------ Edward M. Krakauer (4) 1996 150,000 0 0 Chief Executive Officer and President 1995 248,468 0 0 1994 210,330 75,000 0 Mitchell B. Rubin (4) 1996 135,000 0 0 Vice President, Finance and Operations 1995 157,750 0 0 1994 127,954 150,000 30,000 (2) George H. Fischer (4) 1996 100,000 25,000 0 Vice President, Engineering 1995 136,875 0 0 1994 118,783 40,000 0 Kenneth I. DeWitt (4) 1996 100,000 25,000 0 Vice President, Manufacturing 1995 57,308 (3) 60,000 0
(1) The amounts in this column represent shares which are subject to stock options granted by the Company to the named persons under the Company's 1992 and 1994 Stock Option Plans. (2) The amounts shown represent moving expenses paid to the named individuals for costs and expenses associated with relocating to southern California from out of state upon accepting employment with the Company. (3) Mr. DeWitt's annualized base salary upon joining the Company in July 1995 was $120,000. (4) See "Part III, Item 9. Directors and Executive Officers of the Company - Subsequent Events." 24 25
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES: (A) (B) (C) (D) (E) NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING IN-THE-MONEY OPTIONS UNEXERCISED OPTIONS/ AT FY-END ($) (1) (2) SHARES SARS, FY-END (#) (1) ACQUIRED VALUE EXERCISABLE/ NAME ON EXERCISE REALIZED ($) EXERCISABLE/UNEXERCISABLE UNEXERCISABLE (#) ------------------------------- --------------- ---------------- -------------------------------- ------------------------ Edward M. Krakauer (3) 0 0 648,825/0 0/0 Mitchell B. Rubin (3) 0 0 150,000/0 0/0 George H. Fischer (3) 0 0 138,046/25,000 0/0 Kenneth I. DeWitt (3) 0 0 90,000/25,000 0/0
(1) The Company has not granted any stock appreciation rights to any persons. (2) Potential unrealized value means the fair market value on December 31, 1996 ($0.25 per share), less the option exercise price (for options with respect to which the exercise price is less than $0.25 per share), times the number of shares. (3) See "Part III, Item 9. Directors and Executive Officers of the Company - Subsequent Events." EMPLOYMENT AGREEMENTS Mr. Krakauer. In August 1993, the Company entered into a new employment agreement with Edward M. Krakauer under which he serves as the Company's president and chief executive officer. The term of Mr. Krakauer's employment under the agreement expires in June 1998, subject to the right of the parties to terminate earlier under certain conditions, including the right of either party to terminate the agreement on ninety days' notice. If such termination is by the Company without cause, Mr. Krakauer is entitled to receive one year's salary as severance plus one year's participation in the bonus pool described in the employment agreement. If termination results from death or disability, he is entitled to one year's salary. The agreement provides for a base salary of $175,000 through December 31, 1993, with increases of at least 15% annually to the base salary, commencing January 1, 1994. In addition, Mr. Krakauer is eligible to receive incentive bonuses equal to 33-1/3% of a bonus pool for executive employees, which pool, in the aggregate, is 10% of the Company's annual pre-tax profits, as defined in the employment agreement. The employment agreement contains certain restrictions on Mr. Krakauer's right to compete and provides him with indemnification on various matters that may result from his service to the Company. Effective January 1, 1996, this agreement was amended to reduce Mr. Krakauer's 1996 base salary to $150,000, which was the total 1996 compensation paid, subject to a January 1, 1997 reinstatement of the prior base salary. Effective January 1, 1997, this agreement was again amended to provide for a deferral of a portion of salaries otherwise payable until such time as the Company obtains additional capital, completes a merger or other business combination, or the employment agreement is otherwise terminated. Subsequent to year end under a Termination Agreement, the above mentioned employment agreement was terminated. Under the conditions of the Termination Agreement, the Company and Mr. Krakauer agreed to a negotiated payment plan under which the Company will pay Mr. Krakauer $52,000 in consideration of past due amounts under the employment agreement, and will pay $190,000 in consideration of amounts due for the balance of the employment agreement. Payments for both of the foregoing obligations will be made at various intervals through June 30, 1998 (see "Item 9. Directors and Executive Officers of the Company - Subsequent Events"). Mr. Rubin. In January 1994, the Company entered into an employment agreement with Mitchell B. Rubin under which he served as the Company's vice president and general manager until December 1994, when he became vice president of finance and operations and CFO. The term of Mr. Rubin's employment agreement 25 26 expires in February 1997, subject to the right of the parties to terminate the agreement earlier under certain conditions, including the right of the Company to terminate the agreement on ninety days' notice, and Mr. Rubin to terminate the agreement on six months' notice. If such termination is by the Company without cause, Mr. Rubin is entitled to receive one year's salary as severance plus one year's participation in the bonus pool described in the agreement. If termination results from death or disability, he is entitled to one year's salary. The agreement provides for a base salary of $150,000 through December 31, 1994, with increases at the discretion of the Board of Directors thereafter. In addition, Mr. Rubin is eligible to receive incentive bonuses equal to not less than 10% of a bonus pool for executive employees, which pool, in the aggregate, is 10% of the Company's annual pre-tax profits, as defined in the employment agreement. The employment agreement contains certain restrictions on Mr. Rubin's right to compete. Effective January 1, 1996, this agreement was amended to reduce Mr. Rubin's 1996 base salary to $135,000, which was the total 1996 compensation paid, subject to a January 1, 1997 reinstatement of the prior base salary. In September 1996, the agreement was amended to extend the expiration date until February 1998. Effective January 1, 1997, this agreement was again amended to provide for a deferral of a portion of salaries otherwise payable until such time as the Company obtains additional capital, completes a merger or other business combination, or the employment agreement is otherwise terminated. In connection with Mr. Rubin entering into his employment agreement in January 1994, the Company granted him stock options for a term of ten years under its 1992 Stock Option Plan to purchase up to 100,000 shares of the Company's Common Stock at an exercise price of $4.0625 per share, the then market price of such Stock. The Company also granted Mr. Rubin certain registration rights with regard to the shares which were the subject of these options. In December 1994, these options were terminated. Also in December 1994, the Company granted Mr. Rubin options to purchase an aggregate of 150,000 shares of the Company's Common Stock pursuant to its 1994 Stock Option Plan at an exercise price of $1.69 per share, the then market price of such Stock, in connection with his assuming significant additional responsibility for the Company. The registration rights granted to Mr. Rubin in January 1994 were amended to apply to 125,000 of the shares subject to the options granted in December. The Company also entered into an agreement with Mr. Rubin in January 1994 providing him with indemnification on various matters that may result from his service to the Company. (See "Item 9. Directors and Executive Officers of the Company - Subsequent Event.") Mr. Fischer. In July 1994, the Company entered into an employment agreement with George H. Fischer, an employee of the Company since May 1992, under which he serves as the Company's vice president of engineering. This agreement, as amended in December 1994, expired in December 1996. Total 1996 compensation paid was $100,000. Mr. Fischer remains employed by the Company as the vice president of engineering at a base salary of $100,000 per annum. During his term of employment with the Company, Mr. Fischer had been granted options to purchase the Company's Common Stock under its 1992 and 1994 Stock Option Plans. These grants occurred in October 1992, November 1993, December 1994, and December 1996 for 48,046 shares, 50,000 shares, 40,000 shares, and 25,000 shares respectively, at exercise prices of $3.00 per share, $4.06 per share, $1.69 per share, and $0.38 per share respectively, in each case the then market price of such Stock. (See "Item 9. Directors and Executive Officers of the Company - Subsequent Event.") Mr. DeWitt. In June 1995, the Company entered into an employment agreement with Kenneth I. DeWitt under which he serves as the Company's vice president of manufacturing. Pursuant to this agreement, the term of employment expires June 1997, subject to the right of the parties to terminate earlier under certain conditions, including the right of the Company to terminate the agreement on ninety days' notice, and Mr. DeWitt to terminate the agreement on six months notice. If such termination is by the Company without cause, Mr. DeWitt is entitled to receive one year's salary as severance plus one year's participation in the bonus pool as described in the agreement. The agreement provides for a base salary of $120,000 per annum. In addition, Mr. DeWitt is eligible to receive incentive bonuses equal to not less than 5% of a bonus pool for executive employees, which pool, in the aggregate, is 10% of the Company's annual pre-tax profits, as defined in the employment agreement. The employment agreement contains certain restrictions on Mr. DeWitt's right to compete. Effective January 1, 1996, this agreement was amended to reduce Mr. DeWitt's 1996 base salary to $100,000, subject to a January 1, 1997 reinstatement of the prior base salary. Effective January 1, 1997, this agreement was again amended to provide for a deferral of a portion of salaries otherwise payable until such time as the Company obtains additional capital, completes a merger or other business combination, or the employment agreement is otherwise terminated. 26 27 During the term of his employment with the Company, Mr. DeWitt had been granted options to purchase the Company's Common Stock under its 1992 and 1994 Stock Option Plans. These grants occurred in May 1995, February 1996, and December 1996 for 60,000 shares, 30,000 shares, and 25,000 shares respectively, at exercise prices of $3.13 per share, $1.50 per share, and $0.38 per share respectively, in each case the then market price of such Stock. (See "Part III, Item 9. Directors and Executive Officers of the Company - Subsequent Events.") BOARD OF DIRECTORS COMPENSATION Directors who are employees of the Company do not receive any compensation for serving as directors. Each of Messrs. Hitchcock, Townsend, and Dr. Steele has waived the $1,000 cash payments due for attendance at regularly scheduled Board of Directors' meetings which they attend effective January 1, 1996; they have the right to reinstate same prospectively when they believe such to be appropriate. In consideration for agreeing to serve as directors, upon the election at the 1996 Annual Meeting, these same individuals were granted options by the Company to purchase shares of the Company's Common Stock at a price equal to 20% of the closing market price of such Stock on June 19, 1996, the date such individuals were elected to the Board. These options, together with registration rights relating to the underlying shares of Common Stock, were for a number of shares which entitled each of the named individuals to purchase, upon exercise, that many shares of Common Stock as would yield a $16,000 gain if the options were exercised on June 19, 1996. The options became exercisable in equal quarterly amounts at the end of each of the four quarters following the election of these individuals to the Board of Directors; as to Mr. Steele, who resigned in October 1996, and Mr. Townsend, who resigned in March 1997, the portion of these options applicable to the time period subsequent thereto did not become exercisable. It is anticipated that Mr. Hitchcock, if elected at the Annual Meeting, will receive a further grant of options and registration rights immediately following his election to purchase shares of the Company's Common Stock at a price equal to 20% of the closing market price of such Stock on the date of his election and in an amount that would entitle him to purchase that many shares of Common Stock as would yield a gain of up to approximately $16,000 if the options were exercised on the date of grant. It is anticipated that such options will become exercisable in equal quarterly amounts at the end of each of the four quarters following the election of the named persons. 1992 AND 1994 STOCK OPTION PLANS. In July 1992 and January 1994, the Company adopted, respectively, the 1992 Stock Option Plan (the "1992 Plan") and the 1994 Stock Option Plan (the "1994 Plan"). Subject to adjustment by reason of stock splits or similar capital adjustments, each of the 1992 Plan and the 1994 Plan provides for the granting of non-statutory stock options or incentive stock options to employees or consultants to purchase up to an aggregate of 700,000 shares of Common Stock. As of December 31, 1996, options for 453,972 shares of Common Stock had been granted and remained outstanding and unexercised under the 1992 Plan; of these, options for 432,799 shares were exercisable as of December 31, 1996 at prices ranging from $0.66 to $6.75 per share. These options provide for maturing of exercise rights over periods ranging from one year to three years from the dates of grant. As of December 31, 1996, options for 653,120 shares of Common Stock had been granted and remained outstanding and unexercised under the 1994 Plan; of these, options for 465,620 shares were exercisable as of December 31, 1996 at a prices ranging from $0.38 to $3.56 per share. These options provide for maturing of exercise rights over periods ranging from one year to three years from the dates of grant. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table contains information with respect to each person known to the Company to be the beneficial owner of more than five percent of the Company's outstanding Common Stock as of December 31, 1996. To the Company's knowledge, based on information set forth in the Schedule 13-D filed with the Commission on May 16, 1996 by Flextronics (Malaysia) SDN.BHD, unless otherwise indicated in the notes below, each beneficial owner has sole voting and investment power with respect to the Common Stock set forth opposite his or her name in the following table: 27 28
PERCENT OF TOTAL NAME AND ADDRESS OF NUMBER OF SHARES BENEFICIAL OWNER (1) SHARES OUTSTANDING -------------------- ------ ----------- Flextronics (Malaysia) SDN.BHD 1,356,966 9.7% 2241 Lundy Avenue San Jose, California
(1) On May 22, 1997, 2,000,000 shares of the Company's Common Stock were issued to Franklin Electronic Publishers, Inc. (see "Item 1. Description of Business - General/Subsequent Events"). The following table sets forth existing stock ownership by the directors and executive officers of the Company, as well as all directors and executive officers of the Company as a group. To the Company's knowledge, all of the shares shown in the following table are owned both of record and beneficially, and the persons named possess sole voting and investment power, except as otherwise indicated in the notes to the table.
Shares Beneficially Owned As of December 31, 1996 ----------------------- Percent of Name (1) Amount (2) Class - ---- ------ ----- Edward M. Krakauer (5) 648,825 (3) 4.7% Mitchell B. Rubin (5) 150,000 1.1% George H. Fischer (5) 141,046 1.0% Kenneth I. DeWitt (5) 90,000 * Myron H. Hitchcock 56,668 (4) * Ernest W. Townsend 23,355 (4) * All directors, nominees, and executive officers of the Company, as a group 1,109,894 8.0% - -----------------------
* Less than 1%. (1) The address of each individual, unless otherwise indicated, is c/o Voice Powered Technology International, Inc., 18425 Burbank Blvd., Suite 506, Tarzana, California 91356. (2) The amounts shown include shares subject to stock options exercisable as of December 31, 1996 or exercisable within 60 days from such date. Each of Messrs. Fischer, DeWitt, and Kloman have options to purchase 25,000 shares, which options were not exercisable as of December 31, 1996, or exercisable within 60 days from such date. (3) The amount shown does not include 6,000 shares of Common Stock owned by relatives of Mr. Krakauer. Mr. Krakauer disclaims beneficial ownership of such shares. (4) The amounts shown include stock options granted to these directors in 1994, 1995, and 1996 for serving as directors of the Company, except for options for 9,346 shares as to each of Messrs. Hitchcock and Townsend, as such options are not currently exercisable or exercisable within sixty days of this table. The amounts shown do not include grants of stock options which outside directors will receive in 1997 if they are re-elected to the Board. (See "Board of Directors Compensation.") The amounts shown also do not include options for 18,682 shares previously granted to Dr. Jack Steele, formerly a director of the Company. 28 29 (5) See "Part III, Item 9. Directors and Executive Officers of the Company - Subsequent Events." ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MISCELLANEOUS Prior to February 1996, the Company was the licensee under three license agreements with respect to the Technology, which together aggregated the foundation of the Company's exclusive rights to the Technology. One of the license agreements was with the original inventor ("Inventor") of the Technology, Mr. Hitchcock, who is also a director of the Company. The other two license agreements were with a Company ("Licensor") to whom the Inventor had assigned certain rights with respect to the Technology. Under these agreements, the Company was obligated to pay royalties of varying amounts to the Inventor and Licensor for units of products sold by the Company which contained the Technology, as well as royalties applicable to the Company's licensing activities of the Technology. These agreements also had annual minimum royalties payable by the Company to retain exclusivity which varied depending upon the agreement and the product category. For the years ended December 31, 1995 and 1996, the Company paid Mr. Hitchcock, a director of the Company, $131,000 and $98,000, respectively, in royalty payments. On February 20, 1996, the Company entered into a new agreement with the Inventor which effectively replaced the three prior licensing agreements, the result of which was that the Company acquired all right, title, interest, and any future improvements in and to the Technology, inclusive of an assignment of all intellectual property rights associated with the Technology. In consideration of this transfer, the Company agreed to pay $100,000 in two installments to the Licensor, $50,000 of which was paid at the execution of the agreement and $50,000 of which is payable not later than June 30, was paid in July 1996. In addition, the Company granted an option to purchase 33,333 shares of the Company's common stock to the Inventor of the Technology at an exercise price per share which was cumulatively $50,000 lower than the current market value as a means of paying the balance of the purchase price for the rights. In addition, the agreement requires payments of royalties by the Company to the Inventor equal to: 1) $0.50 per unit for each unit of any product sold by the Company which contains the Technology; 2) 5% of net proceeds from the sales of computer chips which contain the Technology; and 3) 15% of licensing revenues (excluding licensing revenues for computer chips) received by the Company as a result of licensing agreements relating to the Technology. The foregoing royalties are subject to a minimum of $60,000 per year payable quarterly. Subsequent to year end, the agreement with Mr. Hitchcock, the Inventor, was assigned to Franklin Electronic Publishers, Inc. under the terms of the Technology Transfer Agreement (see "Item 1. Description of Business - - General/Subsequent Events"). ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: See Exhibit Index (b) REPORTS ON FORM 8-K. Form 8-K filed with the SEC on June 2, 1997. 29 30
INDEX TO FINANCIAL STATEMENTS Report of Independent Certified Public Accountants F-1 Balance Sheets at December 31, 1995 and 1996 F-2 Statements of Operations for the years ended December 31, 1995 and 1996 F-3 Statements of Stockholders' Equity for the years ended December 31, 1995 and 1996 F-4 Statements of Cash Flows for the years ended December 31, 1995 and 1996 F-5 Summary of Significant Accounting Policies F-6 Notes to the Financial Statements F-8
30 31 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Voice Powered Technology International, Inc. Tarzana, California We have audited the accompanying balance sheets of Voice Powered Technology International, Inc., as of December 31, 1995 and 1996 and the related statements of operations, stockholders' equity and cash flows for each of the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to present fairly, in all material respects, the financial position of Voice Powered Technology International, Inc., at December 31, 1995 and 1996 and the results of its operations and its cash flows for each of the two years then ended, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered from recurring losses from operations, including a net loss of $4,834,240 for the year ended December 31, 1996, and has negative working capital of $1,087,000 as of December 31, 1996. The Company has also been slow and is delinquent in paying its accounts payable, inclusive of the Company's primary contract manufacturers. These factors raise substantial doubt about its ability to continue as a going concern. There is no assurance that the Company will be able to realize its recorded assets and liquidate its liabilities in the normal course of business. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. BDO Seidman, LLP Los Angeles, California March 7, 1997, except for Notes 7(d), 16(d), (e) and (f) as to which the date is May 29, 1997 F-1 32 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. BALANCE SHEETS ASSETS (NOTE 15)
DECEMBER 31, 1995 1996 ------------ ------------ Current assets Cash and cash equivalents $ 2,094,848 $ 226,615 Restricted cash (Note 3) -- 150,000 Receivables, net of allowance for doubtful accounts of $80,249 in 1995 and $58,078 in 1996 (Notes 3 and 6) 5,063,116 323,409 Receivables sold to financial institution (Note 3) -- 3,367,772 Less initial payments received from financial institution -- 1,889,052 ------------ ------------ Net amount due from financial institution -- 1,478,720 Inventory 2,961,830 1,831,217 Prepaid expenses 138,881 101,495 ------------ ------------ Total current assets 10,258,675 4,111,456 ------------ ------------ Property and equipment (Note 7(a)) Equipment 1,624,141 1,882,569 Other 141,493 142,512 ------------ ------------ 1,765,634 2,025,081 Less accumulated depreciation 1,049,383 1,376,449 ------------ ------------ Net property and equipment 716,251 648,632 Patents and technology rights, net of amortization of $22,102 in 1995 and $70,764 in 1996 165,901 267,241 Deferred costs, net (Note 4) 858,922 620,749 Other assets 115,423 127,496 ------------ ------------ Total assets $ 12,115,172 $ 5,775,574 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 3,901,649 $ 4,340,981 Accrued expenses (Note 5) 1,605,381 857,922 Loan payable (Note 6) 3,265,439 -- ------------ ------------ Total liabilities 8,772,469 5,198,903 ------------ ------------ Commitments and contingencies (Note 7) Stockholders' equity (Note 8) Preferred stock, $.001 par value, 10,000,000 shares authorized; none issued -- -- Common stock, $.001 stated value - shares authorized, 50,000,000; issued and out- standing, 12,486,273 and 13,949,072 12,486 13,949 Additional paid-in capital 25,679,900 27,746,645 Accumulated deficit (22,349,683) (27,183,923) ------------ ------------ Total stockholders' equity 3,342,703 576,671 ------------ ------------ Total liabilities and stockholders' equity $ 12,115,172 $ 5,775,574 ============ ============
See accompanying summary of accounting policies and notes to financial statements. F-2 33 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
1995 1996 ------------ ------------ Sales $ 23,443,837 $ 10,813,447 Less price protection costs (Note 9) 1,100,000 -- ------------ ------------ Net sales 22,343,837 10,813,447 Costs and expenses Cost of goods sold 13,504,478 7,620,465 Discontinued model costs (Note 10) 1,716,192 419,960 Marketing 4,182,618 2,803,361 General and administrative 3,295,047 2,567,782 Research and development 1,264,225 1,061,885 Warehouse 1,163,059 1,005,901 ------------ ------------ Total costs and expenses 25,125,619 15,479,354 ------------ ------------ Operating loss (2,781,782) (4,665,907) Other income (expense) Interest expense (128,967) (227,841) Other 91,652 59,508 ------------ ------------ Net loss $ (2,819,097) $ (4,834,240) ============ ============ Net loss per share $ (0.22) $ (0.35) ============ ============ Weighted average common shares outstanding 12,549,201 13,720,414 ============ ============
See accompanying summary of accounting policies and notes to financial statements. F-3 34 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional -------------------------- Paid In Accumulated Stockholders' Shares Amount Capital Deficit Equity ------------ ------------ ------------ ------------ ------------ Balance, January 1, 1995 12,435,673 $ 12,436 $ 25,531,544 $(19,530,586) $ 6,013,394 Vendors/employees exercised stock options (Note 8(a)) 50,600 50 84,356 -- 84,406 Stock options issued to Board of Directors members (Note 8(a)) -- -- 64,000 -- 64,000 Net loss -- -- -- (2,819,097) (2,819,097) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1995 12,486,273 $ 12,486 $ 25,679,900 $(22,349,683) $ 3,342,703 Vendors/employees exercised stock options (Note 8(a)) 90,833 91 15,065 -- 15,156 Stock options issued to Board of Directors members (Note 8(a)) -- -- 48,000 -- 48,000 Stock options issued to related party (Note 8(a)) -- -- 50,000 -- 50,000 Shares of common stock issued to manufacturer (Note 8(c)) 1,371,966 1,372 1,953,680 -- 1,955,052 Net loss -- -- -- (4,834,240) (4,834,240) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1996 13,949,072 $ 13,949 $ 27,746,645 $(27,183,923) $ 576,671 ============ ============ ============ ============ ============
See accompanying summary of accounting policies and notes to financial statements. F-4 35 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1995 1996 ----------- ----------- Cash flows from operating activities: Net loss $(2,819,097) $(4,834,240) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 700,892 832,415 Compensatory stock options 64,000 48,000 Writeoff of tooling related to discontinued models 140,881 -- Writeoff of deferred costs related to discontinued models 259,328 419,960 Writedown of inventory 586,984 150,000 Reserve for price protection 1,100,000 -- Reserve for parts commitments 729,000 -- Changes in operating assets and liabilities: Increase in restricted cash -- (150,000) (Increase) decrease in receivables, net (2,697,763) 3,260,987 (Increase) decrease in inventory (1,953,959) 980,613 (Increase) decrease in prepaid expenses (50,894) 37,386 Increase in patents and technology rights (32,925) (100,000) Increase in deferred costs (947,164) (494,509) (Increase) decrease in other assets 61,403 (155,918) Increase in accounts payable 245,730 2,394,383 Increase (decrease) in accrued expenses 180,136 (747,458) ----------- ----------- Net cash provided by (used in) operating activities (4,433,448) 1,641,619 ----------- ----------- Cash flows from investing activities: Capital expenditures (530,527) (259,569) Proceeds from the sale of property and equipment 11,110 -- ----------- ----------- Net cash used in investing activities (519,417) (259,569) ----------- ----------- Cash flows from financing activities: Capital lease payments (14,545) -- Proceeds from (payments on) loan payable 2,965,439 (3,265,439) Proceeds from the exercise of stock options and warrants 84,406 15,156 ----------- ----------- Net cash provided by financing activities 3,035,300 (3,250,283) ----------- ----------- Net decrease in cash and cash equivalents (1,917,565) (1,868,233) ----------- ----------- Cash and cash equivalents at the beginning of the year 4,012,413 2,094,848 ----------- ----------- Cash and cash equivalents at the end of the year $ 2,094,848 $ 226,615 =========== ===========
See summary of accounting policies and notes to financial statements. F-5 36 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION The Company recognizes revenue upon shipment of product. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. INVENTORY Inventory consists of finished goods and is valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are depreciated on a straight-line basis using estimated useful lives which range from 3-7 years. PATENTS AND TECHNOLOGY RIGHTS Patents are stated at cost less amortization, which is provided on a straight-line basis over 15 years. Technology rights are stated at cost less amortization, which is provided on a straight-line basis over 3 years. Patents and technology rights are expensed when management believes they provide no future benefit. DEFERRED COSTS Deferred costs include capitalized product development, product improvement, and user manual design and development costs, less amortization, which is provided on a straight-line basis over 2-3 years. Such costs are periodically reviewed each year based upon management's estimates of sales of the related products. Deferred costs are written off when management believes they provide no future benefit. INCOME (LOSS) PER SHARE Net income (loss) per common share is calculated by dividing net income (loss) applicable to common stock by the weighted average number of shares of common stock and common stock equivalent shares outstanding during each year. Common stock equivalents have not been included since their effect would be anti-dilutive. INCOME TAXES The Company utilizes Statement of Financial Accounting Standards No. 109, 'Accounting for Income Taxes' (SFAS No. 109). This standard employs an asset and liability approach in accounting for income taxes, the objective of which is to recognize the amount of current and deferred taxes payable or receivable at the date of the financial statements using the provisions of enacted tax laws. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses at the date that the financial statements are prepared. Actual results could differ from those estimates. F-6 37 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash, cash equivalents, restricted cash, accounts receivable, accounts payable, and loan payable approximate their fair values because of the short maturity of these instruments. IMPAIRMENT OF LONG-LIVED ASSETS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (SFAS No. 121) establishes guidelines regarding when impairment losses on long-lived assets, which include plant and equipment, and certain identifiable intangible assets, should be recognized and how impairment losses should be measured. The adoption of this standard did not have a material effect on the Company's financial position or results of operations. STOCK BASED COMPENSATION As of January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which establishes a fair value method of accounting for stock-based compensation plans. In accordance with SFAS 123, the Company has chosen to continue to account for employee stock-based compensation utilizing the intrinsic value method prescribed in APB 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Also, in accordance with SFAS 123, the Company is to make a footnote disclosure with respect to stock-based employee compensation. The cost of stock-based employee compensation is measured at the grant date based on the value of the award and recognized over the service period. The value of the stock based award is determined using a pricing model whereby compensation cost is the excess of the fair value of the stock as determined by the model at grant date or other measurement date over the amount an employee must pay to acquire the stock. For the years ended December 31, 1996 and 1995, additional compensation cost as measured pursuant to SFAS 123 for options granted in 1996 and 1995 was not material. Accordingly, pro forma net loss and net loss per share is not applicable. RECLASSIFICATION Reclassification of certain prior year amounts have been made to conform to current year classification. F-7 38 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS 1. BUSINESS The Company, a California corporation, began operations in July 1992 when it commenced sales of its first product, the VCRoVOICE Programmer. In 1993, the Company designed and developed its second product, the IQoVOICE Organizer. Sales of the IQoVOICE Organizer commenced in October 1993 via direct response marketing, and were expanded to include retail and international sales beginning in September 1994. Along with the original versions, subsequent domestic and international models of the IQoVOICE Organizer, including a low cost version of the IQoVOICE Organizer, sales of which commenced in August 1995; a mini or "pocket sized" version of the IQoVOICE Organizer, sales of which commenced in June 1996; and a IQoVOICE Organizer/Pager, sales of which began in October 1996, continue to comprise a substantial portion of the Company's revenues. The Company has further designed the IQoVOICE Tell-It Phone, sales of which commenced in October 1994; and the IQoVOICE MessagePad, sales of which commenced in August 1995. Production of both of these products was discontinued in 1996 (Note 10). The Company continues to be engaged in the design, development, and distribution of consumer electronic products using proprietary voice recognition technology. As the Company's proprietary VoiceLogic technology is adaptable to a wide variety of microprocessors, it has been able to engage in joint development and licensing agreements with certain manufacturing companies. The Company plans to continue to license its technology to manufacturers for incorporation into general business and consumer products, such as audio/video equipment, telecommunication devices, office equipment, home appliances, wireless communications, organizing and accessing of information, and other products. 2. GOING CONCERN The Company has incurred losses from operations for the past two years, and as of December 31, 1996 has negative working capital of approximately $1,087,000. The Company has also been slow and is delinquent in paying certain of its accounts payable inclusive of the Company's primary contract manufacturers. These factors raise substantial doubt about the Company's ability to continue as a going concern. There is no assurance that the Company will be able to realize its recorded assets and liquidate its liabilities in the normal course of business. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties. As a result of transactions which occurred in May 1997 (see Subsequent Event - Note 16(d) and 16(c)), the Company has significantly improved its working capital position and its Shareholders' Equity. However, the Company anticipates continued losses from operations through the first nine months of 1997, and believes that such losses will continue unless the Company is successful in its efforts to increase sales from its current distribution channels and diversify its product line. As a result, management continues to seek a strategic relationship including merger opportunities, product development joint ventures, and distribution agreements in order to grow and strengthen its financial base. In the event that a strategic relationship fails to take place, the Company believes that it will need to raise additional funding through an equity transaction. This funding would not only be used to continue to fund operations, but also to satisfy the costs associated with completing products currently in development and then marketing those products in order to increase future profitability. No assurance can be given that the Company will be able to enter into a strategic relationship or raise capital. See Subsequent Event at Note 16. F-8 39 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 3. ACCOUNTS RECEIVABLE In August 1996, the Company entered into a $3,000,000 accounts receivable transfer and purchase agreement with a financial institution which was used to pay off and replace its working capital line of credit agreement (Note 6). Under the terms of the new agreement, the Company may sell certain accounts receivable to the financial institution for an initial payment from the institution of 65% of the net amount of the related invoices. The Company pays a fixed discount of 1.25% of the net amount upon sale of the invoice, and a variable discount of a base rate maintained by the bank plus 2% per annum (10.25% at December 31, 1996) on the initial payment until the related invoices are paid by the customer. Further, the Company is required to maintain a reserve and a restricted cash deposit with the financial institution to be used as a collateral account for a cumulative amount that varies from zero to $750,000 ($300,000 reserve and $150,000 cash collateral at December 31, 1996), depending on the amount of outstanding uncollected accounts sold to the financial institution. At December 31, 1996, the Company had $3,367,772 in accounts receivable which had been sold to the financial institution, 65% of which was used to establish the $300,000 reserve and fund the initial payment of $1,889,052 which had been received from the financial institution. The December 31, 1996 amount was the largest amount of outstanding receivables sold under the agreement during 1996. The average rate of interest under this agreement in 1996 was 21.9%. 4. DEFERRED COSTS Deferred costs consist of the following:
DECEMBER 31, 1995 1996 ------------------------------------------------------ Product improvement costs $ 312,678 $ 430,165 Product development costs 641,748 476,798 User manual design and development costs 162,655 145,809 ----------------------- ---------------------- 1,117,081 1,052,772 Less accumulated amortization 258,159 432,023 ----------------------- ---------------------- $ 858,922 $ 620,749 ======================= ======================
5. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, 1995 1996 ------------------------------------------------------ Accrued expenses $ 876,381 $ 582,922 Reserve for parts commitments (Note 10) 729,000 275,000 ----------------------- ---------------------- $ 1,605,381 $ 857,922 ======================= ======================
6. LOAN PAYABLE In August 1995, the Company entered into a collateralized $4,000,000 working capital line of credit agreement with a banking facility from which an outstanding loan payable in the amount of $3,265,439 existed at December 31, 1995. The term of the agreement was twelve months and was collateralized by the assets of the Company, including a $1,000,000 restricted cash time deposit held at the bank. Borrowings under the agreement were permitted up to 80% of the Company's eligible accounts receivable and 100% of restricted cash. The agreement carried an interest rate of prime less 1% on the first $1,000,000 borrowed, and prime plus 1% (9.5% at December 31, 1995) on any additional borrowing. The December 31, 1995 balance was the highest amount borrowed during the year, and the average rate of interest under this loan in 1995 was 8.8%. F-9 40 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) In March 1996, the Company entered into an amendment of the foregoing working capital line of credit agreement. Pursuant to this amendment, the lender agreed to waive certain requirements regarding financial covenants as of December 31, 1995 through the expiration of the agreement. In addition, the terms of the agreement were amended resulting in a reduction of the aggregate amount of the working capital line of credit from $4,000,000 to $2,000,000, an increase in the interest rate of 1% on balances not secured by cash, and a reduction in the advance rate from 80% of the Company's eligible accounts receivable plus restricted cash to 60% of eligible accounts receivable plus restricted cash. The January 1, 1996 balance of $3,265,439 was the highest amount borrowed under this agreement during the year, and the average rate of interest under this agreement in 1996 was 9.0%. This agreement was paid off and replaced with an accounts receivable transfer and purchase agreement (Note 3). 7. COMMITMENTS (a) As of December 31, 1996, future minimum rental payments required under operating leases that have initial or remaining terms in excess of one year are as follows:
OPERATING LEASES ---------------- 1997 $ 147,902 1998 115,548 1999 115,548 2000 28,887 ---------------- Total $ 407,885 ================
The operating leases pertain to leases for the Company's office facilities. The current lease expires in March 1997, and will be replaced by a lease for a new facility which expires in March 2000. The new lease carries provisions for cancellation by the Company between October 1997 and March 1998, and space reduction if elected by the Company in April 1998. Neither the cancellation nor the space reduction is included in the above schedule. The Company also has a lease on certain warehouse facilities which is renewable on a month-to-month basis. Rent expense was $248,000 and $264,000 for the years ended December 31, 1995 and 1996. (b) In February 1996, the Company executed an agreement with its prior contract manufacturer, located in Malaysia, which established the terms and conditions pursuant to which the Company is winding down its affairs with this manufacturer. The terms of this agreement included the following: 1) the issuance to the manufacturer of 1,371,966 shares of the Company's common stock at market (Note 8(c)), valued at, $1,955,052, which amount was applied to the Company's December 31, 1995 trade debt to the manufacturer; 2) a payment schedule for the remaining balance of the related trade debt as of December 31, 1995; 3) terms and conditions for payment of the Company's obligation regarding component parts purchased for the manufacture of the Company's products and for which the Company is obligated (Note 10); and 4) purchasing and payment terms for the remaining products to be manufactured and shipped to the Company. The Company has not made payments due on various dates pursuant to this agreement. In May 1997, an agreement was reached regarding the outstanding obligation to this manufacturer (see Subsequent Event - Note 16(e)). (c) In February 1996, the Company entered into two new manufacturing related agreements: first, an agreement with a manufacturer based in Thailand for the manufacture of the Company's products, and secondly an agreement with a company to manufacture, market, and distribute the Company's products in the Far East. The second agreement was terminated subsequent to year end (see Note 16). (d) In February 1996, the Company entered into an agreement with a related party ("the inventor"), inventor of an integral part of the voice recognition technology used by the Company, which resulted in the Company obtaining unrestricted exclusive world wide ownership rights to the technology subject to ongoing royalties. As a result of the agreement, the Company granted stock options to the inventor at an exercise price per share which was cumulatively F-10 41 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) $50,000 lower than market value (Note 8(a)), and paid $100,000 in cash to a company in which the inventor is a 31% owner. Under the agreement, the Company is obligated to pay royalties to the inventor equal to 1) $.50 per unit for each unit of any product (other than computer chips) sold by the Company which contains the technology; 2) 5% of net proceeds from sales of computer chips which contain the technology, and 3) 15% of licensing revenues (excluding licensing for computer chip only sales) received by the Company as a result of licensing agreements relating to the technology. The foregoing royalties are subject to a minimum of $60,000 per year, payable quarterly. Royalty expense incurred in 1995 and 1996 amounted to $99,300 and $130,400, respectively. Subsequent to year end, the agreement with the inventor was assigned to Franklin Electronic Publishers, Inc. ("Franklin") under the terms of the Technology Transfer Agreement. However, with respect to the annual minimum royalty due to the inventor by Franklin, the Company remains obligated to Franklin for the $60,000 per year less royalties due and payable by Franklin to the inventor. See Subsequent Event - Note 16(d). (e) The Company entered into a licensing agreement with the manufacturer of the IQoVOICE Tell-It Phone for certain technologies held by the manufacturer that are used in the product. In the event the Company elects to build this product through another source, the Company would be liable to the manufacturer for $50,000 plus fifty cents per unit for each of the first 100,000 IQoVOICE Tell-It Phones sold. (f) As of December 31, 1996, the Company has employment agreements with certain of its officers for various terms expiring between June 30, 1997 and June 30, 1998. Effective January 1, 1997, three of these agreements were amended to provide for a deferral of a portion of 1997 salaries otherwise payable until such time as the Company obtains additional capital, completes a merger or other business combination, or the employment agreement is otherwise terminated. The minimum aggregate obligations pursuant to these contracts are $560,000 in 1997 and $195,000 in 1998 (see Subsequent Event - Note 16(f)). 8. CAPITAL STOCK (a) Stock options The Company's 1992 Stock Option Plan (the "1992 Plan") provides for the granting of non statutory stock options or incentive stock options to employees to purchase up to an aggregate of 700,000 shares of common stock, subject to anti-dilution provisions. The Company's 1994 Stock Option Plan (the "1994 Plan") provides for the granting of non statutory stock options or incentive stock options to employees to purchase up to an aggregate of 700,000 shares of common stock, subject to anti-dilution provisions. The option price per share for non statutory stock options granted under the 1992 Plan must be at least 85% of the fair market value of the common stock on the date any such options are granted or 100% for incentive stock options, except that in the case of a stockholder owning more than 10% of the combined voting power of all classes of the outstanding stock of the Company, the option price for any incentive stock options shall be at least 110% of the fair market value on the date of grant. Outstanding 1992 Plan options vest and are exercisable over a three year period or less from the date of grant, as determined by the Board of Directors. Outstanding 1994 Plan options vest over time periods from the date of grant, as determined by the Board of Directors. During 1995, 13,600 compensatory stock options were exercised by vendors at $.03 per share for the Company's common stock. In addition, vendors and employees exercised 37,000 stock options from $1.69 to $3.00 per share for the Company's common stock. In May 1995, the Company granted 26,948 compensatory stock options to Directors of the Company at an exercise price of $.59, which were below fair market value. In June 1996, the Company granted 56,076 compensatory stock options to the Directors at an exercise price of $.27, which were below fair market value. The options vest and are exercisable over a 1 year period. In accordance with Accounting Principles Board Opinion No. 25, the Company has recorded non-cash stock option compensation expense with a corresponding credit to additional paid-in capital in the amount of $64,000 in 1995 and $48,000 in 1996. F-11 42 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) During 1996, 83,333 compensatory stock options were exercised by a former employee at $.03 per share for the Company's common stock. In addition, vendors exercised 7,500 stock options at $1.69 per share for the Company's common stock. In the February 1996, the Company entered into an agreement with a related party, the inventor of an integral part of the voice recognition technology used by the Company, which resulted in the Company obtaining unrestricted exclusive world wide ownership rights to the technology subject to ongoing royalties. In accordance with this agreement, the Company granted stock options which were cumulatively $50,000 lower than market value to the related party (Note 7(d)). The following table sets forth additional information with respect to common stock options:
WEIGHTED AVERAGE EXERCISE PRICE SHARES PER SHARE --------- ---------------- Balance at January 1, 1995 1,805,737 $4.32 Options exercised (50,600) 3.64 Options granted 137,219 3.18 Options canceled (48,495) 2.81 --------- Granted and outstanding at December 31, 1995 1,843,861 $3.90 Options exercised (90,833) 1.78 Options granted 446,452 .87 Options canceled (356,173) 2.38 --------- Granted and outstanding at December 31, 1996 1,843,307 $3.78 ========= Exercisable at December 31, 1996 1,615,942 $3.78 =========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------- ------------------------------------- NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED- RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE - ---------------- ----------- ---------------- -------------- ----------- -------------- $0.27 - $0.55 255,971 9.5 years $0.38 88,606 $0.50 $1.50 - $1.68 570,103 8.5 years $1.56 510,103 $1.56 $3.00 - $6.75 1,017,233 7.0 years $5.88 1,017,233 $5.88
(b) Warrant Grants With respect to warrants, the Company had a balance of 1,098,817 outstanding and exercisable at December 31, 1995 and 1996 with a weighted average exercise price of $6.38. (c) Stock issuance In February 1996, the Company executed an agreement with its prior contract manufacturer which established the terms and conditions pursuant to which the Company is winding down its affairs with this manufacturer. The terms of this agreement included the issuance to the manufacturer of 1,371,966 shares of the Company's common stock at market value, valued at $1,955,052, which amount was applied to the Company's outstanding debt to the manufacturer (Note 7(b)). See Subsequent Event - Note 16(e). F-12 43 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 9. PRICE PROTECTION In January 1996, the Company instituted a program to reduce the retail price of two of its product lines. Accordingly, established retail accounts were issued credits for on-hand inventory equal to the difference between the wholesale price at which they had purchased the products and their new wholesale price which is based on the reduced retail price. The total cost to the Company for this program was recorded in 1995, and was approximately $1,100,000. 10. DISCONTINUED MODEL COSTS As of December 31, 1995 the Company elected to discontinue future production of two of its product lines. In addition, the Company adopted a new technology for memory storage in the IQoVOICE Organizer products which rendered certain component parts committed to by the Company at December 31, 1995 obsolete. As a result, the Company established at December 31, 1995 a reserve of $729,000 ($275,000 remaining at December 31, 1996) to encompass the difference between the cost and the net realizable value of components purchased, or committed to be purchased, by the Company for inclusion in the discontinued products. Further in 1995, the Company wrote down the inventory value of the related finished goods by $586,983 in accordance with the lower of cost or market methodology. Finally in 1995, the Company wrote off $400,209, which was the book value of tooling and product development costs related to the discontinued products. As such, the total cost charged to operations in 1995 related to discontinued products was $1,716,192. As of December 31, 1996 the Company elected to discontinue future production of its IQoVOICE Tell-It Phone as well as write off costs relating to its Diary/Organizer product, previously capitalized. The Diary/Organizer was designed for girls between the ages of seven to thirteen, and featured games and activities which utilized the Company's VoiceLogic technology. Due to the high marketing and start-up manufacturing costs associated with the introduction of this product, the Company, due to the limitation of cash resources, was unable to introduce this product in 1996 and does not believe that sufficient cash resources will be available in the near future. As a result, at December 31, 1996, the Company wrote off $419,960, which was the book value of product development costs related to the discontinued products. 11. MAJOR CUSTOMERS AND INTERNATIONAL SALES In 1995, the Company had no customers whose purchases exceeded 10% of the Company's total net sales. During 1995, approximately 20% of the Company's net sales were international sales. In 1996, the Company had two customers whose purchases, totaling $3,100,000, each exceeded 10% of the Company's net sales. During 1996, approximately 15% of the Company's net sales were international sales, primarily in Europe. 12. SUPPLEMENTAL CASH FLOW INFORMATION During the years ended December 31, 1995 and 1996, the Company paid $129,000 and $228,000 in interest expense, and $800 in minimum state income taxes for each year. Supplemental non-cash financing and investing activities were as follows:
YEARS ENDED DECEMBER 31, 1995 1996 ------------ ---------- Issuance of compensatory stock options (Note 8(a)) $ 64,000 $ 48,000 Issuance of compensatory stock options to related party (Notes 7(d) and 8(a)) -- 50,000 Issuance of common stock to vendor (Note 8(c)) -- 1,955,052
F-13 44 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) 13. INCOME TAXES Unused net operating losses of approximately $22,000,000 are available as of December 31, 1996 to offset future years' federal taxable income, and expire through 2011. Unused California net operating losses of approximately $11,200,000 are available as of December 31, 1996 to offset future years' California taxable income and expire through 2001. Under federal tax law IRC Section 382, certain significant changes in ownership of the Company may restrict future utilization of these carryforwards. In the event the loss carryforwards are fully utilizable, the Company has a deferred tax asset of approximately $8,680,000 as of December 31, 1996. In addition, the Company has research and development tax credits of approximately $237,000 and $111,500 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. 14. RELATED PARTY TRANSACTIONS During 1995 and 1996 the Company paid royalties of $130,880 and $97,530, respectively, to a director of the Company. Further, during 1996 the Company granted stock options which were cumulatively $50,000 lower than market value to the same director (Note 8(a)). During 1995 and 1996 the Company granted compensatory stock options to its external Board of Directors members (Note 8(a)). 15. FOURTH QUARTER ADJUSTMENTS As of December 31, 1995, the Company established reserves for price protection costs of $1,100,000 and parts commitments of $729,000. The Company also wrote off deferred costs and tooling related to discontinued models of $400,209, and wrote down inventory of $586,983. These adjustments relate to events occurring during the fourth quarter of 1995. The effect of these adjustments was to increase net loss by $2,816,192 and $.22 per share. As of December 31, 1996 the Company wrote off deferred costs related to discontinued models of $419,960, and recorded a $150,000 writedown in inventory in accordance with lower of cost or market methodology. These adjustments relate to events occurring during the fourth quarter of 1996. The effect of these adjustments was to increase net loss by $569,960 and $.04 per share. 16. SUBSEQUENT EVENTS (a) In February 1996, the Company entered into a five year Business Cooperation Agreement with a South Korean based company, Hansol Electronics Inc. ("Hansol"). The agreement granted Hansol exclusive marketing, manufacturing, and distribution rights for the Company's products and technology in certain countries in the Far East, including but not limited to, China, Hong Kong, and India. In addition, the agreement granted to Hansol the right to manufacture for the Company at least 50% of the Company's total production requirements, subject to Hansol providing pricing and terms equal to or better than those otherwise obtainable by the Company. In payment for the marketing, manufacturing, and distribution rights granted, Hansol was to pay the Company $1,000,000 in six installments during the initial two years of the agreement, $850,000 of which was to be paid during 1996. At December 31, 1996, $260,000 of the $850,000 remained outstanding. Further, at December 31, 1996, included in the Company's accounts payable was $83,000 due to Hansol for inventory purchases. In February 1997, the Company and Hansol entered into a termination agreement which established the terms and conditions pursuant to which the companies are winding down their relationship. The terms of this agreement included F-14 45 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) mutual release and discharge of any outstanding amounts and claims, Hansol releasing to VPTI approximately $180,000 of inventory which had already been manufactured, and the transfer to the Company of all technology and marketing rights previously granted to Hansol. (b) In December 1995, the Company entered into a purchase and joint marketing agreement with MobileComm Nationwide Operations, Inc., subsequently acquired by MobileMedia Corporation ("MMC"), regarding the IQoVOICE Organizer/Pager. In November 1996, The Company entered into a settlement agreement with MMC, in which MMC agreed to continue to provide paging services in support of the product, cooperate with the Company in marketing of the product, a payment schedule for the balance due to the Company for prior product purchases, and also a payment schedule for a cancellation fee releasing MMC from future purchase commitments. At December 31, 1996, included in the Company's accounts receivable was $252,400 due from MMC relating to product purchases. No receivable has been recorded relating to the cancellation fee. In January 1997, the Company entered into a letter agreement with MMC, releasing MMC from the cancellation fee due in exchange for immediate payment of the outstanding $252,400 which the Company then received. Subsequently in January 1997, MMC filed for Chapter 11 protection in the U.S. Bankruptcy Court in Delaware. MMC, however, entered into a debtor-in-possession credit agreement, and continues to sustain its business operations including pager services. (c) In February 1997, the Company entered into a Letter of Intent with Franklin Electronic Publishers, Inc. ("Franklin"), setting forth the intention of the companies to enter into an agreement regarding a merger of the Company with Franklin upon certain terms and conditions including the Company's shareholder approval. Under the terms of the Letter of Intent, in March 1997, Franklin loaned the Company $500,000, secured by a promissory note on which interest accrues on the principal at 9% per year. The interest and principal on the note is payable (whether or not a merger agreement is executed) on December 31, 1997, and is secured by all of the Company's tangible and intangible assets, subordinate only to the financial institution with which the Company has an accounts receivable transfer and purchase agreement (Note 3). The letter of intent was subsequently terminated. (d) Subsequent to year end, in May 1997, the Company consummated a transaction involving two agreements with Franklin Electronic Publishers, Inc. ("Franklin"), a Pennsylvania corporation. 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 Organizer Models 5150 and 5160 (IQoVOICE Pocket Organizers); 2) The Company sold to Franklin for $150,000 in cash 2,000,000 shares of the Company's common stock, par value $.001 per share, representing the approximate market price of the Company's common stock at the time of the transaction; and 3) Franklin loaned the Company cash equal to $1,200,000, in addition to $500,000 previously loaned to the Company, and restructured the payment terms of a new $1,700,000 note over a four year period. The second agreement was a Technology Transfer Agreement in which the two companies entered into the following transactions: 1) The Company granted to Franklin a non-exclusive perpetual license for technology rights evidenced by the Company's patent related to operation of Voice Organizer products as well as other technology and software developed by the Company related to or used in the Model 5150 and 5160 for an advance royalty of $700,000 against an agreed upon per unit royalty; and 2) the Company assigned the rights to its VoiceLogic Technology to Franklin, and Franklin granted back to the Company a non-exclusive perpetual license of the VoiceLogic Technology, including the right to sublicense, for the development, manufacture, sale and distribution of Voice Organizer products with recording times in excess of four minutes and any other electronic products that are not Voice Organizers, subject to the Company remaining obligated to pay royalties to Franklin at the same rates for which the Company was obligated to the inventor of the VoiceLogic Technology prior to its assignment to Franklin. (e) Also in May 1997, the Company entered into agreements with Flextronics (Malaysia) SDN. BHD. ("Flextronics") and GSS/Array Technology, Inc. ("GSS"), the manufacturers of the Company's products, relating to the resolution of outstanding liabilities and commitments. The Company entered into a Settlement Agreement with Flextronics under which the Company made a cash payment and assigned the proceeds due pursuant to a licensing agreement with Kong Wah Video F-15 46 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS - (Continued) for a voice operated television remote control device to Flextronics as full and final settlement for all outstanding liabilities and commitments other than approximately $260,000 in inventory which has already been manufactured by Flextronics. The Company has committed to purchase such inventory prior to June 30, 1997. The Company also entered into a Discounted Payment and Adequate Assurance of Performance Agreement with GSS under which the Company made a cash payment and issued 500,000 shares of non-voting, non-cumulative, convertible preferred stock, with a $0.06 per share mandatory dividend payable annually in cash or common stock at the option of the Company on the anniversary date of issuance, as full and final settlement of outstanding liabilities. The preferred stock will have a $1.00 per share liquidation preference and each share will be convertible into four (4) shares of the Company's common stock. Further, at the option of GSS, for a one year period the Company will agree to either appoint a representative of GSS to the Board of Directors of the Company or to allow a representative to attend Board of Directors meetings as a non-voting observer. Also under the Discounted Payment and Adequate Assurance of Performance Agreement, GSS has agreed to continue to manufacture pursuant to the terms of the original Manufacturing Agreement for a period of not less than six months, and the Company has agreed to provide GSS with a standby letter of credit to secure the Company's payments. Lastly, on or about May 22, 1997, the Company entered into agreements with many of its other trade creditors in which the trade creditors agreed to accept discounted lump sum payments in full consideration of current obligations of the Company. (f) As of May 1, 1997, the Company entered into three agreements with Edward M. Krakauer establishing the terms and conditions under which Mr. Krakauer resigned as the Company's president and CEO. Under the first agreement, a Termination Agreement, Mr. Krakauer's employment agreement was terminated and a negotiated payment plan was established for accrued salaries of $52,000.00 owed to the date of termination plus a discounted balance of the terminated employment agreement of $190,000.00 Payments applicable to the foregoing will be made at various intervals through June 30, 1998. Under the terms of the second agreement, a Consulting Agreement, Mr. Krakauer would serve the Company as a consultant through June 30, 1998, at an annual rate of $60,000 per year. Under the third agreement, Mr. Krakauer was granted 75,000 stock options at an exercise price of $.008 per share (which was 20% of the fair market value per share at the time of the grant in accordance with previous options granted by the Company for non-employee directors). Mr. Krakauer will remain The Chairman of the Company's Board of Directors. F-16 47 EXHIBIT 11 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
YEAR ENDED YEAR ENDED 12/31/95 12/31/96 ------------ ------------ ENDING MARKET PRICE PER SHARE $ 1.63 $ 0.25 ------------ ------------ AVERAGE MARKET PRICE PER SHARE $ 2.78 $ 1.16 ------------ ------------ EARNINGS: Net loss applicable to common stock $ (2,819,097) $ (4,834,240) PRIMARY EARNINGS (LOSS) PER SHARE: Weighted average number of common shares outstanding 12,549,201 13,720,414 Incremental shares assuming all dilutive options and warrants exercised and proceeds used to purchase shares in the market at the average stock price during the period 0 0 ------------ ------------ Total 12,549,201 13,720,414 ============ ============ Primary loss per share $ (0.22) $ (0.35) ============ ============ FULLY DILUTED EARNINGS (LOSS) PER SHARE: Weighted average number of common shares outstanding 12,549,201 13,720,414 Incremental shares assuming all dilutive options and warrants exercised and proceeds used to purchase shares in the market at the average stock price during the period, or the stock price at the end of the period, whichever is higher 0 0 ------------ ------------ Total 12,549,201 13,720,414 ============ ============ Fully diluted loss per share $ (0.22) $ (0.35) ============ ============
48 EXHIBIT 11 CONTINUED VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
Actual Shares outstanding at 1/1/95 12,435,673 Net weighted average shares issued during 1995 113,528 ---------------- Weighted average shares outstanding for earnings per share computation at 12/31/95 12,549,201 ================ Actual Shares outstanding at 1/1/96 12,486,273 Net weighted average shares issued during 1996 1,234,141 ---------------- Weighted average shares outstanding for earnings per share computation at 12/31/96 13,720,414 ================
Note: Common stock equivalents for 1995 and 1996 have not been considered because their effect would be anti-dilutive. 49 EXHIBIT INDEX
* 3(a) Articles of Incorporation, as amended * 3(b) Bylaws, as amended * 4(a) Form of Warrant Agreement with U.S. Stock Transfer Corp. * 4(b) Form of Representative's Unit Purchase Option * 4(c) Specimen of Common Stock Certificate of Registrant * 4(d) Form of Warrant Certificate * 10(a) 1992 Stock Option Plan *** 10(aa) 1994 Stock Option Plan * 10(b) Employment Agreement with Michael Bissonnette * 10(c) Employment Agreement with Edward M. Krakauer * 10(d) Employment Agreement with Jerry Gutterman **** 10(dd) 1994 Consulting Agreement between Registrant and Jerry Gutterman * 10(e) Non-Qualified Stock Option Agreement with Edward M. Krakauer * 10(f) Non-Qualified Stock Option Agreement with Jerry Gutterman * 10(g) Agreement and Stock Option Agreement with Jerry Gutterman * 10(h) Leases for Canoga Park, California * 10(hh) Additional Leases for Canoga Park, California *** 10(hhh) Additional Leases for Canoga Park and Chatsworth, California **** 10(hhhh) Lease for Executive Offices, Sherman Oaks, California * 10(i) License Agreement with ESSO Development, Inc. * 10(j) Manufacturing and Warrant Agreements with Flextronics (Malaysia) SDN, BHD * 10(l) Agreements with Regal Communications Corporation **+ 10(m) Stock Option Agreement between Michael Bissonnette and Edward Krakauer **+ 10(n) Escrow Agreement among Michael Bissonnette, Edward Krakauer and U.S. Stock Transfer Corporation **+ 10(o) Registration Rights Agreement between Registrant and Edward Krakauer **+ 10(p) 1993 Employment Agreement between Registrant and Edward Krakauer **+ 10(pp) Indemnity Agreement between Registrant and Edward Krakauer (1)+ 10(ppp) Amendment to Employment Agreement with Edward M. Krakauer + 10(pppp) Amendment to Employment Agreement with Edward M. Krakauer + 10(ppppp) Termination Agreement with Edward M. Krakauer + 10(pppppp) Consulting Agreement with Edward M. Krakauer **+ 10(q) Amendment to Employment Agreement between Michael Bissonnette and Registrant ***+ 10(qq) Indemnity Agreement between Registrant and Michael Bissonnette ***+ 10(qqq) 1994 Consulting Agreement between Registrant and Michael Bissonnette ***+ 10(r) Indemnity Agreement between Registrant and Jerry Gutterman ***+ 10(s) Employment Agreement between Registrant and Mitchell Rubin ***+ 10(ss) Indemnity Agreement between Registrant and Mitchell Rubin **** 10(sss) Registration Rights Agreement and Amendment thereto between Registrant and Mitchell Rubin (1)+ 10(ssss) Amendment to Employment Agreement with Mitchell B. Rubin + 10(sssss) Amendment to Employment Agreement with Mitchell B. Rubin ****+ 10(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 (1)+ 10(uu) Amendment to Employment Agreement with George H. Fischer ***** 10(v) Flextronics Termination Agreement 10(vv) Settlement Agreement with Flextronics (1)+ 10(w) Employment Agreement with Kenneth I. DeWitt (1)+ 10(ww) Amendment to Employment Agreement with Kenneth I. DeWitt + 10(www) Amendment to Employment Agreement with Kenneth I. DeWitt (1) 10(x) Business Cooperation Agreement with Hansol Electronics, Inc. 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
50
EXHIBIT INDEX - (Continued) (1) 10(z) Loan Agreement with Manufacturers Bank (1) 10(zz) Amendment to Loan Agreement with Manufacturers Bank 10.1 MobileComm Joint Purchase and Marketing Agreement 10.1.1 MobileComm Settlement Agreement 10.1.2 MobileComm Amended Settlement Agreement 10.2 Employment Agreement with Larry Kloman 10.3 Manufacturing Agreement with GSS/Array 10.3.1 Agreement for Discounted Payment and Adequate Assurance of Performance with GSS/Array 10.4 Loan Agreement with KBK Financial 10.5 Letter of Intent from Voice It Worldwide, Inc. 10.5.1 Termination Letter from Voice It Worldwide, Inc. 10.6 Letter of Intent from Franklin Electronic Publishers, Inc. 10.6.1 Security Agreement with Franklin Electronic Publishers, Inc. @ 10.6.2 Purchase and Loan Agreement with Franklin Electronic Publishers, Inc. @ 10.6.3 Technology Transfer Agreement with Franklin Electronic Publishers, Inc. 10.7 Lease for Executive offices, Tarzana, California 11 Calculations of Earnings Per Share 21 Subsidiaries: None 23 Consent of BDO Seidman, LLP 27 Financial Data Schedule
- ---------------
* 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.
51 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, there and to duly authorized. VOICE POWER TECHNOLOGY INTERNATIONAL, INC. /s/ Mitchell B. Rubin ----------------------------------------- DATE: June 9, 1997 By: Mitchell B. Rubin President and CEO In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date - --------- ----- ---- /s/ Edward M. Krakauer - --------------------------- Edward M. Krakauer Chairman of the Board June 9, 1997 /s/ Mitchell B. Rubin - --------------------------- Mitchell B. Rubin President and CEO June 9, 1997 /s/ Myron Hitchcock - --------------------------- Myron Hitchcock Director June 9, 1997
EX-10.(PPPP) 2 AMENDMENT TO EMPLOYMENT AGREEMENT 1 EXHIBIT 10(pppp) Amendment to Employment Agreement of Edward M. Krakauer Effective as of January 1, 1997 The following amendment to the written employment agreement dated August 3, 1993 (the "Employment Agreement") by and between Voice Powered Technology International, Inc. (the "Company") and Edward M. Krakauer ("Employee") is made and entered into effective as of January 1, 1997 as follows: 1. Reduction in Payment of Base Salary: Subject to the provisions of Paragraph 2 below, commencing effective as of January 1, 1997 and continuing for the shorter of either (referred to as the "Reduction Period") (A) the term of Employee's employment, or (B) December 31, 1997, the cash payment of the Employee Base Salary shall be paid at the rate of the annual sum of One Hundred Fifty Thousand ($150,000) (the "Payment Rate"); thereafter, the rate of payment of the Employee's Base Salary cash payment shall return to the amount otherwise provided in the Employment Agreement without regard to this Amendment. During the Reduction Period, the difference between the Employee's Base Salary and the Payment Rate ("Deferred Payment") shall be accrued on the books of the Company as a valid and owing current obligation. The Deferred Payment shall be payable by the Company to the Employee upon expiration of the term of Employee's employment. The Board of Directors of the Company may, but is not obligated to, increase the Base Salary or the Payment Rate prior to expiration of the Reduction Period if, in its sole discretion, it deems such to be reasonable and appropriate. 2. Cessation of Reduction: Notwithstanding anything to the contrary in Paragraph 1 above, the cash payment reduction described in said Paragraph 1 shall automatically cease, and thereafter the cash payment of the Employee's Base Salary shall return to the amount otherwise provided in the Employment Agreement without regard to this Amendment and notwithstanding that
1 2 the Reduction Period may not have expired and the Deferred Payment shall become immediately due and payable upon the occurrence of any of the following: (A) the acquisition by any person or entity, or by any group (as such term is used for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules, regulations, and forms thereunder, of 20% or more of the outstanding voting securities of the Company; (B) the approval by either the Board of Directors or the shareholders of the Company of any merger or other reorganization (as such term is defined in Section 181 of the California Corporations Code) involving the Company; (c) termination of Employee's employment under either paragraph 5(a)(3) or 5(a)(4) (but, as concerns said paragraph 5(a)(4), only in the case of mental or physical disability or death as described in said paragraph 5(a)(4) and in no other case); or (d) the filing of any petition by or against the Company under the United States Bankruptcy Code. 3. No Other Changes: Except as expressly provided in this Amendment, the Employment Agreement shall remain in full force and effect, without any other change, amendment, or alteration.
EXECUTED effective as of January 1, 1997 by the Company and Employee. The Company -- Voice Powered Technology International, Inc., a California corporation By: /s/ Mitchell Rubin ---------------------------------- Its: Vice President/CFO Employee -- /s/ Edward M. Krakauer, an individual ----------------------- Edward M. Krakauer 2 EX-10.(PPPPP) 3 TERMINATION AGREEMENT 1 Exhibit 10(PPPPP) TERMINATION AGREEMENT (Voice Powered Technology International. Inc. Edward M. Krakauer) This Termination Agreement (this "Agreement") is entered into as of this 2nd day of May, 1997, by and between Voice Powered Technology International, Inc., a California corporation (the "Company"), and Edward M. Krakauer, an individual ("Krakauer"). RECITALS A. The Company and Krakauer are parties to that certain 1993 Employment Agreement dated August 3, 1997 (the "Employment Agreement"), and as thereafter amended, pursuant to which Krakauer is employed by the Company. B. The Company and Krakauer desire to terminate the Employment Agreement upon the terms and conditions hereinafter set forth. AGREEMENT 1. Termination of Employment Agreement. Subject to the further terms and conditions set forth in this Agreement, effective as of the close of business on April 30, 1997 (the "Termination Date") the Employment Agreement is hereby terminated and nullified in its entirety, and shall be of no further force or effect whatsoever, including the severance payment provisions thereof. 2. Past Due Amounts Under Employment Agreement. The parties agree and acknowledge that, through the Termination Date the Company owes Krakauer Fifty Two Thousand Twenty Five Dollars ($52,025) (the "Past Due Compensation") for compensation earned by Krakauer under the Employment Agreement but not paid by the Company. In satisfaction of all Past Due Compensation, the Company will pay to Krakauer: (a) Two Thousand Five Hundred Dollars ($2,500) on the 15th day of each month beginning May 15, 1997 and ending on February 15, 1998; and (b) Twenty Seven Thousand Twenty Five Dollars ($27,025) on March 15, 1998. 3. Amounts Due For Balance of Employment Agreement. The parties further agree and acknowledge that, if the Employment Agreement were not terminated pursuant to this Agreement, Krakauer would be entitled to an additional Three Hundred Eighty Thousand One Hundred Forty Seven Dollars ($380,147) as compensation under the Employment Agreement from the Termination Date through the termination date of June 30, 1998 as set forth in Section 1 of the Employment Agreement (the "Balance 2 Compensation"). Subject to Section 5 of this Agreement, Krakauer agrees to forego payment of 50% of the Balance Compensation, leaving a balance of One Hundred Ninety Thousand Seventy Four Dollars ($190,074). In satisfaction of all Balance Compensation, the Company will pay to Krakauer: (a) Ten Thousand Dollars ($10,000) on September 30, 1997; (b) Twenty Thousand Dollars ($20,000) on December 31, 1997; (c) Forty Thousand Dollars ($40,000) on March 31, 1998; and (d) One Hundred Twenty Thousand Seventy Four Dollars ($120,074) on June 30, 1998. 4. Default in Payment of Balance Compensation. Any failure by the Company to pay an installment of Balance Compensation under Section 3 of this Agreement must be cured by the Company within ten (10) business days after its receipt of written notice of such failure. In the event the Company fails to make payment within that period, the Company will again be liable for the full Three Hundred Eighty Thousand One Hundred Forty Seven Dollars ($380,147) of Balance Compensation, less any payments of Balance Compensation actually made by the Company. 5. Consulting Agreement. Simultaneously with the execution of this Agreement, the parties will also execute a consulting agreement (the "Consulting Agreement") substantially in the form of Exhibit A to this Agreement. 6. Continued Effectiveness of Indemnity Agreement. Notwithstanding termination of the Employment Agreement, the parties agree that that certain Indemnity Agreement dated August 3, 1993 (the "Indemnity Agreement") between Krakauer and the Company will remain in full force and effect and Krakauer will be entitled to all of the rights, benefits and protection afforded by the Indemnity Agreement for the duration of Krakauer's life for all services rendered to the Company by Krakauer in any capacity pursuant to the Employment Agreement, pursuant to the Consulting Agreement and otherwise. 7. Miscellaneous. 1 Entire Agreement. This Agreement, the Consulting Agreement and the Indemnity Agreement constitute the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements, negotiations and understandings of the parties in connection therewith, including the aforementioned Employment Agreement. 2 3 2 Amendment. Neither this Agreement nor any term or provision hereof may be changed, waived, discharged or terminated orally, or in any manner other than by an instrument in writing signed by the party against which the enforcement or the change, waiver, discharge or termination is sought. 3 Waiver. Any term or condition of this Agreement may be waived only in writing at any time by the party hereto which is entitled to the benefit thereof, but such waiver shall only be effective if evidenced by a writing signed by such party. A waiver on one occasion shall not be deemed to be a waiver of the same or of any other breach on a future occasion. 4 Severability. If any term, provision, covenant, or restriction is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants, or restrictions of this Agreement shall remain in full force and effect and shall in no way be effected, impaired, or invalidated; provided, however, that the deletion of such term, provision, covenant, or restriction would not materially impair the performance of the transactions contemplated hereunder. 5 Counterpart Execution. This Agreement may be executed in two or more counterparts each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 6 Headings. The headings set out in this Agreement are for the convenience of the parties and shall not be deemed a part of this Agreement. 7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California and the parties agree to submit to the jurisdiction of the courts in California with respect to any lawsuits, judicial reference or other legal proceedings arising hereunder or in connection herewith. 8 Dispute Resolution. Any dispute or disagreement between the parties with respect to any term of this Agreement, the subject matter hereof or the interpretation or enforcement hereof shall be resolved pursuant to the dispute resolution provisions set forth in Sections 638 - 645.1 of the California Code of Civil Procedure and the unsuccessful party in any such litigation shall pay to the successful party all costs and fees, including reasonable attorneys' fees, incurred by the successful party and such costs and fees shall be included in and as part of any judgment rendered in such action. 9 Legal Representation. Both parties acknowledge that Cox, Castle & Nicholson, LLP has represented only the Company in connection with the negotiation and preparation of this Agreement, and has not served as legal 3 4 counsel for Krakauer in connection with same. Each party hereto has been represented by its own separate legal counsel in connection with the negotiation and preparation of this Agreement. By execution hereof, Krakauer consents to Cox, Castle & Nicholson, LLP representing the Company in connection with the drafting and negotiation of this Agreement, and waives any conflict of interest in connection therewith arising out of any past representation of Krakauer by Cox, Castle & Nicholson, LLP. IN WITNESS WHEREOF, the parties hereto have executed this Termination Agreement as of the day and year first above written. "COMPANY" Voice Powered Technology International, Inc., a California corporation By: /s/ Mitchell B. Rubin --------------------------------- Mitchell B. Rubin, President/CEO "KRAKAUER" Edward M. Krakauer, an individual By: /s/ Edward M. Krakauer --------------------------------- Edward M. Krakauer 4 EX-10.(PPPPPP) 4 CONSULTING AGREEMENT 1 EXHIBIT 10(PPPPPP) CONSULTING AGREEMENT (Voice Powered Technology International, Inc. Edward M. Krakauer) This Consulting Agreement (this "Agreement") is entered into as of this 2nd day of May, 1997, by and between Voice Powered Technology International, Inc., a California corporation (the "Company"), and Edward M. Krakauer, an individual ("Consultant"). RECITALS A. The Company is engaged in the business of developing, marketing, licensing, and otherwise exploiting voice recognition technology and products. B. The Company and Consultant are presently parties to that certain 1993 Employment Agreement dated August 3, 1997, and as thereafter amended (the "Employment Agreement"), pursuant to which Consultant is employed by the Company. C. Simultaneously with the execution of this Agreement, the parties are executing a Termination Agreement (the "Termination Agreement") whereby they agree to terminate the Employment Agreement. D. The Company desires to retain Consultant to provide the services described below upon the terms and conditions hereinafter set forth. AGREEMENT 1. Term of Agreement. Consultant hereby agrees with the Company to provide the services hereinafter described on the terms and conditions set forth herein for the period commencing on the date of this Agreement and ending on June 30, 1998 (the "Term"). 2. Duties. Consultant shall assist appropriate Company personnel using Consultant's commercially reasonable efforts to enable such personnel to learn and take over all of the executive and other functions previously performed by Consultant for the Company, and to provide the Company with Consultant's advice and services on and subject to the terms herein provided. Consultant shall provide such services, and such other services as the Company may request which are similar to those heretofore provided by Consultant to the Company, in person, via telephone or other means acceptable to both parties for a minimum of two (2) days per week during the Term of this Agreement. The Company shall give reasonable advance notice to Consultant regarding the exact hours during which such services are to be provided. 2 In addition to the foregoing duties, the Consultant may (though he is not required to) continue to serve on the Company's Board of Directors. 3. Nature of Services; Competition. Consultant shall use his commercially reasonable efforts in the performance of his duties hereunder. For a period of one (1) year immediately following the commencement of the Term hereof, Consultant will neither permit his name to be used by, nor engage in or carry on, directly or indirectly, either for himself or as a member or manager of a partnership or limited liability company, or as a stockholder (except as a stockholder of less than one percent (1%) of the issued and outstanding stock of a publicly held corporation), investor, officer or director of a corporation or as an employee, agent, associate or consultant of any person, partnership, limited liability company or corporation in any business in competition with the Company's voice recognition technology business. 4. Consulting Fee. The Company shall pay the Consultant a consulting fee of Five Thousand Dollars ($5,000) per month on the 15th day of each month, with the first payment due on May 15, 1997. The Company shall pay all sums called for hereunder as and when required notwithstanding any dispute or disagreement with Consultant concerning his services hereunder or any other matter unless and until the Company obtains a final judgment from a court of competent jurisdiction to the effect that the Company is not obligated to make such payments and the appeal period and any appeal of any such judgment has expired or concluded, as the case may be, and, additionally, Consultant shall not have a duty to mitigate his damages hereunder. Any failure to pay a monthly installment hereunder must be cured by the Company within five (5) business days of its receipt of written notice of such failure. 5. Medical Insurance. The Company will maintain health insurance coverage for Consultant through June 30, 1997, after which all such insurance coverage will be terminated. Thereafter, the Company will pay to Consultant an additional Two Hundred Dollars ($200) per month during the Term of this Agreement in lieu of providing health insurance coverage. 6. Relationship and Authority, Taxes, Insurance, Other. The relationship between the Company and Consultant intended to be created by this Agreement is that of an independent contractor, and nothing herein contained shall be construed as creating a relationship of employer and employee or principal and agent between the parties hereto. Consultant covenants and agrees that he shall not act as if or make any representation that he is authorized to act as an agent or officer of the Company. Consultant, not the Company, shall pay all federal income taxes, FICA taxes, medicare taxes, state 2 3 income taxes, state disability insurance, and all other federal, state, and local taxes, insurance, or other charges relating to Consultant's performance of services hereunder. Consultant shall also carry for himself any required worker's compensation insurance. 7. Surrender of Books and Records. Consultant agrees that, as and when requested to do so by the Company, and in any event upon the termination of this Agreement, Consultant shall immediately surrender to the Company all lists, books and records (and any copies thereof) of, or in connection with, the business of the Company, and all other properties belonging to the Company then in his possession, it being distinctly understood that all such lists, books and records, and other documents or property are the confidential, proprietary property of the Company. 8. Trade Secrets of the Company. Prior to and during the Term hereof Consultant has had and will have access to and become acquainted with various trade secrets consisting of devices, secret inventions, processes, and compilations of information, records, and specifications, which are owned by the Company, and which are regularly used or to be used in the operation of the business of the Company. Consultant shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the Term of this Agreement or at any time thereafter, except as required in the course of rendering his services to the Company. All files, records, documents, drawings, specifications, equipment, and similar items relating to the business of the Company, whether prepared by the Consultant or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not be removed under any circumstances from the premises where the work of the Company is being carried on without the prior written consent of the Company or consistent with the Company's normal business practices. 9. Inventions and Patents. Consultant agrees that as to any inventions relating to the Company's business made by him during the Term of his employment prior to the date hereof, or during the Term of this Agreement, solely or jointly with others, which are made with the equipment, supplies, facilities or trade secret information of the Company, or which relate at the time of the conception or reduction to purchase of the invention to the business of the Company (which currently is voice recognition technology products) or the Company's actual or demonstrably anticipated research or development, or which result from any work performed by Consultant for the Company, shall belong to the Company, and Consultant promises to assign such inventions to the Company. Consultant also agrees that the Company shall have the right to keep such inventions as trade secrets, if the Company chooses. Consultant agrees to assign to the Company Consultant's rights in any other inventions where the Company is required to grant those rights to the United States government or any agency thereof. 3 4 This Agreement does not apply to any inventions which are the subject of Section 2870 of the California Labor Code. In order to permit the Company to claim rights to which it may be entitled, Consultant agrees to disclose to the Company in confidence all inventions which Consultant makes arising out of the Consultant's services hereunder (or his prior employment) and all patent applications filed by Consultant through expiration of the Term hereof. Consultant shall assist the Company in obtaining patents on all inventions, designs, improvements, and discoveries deemed patentable by the Company in the United States and in all foreign countries, and shall execute all documents and do all things necessary to obtain letters patent, to vest the Company with full and extensive title thereto, and to protect the same against infringement by others. 10. Confidential Data of Customers of the Company. Consultant in the course of his employment prior to the commencement of the Term hereof, and during the Term hereof, may be handling financial, accounting, statistical, and personnel data of customers of the Company. All such data is confidential and shall not be disclosed, directly or indirectly, or used by Consultant in any way, either during the Term of this Agreement or at any time thereafter, except as required in the course of rendering services hereunder. 11. Assignment. Neither the rights of the Company nor its obligations under this Agreement may, without the consent of Consultant (which consent may be granted or withheld in Consultant's sole and absolute discretion), be assigned by the Company to any parent, subsidiary, or successor of the Company; provided that such parent, subsidiary or successor acknowledges in writing that it is also bound by the terms and obligations of this Agreement, and any such assignment shall not release the Company from any of its obligations hereunder. Except as provided in the preceding sentence, the Company may not assign all or any of its rights, duties or obligations hereunder without prior written consent of Consultant. Consultant may not assign all or any of his rights, duties or obligations hereunder without the prior written consent of the Company. 4 5 12. Notices. All notices, demands, requests and other communications required or permitted hereunder shall be in writing, and shall be deemed to be delivered when actually received, or, if earlier and regardless of whether actually received, three (3) business days after deposit in a regularly maintained receptacle for United States mail, registered or certified, postage fully prepaid, addressed to the addressee at its address set forth below or at such other address as such party may have specified theretofore by notice delivered in accordance with this paragraph and actually received by the addressee: If to Consultant: Mr. Edward M. Krakauer 940 Bluegrass Lane Los Angeles, California 90049 With a copy to: Rosenfeld & Wolff 2049 Century Park East, Suite 600 Los Angeles, California 90067 Attention: Morton M. Rosenfeld, Esq. If to the Company: Voice Powered Technology International, Inc. 18425 Burbank Boulevard, Suite 508 Tarzana, California 91356 Attention: Mr. Mitchell B. Rubin With a copy to: Cox, Castle & Nicholson, LLP 2049 Century Park East, Suite 2800 Los Angeles, California 90067 Attention: Samuel H. Gruenbaum, Esq. 13. Miscellaneous. 1 Entire Agreement. This Agreement, the Termination Agreement and that certain Indemnity Agreement dated August 3, 1993 between the Company and Consultant constitute the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements, negotiations and understandings of the parties in connection therewith, including the aforementioned Employment Agreement. 2 Amendment. Neither this Agreement nor any term or provision hereof may be changed, waived, discharged or terminated orally, or in any manner other than by an instrument 5 6 in writing signed by the party against which the enforcement or the change, waiver, discharge or termination is sought. 3 Waiver. Any term or condition of this Agreement may be waived only in writing at any time by the party hereto which is entitled to be the benefit thereof, but such waiver shall only be effective if evidenced by a writing signed by such party. A waiver on one occasion shall not be deemed to be a waiver of the same or of any other breach on a future occasion. 4 Severability. If any term, provision, covenant, or restriction is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants, or restrictions of this Agreement shall remain in full force and effect and shall in no way be effected, impaired, or invalidated; provided, however, that the deletion of such term, provision, covenant, or restriction would not materially impair the performance of the transactions contemplated hereunder. 5 Counterpart Execution. This Agreement may be executed in two or more counterparts each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 6 Headings. The headings set out in this Agreement are for the convenience of the parties and shall not be deemed a part of this Agreement. 7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California and the parties agree to submit to the jurisdiction of the courts in California with respect to any lawsuits, judicial reference or other legal proceedings arising hereunder or in connection herewith. 8 Dispute Resolution. Any dispute or disagreement between the parties with respect to any term of this Agreement, the subject matter hereof or the interpretation or enforcement hereof shall be resolved pursuant to the dispute resolution provisions set forth in Sections 638 - 645.1 of the California Code of Civil Procedure and the unsuccessful party in any such litigation shall pay to the successful party all costs and fees, including reasonable attorneys' fees, incurred by the successful party and such costs and fees shall be included in and as part of any judgment rendered in such action. 9 Legal Representation. Both parties acknowledge that Cox, Castle & Nicholson, LLP has represented only the Company in connection with the negotiation and preparation of this Agreement, and has not served as legal counsel for Consultant in connection with same. Each party hereto has been represented by its own separate legal counsel in 6 7 connection with the negotiation and preparation of this Agreement. By execution hereof, the Consultant consents to Cox, Castle & Nicholson, LLP representing the Company in connection with the drafting and negotiation of this Agreement, and waives any conflict of interest in connection therewith arising out of any past representation of Consultant by Cox, Castle & Nicholson, LLP. IN WITNESS WHEREOF, the parties hereto have executed this Consulting Agreement as of the day and year first above written. "COMPANY" Voice Powered Technology International, Inc., a California corporation By: /S/Mitchell B. Rubin -------------------------- Mitchell B. Rubin, President/CEO "CONSULTANT" Edward M. Krakauer, an individual By: /S/Edward M. Krakauer -------------------------- Edward M. Krakauer 7 EX-10.(SSSSS) 5 AMENDMENT TO EMPLOYMENT AGREEMENT 1 EXHIBIT 10(sssss) Amendment to Employment Agreement of Mitchell B. Rubin Effective as of January 1, 1997 The following amendment to the written employment agreement dated January 5, 1994 (the "Employment Agreement"), by and between Voice Powered Technology International, Inc. (the "Company") and Mitchell B. Rubin ("Employee") is made and entered into effective as of January 1, 1997 as follows: 1. Reduction in Base Salary: Subject to the provisions of Paragraph 2 below, Employee's Base Salary commencing effective as of January 1, 1997 and continuing for the shorter of either (referred to as the "Reduction Period") (A) the term of Employee's employment, or (B) December 31, 1997, the cash payment of the Employee Base Salary shall paid at the rate of the annual sum of One Hundred Thousand ($135,000) (the "Payment Rate"); thereafter, the rate of payment of the Employee's Base Salary cash payment shall return to the amount otherwise provided in the Employment Agreement without regard to this Amendment. During the Reduction Period, the difference between the Employee's Base Salary and the Payment Rate ("Deferred Payment") shall be accrued on the books of the Company as a valid and owing current obligation. The Deferred Payment shall be payable by the Company to the Employee upon expiration of the term of Employee's employment. The Board of Directors of the Company may, but is not obligated to, increase the Base Salary prior to expiration of the Reduction Period if, in its sole discretion, it deems such to be reasonable and appropriate. 2. Cessation of Reduction: Notwithstanding anything to the contrary in Paragraph 1 above, the cash payment reduction described in said Paragraph 1 shall automatically cease, and thereafter the cash payment of the Employee's Base Salary shall return to the amount otherwise provided in the Employment Agreement without regard to this Amendment and notwithstanding that the Reduction Period may not have 1 2 expired and the Deferred Payment shall become immediately due and payable upon the occurrence of any of the following: (A) the acquisition by any person or entity, or by any group (as such term is used for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules, regulations, and forms thereunder, of 20% or more of the outstanding voting securities of the Company; (B) the approval by either the Board of Directors or the shareholders of the Company of any merger or other reorganization (as such term is defined in Section 181 of the California Corporations Code) involving the Company; (c) termination of Employee's employment under either paragraph 5(a)(3) or 5(a)(4) (but, as concerns said paragraph 5(a)(4), only in the case of mental or physical disability or death as described in said paragraph 5(a)(4) and in no other case); or (d) the filing of any petition by or against the Company under the United States Bankruptcy Code. 3. No Other Changes: Except as expressly provided in this Amendment, the Employment Agreement shall remain in full force and effect, without any other change, amendment, or alteration. EXECUTED effective as of January 1, 1997 by the Company and Employee. The Company -- Voice Powered Technology International, Inc., a California corporation By: Edward M. Krakauer -------------------------------- Its: President Employee -- /s/ Mitchell B. Rubin, an individual ---------------------- Mitchell B. Rubin 2 EX-10.(VV) 6 SETTLEMENT AGREEMENT 1 EXHIBIT 10(vv) SETTLEMENT AGREEMENT This settlement agreement (the "Agreement") is entered into between Voice Powered Technology International, Inc. ("VPTI") and Flextronics (Malaysia) SDN, BHD ("Flextronics") and is executed as of this 19th day of May 1997. I. RECITALS 1.1 VPTI is a manufacturer of products using voice recognition. Flextronics is a contract manufacturer for VPTI. VPTI issues purchase orders (the "Purchase Orders") to Flextronics. Flextronics then orders the necessary components and manufactures finished goods for VPTI. Flextronics has manufactured finished goods for VPTI, and VPTI has not paid the amounts due under the Purchase Orders. Some of the outstanding Purchase Orders issued by VPTI relate to finished goods manufactured by Flextronics which have been invoiced and shipped to VPTI customers (the "Invoiced Finished Goods"). The remaining outstanding Purchase Orders issued by VPTI relate to finished goods manufactured and held by Flextronics (the "Finished Goods Inventory"). The Finished Goods Inventory is identified on Schedule "A" attached hereto. In addition, Flextronics is in possession of components ordered by Flextronics pursuant to certain "Long Lead Agreements" (the "Raw Components"). The total amount due to Flextronics from VPTI as of the date hereof for the Invoiced Finished Goods, the Finished Goods Inventory and the Raw Components is hereinafter referred to as the "Total Indebtedness." 2 1.2 VPTI has developed a unique proprietary voice recognition technology, designated as "VoiceLogic" technology. Said VoiceLogic technology has been licensed to Kong Wah Video Company Limited ("ONWA") pursuant to that certain license agreement (the "License Agreement") effective on March 30, 1994. Paragraph 4 of the License Agreement requires ONWA to pay certain royalties to VPTI in consideration for ONWA's use of the VoiceLogic technology. Paragraph 4 of the License Agreement provides that a minimum royalty of $275,000 is due to VPTI through termination of the License Agreement on December 31, 1999. 1.3 VPTI has recently experienced financial difficulties and is presently unable to pay the amounts owed to Flextronics pursuant to the Purchase Orders. VPTI is presently attempting to sell certain of its assets to an unrelated third party (the "Transaction") and distribute certain of the proceeds to its creditors. VPTI and Flextronics acknowledge that in the event that VPTI is unable to sell its assets for a satisfactory price or otherwise restructure its financial affairs VPTI may file a voluntary petition for relief under Title 11 United States Code. In order to facilitate a sale of VPTI's assets, Flextronics shall accept discounted payment of the Total Indebtedness as set forth herein. II. AGREEMENT 2.1 In full and final satisfaction of all of the Total Indebtedness owed by VPTI to Flextronics as of the date of this Agreement is executed, VPTI shall: -2- 3 2.1.1 Pay to Flextronics on or before May 21, 1997 the sum of Nine Hundred Fifty-Five Thousand Dollars and No/Cents ($955,000.00) which, in addition to the consideration set forth in paragraph 2.1.2 below, shall represent full and final settlement of all outstanding obligations for (i) goods manufactured by Flextronics and shipped to VPTI including, but not limited to, the Invoiced Finished Goods; and (ii) any remaining components in the possession of Flextronics including, but not limited to, the Raw Components. 2.1.2 Use best efforts to assign without recourse to Flextronics the royalties due under the Licensing Agreement with ONWA, notify ONWA of such assignment and request payment directly to Flextronics from ONWA. If VPTI is unable to obtain ONWA's consent to said assignment, then VPTI hereby agrees to remit to Flextronics immediately upon receipt thereof, any royalty payments paid by ONWA pursuant to the Licensing Agreement. 2.1.3 Take delivery of all Finished Good Inventory held by Flextronics, as indicated in Schedule "A" attached to this Agreement on or before June 30, 1997. The purchase price for the aforementioned units shall be as set forth in Schedule "A" and shall be paid immediately prior to shipment by Flextronics. Notwithstanding the foregoing, VPTI shall purchase and pay for all units of Models 5200, 5300, 5050B and 5050BEIS on or before May 21, 1997. 2.1.4 In the event VPTI fails to comply with the provision of 2.1.1, then this Agreement shall become null and void, and VPTI shall be obligated for the Total Indebtedness owed by VPTI to Flextronics prior to the Agreement less any payments made under 2.1.1. In addition should any amounts paid to Flextronics pursuant to 2.1.1, 2.1.2 or 2.1.3 be required, by -3- 4 order of any court or pursuant to any negotiated compromise, to be returned to VPTI, this Agreement shall be null and void, and VPTI shall be obligated for the Total Indebtedness less any amounts retained by Flextronics. 2.1.5 As of the date hereof, VPTI represents that it has no claim, offset or counterclaim against Flextronics including, without limitation, claims with respect to quality or workmanship related to the manufacture of VPTI's products by Flextronics. Further, VPTI hereby releases Flextronics, as of the date herein, from any and all claims and liabilities of any nature whatsoever. III. ASSIGNMENT OF CLAIMS 3.1 No party hereto has assigned, transferred, or granted, or purported to assign, transfer or grant, any of the claims and causes of action disposed of by this Agreement. IV. NO ADMISSION 4.1 This Agreement represents a compromise of claims and shall not be construed as an admission by any party of any liability or of any contention or allegation made by any other party, except that VPTI acknowledges the Total Indebtedness as a valid debt due and owing from VPTI to Flextronics. -4- 5 V. GOVERNING LAW 5.1 This Agreement shall be governed by and construed in accordance with the laws of the State of California. VI. ENTIRE AGREEMENT 6.1 This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous oral and written agreements and discussions. This Agreement may be amended only by an agreement in writing. VII. CONSENT 7.1 The parties hereto acknowledge that they were represented by attorneys of their own choosing in the negotiations for and preparation of this Agreement, that they have read this Agreement, that they are fully aware of its contents and of its legal effect by virtue of discussions with their attorneys, and that they have freely and voluntarily entered into the settlement set forth in this Agreement. -5- 6 VIII. CAPTIONS 8.1 Any captions to the paragraphs of this Agreement are solely for the convenience of the parties, are not a part of this Agreement, and shall not be sued for the interpretation or determination of the validity of this Agreement or any portion thereof. IX. AUTHORITY TO EXECUTE AGREEMENT 9.1 Each party or responsible officer or partner thereof executing this Agreement is duly authorized to enter into and execute this Agreement in such capacity. X. JURISDICTION 10.1 The parties hereto agree that in the event that VPTI files a voluntary petition under Title 11, United States Code, or a petition is filed against it under Title 11, United States Code, the United States Bankruptcy Court for the Central District of California shall have sole and exclusive jurisdiction, sitting without a jury, to hear and determine any disputes that arise under or account of this Agreement. -6- 7 10.2 In all other events, all actions or proceeding arising in connection with this Agreement, shall be tried and litigated only in the state and federal courts located in the County of Los Angeles, State of California. XI. WAIVER OF JURY TRIAL 11.1 VPTI AND FLEXTRONICS HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, CAUSE OF ACTION, OR PROCEEDING ARISING UNDER AND IN ANY WAY RELATED TO THIS AGREEMENT. EITHER PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE OTHER PARTY HERETO TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY. XII. ATTORNEYS FEES TO PREVAILING PARTY 12.1 To the extent any party needs to commence an action to enforce the provisions of this Agreement, then the prevailing party in that action shall be entitled to collect all reasonable attorneys fees and costs in connection therewith. -7- 8 XIII. IMPLEMENTATION 13.1 VPTI and Flextronics shall execute such other and further documents and do such further acts as may reasonably be required to effectuate the intent of the parties to carry out the terms of this Agreement. XIV. MISCELLANEOUS 14.1 This Agreement shall inure to the benefit of and be binding on the successors and assignees of the parties and each of them. 14.2 If any provision of this Agreement or portion thereof shall be declared invalid for any reason, then the invalid provision or portion thereof shall be deemed omitted and the remaining terms shall nevertheless be carried into effect. -8- 9 14.3 This Agreement may be executed in any number of counterparts, each of which shall constitute one and the same instrument. Facsimile signatures shall be treated as originals. DATED: May 19, 1997 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. By: /s/ MITCHELL B. RUBIN -------------------------------------- Mitchell B. Rubin Its: President and CEO -------------------------------------- DATED: May ____, 1997 FLEXTRONICS (MALAYSIA) SDN, BHD By: /s/ MICHAEL E. MARKS -------------------------------------- Michael E. Marks Its: Chairman and CEO -------------------------------------- -9- 10 SCHEDULE A FINISHED GOODS INVENTORY
MODEL NO. UNIT PRICE UNITS PURCHASED AMOUNT - ---------------------- ---------- --------------- ----------- 5200 $50.87 1,680 $ 85,461.60 5300 EIS 52.86 731 38,640.66 5300 EFG 52.86 457 24,157.02 5300 PSI 52.94 40 2,117.60 5500 60.08 740 44,459.20 5050 B 33.70 79 2,662.30 5050 BEIS 33.70 200 6,740.00 5050 GEFG 33.70 1,654 55,739.80 ----------- Total Purchase Price $259,978.18 ===========
-10- EX-10.(WWW) 7 AMENDMENT TO EMPLOYMENT AGREEMENT 1 EXHIBIT 10(www) Amendment to Employment Agreement of Kenneth I. DeWitt Effective as of January 1, 1997 The following amendment to the written employment agreement dated June 23, 1995 (the "Employment Agreement") by and between Voice Powered Technology International, Inc. (the "Company") and Kenneth I. DeWitt ("Employee") is made and entered into effective as of January 1, 1997 as follows: 1. Reduction in Base Salary: Subject to the provisions of Paragraph 2 below, Employee's Base Salary commencing effective as of January 1, 1997 and continuing for the shorter of either (referred to as the "Reduction Period") (A) the term of Employee's employment, or (B) December 31, 1997, the cash payment of the Employee Base Salary shall be paid at the rate of the annual sum of One Hundred Thousand ($100,000) (the "Payment Rate"); thereafter, the rate of payment of the Employee's Base Salary cash payment shall return to the amount otherwise provided in the Employment Agreement without regard to this Amendment. During the Reduction Period, the difference between the Employee's Base salary and the Payment Rate ("Deferred Payment") shall be accrued on the books of the Company as a valid and owing current obligation. The Deferred Payment shall be payable by the Company to the Employee upon expiration of the term f Employee's employment. The Board of Directors of the Company may, but is not obligated to, increase the Base Salary prior to expiration of the Reduction Period if, in its sole discretion, it deems such to be reasonable and appropriate. 2. Cessation of Reduction: Notwithstanding anything to the contrary in Paragraph 1 above, the cash payment reduction described in said Paragraph 1 shall automatically cease, and thereafter the cash payment of the Employee's Base Salary shall return to the amount otherwise provided in the Employment Agreement without regard to this Amendment and notwithstanding that the Reduction Period may not have expired and the Deferred Payment shall become immediately due and payable upon 1 2 the occurrence of any of the following: (A) the acquisition by any person or entity, or by any group (as such term is used for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules, regulations, and forms thereunder, of 20% or more of the outstanding voting securities of the Company; (B) the approval by either the Board of Directors or the shareholders of the Company of any merger or other reorganization (as such term is defined in Section 181 of the California Corporations Code) involving the Company; (c) termination of Employee's employment under either paragraph 5(a)(3) or 5(a)(4) (but, as concerns said paragraph 5(a)(4), only in the case of mental or physical disability or death as described in said paragraph 5(a)(4) and in no other case); or (d) the filing of any petition by or against the Company under the United States Bankruptcy Code. 3. No Other Changes: Except as expressly provided in this Amendment, the Employment Agreement shall remain in full force and effect, without any other change, amendment, or alteration. EXECUTED effective as of January 1, 1997 by the Company and Employee. The Company -- Voice Powered Technology International, Inc., a California corporation By: Edward M. Krakauer ---------------------------- Its: President Employee -- /s/ Kenneth I. DeWitt an individual --------------------- Kenneth I. DeWitt 2 EX-10.(XX) 8 TERMINATION AGREEMENT 1 EXHIBIT 10(xx) TERMINATION AGREEMENT This Termination Agreement is entered into this 20th day of February, 1997 by and between Voice Powered Technology International, Inc., a corporation organized and existing under the laws of the State of California, U.S.A. and having a principal place of business at 15260 Ventura Boulevard, Sherman Oaks, California 91403 ("VPTI"), and Hansol Electronics, Inc., a corporation organized and existing under the laws of the Republic of South Korea and having its principal place of business at 5th Floor, AD Bldg., 997 Daechi-Dong, Gangnam-Gu, Seoul, Korea ("Hansol"). WHEREAS, VPTI and Hansol have previously entered into a Business Cooperation Agreement for Technology Transfer, Manufacturing and Marketing dated February 23, 1996 (the "Agreement"), and; WHEREAS, VPTI and Hansol have determined that it is in their mutual best interest to terminate the Agreement and settle the pending disputes between the parties hereto in connection with the Agreement pursuant to the terms and conditions as stated herein. NOW, THEREFORE, in consideration of the mutual covenants and premises set forth herein, VPTI and Hansol hereby agree as follows. I. DEFINITIONS - All capitalized terms used herein shall have the same meanings ascribed to them in the Agreement. II. TERMINATION - Hansol and VPTI hereby agree to terminate the Agreement effective as of the date written above subject to the following terms and conditions: 1. TRANSFER OF INVENTORY a) Hansol agrees to release to VPTI, free of all claims, liens and encumbrances of any kind whatsoever the Products and parts (the "Inventory") listed on Exhibit "A" attached hereto valued at $180,365.20. b) Hansol shall make available and VPTI shall be entitled to inspect the Inventory at Hansol's factory in South Korea or other such location within South Korea as Hansol may designate during normal business hours. Such inspection shall require a minimum of three working days and shall be scheduled by mutual agreement between Hansol and VPTI between March 1, 1997 and March 10, 1997. c) VPTI shall have the right to reject any finished goods Inventory that does not meet quality control standards for finished goods in accordance with Exhibit B attached hereto and any parts Inventory which has been previously used in any manufacturing process. Hansol further agrees, upon completion of such inspection by VPTI, to release to VPTI free of all claims, liens or encumbrances of any kind whatsoever, all test fixtures for VPTI's products 1 2 provided by VPTI to Hansol, including but not limited to the COB test fixtures provided by VPTI for the Model 5160. Hansol shall provide to VPTI all documentation required by any governmental authority in South Korea to enable export of the Inventory to VPTI's warehouse in the United States of America. Hansol shall be responsible for all taxes and other fees that may be imposed by such South Korean governmental authority as a result of VPTI's export of such Inventory. d) In the event VPTI rejects any inventory in accordance with Section II.1(c) above, Hansol shall pay to VPTI in cash, within ten (10) business days from the date VPTI notifies Hansol in writing of such rejection, the value of such inventory based upon the component prices utilized to compute the value of such Inventory on Exhibit "A" (the "Shortfall"). e) In the event Hansol defaults in its obligation to transfer the Inventory to VPTI in accordance with Section II.1, or fails to make the Shortfall payment to VPTI in accordance with Section II.1(d), VPTI shall have the right to pursue any and all remedies against Hansol to enforce collection of the amounts due VPTI pursuant to this Termination Agreement plus the sum of $150,000 which would have been due to VPTI under Section V.5.B. of the Agreement. f) Except as set forth in the terms of this Termination Agreement, the parties to this Termination Agreement unconditionally release and forever discharge each other, including all respective parents, subsidiaries, predecessors, successors, directors, officers, shareholders, executors, administrators, assigns, representatives, employees and employers, from, and hereby waive, disclaim and relinquish and, all rights to all and any claims they may now have, own, hold or claim to have, own or hold at any time prior to the effective date of this Termination Agreement on whatever basis, whether known or unknown, suspected or not and whether asserted or not with respect to any claims which were, could have been, or may be the subject of the Agreement other than claims pursuant to Section VII of the Agreement which shall survive this Termination Agreement. Each party to the Termination Agreement, furthermore, acknowledges that he is familiar with Section 1542 of the California Civil Code which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF HIS EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED A TERMINATION WITH THE DEBTOR. Each party to this Termination Agreement recognizes that it may have sustained damages, losses, costs or expenses that are presently unknown or unexpected, that may have materially affected the decision to enter this Termination Agreement and that damages, losses or expenses may give rise to additional damages, losses, costs or expenses in the future. Each party to this Termination Agreement acknowledges that this Termination Agreement has been entered into with the knowledge that damages, losses, costs or expenses may exist and hereby expressly waive 2 3 any and all rights he or it may have had under Section 1542 or any other statue or rules of similar effect other than claims assertable pursuant to Section VII of the Agreement. 2. TRANSFER OF TECHNOLOGY Hansol agrees to utilize its best efforts to return to VPTI all the material provided to Hansol by VPTI as shown on Exhibit "C" attached hereto and to destroy any copies or other reproductions (electronic or otherwise) of all such material by not later than March 15, 1997. 3. TRANSFER OF MARKETING RIGHTS a) Hansol hereby agrees that all marketing rights granted to Hansol for the Territory listed in the Agreement are hereby terminated as of the date hereof. b) Hansol agrees that, on or before March 15, 1997, Hansol shall notify all distributors with whom Hansol had previously sold Products of VPTI or with whom Hansol had entered into other written agreements ("Hansol Customers"), that Hansol will no longer be manufacturing and/or distributing the Products in the Territory and shall refer such Hansol customers to VPTI for future orders. Hansol agrees to provide VPTI with a copy of all such notices. c) Notwithstanding the foregoing, Hansol shall be permitted, for a period of one year from the date herein, to sell or otherwise dispose of, inventory of Products in the Territory in Hansol's possession other than the Inventory listed on Exhibit A 4. MISCELLANEOUS PROVISIONS a) NO WAIVER a waiver by any party hereto of any right it may have under this Termination Agreement or by reason of its breach shall not imply the waiver of any other right or a subsequent waiver, nor shall it affect the validity or enforceability of any provision hereof. b) ENTIRE AGREEMENT This Termination Agreement sets forth the entire agreement and understanding between the parties. It merges all discussions between them and voids and replaces any other agreement or understanding which may hitherto have existed between Hansol and VPTI with respect to the Agreement or the Termination Agreement. c) NOTICES All notices and other communications made pursuant to this Termination Agreement shall be in English and in writing and shall be deemed to have been properly given if sent by prepaid registered airmail, by cable (simultaneously confirmed by prepaid registered airmail, by cable (simultaneously confirmed by prepaid registered 3 4 airmail), or by hand delivery to the intended recipient through any of its authorized offices or at its address. All notices, reports and other communications sent to VPTI shall be addressed as follows: Voice Powered Technology International, Inc. 15260 Ventura Boulevard, Suite 2200 Sherman Oaks, California 91403 USA Facsimile: (818) 905-0950 Attention: Mitchell Rubin All notices, reports and other communications sent to Hansol shall be addressed as follows: Hansol Electronics Inc. Gangnam-Gu, Daechi-Dong 997 (AD B/D 5F) Seoul, Korea Facsimile: (02) 558-0746 Attention: Don Jo d) SEVERABILITY If any provision of this Termination Agreement is deemed or determined to be contrary to, prohibit by, or invalid under the applicable laws or regulations of a competent jurisdiction, such provision shall become inapplicable and shall be deemed omitted from this Termination Agreement. Such provision shall not, however, in any way invalidate the remaining provisions of this Termination Agreement, unless such deemed omission herefrom would eliminate an element of this Termination Agreement considered essential to the validity of a contract under said applicable laws. e) APPLICABLE LAW AND LANGUAGE The validity, constructions and effect of this Termination Agreement shall be governed by the laws of the State of California, United States of America. f) ATTORNEYS' FEES In the event a lawsuit or other proceedings are instituted to enforce any of the terms or conditions of this Agreement, the prevailing party in litigation or proceedings shall be entitled, as an additional item of damages, to such reasonable attorneys' fees and court costs or costs of such other proceedings as may be fixed by any court, or other judicial or quasi-judicial body having proper jurisdiction, whether or not such litigation proceedings proceed to a final judgment or award. 4 5 IN WITNESS WHEREOF, the parts hereto have caused this Termination Agreement to be duly executed the day and year first above written. VOICE POWERED TECHNOLOGY HANSOL ELECTRONICS, INC. INTERNATIONAL, INC. By: /s/ MITCHELL B. RUBIN By: /s/ KYUNG HOON KIM -------------------- ---------------------- Name: Mitchell B. Rubin Name: Kyung Hoon Kim Title: Vice President Title: Director 5 6 EXHIBIT A
PRICE PER DESCRIPTION QUANTITY UNIT TOTAL - ----------- -------- ---- ----- Finished Goods -------------- Model 5150 4,544 $23.00 $ 104,512.00 Model 5160 40 $23.83 953.20 -------------- Total Finished Goods $ 105,465.20 -------------- Panasonic MCU's --------------- Model 5150 - Part # MN1872456XBW-C 5,400 $4.50 $ 24,300.00 Model 5160 - Part # MN1873256XBY-C 5,400 $4.50 24,300.00 Model 5210 - Part # MN1873256XBS-C 5,400 $4.50 24,300.00 -------------- Total Panasonic MCU's $ 72,900.00 -------------- Other Parts ----------- (Details to be provided. Cost shall not exceed 100% of VPTI's current component costs) $ 2,000.00 -------------- Total $ 180,365.20 ==============
6 EX-10.1 9 MOBILCOMM JOINT PURCHASE 1 EXHIBIT 10.1 PURCHASE AND JOINT MARKETING AGREEMENT THIS AGREEMENT is made and effective this 11th day of December, 1995 by and between Voice Powered Technology International, Inc. ("VPTI") with its principal offices in Sherman Oaks, California and MobileComm Nationwide Operations, Inc. ("MobileComm") with its principal offices in Ridgeland, Mississippi as follows: 1. The purpose of this Agreement is to establish a relationship between the parties to accomplish the development and subsequent joint marketing of a voice activated pager/organizer according to the design and specifications developed by VPTI and incorporating performance characteristics suggested by MobileComm. The said relationship between the parties shall be governed by the terms of VPTI's November 9, 1995 Business Proposal to MobileComm. except as modified by the terms of this Agreement. The said Business Proposal is attached hereto as Exhibit "C" and incorporated into this Agreement by this reference. In the event of any conflict between the terms of the said Business Proposal and this Agreement, the terms of this Agreement shall prevail. 2. The term of this Agreement is one year commencing as of the date recited hereinabove. This Agreement shall be automatically renewed for one successive term unless either party gives to the other written notice of its intention not to renew. Such notice must be given no less than sixty days prior to the expiration of the original term hereof. 3. The voice activated pager/organizer devices ("Devices") which are the subject of this Agreement will be developed and manufactured by or for VPTI at its expense. The Devices will be sold by VPTI with a standard warranty to the end-user on parts and labor for ninety days and with a further warranty to the end-user on parts (only) for one year from the date of receipt. Any claims under the warranty on the basis of defective parts after the initial ninety day warranty period, but within the one year period, will be repaired or replaced, at VPTI's sole option, for a charge not to exceed VPTI's actual and reasonable cost for labor ordinarily incurred in making such repair. 4. The prices and related terms of the sale of the Devices by VPTI to MobileComm are as follows: A. MobileComm agrees to purchase a minimum of forty thousand Devices from VPTI during the initial term of this Agreement at a unit price of One Hundred Eight Dollars, for a total of Four Million Three Hundred Twenty Thousand Dollars. Thereafter, the unit price shall be as follows: 2
Cumulative Number of Units Unit Price -------------------------- ---------- 40,001 - 100,000 $105.00 100,001 - 250,000 $101.00 Over 250,000 $98.00
Provided, however, that the said prices are dependent upon the prices of certain key components incorporated into the Devices and the parties agree that the prices may be adjusted to reflect the actual changes in cost of components. Any such price changes shall be made only in the event a price changes by five percent or more and then only after written notice is given to MobileComm. Such notice shall be in writing and shall specify the component(s) involved and the precise amount of the change in the cost of such components. All prices are F.O.B. MobileComm's receiving dock in Jackson, Mississippi unless otherwise specified in the respective Purchase Order(s). B. In the event that MobileComm falls to meet the initial annual minimum purchase commitment of 40,000 units, pursuant to the following schedule and pursuant to Paragraph 7B hereof, MobileComm will pay to VPTI the following amounts representing fees for cancellation of such commitment for the unit quantities and time frame indicated:
Purchase Quantity Cancellation Timing Committed Fee if not Purchased ------ --------- -------------------- Four weeks following the submission of prototypes 5,000 $200,000 Thereafter following the initial order of units: First three months 10,000 $150,000 Second three months 10,000 $100,000 Third three months 15,000 $ 50,000
C. Provided, however, that such cancellation fees are not applicable if: 1) the number of Devices otherwise committed to are not available for shipment to MobileComm at the scheduled time and; 2) MobileComm has complied with the minimum purchasing requirements pursuant to Section 7B herein." 2 3 D. VPTI will credit MobileComm for returned product not to exceed 15% (fifteen percent) of units shipped to MobileComm by VPTI in the immediately proceeding three (3) month period from the date the return of such product is authorized by VPTI. 5. The Product Definition pertaining to the Devices is set forth on Exhibit "A" attached hereto and incorporated into this Agreement by this reference. Provided, however, that the reference to the POCSAG Protocol on Exhibit "A" pertains to Devices first sold and shipped under this Agreement. It is the intention of the parties that VPTI will produce a Device utilizing the Motorola FLEX protocol (with a similar feature set) and offer SAME to MobileComm within twelve months after the initial product launch. VPTI agrees that it will actively and in good faith negotiate with Motorola (and others as appropriate) to obtain a license permitting VPTI to utilize the FLEX protocol in such Devices. 6. VPTI undertakes and agrees: A. Utilize reasonable and best efforts to develop and manufacture the Devices at its sole expense, and consistent with the product specifications jointly agreed to with MobileComm, with the development scheduled to be completed within nine months of the date hereof. The Devices will provide A feature set and the paging function will perform in conformance with Exhibit "A". B. Utilize reasonable and best efforts to deliver completed Devices to MobileComm according to the schedule agreed to in writing by the parties. C. To sell the Devices to MobileComm on an exclusive basis for a period of twelve (12) months commencing with the date of MobileComm's receipt of goods from the initial order pursuant to Section 7(E) (the "Initial Term"). The parties hereby agree, beginning ninety (90) days prior to the expiration of the Initial Term, to negotiate in good faith in order to establish a new annual minimum purchase commitment for the next twelve (12) month period following the Initial Term. However, if MobileComm purchases 125% of the annual minimum purchase commitment in accordance with Section 4(B) for the Initial Term, then MobileComm will have the option, but not the obligation, to extend the period of exclusivity for a second twelve (12) month period subject to the same annual minimunm purchase commitment that was in effect for the Initial Term. In the event that MobileComm fails to purchase the number of Devices in accordance with Section 4(B) herein, VPTI will have the right to terminate the exclusivity of MobileComm anytime after thirty (30) days following the close of the calendar quarter in which MobileComm failed to purchase the required number of Devices. 3 4 D. VPTI will market the Device through its own marketing channels which will not include any retailers which are established and ongoing customers for pagers distributed by MobileComm. VPTI will promote the radio paging service of MobileComm to purchasers of the Device on an exclusive basis for a period equal to thirty (30) days beyond the termination of the exclusivity period applicable to MobileComm's sales of the Device. Thereafter, VPTI will promote MobileComm's radio paging service on a non-exclusive basis. E. Deliver three non-working models of the Device to MobileComm, not later than January 1, 1996. The schedule for development and testing of the Device by VPTI shall substantially conform to the schedule set forth in Exhibit "B" which is attached and incorporated into this Agreement. 7. MobileComm undertakes and agrees to: A. To assist VPTI in the development of final specifications relating to the Device. Such assistance will consist of testing, evaluation and critique of test model Devices according to mutually agreed testing and evaluation procedures. Such assistance will be rendered at the expense of MobileCommm and consistent with the restrictions applicable to MobileComm by virtue of the Modified Final Judgment ("MFJ"), as amended, rendered in that certain civil action styled United States of America vs. Western Electric Co., Inc. et al, Civil Action No. 82-0192 in the U.S. District Court for the District of Columbia. B. To place and pay for orders for the Devices in quantities and upon such terms as are incorporated into the Purchase Orders issued hereunder. Each order shall be made on the basis of a non-cancelable Purchase Order issued by MobileComm which shall not include any material terms and conditions which conflict with thosse indicated in this Agreement. Each such Purchase Order will specify quantities of the Device to be delivered thereunder which quantity will not ordinarily exceed the quantity of buffer stock maintained by VPTI for MobileComm's account, and will allow no less than thirty days for the delivery of each shipment thereunder. If the quantity on my Purchase Order exceeds the quantity maintained by VPTI as buffer stock, VPTI shall have ninety days to deliver that part of the ordered quantity which exceeds the quantity in the buffer stock. C. Market and sell the Device through its retail and other distribution channels; D. Promptly pay when due all sums owed to VPTI, including the amounts due under the aforesaid Purchase Orders and agreed processing and residual fees related to customer subscriptions generated by 4 5 MobileComm, with respect to the Devices. All invoices for Devices from VPTI to MobileComm will be due and payable within forty-five (45) days from date of shipment. E. Issue an initial, non-cancelable purchase order for not less than 5,000 Devices upon satisfactory completion of Alpha testing, but not later than four weeks from VPTI's submission of prototype samples to MobileComm, which samples shall be in compliance with the agreed specifications. Delivery of said initial quantity of Devices shall be made not less than ninety days, nor more than one hundred fifty days, from the date of such initial Purchase Order. F. MobileComm will assign to VPTI on each of the Devices sold by VPTI and activated on MobileComm's radio paging system the $15 processing fee in addition to paying to VPTI a five percent (5%) residual fee on the base air time rate, beginning on the sixty first day following the activation date for as long as such Device remains in service on MobileComm's radio paging system through the period ending twenty-four (24) months after VPTI ceases selling the Device. MobileComm will pay to VPTI on all Devices sold by MobileComm and activated on MobileComm's radio paging system a $5.00 per unit processing fee in addition to a three percent (3%) residual fee on the base air time rates beginning on day ninety-one (91) following the activation date for as long as such Device remains in service on MobileComm's radio paging system through the period ending twelve (12) months after MobileComm's exclusivity has been terminated by VPTI. All payments for residuals and processing fees will be payable monthly within thirty (30) days from the end of each calendar month. 8. The parties will coordinate their marketing and sales activities pertaining to the Device and MobileComm's radio paging service. Advertising and other expenses related to the respective marketing and sales activities of the parties shall be borne by the party conducting the activity. 9. VPTI shall exert its best reasonable efforts to develop the POCSAG version of the Device timely so as to meet the objectives of this Agreement, all substantially in accord with the Schedule set forth in Exhibit "B". 10. This Agreement shall be interpreted and enforced according to the laws of the State of California. In the event any dispute arises between the parties pertaining to this Agreement and such dispute cannot be amicably resolved by the parties, such dispute shall be submitted to binding arbitration for resolution. Unless the parties agree otherwise, any such arbitration proceedings are to be conducted according to the applicable Rules of the American Arbitration Association, in California. 5 6 11. Any notices to be given under this Agreement shall be in writing and transmitted via certified U.S. Mail addressed as follows: IF TO MOBILECOMM: General Counsel MobileComm 1800 East County Line Road, Suite 300 Ridgeland, MS 39157 IF TO VPTI: Mitchell B. Rubin Vice President/CFO Voice Powered Technology Intl., Inc. 15260 Ventura Blvd. Suite 2200 Sherman Oaks, CA 91403 12. All information (whether or not in writing) disclosed by one party to the other is to be considered proprietary and confidential Property of the providing party and shall be safeguarded accordingly. This obligation shall survive the termination or expiration of this Agreement and applies to any information which is not proven to be in the public domain at the time of such disclosure. 13. Miscellaneous Administrative Provisions A. Records Audit. VPTI or its designated representative shall have the right to inspect the books and records of MobileComm relevant to this Agreement to verify the accuracy of payments to be made by MobileComm to VPTI hereunder. Any such inspection shall be conducted at MobileComm offices maintaining such records and shall be during ordinary business hours and following no less than ten days notice. B. Trade Name and Trademark. (1) Each party recognizes the right, title and interest of the other party and its affiliated and associated companies to all service marks, logos, trademarks and trade names used in association with their business activities and agrees not to engage in any activities or commit any acts, directly or indirectly, which may contest, dispute or otherwise impair such right, title and interest. Each party hereby agrees that all its uses of such service marks, logos, trademarks and trade names of the other 6 7 party shall only be according to reasonable and uniform standards furnished by the other party, shall be subject to prior written approval by the other party which approval may be revoked at any time upon 15 days' notice, and shall be in such manner as to inure at all times to the benefit of the other party. (2) This section shall survive termination of this Agreement, and, in the event of termination, no service marks, logos, trademarks or trade names of a party shall be registered or used which are the same as, or confusingly similar to, service marks, logos, trademarks and trade names of the other party. Use or ownership by either party of any trade name or style containing any mark or trade name confusingly similar to that of the other party shall be immediately surrendered or abandoned. C. Force Majeure. (1) Either party may suspend or reduce, in whole or in part, the provision of the Services or any of its obligations hereunder, for the time and to the extent such suspension or reduction is occasioned by an event or an act of God, war, fire or other casualty, acts of any governmental body or similar causes or conditions beyond the party's reasonable control and such event is not due to the negligence or willful act or omission that party (any such act is hereinafter referred to as an "Event"). The suspending party agrees to use its best efforts to restore in full, as quickly as possible and to the extent possible the performance reduced or suspended as a result of the Event. (2) Any other term or provision herein to the contrary notwithstanding, if any Event continues and remains not fully remedied for a period in excess of 60 days, the non-suspending party may terminate all its obligations under this Agreement and resort to whatever other or additional remedies may be available to it under this Agreement, at law or in equity. D. Proprietary Information: Confidentiality, Non-Solicitation. (1) Each party acknowledges that, during the term of this Agreement, it will be provided with confidential information relating to the business policies and procedures and products of the other party. Each party agrees that it will not use such confidential information for any purpose except the performance of this Agreement, and that it will not disclose any such confidential information to any third party unless such disclosure is authorized in advance by the other party in writing or is required 7 8 by order of a court or regulatory agency of competent jurisdiction with notice of same being given to the other party. Each party agrees that the terms and conditions of this Agreement are, except to the extent disclosure is required by law, necessary to the protection of a party's rights or mutually agreed to by the parties in writing, confidential and restricted by this Article as to their disclosure to any third party. (2) Either party's noncompliance with such conditions shall be considered to be a material breach of this Agreement. (3) Each party agrees not to knowingly solicit for employment or employ the employees of the other party during the term hereof and for a period of 12 months after termination of this Agreement without the written consent of the other party to the extent consistent with applicable state and fcderal law, provided, however, that nothing contained herein shall prohibit the employment by one party of an employee of the other party where the employment opportunity was called to the attention of that employee by means of advertising in the mass media not specifically targeted at the employees of one party by the other. E. Assignment or Transfer. No rights or obligations hereunder may be assigned or transferred, in whole or in part, by either party without the prior written consent of the other, which consent may not be unreasonably withheld or delayed. F. Parties' Status. Each party is an independent contractor of the other. Neither party is authorized to act as an agent for, or legal representative of, the other party nor shall either party have authority to assume or create any obligation on behalf of, in the name of, or binding upon, the other party. Without limiting the generality of the foregoing, neither shall represent itself as an agent of the other. G. Severability. If any party of this Agreement is for any reason declared invalid by court order or by order of any regulatory agency, the order shall not affect the validity of any remaining portion, which shall remain in force and effect as if this Agreement had been executed with the invalid portion eliminated, and it is the intention of the parties that they would have executed the remaining portion of this Agreement without including any part or portion which may, for any reason be declared invalid. 8 9 H. Non-Conflict. Each party represents and warrants that no obligation provided for herein is in conflict with any other contractual obligation of it with any third party. 1. Binding Effect. This Agreement and the rights and obligations of the parties herein shall inure to the benefit of and be binding upon any successor or assignee and any subsidiary, affiliate, agent, reseller, or related entity. WITNESS OUR SIGNATURES: VOICE POWERED TECHNOLOGY MOBILECOMM NATIONWIDE INTERNATIONAL, INC. OPERATIONS, INC. By: /s/ [SIG] By: /s/ [SIG] ------------------------------ -------------------------- Title: Vice President Title: Vice President --------------------------- ----------------------- 9 10 MOBILECOMM/MOBILEMEDIA VOICE PAGER/ORGANIZER EXHIBIT A PRODUCT DEFINITION PAGER FEATURE SET: MESSAGE TYPES Numeric messages. NUMBER OF MESSAGES STORED Stores up to 24 numeric messages in memory. MESSAGE LENGTH Messages can be up to 24 digits in length. LOCKED MESSAGES A maximum of 16 messages can be locked in memory at any one time. ERASING MESSAGES User can erase messages "individually" or can erase "all" read messages. CALLER ANNOUNCE FEATURE Announces, in the users voice, the name of person who sent the message if that person's name is included in the organizers phone directory. CUSTOM VOICE ANNOUNCE MESSAGES Program up to a total of 10 fixed or time stamped voice announce messages. Fixed messages o User can program voice message such as "call home." When the selected code (up to 4 digits) is received by the Pager/Organizer, the product will announce "call home" in the users voice. Time stamped messages o Caller can program voice messages with time stamps. For example, the person sending the paging message can send a coded message with a time stamped requesting the user call the office at a specified time, for example "call office" at "3:00 PM." AUDIO PLAYBACK OF MESSAGES User can individually select audio playback of any message. MEMO'S ATTACHED TO MESSAGES Memo's can be attached to any message. REMINDER TIMES ATTACHED TO MESSAGES Messages can be time stamped by voice to remind the user to call back at a later time. ALARMS/VIBRATORS Audio alarm or vibrator feature can be selected by button operation. PAGER SECTION ON/OFF Pager section can be turned on or off by the user to conserve battery life.
-1- 11 MOBILECOMM/MOBILEMEDIA VOICE PAGER/ORGANIZER EXHIBIT A PRODUCT DEFINITION ORGANIZER FEATURE SET: MEMO PAD Stores up to 40 voice memos. REMINDERS Stores up to 40 reminders and timed stamped messages. Program reminders up to a year in advance by voice. CALENDAR Review by voice, reminders and time stamped messages programmed for any specific day. PHONE DIRECTORY Stores up to 80 names in 4 directories. Each name in the phone directory can have up to 4 phone numbers included for a total of 320 phone numbers. TOTAL RECORD TIME Maximum record time is 3.5 minutes. ENCLOSURE DESIGN 5200 Voice Organizer enclosure modified in the rear for the paging hardware. BATTERY LIFE 30 days minimum. CAP CODES Preset at the factory. Cap code number to be placed on label on back of unit. Four cap codes only will be used.
-2- 12 MOBILECOMM/MOBILEMEDIA VOICE PAGER/ORGANIZER EXHIBIT A PRODUCT DEFINITION PAGING RECEIVER SPECIFICATIONS: FREQUENCY OF OPERATION 929-931 MHz PROTOCOL POCSAG BAUD RATE 1200 Baud or 2400 Baud RF INPUT PAGING SENSITIVITY - 125 dBm, 4.8 KHz Deviation, 1200 BPS ADJACENT CHANNEL SELECTIVITY 65 dB Minimum, (20 KHz Spacing) SPURIOUS IMMUNITY 50 dB Minimum IMAGE REJECTION 60 dB Minimum INTERMODULATION IMMUNITY 55 dB Minimum BLOCKING IMMUNITY 75 dB Minimum AFC COMPENSATION RANGE +/- 10 KHz Minimum for -3 dB Sensitivity Change
-3- 13 MOBILECOMM/MOBILEMEDIA VOICE PAGER/ORGANIZER EXHIBIT B PRODUCT DEVELOPMENT SCHEDULE Finalize product definition November 1995 Provide MobileComm with 2 models for CES January 1996 Complete product development March 1996 Provide 12 prototype units to MobileComm for March 1996 Alpha testing (functional and specification verification) Alpha testing by MobileComm complete in 4 weeks April 1996 Begin production July 1996 Begin shipments to MobileComm August 1996
-4- 14 EXHIBIT C MOBILECOMM/VPTI VOICE ACTIVATED PAGER/ORGANIZER PROPOSED BUSINESS RELATIONSHIP BACKGROUND o MobileComm and VPTI are planning to jointly introduce (i.e. commence initial shipments) a voice activated Pager/Organizer in the United States beginning September 1996. o The companies have agreed on a product specification for the Pager/Organizer that includes both the ... o Product definition (Exhibit "A"); and o Product features (Exhibit "B") o MobileCommm has indicated that the specifications provided by VPTI for the Pager/Organizer appear to be acceptable. o Preliminary testing by MobileComm of the proposed RF front end in conjunction with the VOICE OrganizerTM indicates that the Pager/Organizer product performance is technically acceptable, o The two companies now desire to enter a business relationship relating to the joint marketing of the Pager/Organizer. o Further, it is the intention of the two companies to follow the introduction of the POCSAG protocol voice activated Pager/Organizer with a FLEX protocol product providing a similar feature set within 12 months after the initial product launch. Toward achieving this goal, VPTI will actively negotiate with Motorola (and others) to gain a license to permit it to employ the FLEX protocol in this product. November 9, 1995 -1- 15 EXHIBIT C PROPOSED INDIVIDUAL COMPANY RESPONSIBILITIES The roles proposed for each Company, and its respective commitments are described below: VPTI ROLE/COMMITMENTS o The development of the Pager/Organizer product to mutually agreed specifications, at VPTI's sole expense, with the development scheduled to be completed within nine (9) months following a signed agreement between the companies to proceed (Exhibit "C"). o The delivery of completed units to MobileCOMM, to agreed product specifications, on specified dates, and in accordance with the financial proposal attached hereto. o The sale of the product to MobileComm on an exclusive basis in the United States through August 31, 1997, except that: o In the event MobileComm purchases 125% of the minimum annual purchase as set forth in the Proposed Financial Arrangements, the period of exclusivity will be extended an additional sixty (60) days to October 31, 1997. o Should MobileComm fail to purchase the agreed quantity of units in any quarter as set forth in the Proposed Financial Arrangements, the exclusive sale arrangement will terminate thirty (30) days following the close of that quarter; and o VPTI will retain the right to market the product through its marketing channels. o VPTI shall offer MobileComm paging service to its purchasers of the Pager/Organizer product through August 31, 1997, or a period equal to thirty (30) days beyond the termination of the exclusive product sale arrangement with MobileComm, whichever occurs earlier. Thereafter, the paging service agreement with MobileComm would continue on an annual basis, except that VPTI could exercise its right to terminate at any time on ninety (90) days written notice. o The providing of a 90 day warranty from date of customer purchase for parts and labor and one (1) year warranty for parts only, during which time defective units will be repaired or replaced by VPTI at VPTI's option at no charge for parts to MobileComm or its customers. For units returned which are out of warranty (i.e., beyond the ninety (90) day or one (1) year warranty period), a labor charge will apply to all claims processed. November 9, 1995 -2- 16 EXHIBIT C MOBILECOMM ROLE/COMMITMENTS o The agreement to the product specifications. o The testing, technical evaluation and approval of the Pager/Organizer product that is developed by VPTI at an agreed time in advance of the scheduled completion of the development, in accordance with mutually agreed upon test procedures. o The providing of a purchase order for a minimum number of units to be purchased from VPTL o The payment of certain sums, in the event of a failure to purchase an agreed minimum number of units by certain dates from VPTI. o The release of non-cancelable purchase orders for specified quantities of the product, which are not to exceed the amount of the buffer stock maintained by VPTI for MobileComm, 30 days in advance of each planned shipment date. o The marketing and distribution of the product through MobileComm's retail and other distribution channels. o The processing of VPTI generated customer subscribers to the MobileComm paging service, with agreed processing and residual fees to be paid to VPTI in accordance with the financial proposal attached hereto. o The payment of agreed processing and residual fees to VPTI on all customer subscriptions generated by MobileComm resulting from the sales of the Pager/Organizer. PROPOSED FINANCIAL ARRANGEMENTS VPTI will agree to bear all costs involved in the development, tooling, manufacturing and start up of the Pager/Organizer. MobileComm will commit to the minimum annual purchase of 40,000-Pager/Organizer units, at a unit price of $108 each, totaling $4,320,000. Thereafter, the purchase price to MobileComm shall be reduced as follows...
Cumulative Number of Units Unit Price -------------------------- ---------- 40,001 - 100,000 $105 100,001 - 250,000 $101 Over 250,000 $98
Pricing is predicated on current key component quotes and is subject to revision. November 9, 1995 -3- 17 EXHIBIT C o MobileComm will issue an initial non-cancelable purchase order equal to not less than 5,000 units on satisfactory completion of Alpha testing but no later than eight (8) weeks from submission of prototype samples (assuming compliance with agreed specifications) for deliveries commencing ninety (90) days from the date of such purchase order. o To Support MobileComm sales requirements, VPTI will, on an ongoing basis, maintain a buffer stock of units, commencing with the initial shipment, equal to the initial purchase order for delivery within a thirty (30) day period. Orders placed by MobileComm against such buffer stock cannot exceed the amount of the initial order in any ninety-day period. All other orders must be placed on a ninety (90) day basis. o In the event that MobileComm purchases fewer than the number of Pager/Organizer units by the dates specified below, then MobileComm will pay the following sums to VPTI
Cumulative In Event of Number of Units Non-Performance to be Purchased Sums to be Timing by Mobilecomm Paid VPTI Eight (8) weeks following the submission of prototypes 0 to 5,000 unit is $200,000 Thereafter following the Initial order of units . . . 13, weeks 5,001 to 15,000 $150,000 26 weeks 15,001 to 25,000 $100,000 39 weeks 25,001 to 40,000 $50,000 52 weeks over 40,000 units
o VPTI will credit MobileComm for returned product not to exceed 15% (fifteen percent) of units shipped to MobileComm, by VPTI in the immediately preceding three (3) month period from the date the return of such product is authorized by VPTI. o MobileComm will pay to VPTI on all pagers sold by VPTI a $15 processing fee, in addition to a five percent (5%) residual fee on the base air time rate, beginning on day 61 following the sign-on date. o MobileComm will pay to VPTI on all Pager/Organizers sold by MobileComm during such time as MobileComm is the exclusive service provider for the Pager/Organizer, a $5 per unit processing fee. In addition, MobileComm will pay to VPTI a three percent (3%) residual on base air time rates beginning on day 91 following the sign-on date. Residual fees paid to VPTI will continue throughout the life of the subscription, even after the exclusive agreement between the companies expires. November 9, 1995 -4- 18 EXHIBIT C o VPTI's right to receive the three and five (3% and 5%) percent residuals on all units sold will cease in the event VPTI elects to utilize a service provider other than MobileComm during the period of exclusivity to provide paging services for the Pager/Organizer. Notwithstanding the foregoing, VPTI's right to receive such three and five (3% and 5%) percent residual shall continue in the event that VPTI's use of such other service provider is due to a retailer imposing another service provider upon VPTI as a pre-condition to purchasing units of the Pager/Organizer. If VPTI is advised of such a pre-condition by a retailer, VPTI agrees to notify MobileComm, in writing, of such restriction immediately in order to permit MobileComm to attempt to obtain rights to provide paging services to customers of such retailer. November 9, 1995 -9- EX-10.1.1 10 MOBILECOMM SETTLEMENT AGREEMENT 1 Exhibit 10.1.1 SETTLEMENT AGREEMENT This Agreement is made this 13th day of November, 1996 ("Effective Date"), by and between Voice Powered Technology International, Inc. ("VPTI"), a California Corporation, with its principal offices in Sherman Oaks, California, and MobileMedia Corporation ("MMC"), a Delaware Corporation, within principal offices in Ridgefield Park, New Jersey. RECITALS WHEREAS, VPTI and MobileComm Nationwide Operations, Inc. ("MobileComm") have previously entered into a Purchase and Joint Marketing Agreement dated December 11, 1995 (the "PJM Agreement"), and: WHEREAS, MobileComm was subsequently acquired by or otherwise combined with MMC and the PJM Agreement was assigned and assumed by MMC and; WHEREAS, MMC has received from VPTI as of the date herein a certain number of units of the Device (as defined in the PJM Agreement including Exhibit A thereto) and MMC owes to VPTI a balance equal to $100 times the number of units received as a result of such purchase (the "Trade Balance"), and; WHEREAS, MMC has determined that it will not purchase any more Devices from VPTI pursuant to the PJM Agreement and agrees to be subject to a Cancellation Fee of $200,000, and; WHEREAS, VPTI desires to continue to market, promote and distribute the Devices utilizing, at VPTI's option, the MMC frequency of 931.8875 MHZ and the MobileComm trademark to existing retail customers of MMC, and customers of VPTI for activation of MMC's radio paging system, and; WHEREAS VPTI, and MMC intend this Agreement to provide for the payment of the Trade Balance and the Cancellation Fee, as well as allow VPTI to continue to market, promote and distribute the Device pursuant to the terms and conditions set forth below. NOW THEREFORE, for valuable consideration, the parties agree as follows: 1. PAYMENTS TO VPTI A. Trade-Balance MMC hereby agrees to pay to VPTI the Trade Balance of $352,400 pursuant to the following payment schedule:
On or More Cash Payment Amount ---------- ------------------- November 20, 1996 $100,000 December 15, 1996 100,000 January 15, 1997 100,000 February 15, 1997 52,400
1 2 B. Cancellation Fee MMC hereby agrees to pay to VPTI a Cancellation Fee of $100,000 in two equal installments of $50,000 each on February 15, 1997 and March 15, 1997. Such Cancellation Fee shall be in lieu of the Cancellation Fees set forth in Section 4 of the PJM Agreement. 2. ACTIVATION AND SERVICE BY MMC MMC hereby agrees to activate and provide paging services for end users of all Devices distributed by VPTI with a frequency of 931.8875 MHZ under MMC's then-current applicable rates and term and conditions. MMC further agrees to introduce VPTI to vendors of MMC to purchase collateral materials relating to the Devices normally included in pagers sold by MMC which have the capability of both local and nationwide services. 3. RESIDUAL FEES MMC hereby agrees to pay to VPTI a residual fee of five percent (5%) of the base air time fees received by MMC from purchasers of the Device for as long as such Device remains in service on MMC's radio paging system through the period ending twenty-four (24) months after VPTI ceases selling the Device. Such payments will be payable to VPTI monthly within sixty (60) days from the end of each calendar month. The residual fee described in this Section 3 shall be in lieu of any fees or charges set forth in Section 7.F of the PJM Agreement. 4. RIGHT TO USE TRADEMARK MMC hereby grants a license during the Term (as defined below) to VPTI to mark the Devices sold or distributed by VPTI for activation on MMC's radio paging system with a frequency of 931.8875 MHZ with the logo and trademark of MobileComm. Such license shall be subject to uniform standards provided by MMC and each such use shall be subject to prior written approval by MMC. Without limiting the foregoing, VPTI acknowledges that use of the MobileComm logo and trademark may be restricted in certain areas as identified by MobileComm from time to time and agrees that VPTI has no right to use the MobileComm logo and trademark in such areas. As of the Effective Date, such restricted areas include the greater Cincinnati metropolitan area. This license may be revoked by MMC by the giving of one hundred and eighty (180) days written notice, provided that if VPTI uses the MobileComm logo or trademark in a manner not approved by MMC, MMC may revoke such license upon thirty (30) days written notice. 5. TERMINATION BY VPTI A. VPTI shall have the right to terminate this Agreement upon the occurrence of any one of the following events: (i) MMC fails to pay when due any of the payment required pursuant to Section 1(A) and 1(B) herein and such failure continues for a period of fifteen (15) business days after the written notice by VPTI. (ii) MMC fails to activate and provide paging services for purchasers of the Devices in 2 3 accordance with Section 2 herein and such failure continues after the giving of fifteen (15) business days written notice by VPTI. (iii) An order for relief is entered with respect to MMC in any voluntary or involuntary case filed under the United States Bankruptcy Code and at such time MMC is not current with its payments under Section 1 hereof. (iv) An involuntary petition is filed against MMC under the United States Bankruptcy Code and such petition is not dismissed within (60)days after the date of filing and at such time MMC is not current with its payments under Section 1 hereof. (v) A receiver is appointed with respect to substantially all of the assets of MMC, or MMC makes a general assignment for the benefit of creditors, or MMC is dissolved or substantially all of the assets are liquidated not in the ordinary course of business and at such time MMC is not current with its payments under Section 1 hereof. B. In the event and to the extent MMC does not make payments to MMC in accordance with the schedule under Section 1 and VPTI elects to terminate under Section 5.A(i) then: (i) The Cancellation Fee pursuant to Section 1(B) herein shall be increased by an additional $100,000 which amount shall be immediately due and payable. (ii) MMC will be obligated to continue to provide paging services pursuant to Section 2 herein and will continue to activate new Devices for a period of one year from the date of termination. 6. MUTUAL COOPERATION Both MMC and VPTI hereby agree to use reasonable efforts to cooperate with the other in order to enable VPTI to directly sell the Devices in accordance with this Agreement to retail customers which are retail customers of MMC on the Effective Date for activation on MMC's radio paging system. 7. RELATIONSHIP TO PJM AGREEMENT This Agreement is intended to supersede and replace the PJM Agreement including Exhibits B and C thereto. Notwithstanding the foregoing, the parties agree that Sections 12 and 13 and Exhibit A and, with respect to the units of the Device purchased by MMC as of the Effective Date, Section 3 of the PJM Agreement shall survive and be incorporated herein by reference. This Agreement supersedes all oral or written agreements with regard to the subject matter herein and can be modified only by written agreement of both parties. 3 4 8. TERM The Term of this Agreement shall commence on the Effective Date and terminate on December 31, 1997. Upon the expiration of the Term, this Agreement, excluding Sections 1 and 5, may be renewed for successive one year renewal terms by mutual agreement of the parties. VPTI's rights under Section 3 hereof shall continue for twelve (12) months following termination under this Section. 9. RESOLUTION OF OUTSTANDING ISSUES This Agreement shall resolve any outstanding issues under the PJM Agreement, and VPTI, along with its affiliates, successors and assigns and its employees, shareholders, partners, limited partners, directors, officers, parents, subsidiaries, representatives and agents, does hereby release, acquit and discharge MMC, along with its affiliates, sucessors and assigns and its employees, shareholders, partners, limited partners, directors, officers, parents, subsidiaries, representatives and agents from any and all claims, liabilities, demands, causes of action, costs, expenses and attorneys' fees arising out of the PJM Agreement prior to the date of this Agreement. 10. LIABILITY Regardless of the legal or equitable basis of any claim or of actual notice, neither party shall be liable for any incidental, indirect, special or consequential loss or damages. 11. NOTICES Any notices to be given under this Agreement shall be in writing and transmitted via Certified Mail or commercial overnight courier addressed as follows: If to MMC: General Counsel MobileComm 65 Challenger Road Ridgefield Park, New Jersey 07660 With a copy to, Steven Kondracki, Director of Logistics If to VPTI: Mitchell B. Rubin Vice President/CFO Voice Powered Technology International, Inc. 15260 Ventura Boulevard, Suite 2200 Sherman Oaks, California 91403 4 5 12. GOVERNING LAW This Agreement shall be subject to and governed by the laws of the State of California in all respects. This Agreement shall be governed by the laws of the State of California applicable to agreements entered into and to be wholly performed within the State of California by residents of such state. Unless otherwise agreed to by the parties, all claims or disputes between the parties arising out of or relating to this Agreement, or breach thereof, shall be resolved by arbitration according to the rules of J.A.M.S./Endispute. Agreed to and executed as of the date first written above by: VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. By: /s/ MITCHELL R. RUBIN ------------------------------------ Mitchell R. Rubin Vice President, Finance and Operations MOBILEMEDIA CORPORATION By: /s/ PATRICIA GRAY ------------------------------------- Patricia Gray Secretary & Acting General Counsel 5 EX-10.1.2 11 MOBILECOMM AMEDNED SETTLEMENT AGREEMENT 1 EXHIBIT 10.1.2 f VIA FACSIMILE (818) 905-0564 AND OVERNIGHT COURIER January 29, 1997 [MOBILECOMM LOGO] Mitchell B. Rubin Vice President, Finance & Operations 15260 Ventura Blvd., Suite 2200 Sherman Oaks, CA 91403 Re: Amended Settlement Dear Mr. Rubin: This Letter Agreement is to confirm the understanding of MobileMedia Communications, Inc., as successor to MobileMedia Corporation, ("MobileMedia") and Voice Powered Technology International, Inc. ("VPTI") regarding the settlement of any disputes between the parties. The parties, either by themselves or by a parent or subsidiary, have previously entered into a Purchase and Joint Marketing Agreement dated December 11, 1995 ("PJM Agreement") and a Settlement Agreement dated November 13, 1996 ("Settlement Agreement"). A dispute has arisen in connection with such Agreements and the parties to settle dispute in accordance with the terms of this Letter Agreement. Provided that VPTI executes this Letter Agreement prior to 2:30 p.m. Eastern Time on January 29, 1997, then upon such execution MobileMedia shall pay to VPTI an amount equal to $252,400.00, which payment shall be made by wire transfer by close of business on January 29, 1997. Upon payment of such amount, VPTI along with its parents, affiliates, successors and assigns and its employees, shareholders, partners, limited partners, directors, officers, parents, subsidiaries, representatives and agents, does hereby release, acquit and discharge MobileMedia, along with its parents, affiliates, successors and assigns and its employees, shareholders, partners, limited partners, directors, officers, parents, subsidiaries, representatives and agents from any and all claims, liabilities, demands, causes of action, costs, expenses and attorney's fees arising out of the PJM Agreement and the Settlement Agreement prior to the date of this Letter Agreement, including without limitation all claims raised in the letters of VPTI to MobileMedia dated January 13, 1997 and December 17, 1996. 2 Mitchell B. Rubin January 29, 1997 Page 2 This Letter Agreement sets forth the entire agreement between the parties and fully supersedes any prior oral or written agreements between the parties regarding the subject matter hereof, including the Settlement Agreement; provided however that Sections 2, 3, 4, 6, 7, 9, 10, 11 and 12 of the Settlement Agreement shall remain in full force and effect and the term with respect to Sections 2, 3, 4 and 6 of the Settlement Agreement shall be as specified in Section 8 of the Settlement Agreement. If any material breach of Sections 2, 3, 4 and 6 of the Settlement Agreement continues uncorrected for more than 30 days after written notice from the aggrieved party describing the breach, the aggrieved party shall be entitled to declare a default and pursue any and all remedies available at law or equity, except as specifically limited elsewhere in this Letter Agreement. This Agreement may not be amended, in whole or in part, except by a written instrument duly executed by the parties. This Letter Agreement shall inure to the benefit of and be binding upon the parties, including all of their officers, directors, agents, representatives, employees, affiliates, parents, subsidiaries, partners, limited partners, successors and assigns. Please confirm VPTI's agreements with this Letter Agreement by having a duly executed copy of this Letter Agreement returned to Roberta M. Boykin both (i) via facsimile at (201) 440-1303 before 2:30 p.m. Eastern Time today and (ii) by overnight courier at the address listed at the top of this Letter Agreement. Sincerely, MOBILEMEDIA CORPORATION MOBILEMEDIA COMMUNICATIONS, INC. By: /s/ Patricia A. Gray --------------------------------- Patricia A. Gray, Secretary cc: Roberta M. Boykin AGREED AND ACCEPTED: VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. By: /s/ [SIG] --------------------------------- Name: Illegible ------------------------------- Title: Illegible ------------------------------ Date: 1/29/97 ------------------------------- EX-10.2 12 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.2 EMPLOYMENT AGREEMENT (Larry R. Kloman) THIS AGREEMENT is entered into on June 12, 1996, between VOICE POWERED TECHNOLOGY INTERNATIONAL, INC., a California corporation (the "Company"), and LARRY R. KLOMAN ("Employee"). Employee and Company, in consideration of the covenants and agreements hereinafter contained, agree as follows with respect to the employment by the Company of Employee and Employee's future business activities: 1. Employment; Term of Employment. The Company hereby employs Employee and Employee hereby accepts such employment upon the terms and conditions hereinafter set forth, effective as of the "Commencement Date" (as defined hereafter). Subject to the provisions for earlier termination as hereinafter provided, Employee's term of employment by the Company shall commence as soon as reasonably possible following the execution and delivery hereof, but in any event not later than July 1, 1996 (the date of actual commencement of employment is referred to herein as the "Commencement Date"), and shall continue thereafter until June 30, 1997. 2. Services to be Rendered by Employee. (a) On and subject to the terms and provisions hereof, Employee shall be employed initially as the Company's Vice President of Sales and Marketing, subject to the direction of the Board of Directors or a duly authorized committee thereof from time to time, and subject to the authority and direction of the President and Chief Executive Officer of the Company from time to time. Subject to the foregoing, Employee's responsibilities shall include management of the Company's domestic sales and marketing activities, including management of all sales representative 2 organizations, direct contact with buyers of major customers, development of new customers, development of pricing recommendations, sales and market programs, advertising, public relations materials, and participation in defining the Company's product developments; and, Employee shall have such other powers and duties as may be prescribed by the By-laws, the Board of Directors, or a duly authorized committee thereof, and shall perform such executive duties as from time to time may be decided upon by the Board of Directors, or a duly authorized committee thereof, of the Company. During the term of employment hereunder, Employee's primary employment location shall be the greater Los Angeles, Orange, and Ventura County areas. (b) Employee shall devote substantially all his productive time, energy and ability to the proper and efficient conduct of the Company's business during the term of this Agreement. Employee shall not directly or indirectly render any substantial services of a business, commercial, or professional nature to any person or organization, other than the Company, whether for compensation or otherwise, without the prior written consent of the Board of Directors, or a duly authorized committee thereof, of the Company. 3. Compensation. (a) For the services to be rendered by Employee during his employment by the Company, the Company shall pay Employee, commencing as of the Commencement Date, a yearly Base Salary of Ninety Thousand Dollars ($90,000). The Base Salary may be adjusted upward by and at the discretion of the Board of Directors in its sole discretion. The yearly Base Salary shall be payable in equal installments at such times as other employees are paid but in any case at least monthly. In addition, as further compensation to Employee hereunder, Employee shall also be entitled to receive an amount equal to one percent (1%) of the net selling price collected by the -2- 3 Company on all shipments of the Company's IQ*VOICE Organizers that are made during the period between the Commencement Date and December 31, 1996 to U.S. retail customers with whom the Company has not done business prior to the Commencement Date, except that Employee shall not be entitled to any of such further compensation with regard to products so sold during such period at "close out" prices; and, Employee shall not be entitled to any such further compensation with respect to any shipment of such products subsequent to December 31, 1996. (b) (1) Employee shall be eligible to participate in a Bonus Pool during each "Employee Year" (which for purposes of this Agreement means each fiscal year of the Company during which Employee is employed hereunder, commencing with the 1996 calendar year) or partial Employee Year of this Agreement, except as otherwise provided hereinafter. The Bonus Pool shall equal for each Employee Year 10% of the Net Pre-Tax Income of the Company for such Employee Year or a pro rata portion thereof based on actual employment time in any partial Employee Year. Employee's participation with regard to the current Employee Year (i.e., the 1996 calendar year) shall be based on one-half year of employment for the 1996 calendar year (i.e., July 1, 1996 through December 31, 1996), and Employee's participation thereafter shall continue through to the date of his termination of employment hereunder, as hereinafter described. Except as otherwise provided hereinafter, Employee's share of the Bonus Pool for an Employee Year or partial Employee Year shall be determined by the vote or written consent of a majority of the Board of Directors, provided in no case shall Employee receive less than ten percent (10%) of the Bonus Pool or a pro rata portion thereof where Employee participates in the Bonus Pool for less than a full Employee Year. Other participants in the Bonus Pool will be decided by a vote of Board of Directors of the Company. Notwithstanding anything hereinabove set forth, -3- 4 Employee shall participate in the Bonus Pool for an Employee Year only if he was employed by the Company during such entire Employee Year, unless termination of employment during such Employee Year (or during the 1996 calendar year, should termination then occur) was pursuant to Paragraph 5(a)(2) hereof, in which case Employee's share of the Bonus Pool shall be what he would have received if he had been employed hereunder until the date of his termination of employment and participated in ten percent (10%) of the Bonus Pool through such time, and except that: (A) for the 1996 Employee Year (i.e., the 1996 calendar year), Employee shall participate on a pro-rata one-half year basis if he remains in the Company's employ through at least December 31, 1996; and (B) for the 1997 Employee Year (i.e., the 1997 calendar year), assuming Employee remains in the employ of the Company under the terms hereof through at least December 31, 1997, and for each full Employee Year (i.e., calendar year) thereafter, Employee shall participate in the Bonus Pool for such Employee Year only if he was employed by the Company during such entire Employee Year. The amounts payable to Employee as a result of the participation in the Bonus Pool shall be paid to Employee in cash within 90 days of the earlier of either (1) the close of each Employee Year or (2) Employee's termination of employment hereunder. (2) "Net Pre-Tax Income" of the Company shall be the consolidated pre-tax income (loss) of the Company for each Employee Year of the Company, or partial Employee Year, if applicable, during the term of this Agreement. (For portions of an Employee Year any time after June 30, 1997, Employee shall be deemed to be employed to the end of the fiscal quarter of the Company ending on or immediately after the date of termination of -4- 5 employment with the Company; in case of termination prior to June 30, 1997, Employee shall be deemed to be employed to the end of the calendar month in which termination occurred if termination occurred later than the 15th day of the calendar month, or to the end of the calendar month immediately preceding the month in which termination occurred if termination occurred on or before the 15th day of the calendar month.) Net Pre-Tax Income shall reflect all revenues less all deductions, including the Base Salary and bonuses but excluding the Bonus Pool, and without deduction for income taxes. Net Pre-tax Income shall be determined under generally accepted accounting principles consistently applied during such Employee Year or partial Employee Year, if applicable, unless required to be changed by generally accepted accounting principles, and such determination shall be made based upon the audited financial statements of the Company for each Employee Year, or, in the case of Net Pre-tax Income for a partial Employee Year, such determination shall be made by the Board of Directors. (c) The Company shall pay or reimburse Employee for all expenses normally reimbursed by the Company and reasonably incurred by him in furtherance of his duties hereunder and authorized by the Company, including, without limitation, expenses for entertainment, traveling, meals, hotel accommodations, cellular phone usage, and the like upon submission by him of vouchers or an itemized list thereof as the Board of Directors may from time to time adopt and authorize, and as may be required in order to permit such payments as proper deductions to the Company under the Internal Revenue Code of 1986 and the rules and regulations adopted pursuant thereto now or hereafter in effect. (d) The Company shall pay to Employee an automobile allowance of $700 per month for all automobile expenses incurred by Employee, including fuel, repairs, maintenance, -5- 6 insurance, and any other expenses. Employee shall pay all such expenses directly, and shall not be accountable to the Company therefor. (e) Employee and his immediate family (i.e., spouse and children under 21 years of age) shall be entitled to participate, at the Company's expense, in the health insurance plan and other benefit plans and arrangements the Company may have in effect from time to time for its employees and executives with salaries and responsibilities comparable to Employee, in accordance with any policies adopted by the Board of Directors of the Company with regard thereto from time to time. (f) During the term of his employment hereunder, Employee shall be entitled to two weeks paid vacation per annum. Use thereof shall be in accordance with the Company's policies in effect from time to time. (g) Simultaneously herewith, the Company and Employee are entering into a certain stock option agreement in connection with the transactions contemplated hereunder. 4. Direct Competition. While employed by the Company and thereafter (subject to the term described below in this paragraph regarding applicability of the prohibition in this paragraph to periods after termination of employment), Employee will neither permit his name to be used by, nor engage in or carry on, directly or indirectly, either for himself or as a member of a partnership, or as a stockholder (except as a stockholder of less than one percent (1%) of the issued and outstanding stock of a publicly held corporation), investor, officer or director of a corporation or as an employee, agent, associate or consultant of any person, partnership or corporation, any business in competition with any business carried on by the Company or a parent, subsidiary, affiliate or successor of the Company, provided that for the period after termination of employment, the -6- 7 provision of this Paragraph 4 shall only apply to the Company's voice recognition technology, shall continue for a period of one (1) year after termination of employee's employment hereunder, and shall be limited geographically to those cities and counties in the United States and outside of the United States where the Company's voice recognition technology was being marketed and sold immediately prior to termination of Employee's employment hereunder. 5. Termination of Employment. (a) On and subject to the terms and provisions hereof, the Company shall have the right at its option to terminate the employment of Employee hereunder by giving written notice thereof to Employee in the event of any of the following: (1) Employee has materially breached any material provision of this Agreement and does not cure such breach within 20 days after the Company has given notice of such breach (specifying with particularity the basis for such breach) to Employee, or Employee is convicted of fraud or embezzlement, or has engaged in material misconduct in connection with his material duties under this Agreement. (2) If the Company gives Employee ninety (90) days advance written notice of termination of employment. (3) If Employee dies (in which case except as otherwise provided herein employment under this Agreement shall automatically terminate upon such death). (4) If Employee shall fail to carry out or to perform the duties required of him because of mental or physical disability for thirty (30) consecutive days or any thirty (30) days within a sixty (60) day period during the term hereof, and does not resume his duties prior to the termination date specified in the Company's written notice of termination by reason of such; -7- 8 provided, however, that in no event may any such notice provide a termination date shorter than thirty (30) days from the date the notice is delivered to Employee. Following termination by reason of either death or disability, Employee shall not be entitled to receive any further Base Salary, bonus, or other compensation hereunder for any period thereafter. If Employee's employment is terminated by the Company pursuant to Paragraph 5(a)(2) hereof, then Employee shall receive severance payments equal to the Base Salary (and the further compensation described elsewhere herein relating to certain product shipments through December 31, 1996) which employee would have been entitled to receive through expiration of the initial term of this Agreement (i.e., through June 30, 1997) had he remained in the regular employ of the Company through such time; such payments will be made to Employee in equal monthly installments at the same time his Base Salary payments would have been made had Employee remained in the employ of the Company (and in the case of the further compensation relating to shipments through December 31, 1996, payments shall be made at the time they would have otherwise been made had Employee been employed through the date of termination of employment), and he shall be entitled to continue participating in the Bonus Pool through the date of such termination and such payment from the Bonus Pool shall be paid (i) as provided for in Paragraph 3(b)(1) hereof after the end of an Employee Year or (ii) if earlier, within ninety (90) days after such termination of employment. (b) Except as specifically provided for in this Paragraph 5 or by applicable law, Employee shall not be entitled to any severance compensation upon termination of employment -8- 9 with the Company, whether at the Company's or Employee's option. Except as specifically provided in this Paragraph 5, the Company may not terminate Employee's employment for any reason. (c) Employee shall have the right at his option to terminate his employment hereunder by giving the Company three (3) months advance written notice of such termination. 6. Soliciting Customers; Employees. Employee agrees that he will not for a period of one (1) year immediately following the termination of his employment with the Company, either directly or indirectly, make known to any competing person, firm, or corporation the names or addresses of any of the customers of the Company, including any prospective customers with whom the Company or its agents or its representatives have had discussions or other communications concerning such persons or entities becoming customers of the Company, or any other information pertaining to them. Employee also agrees that following termination of employment hereunder, Employee shall not, directly or indirectly, solicit any employees of the Company to leave the employ of the Company for any reason, nor shall Employee assist or participate with, directly or indirectly, any other person, organization or entity in so doing. 7. Trade Secrets of the Company. During the term of employment under this Agreement, Employee will have access to and become acquainted with various trade secrets, consisting of devices, secret inventions, processes, and compilations of information, records, and specifications, and licensing arrangements and potential uses and/or applications of the Company's technology, which are owned by the Company and which are regularly used or to be used in the operation of the business of the Company. Employee shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the term of this Agreement or at -9- 10 any time thereafter, except as required in the course of his employment. All files, records, documents, drawings, specifications, equipment, and similar items relating to the business of the Company prepared by Employee or otherwise coming into his possession during the term of his employment, shall remain the exclusive property of the Company and shall not be removed under any circumstances from the premises where the work of the Company is being carried on without the prior written consent of the Company, or consistent with the Company's normal business practices. 8. Inventions and Patents. Employee agrees that any inventions made by him during the term of his employment, solely or jointly with others, which are made with the equipment, supplies, facilities or trade secrets information of the Company, or which relate at the time of conception or reduction to practice of the invention to the business of the Company or the Company's actual or demonstrably anticipated research or development, or which result from any work performed by Employee for the Company, shall belong solely and exclusively to the Company, and Employee promises to assign such inventions to the Company without additional payment or consideration. Employee also agrees that the Company shall have the right to keep such inventions as trade secrets, if the Company chooses. Employee agrees to assign to the Company Employee's rights in any such inventions where the Company is required to grant those rights to the United States government or any agency thereof. This Agreement does not apply to any inventions which are the subject of Section 2870 of the California Labor Code. In order to permit the Company to claim rights to which it may be entitled, Employee agrees to disclose to the Company in confidence all inventions which Employee makes arising out of Employee's employment, and all patent applications filed by Employee within one (1) year after -10- 11 termination of his employment. The Company agrees to maintain all information and documents provided by Employee in strict confidence and to return any such information and documents (including all copies thereof) to Employee within sixty (60) days of Employee's request therefor which the Company does not obtain ownership of. Employee shall, at the Company's expense, assist the Company in obtaining patents on all inventions, designs, improvements, and discoveries deemed patentable by the Company in the United States and in all foreign countries, and shall execute all documents and do all things necessary to obtain letters patent, to vest the company with full and exclusive title thereto, and to protect the same against infringement by others, all at the Company's expense. 9. Confidential Data of Customers of the Company. Employee in the course of his employment may be handling financial, accounting, statistical, and personnel data of customers of the Company. All such data is confidential and shall not be disclosed, directly or indirectly, or used by Employee in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of his employment. 10. Severability. Each paragraph and subparagraph of this Agreement shall be construed and considered separate and severable from the validity and enforceability of any other provision contained in this Agreement. 11. Assignment. The rights of the Company (but not its obligations) under this Agreement may, with the reasonable consent of Employee (which may be withheld if, among other things, Employee's title or the scope or stature of Employee's responsibilities within the Company would be substantially diminished), be assigned by the Company to any parent, subsidiary, or successor of the Company; provided that such parent, subsidiary or successor acknowledges in -11- 12 writing that it is also bound by the terms and obligations of this Agreement. Except as provided in the preceding sentence, the Company may not assign all or any of its rights, duties or obligations hereunder without prior written consent of Employee. Employee may not assign all or any of his rights, duties or obligations hereunder without the prior written consent of the Company. -12- 13 12. Notices. All notices, requests, demands and other communications shall be in writing and shall be deemed to have been duly given if delivered or if mailed by registered mail, postage prepaid: (a) If to Employee, addressed to him at the address set forth below his name: Larry R. Kloman 23525 Arlington Avenue Torrance, California 90501 (b) If to the Company, addressed to: Voice Powered Technology International, Inc. 15260 Ventura Boulevard, Suite 2200 Sherman Oaks, California 91403 Attention: Mr. Edward M. Krakauer, President with a copy to: Samuel H. Gruenbaum, Esq. Cox, Castle & Nicholson, LLP 28th Floor 2049 Century Park East Los Angeles, California 90067 or to such other address as any party hereto may request by notice given as aforesaid to the other parties hereto. 13. Titles and Headings. Titles and headings to paragraphs hereof are for purposes of reference only and shall in no way limit, define or otherwise affect the provisions hereof. 14. Governing Law. This Agreement is being executed and delivered and is intended to be performed in the State of California, and shall be governed by and construed in accordance with the laws of the State of California. 15. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall -13- 14 constitute one and the same instrument. It shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart. Facsimile signatures shall be accepted by the parties as valid and binding in lieu of original signatures; however, if facsimile signatures are presented by any party in lieu of original signatures, within two (2) business days after execution of the Agreement such party shall also deliver to counsel for the other party(ies) an original signature page signed by that party (but failure to do so shall not affect the validity of this Agreement). 16. Cumulative Rights. Each and all of the various rights, powers and remedies of the Company in this Agreement shall be considered as cumulative, with and in addition to any rights, powers or remedies of the Company and no one of them as exclusive of the others or as exclusive of any other rights, powers and remedies allowed by law. The exercise or partial exercise of any right, power or remedy shall neither constitute the election thereof nor the waiver of any other right, power or remedy. 17. Entire Agreement. This Agreement is being entered into concurrently with the Stock Option Agreement pursuant to which the Company has granted to Employee options to purchase up to 50,000 shares of the Company's common stock on the terms and conditions therein set forth, and all of such documents contain the entire agreements of the parties hereto with respect to the subject matter hereof and thereof, and each such agreement may be modified or amended only by a written instrument executed by both parties to such agreement. 18. Good Faith. Each of the parties hereto agrees that he or it shall act in good faith in all actions taken under this Agreement. -14- 15 19. Expenses of Proceedings. In the event that any party hereto brings any type of proceeding to enforce the terms and conditions of this Agreement, the prevailing party in such proceeding shall be entitled to recover from the unsuccessful party all incidental costs and reasonable attorneys' and paralegals' fees incurred by said prevailing party. 20. Dispute Resolution. Any dispute or disagreement concerning this Agreement or any term or provision hereof shall be heard and determined by a reference under and in accordance with the provision of sections 638 to 645.1 or the California Code of Civil Procedure, and the prevailing party therein shall be entitled to recover its reasonable attorneys' fees and litigation and court costs and expenses (including the fees of the referee or temporary judge). IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. By: /s/ Edward M. Krakauer --------------------------- Its: President /s/ Larry R. Kloman ---------------------------- Larry R. Kloman 23525 Arlington Avenue Torrance, California 90501 -15- EX-10.3 13 MANUFACTURING AGREEMENT 1 EXHIBIT 10.3 MANUFACTURING AGREEMENT This Agreement is made this 7th day of February, 1996 between GSS/ARRAY TECHNOLOGY, INC., a Delaware corporation (herein called "Manufacturer") and Voice Powered Technology International Inc., a California corporation (hereinafter called "Buyer"). RECITALS A. Buyer has developed various consumer electronic products and has the exclusive right to make, use, distribute and sell the product/s described in quotations provided to Buyer by Manufacturer (the "Products"). B. Buyer has requested Manufacturer to manufacture, assemble and deliver the Products to Buyer, and Manufacturer has agreed to do so, pursuant to the terms and conditions of this Agreement. NOW, THEREFORE, the parties agree: 1. PRODUCTION. 1.1. Manufacturer shall manufacture, assemble and/or reproduce the Products listed on Exhibit A, as amended from time to time, which is attached hereto and incorporated herein, in compliance with the specifications and instructions provided by Buyer. Manufacturer shall not have the right to have any Products manufactured, assembled and/or reproduced by any of its subsidiaries or affiliates or relocate the principal manufacturing location to another country without written approval from Buyer, such approval not to be unreasonably withheld. Products shall be initially manufactured in Thailand. 1.2. Buyer may elect to have Manufacturer use components consigned by Buyer to Manufacturer for inclusion in the Products ("Consigned Inventory"). Consigned Inventory shall be defined on each purchase order issued by Buyer. Buyer shall retain title to the Consigned Inventory during the term of this Agreement. Upon Manufacturers receipt of Consigned Inventory, Manufacturer agrees to utilize best efforts to inspect, store and handle Consigned Inventory on behalf of Buyer. In the event any Consigned Inventory is lost or damaged as a result of negligent acts committed by Manufacturer or employees or agents of Manufacturer, Manufacturer agrees to replace such Consigned Inventory at its own expense or credit Buyer for the cost thereof. 1.3 Except upon buyer's default under this Agreement, Manufacturer is authorized to sell the Products only to Buyer. 2. MANUFACTURING LICENSE AND INFORMATION. 2.1 Subject to all terms of this Agreement, Buyer hereby grants Manufacturer a non-exclusive, nontransferable license to use all the designs, technology, source and object codes and other information (the "Proprietary Information") made available to Manufacturer pursuant to this Agreement solely for the purpose of manufacturing and repairing Products pursuant to purchase orders from Buyer. 1 2 2.2 Buyer will provide Manufacturer with all Proprietary Information necessary to carry out the obligations contained in this Agreement as promptly after execution hereof as is reasonably possible. Nothing in this Agreement shall be construed to limit Buyer's rights to manufacture, distribute or take any other action with respect to the Products or to authorize any other persons to do any of the foregoing. 2.3 Buyer, at Manufacturer's request, will send personnel to the Manufacturer's premises at Buyer's expense to instruct Manufacturer's engineers in maintenance and support of the Products, and will provide such technical support as may from time to time be reasonably required. 2.4 Manufacturers shall submit each Product it manufactures and components thereof to such tests as specified by Buyer. Buyer shall provide to Manufacturer information regarding such tests prior to Manufacturer issuing a firm quoted price for the Products. The cost of such testing shall be included in the price quoted by Manufacturer for such Product unless Buyer materially alters such testing procedures subsequent to Manufacturer providing a final quotation for the Product. 3. PURCHASE OF GOODS. 3.1 Purchases of Product pursuant to this Agreement shall be initiated by Buyer's purchase orders (the "Purchase Orders"), which will include the following information: (i) Description of Products ordered using part numbers and specification numbers, where applicable, in accordance with Buyer's Purchase Orders based on Manufacturer's quotations; (ii) Quantities and delivery schedules; (iii) Shipping instructions including destination address and customer reference number; and (iv) Prices applicable for invoice purposes (the "Purchase Price") are based on the Payment Terms attached hereto as Exhibit B. (v) Manufacturer agrees that initial Purchase Orders will be based upon a formula attached hereto as Exhibit "C" (the "Margin Formula"). Manufacturer has the right to modify such Margin Formula by giving Buyer forty five days written notice. Such revised Margin Formula shall apply to any Purchase Orders issued by Buyer after the expiration of the foregoing notice period. The Purchase Orders will not include any terms that are inconsistent with the terms of this Agreement. Any such inconsistent terms will be void unless approved in writing by Manufacturer. The Purchase Price of the Products are directly related to the Payment Terms granted to Buyer. All Purchase Orders issued in accordance with Section 3.2 herein will be binding upon Manufacturer fifteen (15) days after receipt unless Manufacturer notifies Buyer in writing that Manufacturer is rejecting a Purchase Order and the reasons for such rejections. 2 3 3.2 Buyer will issue ninety (90) day firm non-cancelable Purchase Orders and provide Manufacturer a six (6) month forecast of anticipated requirements. Buyer will pay for any and all Products purchased hereunder in accordance with the Payment Terms. Unless otherwise indicated, the Purchase Price quoted is exclusive of transportation and insurance costs, and all taxes, duties, tariffs, and other government impositions, all of which Buyer shall pay, if applicable. 3.3 Buyer agrees to update the ninety (90) day firm Purchase Orders every Thirty (30) days. To accomplish this update, Buyer will notify Manufacturer via facsimile or hard copy Purchase Orders the 1 (one) to ninety (90) day requirement of its six (6) month forecast. 3.4 Long Lead Material (i) In order to provide for ongoing material supply sufficient to maintain Buyer's future production, it is necessary for Manufacturer to commit to certain material on behalf of the Buyer, not covered by Purchase Orders issued by Buyer ("Long-Lead Material"). Based upon the six (6) month forecast provided by Buyer, Manufacturer shall prepare a written schedule of Long-Lead Material required to maintain the forecasted level of production. Such schedule, and all amendments thereto, shall be subject to written approval from Buyer. Buyer shall be liable for all Long-Lead Material so approved in the event this Agreement is terminated for any reason other than material breach of this Agreement by Manufacturer. Manufacturer shall provide a monthly report showing Long Lead Material components, the lead-time and the amount related to Buyer's orders and forecasts. This list, subject to the foregoing, shall define Buyer's exposure for the time period the list represents. 4. DELIVERY. All Products shall be suitably packed in Manufacturer's standard shipping cartons (or Buyer's specified cartons) and delivered to Buyer or its carrier F.O.B. Manufacturer's plant, unless F.O.B. destination has been quoted by Manufacturer. 5. CANCELLATION AND RESCHEDULING. 5.1 Cancellation: Buyer may cancel a request for shipment release of any Products ordered hereunder by providing Manufacturer with written notification at least sixty (60) days before the originally scheduled shipment date, provided, however, that Buyer shall be required to pay Manufacturer a cancellation fee with respect to such Products based on the following schedule: If Manufacturer's receipt The Cancellation Fee will be the following of cancellation notice is: percentage of the Purchase Price (as set forth in Subsection 3.1 (iv) hereof) for the Products canceled. More than 90 days prior 0% to scheduled shipment date 61-90 days prior to 80% scheduled shipment date 0-60 days prior to 100% scheduled shipment date 3 4 The notice period computation with respect to the cancellation fee shall be based on the originally scheduled shipment date, in the event that a unit previously rescheduled as to date of shipment, shall be subsequently canceled. All materials associated with cancellations which occur with less than ninety days notice will be shipped to Buyer upon request. 5.2 Rescheduling: Buyer may reschedule delivery (one-time) of Products ordered hereunder for delivery up to sixty (60) days later than the original delivery date without penalty, upon giving written notice to Manufacturer at least sixty (60) days prior to the original shipment date. Buyer agrees that reschedule deliveries may incur storage and carrying charges not to exceed two (2%) percent per month of the total cost of the Products which have been rescheduled. 6. ENGINEERING CHANGES. 6.1 In the event any component material in Manufacturer's inventory purchased for inclusion in Products are rendered obsolete as a result of any engineering change(s) implemented at Buyer's request in furtherance of this Agreement and cannot be used for any other product produced by Manufacturer and provided further that Manufacturer advises Buyer concerning the prospective quantity and value prior to change introduction, Manufacturer may invoice Buyer for all obsolete components, limited to the quantity required for outstanding purchase orders plus Long Lead Material, at Manufacturer's direct cost thereof. Manufacturer will make its records concerning its costs available to Buyer upon Buyer's request. Any such component materials for which Buyer is liable will, upon Buyer's request, be shipped to Buyer, freight collect, F.O.B. point of shipment. 6.2 If any engineering change(s) require Manufacturer to cancel outstanding orders for components or other materials purchased for inclusion in Products to be manufactured pursuant to the non-cancelable portions of Buyer's purchase orders which will no longer be useable by Manufacturer, Buyer shall reimburse Manufacturer in canceling such orders. 6.3 The Buyer agrees to pay $250.00 (two hundred fifty dollars) per engineering change to Manufacturer to cover costs of documentation processing. Multiple ECO's submitted on the same date may be combined for a one-time charge of $250.00 (two hundred fifty dollars). 7. BUYER'S PROPRIETARY RIGHTS. 7.1 Buyer and its suppliers retain all title to, and except as and to the extent expressly licensed herein, all Proprietary Information and property provided to Manufacturer pursuant to this Agreement, including, without limitation, copyrights, patent rights, trade secret rights, and other proprietary rights. 8. WARRANTY ON MANUFACTURER ASSEMBLIES. 8.1 Manufacturer warrants for the benefit of the Buyer that for a period of six (6) months (180 days) from the date of acceptance of any such items by Buyer the portions of the Products which it has agreed to produce and manufacture (hereinafter "Manufacturer Assemblies") will conform to the specifications incorporated in the attached Exhibit A and will be free from defects in materials and workmanship under normal use and service. 4 5 As used herein, the term "Manufacturer Assemblies" shall mean only those portions of the Products for which component materials and subassemblies are purchased by Manufacturer and which are actually manufactured and/or assembled by Manufacturer; Manufacturer Assemblies shall include any Consigned Inventory which is a component part but shall not include subassemblies which are produced by separate manufacturers and consigned to Manufacturer by Buyer. 8.2 Manufacturer's express warranty with respect to Manufacturer Assemblies shall not apply to any Manufacturer Assemblies damaged as a result of any accident, negligence, use in any application for which the Manufacturer Assemblies were not designed or intended, modification without the prior consent of Manufacturer, or by any other causes unrelated to defective materials or workmanship. 8.3. EXCEPT FOR THE EXPRESS WARRANTY SET FORTH IN THIS SECTION 8, MANUFACTURER MAKES NO OTHER WARRANTIES, WHETHER EXPRESSED OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND OF FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE PRODUCTS OR ANY MANUFACTURER ASSEMBLIES. 9. INSPECTION AND ACCEPTANCE. 9.1 Buyer has fifteen (15) business days after actual receipt of Products at final destination to inspect and test the Products, and to notify Manufacturer in writing of any noncompliance with the functional specification. Any Products not properly rejected within such period shall be deemed accepted hereunder for all intents and purposes. Furthermore, if any of the Products are found not to be in compliance with the Products Specification and are rejected, Buyer shall furnish Manufacturer a report detailing reasons for rejection and if such defects are shown to be violation of the Products Specification, or Manufacturer's responsibility in workmanship or defective parts supplied by Manufacturer, then Buyer, within such fifteen (15) day period, may return such defective Products to Manufacturer, F.O.B. Manufacturer's facility in San Jose, California (or such other location upon mutual agreement in writing) in the same condition as delivered. Manufacturer shall at its option repair or replace any such defective Products within thirty (30) days of receipt, or credit Buyer's account for the Purchase Price and all transaction costs paid for the rejects Products. 9.2 Manufacturers liability hereunder is expressly limited to repair or replacement of defective Products or a refund of the Purchase Price then paid to Manufacturer for any defective Products (whether Manufacturer's liability arises from any breach of Manufacturer's express warranty, breach of any obligation arising from breach of warranty, or otherwise with respect to the manufacture and sale of Products hereunder, and whether liability is asserted in contract or tort, including negligence and strict product liability), except as provided in Section 13 of this Agreement. 10. TERM AND TERMINATION OF AGREEMENT. 10.1 This Agreement shall have an initial term of one (1) year but shall be automatically renewed thereafter (and after each subsequent renewal term) for a renewal term of one year unless, at least one hundred and twenty (120) days prior to the date of such renewal, either party hereto shall have given notice to the other of its intention that the Agreement shall not be renewed. This Agreement shall thereafter be automatically terminated at the end of the term during which such notice is given. 5 6 10.2 Should either breach any material term or condition of this Agreement, in addition to all other legal rights and remedies, the other party may terminate this Agreement by giving sixty (60) days' written notice of said breach unless such breach is corrected within the notice period. 10.3 Upon termination of this Agreement: (i) On the effective date of termination, Buyer shall pay the Purchase Price for all finished Products in Manufacturer's inventory that were manufactured pursuant to the non-cancelable portion of Buyer's outstanding Purchase Orders; and (ii) Buyer shall pay Manufacturer's direct costs plus ten percent (10%) for all work in progress in Manufacturer's inventory on the effective date of termination being manufactured pursuant to the non-cancelable portion of Buyer's outstanding Purchase orders; and (iii) Manufacturer will use its best efforts to either (a) use in other products being manufactured by Manufacturer, or (b) return to the appropriate vendor at Buyer's expense, all components and other materials in Manufacturer's inventory on the effective date of termination which were purchased for inclusion in Products to be manufactured against the non-cancelable portions of Buyer's outstanding Purchase orders. Buyer shall pay Manufacturer's direct cost plus ten percent (10%) for any such components and materials which cannot be used or returned by Manufacturer. (iv) Upon payment by Buyer to Manufacturer for the finished Products and work in progress inventory in this Section 10.3, title and ownership to such finished Products and work in progress inventories shall immediately be transferred from Manufacturer to Buyer and Buyer will have 90 (ninety) days to instruct Manufacturer on where to ship such finished Products and work in progress inventories. If Buyer fails to so instruct Manufacturer on the disposition of such finished Products and work in progress inventories, Manufacturer shall have no obligation to Buyer for these goods beyond such ninety (90) day period. 10.4 Upon a material default by Buyer of its obligations under this Agreement which remain uncured after the giving of notice pursuant to Section 10.2 herein. Manufacturer may exercise all rights of any aggrieved seller under Division 2 of the California Uniform Commercial Code. Manufacturer is granted a limited license to use, without charge, Buyer's patents, copyrights, trademarks, trade secrets and property of a similar nature, in disposing of any products and work-in-process for which payment has not been received in accordance with the Payment Terms of this Agreement. 10.5 Bankruptcy. Either party may terminate this Agreement by written notice in the event that the other party makes an assignment for this benefit of creditors, or admits in writing inability to pay debts as they become due; or a Trustee or receiver for any substantial part of its assets is appointed by any court; or a proceeding is instituted under a provision of the Federal Bankruptcy Act by or against the other party and is acquiesced in or is not dismissed within sixty (60) days or results in an adjudication in bankruptcy. 11. BUYER'S WARRANTIES. 11.1 Buyer warrants that it has the right to disclose Proprietary Information to Manufacturer and to authorize Manufacturer's use of Proprietary Information to manufacture Products. 6 7 11.2 Buyer warrants to Manufacturer that the Proprietary Information that Buyer will provide to Manufacturer will be reasonably sufficient, as of the date hereof, to allow Manufacturer to manufacture Products conforming in all material respects to the descriptions thereof contained in its specifications and purchase orders. 12. INTELLECTUAL PROPERTY RIGHTS INDEMNITY. 12.1 Buyer will defend, indemnify and otherwise hold Manufacturer harmless from and against any claims by third parties pertaining to infringements of any valid patent, copyright, trademark or trade secret arising out of Manufacturer's use of Proprietary Information to manufacture Products under this Agreement. Buyer, at its own expense and option, shall then: (i) Settle or defend against such claim; or (ii) Procure for Manufacturer the right to continue to manufacture any infringing Products; or (iii) Modify the Proprietary Information and description of the Products to avoid infringement; or (iv) Remove any infringing Products from the operation of the licenses hereunder (after which Manufacturer shall not make or use such Product or any related documentation) and pay Manufacturer an amount calculated pursuant to Subsection 10.3 with respect to such infringing Products which shall constitute liquidated damages for Buyer's breach of Buyer's warranty. 13. OTHER INDEMNITIES. 13.1 Notwithstanding anything to the contrary in this Agreement or any exhibit hereto, Manufacturer agrees to defend, indemnify and hold Buyer harmless from and against any and all claims, liability for damages, costs and expenses (including reasonable attorney's fees): (i) related to any suit or proceeding where it is alleged that damage or injury to any person or property has occurred as a result of Buyer's use of resale of any Products as manufactured by Manufacturer and as purchased by Buyer hereunder, or as incorporated into any of Buyer's products, where such alleged damage or injury is caused by the fault of negligence of Manufacturer in performing its manufacturing obligations in furtherance of this Agreement; and (ii) for any noncompliance by Manufacturer with export control or other laws. 13.2 Notwithstanding anything to the contrary in this Agreement or any exhibit hereto, Buyer agrees to defend, indemnify and hold Manufacturer harmless from and against any and all claims, liability for damages, costs and expenses (including reasonable attorney's fees): 7 8 (i) related to any suit or proceeding where it is alleged that damage or injury to any person or property has occurred as a result of any use of any Products manufactured by Manufacturer in compliance with the specifications delivered by Buyer to Manufacturer hereunder, where such alleged damage or injury is caused by the fault of negligence of Buyer in designing the Products; and (ii) for any noncompliance by Buyer with export control or other laws. 14. CROSS-INDEMNIFICATION FOR ACTS OR OMISSIONS. Buyer and Manufacturer shall each indemnify, defend and hold the other harmless from and against any and all claims, actions, damages, demands, liabilities, costs and all claims, actions, damages, demands, liabilities, costs and expenses, including reasonable attorneys' fees and expenses, arising by reasons of (i) loss, damage to or destruction of property of each other or any third party, and (ii) death or injury to persons, including but not limited to persons performing on behalf of the indemnifying party hereunder which results from or is caused by any act or omission of the indemnitor, its employees, servants, agents, or representative or persons performing on behalf of such party hereunder. 15. LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES ARISING OUT OF THIS AGREEMENT OR ITS TERMINATION, OR THE BREACH OF ANY OF ITS PROVISIONS, WHETHER OR NOT THE PARTIES HAVE ADVISED OR BEEN ADVISED OF THE POSSIBILITY OF ANY SUCH LOSS OR DAMAGE. 16. FORCE MAJEURE. 16.1 Neither party shall be responsible for delays or failures in performance resulting from acts beyond the control of such party. Such acts shall include but not be limited to acts of god, strikes or other labor disputes, riots, acts of war, governmental regulations superimposed after the facts, communication line failures, power failures, fire or other disasters. 16.2 If it appears that Manufacturer's performance hereunder will be delayed for more than sixty (60) days, Buyer shall have the right to terminate this Agreement, subject to the provisions of Subsection 10.5 17. CONFIDENTIAL INFORMATION. Manufacturer and Buyer each agree to hold in confidence all Proprietary Information of the other and or to disclose any Proprietary Information to any person except employees who have agreed in writing to hold such information in confidence and to whom disclosure is necessary to further the purpose of this Agreement. Neither Manufacturer nor Buyer nor their respective agents or employees shall use any such Proprietary Information, except in furtherance of and as provided in this Agreement. 8 9 18. ASSIGNMENT. Except as otherwise provided in this Agreement, neither party shall assign or transfer, by law or otherwise, any rights or obligations hereunder without the prior written consent of the other party not to be unreasonably withheld. 19. NOTICES. All notices and demands of any kind pursuant to Section 5 or 10 of this Agreement which either party may be required or desire to serve upon the other shall be in writing and shall be delivered by personal service or by mail, commercial overnight courier, telegram or telecopy, at the address or telecopy number of the receiving party set forth herein (or at such different addresses as may be designated by such party by written notice to the other parry). All notices or demands by mail or courier shall be postage prepaid and shall be deemed given upon receipt. All notices or demands by telex or telecopy shall be deemed given upon dispatch. 20. GENERAL. 20.1 Manufacturer and Buyer are independent contractors. Neither party has any power to act on behalf of the other party, take any action or make any representation to the contrary. 20.2 This Agreement is a complete and exclusive statement of the agreement between the parties concerning the subject matter hereof and supersedes all proposals or prior agreements, oral or written. The Exhibits signed and dated by authorized officers shall form part of this Agreement. 20.3 This Agreement can only be modified by a writing duly executed by both parties. 20.4 This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to conflicts of laws principles. 20.5 The prevailing party in any legal action brought to enforce this Agreement shall be entitled to reasonable costs and fees, including reasonable attorneys' fees. 20.6 No delay or failure to exercise any right hereunder shall be deemed to be a waiver thereof, any waiver of any right or condition shall be in writing and shall not apply to any other time or right. 20.7 This Agreement may be signed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the date and the year first herein above written. 9 10 MANUFACTURER: GSS/Array Technology, Inc. Signature: /s/ R. Dale Heinkel Name: R. Dale Heinkel Title: Vice President, Marketing Dated: 2/26/96 Address: 6835 Via Del Oro San Jose, CA 95119 Facsimile: (408) 362-3250 BUYER: Voice Powered Technology International, Inc. Signature: /s/ Mitchell B. Rubin Name: Mitchell B. Rubin Title: Vice President Dated: 2/7/96 Address: 15260 Ventura Blvd. Suite 2200 Sherman Oaks, CA 91403 Facsimile: 818 905-0564 10 11 EXHIBIT A PRODUCT DESCRIPTION AND MANUFACTURING STANDARDS PRODUCT DESCRIPTION: The Product Description, Part number and Revision number, including the complete specification, shall be provided as part of each purchase order issued pursuant to the Manufacturing Agreement. Products hereby included in this Agreement are: Model 4200 IQ VOICE POCKET PLANNER(TM) Model 5210 IQ VOICE ORGANIZER(TM) Model 5310 IQ VOICE ORGANIZER - European Version QUALITY SPECIFICATIONS: 1. GSS/ARRAY TECHNOLOGY shall manufacture Products in accordance with its Quality Procedures described in its ISO-9002 Manuals which are available at GSS/Array facilities for Buyer inspection. 2. GSS/ARRAY TECHNOLOGY shall manufacture Products in compliance with additional specifications as defined by the following quality agencies and indicated below: a) NO Board of Approval, British Telecom b) NO Belcore c) NO GMP/FDA d) Mil Std 105, Level II, AQL 0% Critical, 1% Major, 2.5% Minor WORKMANSHIP ACCEPTANCE CRITERIA: AN SI/IPC - A - 610A, CLASS 3 1. Voice Powered Technology typically uses the following inspection procedures will all its Products: a) Assembled Circuit Boards must pass an In Circuit Test (ICT) which confirm at least 97% of all components as correct, performed by GSS/Array. b) Subassemblies, prior to casing, just pass an initial Functional Test (FT1) performed by GSS/Array. c) Completed product must pass a final Functional Test (FT2) performed by GSS/Array. d) Finished goods must be identified by LOT. LOT size must be mutually agreed to by Voice Powered Technology and GSS/Array, but will typically be between 1,000 and 10,000 units. e) Each LOT will be inspected to an AQL level of 0% Critical, 1% Major and 2.5% Minor by Voice Powered Technology or other designator inspector. Failed LOTS will be reworked at GSS/Array expense. 11 12 EXHIBIT B TERMS OF PAYMENT Option C Yes The Purchase Price for Products shipped hereunder shall be paid to GSS/Array within thirty (30) days from Invoice date. Acceptance of such Product, per Section 9 'Inspection and Acceptance' shall apply, but shall not extend the terms of payment beyond thirty (30) days from the date of invoice, for product inspected and accepted by Buyer. In consideration of terms granted Buyer shall provide GSS/Array with monthly financial reports not later than twenty five days from the close of each calendar month. 12 13 EXHIBIT C MARGIN FORMULA
ITEM FORMULA - ---- ------- (A) Bill of Material Cost As Agreed xx.xx (B) Material Overhead 5% of (A) x.xx ------ (C) Total Material Cost (A) + (B) xx.xx (D) Labor Cost $2.04/hr. x.xx (E) Manufacturing Overhead 350% of (D) .xx ------- (F) Total Material Plus Labor (C) + (D) + (E) xx.xx (G) Gross Margin 8% of (F) x.xx ------ (H) Final Cost - FOB Thailand (F) + (G) xx.xx =====
13 EX-10.3.1 14 AGREEMENT FOR DISCOUNTED PAYMENT 1 EXHIBIT 10.3.1 AGREEMENT FOR DISCOUNTED PAYMENT AND ADEQUATE ASSURANCE OF PERFORMANCE This agreement (the "Agreement") is entered into between Voice Powered Technology International, Inc., a California corporation ("VPTI") and GSS/Array Technology, Inc., a Delaware corporation ("GSS") and is executed as of this 20th day of May 1997. I. RECITALS 1.1 VPTI is a developer and marketer of consumer electronic products including various models of a product known as the Voice Organizer. GSS is a contract manufacturer for VPTI, pursuant to the Manufacturing Agreement between VPTI and GSS dated February 7, 1996 ("Manufacturing Agreement"). VPTI issues purchase orders (the "Purchase Orders") to GSS. GSS then orders the necessary components and manufactures finished goods for VPTI. GSS has manufactured finished goods for VPTI, and VPTI has not paid the amounts due under the Purchase Orders. Some of the outstanding Purchase Orders issued by VPTI relate to finished goods manufactured by GSS which have been invoiced and shipped to VPTI customers (the "Invoiced Finished Goods"). Some of the outstanding Purchase Orders issued by VPTI relate to finished goods manufactured or work in process for models of Voice Organizers, other than Model 5150 and Model 5160, which have not yet been invoiced by GSS and are held by GSS (the "Work in Process Inventory" as shown on Exhibit A). The remaining Purchase Orders issued by VPTI are for units of Model 5150 and Model 5160 which have not yet been shipped and invoiced by GSS (the "Sold Products") as shown on Exhibit B. In addition, GSS is in possession of components ordered by GSS pursuant to a certain canceled Purchase Order issued by VPTI for 7,500 units of the Model 9601 Voice Organizer/Pager (the "Canceled Parts"). As of the date hereof, VPTI owes to GSS $1,638,322.00 for Invoiced Finished Goods and the Manufacturing Equipment (as hereinafter defined) and $139,000 for Canceled Parts, for a total of $1,777,322 (the "Total Indebtedness"). 1.2 VPTI is presently attempting to sell certain of its assets and distribute the proceeds to its creditors. In particular, VPTI is attempting to conclude a sale of all of VPTI's assets used in the manufacturing and sale of its Sold Products (the "Transaction") to an unrelated third party (the "Purchaser"), including, without limitation, all components owned by VPTI used in the manufacture of the Sold Products (the "Components"), and all equipment, software, tooling and other materials purchased and owned by VPTI related to the manufacture of the Sold Products and currently located at GSS's manufacturing facilities (the "Manufacturing Equipment"). 1.3 VPTI and GSS acknowledge that in the event that VPTI is unable to sell its assets for a satisfactory price or otherwise restructure its financial affairs, VPTI may file a voluntary petition for relief under Title 11 United States Code. In order to facilitate the sale of certain of VPTI's 2 assets, GSS shall accept discounted payment of the Purchase Orders as set forth herein. In the event that the transaction with the Purchaser is not concluded as contemplated herein or the transaction is completed with GSS obtaining payment and is subsequently undone GSS retains all of its rights against VPTI based on the Total Indebtedness. II. AGREEMENT --------- 2.1 VPTI agrees to the following: 2.2.2 With respect to the Purchase Orders relating to the Invoiced Finished Goods, the Manufacturing Equipment and the Canceled Parts. VPTI shall pay within two (2) days from the date of closing with the Purchaser the sum of 803,000. 2.2.2 (a) On or before June 15, 1997, VPTI shall issue to GSS 500,000 shares of $1.00 par value, non-voting, non cumulative, 6% Convertible Preferred Stock ("Stock") of VPTI. Dividends shall be mandatory and payable annually thirty (30) days after the anniversary date of its issue in cash or common stock of VPTI at Market Value (as hereinafter defined). Market Value shall be determined by the average closing bid price for the five (5) trading days prior to the anniversary date of its issue. Each share of the Stock shall be convertible, at the election of GSS, into four (4) shares of Common Stock of VPTI at a price equal to $0.25 per share of common stock. (b) At the option of GSS, VPTI will agree to appoint a representative of GSS to the Board of Directors of VPTI for a one year term. In any event VPTI hereby agrees, for a period of one year, to provide notice to GSS of its Board of Director meetings, and GSS shall have the right, at GSS's option, to attend such meetings as a non-voting observer. In addition, VPTI shall provide to GSS not less than quarterly copies of its financial statements, as well as copies of all documents filed with the SEC. 2.1.3 In the event VPTI fails to comply with the provision of 2.1.1 and 2.1.2 (a), then this Agreement shall become null and void, and VPTI shall be obligated for the Total Indebtedness owed by VPTI to GSS prior to the Agreement less any payments made under 2.1.1 and 2.1.2(a). In addition, should any amounts paid to GSS pursuant to 2.1.1 and/or 2.1.2(a) be required, by order of any court or pursuant to any negotiated compromise, to be returned to VPTI, this Agreement shall be null and void, and VPTI shall be obligated for the Total Indebtedness less any amounts retained by GSS. 2.1.4 As of the date hereof, VPTI represents that it has no claim, offset or counterclaim against GSS including, without limitation, claims with respect to quality or - 2 - 3 workmanship related to the manufacture of VPTI's products by GSS. Further, VPTI hereby releases GSS, as of the date herein, from any and all claims and liabilities of any nature whatsoever. 2.2 GSS agrees to the following: 2.2.1 Subject to Section 2.1.3 herein, payment of the consideration discussed in Paragraph 2.1.1 and 2.1.2(a) shall relinquish VPTI from any and all obligations with respect to Purchase Orders relating to the Invoiced Finished Goods, the Manufacturing Equipment and the Canceled Parts. 2.2.2 With respect to the Purchase Orders relating to the Work in Process Inventory GSS shall accept as payment 110% of the price per unit as stated in such Purchase Order, in recognition of the additional labor and administrative cost associated therewith, as full and final satisfaction of the unpaid amounts owed by VPTI for the Work in Process Inventory, such payment to be made by VPTI to GSS upon notification from GSS that such goods are ready for shipment in accordance with a mutually agreeable production and shipping schedule. VPTI further agrees that future Purchase Orders shall be issued at per unit prices equal to the formula previously applied to VPTI products pursuant to the Manufacturing Agreement plus ten percent (10%). 2.2.3 With respect to the Purchase Orders relating to the Sold Products, GSS acknowledges and agrees that, upon written notification from VPTI that VPTI has concluded the Transaction with the Purchaser and written agreement from the Purchaser assuming all obligations under the Purchase Orders for Sold Products, GSS will consent to the assignment of such Purchase Orders for Sold Products in the full amount to the Purchaser as full and final satisfaction of VPTI's obligation under such Purchase Orders. 2.2.4 GSS hereby acknowledges that, upon written notification from VPTI that VPTI has concluded the Transaction with Purchaser, that all Manufacturing Equipment as shown on Exhibit C attached hereto will thereafter by owned by Purchaser free and clear of any claims by GSS. 2.2.5 GSS hereby acknowledges that, upon written notification from VPTI that VPTI has concluded the Transaction with Purchaser, that all Components as shown on Exhibit D attached hereto will thereafter be owned by Purchaser free and clear of any claims by GSS. 2.2.6 GSS agrees to continue to manufacture pursuant to the terms of the Manufacturing Agreement up to 2,000 units per week of Voice Organizers for VPTI for a period not less than six (6) months from the date hereof. VPTI agrees to provide GSS with a Standby Letter of Credit in the amount of $172,000 to secure VPTI's payments, as provided in Section 2.2.2, under Purchaser Orders for the Work in Process Inventory as well as future Purchase Orders to be issued by VPTI, and VPTI agrees to pay GSS for all shipments pursuant to such Purchase Orders, as provided in Section 2.2.2, upon notification from GSS that the goods are ready for shipment. - 3 - 4 III. ASSIGNMENT OF CLAIMS 3.1 No party hereto has assigned, transferred, or granted, or purported to assign, transfer or grant, any of the claims and causes of action disposed of by this Agreement. IV. NO ADMISSION 4.1 This Agreement represents a compromise of claims and shall not be construed as an admission by any party of any liability or of any contention or allegation made by any other party except that VPTI acknowledges the Total Indebtedness as a valid debt due and owing from VPTI to GSS. V. GOVERNING LAW 5.1 This Agreement shall be governed by and construed in accordance with the laws of the State of California. VI. ENTIRE AGREEMENT 6.1 This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous oral and written agreements and discussions. This Agreement may be amended only by an agreement in writing. - 4 - 5 VII. CONSENT 7.1 The parties hereto acknowledge that they were represented by attorneys of their own choosing in the negotiations for and preparation of this Agreement, that they have read this Agreement, that they are fully aware of its contents and of its legal effect by virtue of discussions with their attorneys, and that they have freely and voluntarily entered into the settlement set forth in this Agreement. VIII. CAPTIONS 8.1 Any captions to the paragraphs of this Agreement are solely for the convenience of the parties, are not a part of this Agreement, and shall not be used for the interpretation or determination of the validity of this Agreement or any portion thereof. IX. AUTHORITY TO EXECUTE AGREEMENT 9.1 Each party or responsible officer or partner thereof executing this Agreement is duly authorized to enter into and execute this Agreement in such capacity. X. JURISDICTION 10.1 The parties hereto agree that in the event that VPTI files a voluntary petition under Title 11, United States Code, or a petition is filed against it under Title 11, United States Code, the United States Bankruptcy Court for the Central District of California shall have sole and exclusive jurisdiction, sitting without a jury, to hear and determine any disputes that arise under or on account of this Agreement. 10.2 In all other events, all actions or proceedings arising in connection with this Agreement shall be tried and litigated only in the state and federal courts located in the County of Los Angeles, State of California. - 5 - 6 XI. WAIVER OF JURY TRIAL 11.1 VPTI and GSS hereby waive any right to trial by jury of any claim, cause of action, or proceeding arising under and in any way related to this Agreement. Either party may file an original counterpart or a copy of this Section of this Agreement with any court as written evidence of the consent of the other party hereto to the waiver of its right to trail by jury. XII. ATTORNEYS FEES TO PREVAILING PARTY 12.1 To the extent any party needs to commence an action to enforce the provisions of this Agreement, then the prevailing party in that action shall be entitled to collect all reasonable attorneys fees and costs in connection therewith. XIII. IMPLEMENTATION 13.1 VPTI and GSS shall execute such other and further documents and do such further acts as may reasonably be required to effectuate the intent of the parties to carry out the terms of this Agreement. XIV. MANUFACTURING AGREEMENT 14.1 The parties hereby agree that, unless otherwise modified by the terms herein, that the Manufacturing Agreement shall remain in full force and effect unless otherwise terminated pursuant to its terms. -6- 7 XV. MISCELLANEOUS 14.1 This Agreement shall inure to the benefit of and be binding on the successors and assignees of the parties and each of them. 14.2 If any provision of this Agreement or portion thereof shall be declared invalid for any reason, then the invalid provision or portion thereof shall be deemed omitted and the remaining terms shall nevertheless be carried into effect. 14.3 This Agreement may be executed in any number of counterparts, each of which shall constitute one and the same instrument. Facsimile signatures shall be treated as originals. DATED: May 20, 1997 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. By: /s/ MITCHELL B. RUBIN --------------------------------- Its: President/CEO -------------------------------- DATED: May __, 1997 GSS/ARRAY TECHNOLOGY, INC. By: /s/ [ILLEGIBLE] --------------------------------- Its: Vice President Finance -------------------------------- -7- 8 Exhibit A --------- PURCHASE ORDERS FOR WORK IN PROCESS INVENTORY Purchase Order Quantity P.O. New Number Model Remaining Price Price - -------------- ----- --------- ----- ----- 3544 5210 965 $31.01 $34.11 3570 5250 264 $71.53 $78.68 3581 5210 5,000 $30.49 $33.54 3582-01 6308 4,750 $35.70 $39.27 3588 2010 1,000 $ 7.13 ea $ 7.84 ea 9 Exhibit B --------- PURCHASE ORDERS FOR SOLD PRODUCTS Purchase Order Model Quantity Unit Total Number Number Remaining Price Value - -------------- ------ --------- ----- ----- 3545 5150A 5,000 units $21.90 $109,500.00 3616 5160 3,750 units $22.16 $ 83,100.00 10 EXHIBIT C MANUFACTURING EQUIPMENT
Stock No. DWG No. Description Tool Cost Vendor Art Number PO No. | 171-0005-B 1710092-B Insulator, PCB NIL Decal | 180-0137-A 1801372-A Label, Back, 5150 NIL Decal 527-0008-A | 180-0137-B 1801372-A LABEL, BACK, 5150A NIL Decal 587-0041-A | 180-0141-B 1801412-B POP Body Label NIL Decal 587-0009-B See | 180-0159-A 1801392-A Label, LCD POP, 5160 NIL Decal 587-0055-A Note < | 180-0163-A 1801372-B Label, Back, 5160 NIL Decal 587-0042-B "A" | 183-0208-B Quick Guide, 5150/5150A NIL Many 587-0002-B Below | 183-0209-A WARRANTY CARD NIL Many 587-0013-A | 183-0220-A Quick Guide, 6160 NIL Many 587-0084-A | 185-0128-B Manual, 5150 NIL Many 587-0001-B | 185-0128-C Manual, 5150A NIL Many 587-0001-C | 185-0133-A Manual, 5160 NIL Many 587-0061-A | 190-0116-B Giftbox, 5160 NIL Thai Packaging 587-0056-B | 185-0110-A 1991102-A FIVE COLOR CLAMSHELL CD NIL Thai Packaging 587-0006-A | Circuit Bd Cutting Tools $1,053.00 GSS 3600 | SMT Stencils $1,000.00 GSS 3600 | SMT Stencils, revised Board $1,000.00 GSS 3600 | Presses for Gluing Case $ 435.00 GSS 3600 | Crystal Soldering Fixture $ 220.00 GSS 3600 See Note | FCT#3 Test Fixtures $ 200.00 GSS 3500 "B" < | LCD Assembly Test Fixture $ 155.00 GSS 3600 | Clamshell Heat Seal Fixture $ 383.00 GSS 3503 | COB Tester Base $1,328.00 GSS 3599 | COB Double Sided Fixture $1,070.00 GSS 3599 | COB Electronics Tester, 5150 (2) NIL GSS | COB Electronics Tester, 5150A (1) NIL GSS | Fluke DMM #45 (3) $3,141.00 GSS 3589 | Phillips, PM-668G Counlor (2) $1,000.00 GSS
NOTE A: GSS believes that all these items are in the possession of vendors, and there shall be no warranty expressed or implied, to the condition of these items, by GSS. NOTE B: All these items are transferred to Purchaser, pursuant to Clause 2.2.5. of the agreement, on a ""AS IS" basis. Page 1 of 1 11 Exhibit D --------- PARTS FOR 5150/5160 OWNED BY VPTI AT GSS/ARRAY Item Part Number Quantity Cost Total - ---- ----------- -------- ---- ----- 1. Microprocessor Die (5150) PN 478-0008-01 3,300 $3.75 $12,375.00 3. Inductor .56uH PN 400-0001 18,980 $0.245 $ 4,650.10** ---------- Total $17,025.10 ========== **Subject to confirmation by GSS-Singapore that GSS holds these parts. EX-10.4 15 LOAN AGREEMNET WITH KBK FINANCIAL 1 EXHIBIT 10.4 ACCOUNT TRANSFER AND PURCHASE AGREEMENT This Account Transfer and Purchase Agreement (this "Agreement") is dated this 20th day of August, 1996, and is between KBK Financial, Inc., a Delaware corporation authorized to do business in California and doing business as VPT/KBK Acceptance Corporation ("KBK"), and VOICE POWERED TECHNOLOGY INTERNATIONAL, INC., a California corporation ("Seller"). This Agreement shall become effective as of the day it is accepted in the State of Texas by KBK as indicated at the end hereof by the date and signature on behalf of KBK. WHEREAS, KBK is in the business of purchasing accounts receivable ("accounts"); and WHEREAS, Seller desires, from time to time during the term of this Agreement, to sell accounts to KBK; and WHEREAS, the parties hereto desire to enter into this Agreement to govern the purchase and sale of accounts; NOW THEREFORE, in consideration of the premises, the mutual agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. OFFER OF ACCOUNTS. At its election from time to time during the term of this Agreement, Seller agrees to offer for sale to KBK certain of its accounts arising out of sales of goods, or services rendered, by Seller, and to sell to KBK on the terms set forth in this Agreement such of the offered accounts as KBK may accept for purchase in the State of Texas. KBK shall have the absolute right in its sole discretion to reject any or all offered accounts, whether or not KBK has previously purchased accounts of any particular account debtor hereunder. The parties agree that, without the prior consent of KBK, the maximum face amount of accounts that KBK may purchase hereunder at any time, together with the then outstanding face amount of outstanding accounts previously purchased by KBK from Seller hereunder, will not exceed THREE MILLION AND NO/100 dollars ($3,000,000.00). KBK's consent to purchase accounts in excess of such amount may be evidenced by KBK's acceptance for purchase of such offered accounts. 2. PURCHASE AND SALE OF ACCOUNTS. Each account purchased by KBK hereunder shall be purchased by KBK without recourse against Seller. All losses incurred by KBK from the financial inability of such account debtor to pay such account over and above any and all Residual and Reserve amounts offset shall be borne solely by KBK; provided, however, that nothing in this Agreement shall be construed to relieve Seller from liability for any breach by Seller of any representation, warranty or agreement of Seller contained herein. Notwithstanding any provision in this Agreement to the contrary, it is contemplated by and the intention of the parties hereto that accounts of Seller may be considered and purchased as one account (herein a "batch") and the term "account" and "accounts" as used herein may also refer to and mean a "batch" or "batches," as the case may be. In connection with each offer of accounts to KBK, Seller agrees to deliver to KBK a written assignment of such accounts, together with a copy of all invoices relating to such accounts, and evidence of delivery of the related goods or performance of the related services (and, if requested, the original purchase orders from the applicable customers), all in a form satisfactory to KBK. In order for an account to be eligible for purchase by KBK, the related invoice must set forth, as the sole address for payment, the following post P.O. Box 54679, Los Angeles, CA 90054-0679 ("Authorized Remittance Address") (or, upon notice from KBK, another post office box of KBK) and, in the case of payments to be effected by wire transfer or other electronic means, the related invoice must set forth, as the sole bank account for such payment, the following bank account of KBK Acct. #1690007172, Bank One Texas, Texas, N.A., ABA Routing #111000614, Reference: Voice Powered Technology ("Authorized Remittance Address") (or a third party designated by KBK) previously designated by KBK (except in each case as otherwise agreed in writing by KBK). KBK's acceptance for purchase of offered accounts shall be evidenced by KBK's tendering of the Initial Payment to Seller or otherwise delivering to Seller a schedule of accounts accepted for purchase by KBK. Seller's transference of offered accounts shall not be effective as to any accounts not accepted for purchase by KBK. Seller hereby sells, transfers, assigns and otherwise conveys to KBK (as a sale by Seller and a purchase by KBK, and not as security for any indebtedness or other obligation of Seller to KBK) all right, title and interest of Seller in and to all accounts accepted by KBK for purchase hereunder, together with all related rights (but not obligations) of Seller with respect thereto, including all contract rights, guarantees, letters of credit, liens in favor of Seller, insurance and other agreements and arrangements of whatever character from time to time supporting or securing payment of such accounts and all right, title and interest of Seller in any related goods, including Seller's rights and remedies under Article 2, Part 7 of the applicable Uniform Commercial Code ("UCC"). The foregoing sale, transfer, assignment and conveyance does not constitute and is not intended to result in an assumption by KBK of any obligation of Seller or any other person in connection with the accounts or related rights or under any agreement or instrument relating thereto. Seller agrees to execute and deliver such 1 2 bills of sale, assignments, letters of credit, notices of assignment financing statements (including continuation statements) under the applicable UCC and other documents, and make such entries and markings in its books and records, and to take all such other actions (including the negotiation, assignment or transfer of negotiable documents, letters of credit or other instruments) as KBK may request to further evidence or protect the sales and assignments of accounts and related rights to KBK hereunder, as well as KBK's interest in any returned goods referred to in Section 8 hereof. 3. TERMS OF ACCOUNTS. Except as set forth on Exhibit "A" attached hereto and as otherwise may be agreed to in writing by KBK from time to time, the terms of sale offered by Seller to its account debtors with respect to all accounts offered to KBK for purchase hereunder shall be NET 30 DAYS. After an account has been purchased by KBK, Seller shall not have the right to vary the terms of sale set forth in the invoice relating to such account, or any other aspect of the account except in Seller's capacity as agent for KBK for purposes of collection of accounts purchased by KBK as set forth in Section 8 hereof, and then only with the prior written consent of KBK. 4. PURCHASE PRICE. The purchase price for each account purchased hereunder shall consist of and be paid by the Initial Payment and the Residual Payment. The Initial Payment shall be payable by KBK to Seller on the business day that KBK accepts for purchase the related account, and the Residual Payment shall be payable by KBK to Seller within five business days after KBK receives, in collected and immediately available funds, the Net Amount of the related account (subject to KBK's right to withhold payment of Residuals hereunder, and subject to KBK's right to withhold, offset and charge, each as described below). "Initial Payment" means SIXTY FIVE percent (65%) of the Net Amount of an account. "Net Amount" of an account means the gross face amount payable pursuant to the related invoice, less taxes and all permitted discounts, deductions and allowances, calculated on the basis of the shortest payment period provided with respect to such invoice. "Residual Payment" with respect to an account means aggregate amount collected with respect to such account, less the sum of (i) the Initial Payment with respect to such account and (ii) KBK's Discounts (hereinafter defined), and (iii) any and all attorneys fees and other costs of collection. 5. FIXED AND VARIABLE DISCOUNTS, "Fixed Discount" means a discount of TWO percent (2.0%) of the Net Amount of such account. "Variable Discount" means a discount computed on the Initial Payment and accruing on the basis of actual days elapsed from the date of Initial Payment until and including five business days after KBK receives, in collected and immediately available funds, receipt of the proceeds of collection of such account at a per annum rate equal to KBK's Base Rate in effect on the date of purchase of such account plus TWO percent (2.0%) per annum; provided, however, in no event shall the Variable Discount with respect to any account purchased hereunder be less than seven (7.0%) per annum. "Base Rate" means that per annum variable rate (expressed as a per annum percentage based on a 360 day year) determined from time to time by KBK without notice to its Seller as KBK's base rate for purposes of calculating variable discounts under KBK's Account Transfer Agreement. The Fixed Discount and the Variable Discount (herein collectively referred to as KBK Discounts) may be subject to one or more adjustments during the term of this Agreement if a Performance Based Pricing Addendum is attached hereto. If an Addendum is attached hereto, it is then made a part hereof as though fully written herein. 6. RESERVE. In the event that KBK has reason to believe Seller has breached any material representation, warranty or agreement contained herein, (including, without limitation, in the event of an account purchased by KBK becomes a Disputed Account as hereinafter defined) any account is not paid in full within 90 days from the date of invoice of such account or should KBK deem itself insecure hereunder, KBK may at its election, withhold and accumulate the payment of the Residual ("Reserve") with respect to any or all accounts purchased hereunder to the extent necessary to maintain a Reserve in an amount up to the sum of (a) the total Initial Payments made by KBK with respect to accounts purchased by KBK hereunder which remain uncollected, plus (b) the total of KBK's Discounts with respect to such accounts and (c) such other amounts which may become due by Seller to KBK hereunder or under any other agreement. Seller hereby authorizes KBK to offset and charge any and all amounts for which Seller or the Reserve may be obligated to KBK pursuant to the terms of this Agreement against the Reserve, and at KBK's election, against any funds of Seller in the possession or control of KBK, from whatever source. However, if, on any business day that KBK regularly makes a payment to Seller for accounts purchased, none of the foregoing conditions exists, and no other breach of this Agreement by Seller exists, then KBK shall distribute to Seller the Residuals then due and all funds it then has on hand that it has collected from accounts that KBK has not then purchased. 7. CERTAIN SECURITY. For the purpose of securing KBK (a) in the payment of any and all sums of money (including, without limitation, all attorneys' fees and other fees and costs) that may become due and owing KBK from Seller by reason of this Agreement, (b) in the performance by Seller of Seller's obligations hereunder, and under any other agreement contract document, note or legal instrument in favor of KBK or its assignees and (c) in the performance of all the obligations of all Affiliates under each Affiliate's agreements, contracts, documents, note or legal instruments in favor of KBK or its assigns, Seller hereby grants to KBK a security interest in (i) all of Seller's present and future inventory, accounts, account and contract rights, contracts, notes, drafts, acceptances, documents, instruments, chattel paper, general intangibles (including, but not limited to, all 2 3 trademarks, goodwill of Seller, customer lists, and books and records), and all products and proceeds therefrom, including all returned or repossessed goods, as well as all books and records pertaining to all of the foregoing, (ii) all amounts due as Residuals or withheld by KBK as the Reserve pursuant to Section 6 hereof and (iii) all funds of Seller in the possession or control of KBK, from whatever source (including, but not limited to, all funds now or hereafter held in the Collateral Account (described below) and the Collateral Account itself). Affiliate, for purposes of this Agreement shall mean any subsidiary, parent, brother, sister, commonly controlled or related parties including but not limited to NONE. Seller agrees to execute and deliver such financing statements under the applicable UCC and other documents, and make such entries and markings in its books and records and to take all such other actions, as KBK may request to further evidence, perfect, preserve or protect the security interest granted to KBK hereunder. KBK shall have all rights and remedies in respect of the lien and security interest herein granted as are provided in this Agreement, any document, agreement, or instrument executed in connection with this Agreement, the UCC and other applicable law, including the right at any time, before or after any default by Seller of any of its obligations hereunder, to notify account debtors and obligors on instruments to make payment to KBK (or its designee) and to take control of proceeds to which KBK is entitled, and to apply proceeds to (in addition to other obligations of Seller to KBK) the reasonable attorneys' fees and legal expenses incurred by KBK in connection with the disposition of collateral or the other exercise of rights and remedies by KBK. To further secure the obligations described in the first paragraph of this Section 7, Seller covenants and agrees to maintain at all times, from and after the date of this Agreement, (i) a deposit account at Bank One, Texas, National Association, P. O. box 2629, Houston, Texas 77002, Account Number 1820766580 (the "Collateral Account); and (ii) the following sums in the Collateral Account (which shall be based on the aggregate amount of accounts purchase by KBK under this Agreement that remain uncollected):
Amount of Accounts Purchased that remain uncollected Cash Collateral Required equal to or less than $350,000 $ -0- $350,000-750,000 $ 75,000 $750,001-1,250,000 $150,000 $1,250,001-1,750,000 $300,000 $1,750,001-2,250,000 $450,000 $2,250,001-2,750,000 $600,000 $2,750,001-3,000,000 $750,000
The beneficial owner of the Collateral Account shall be KBK (provided that the Collateral Account may be held in the name of both KBK and Seller). Seller shall have no right to withdraw any funds from the Collateral Account at any time, it being agreed that KBK will permit excess funds to be released to Seller from the Collateral Account in accordance with the foregoing schedule (provided no default or breach of any provision of this Agreement has occurred). Seller shall be responsible for notifying KBK of its right to receive such excess funds. If Seller fails to maintain the requisite level of funds in the Collateral Account, KBK may withhold amounts otherwise payable to Seller by KBK under this Agreement and deposit such amounts into the Collateral Account until such time as the Collateral Account is funded in accordance with the foregoing schedule. The requirements of this Section 7 are in addition to all other requirements of this Agreement (including, without limitation, the Reserve described in paragraph 6 above). Seller herein acknowledges and warrants to KBK that it has received and will receive, direct and indirect benefits by and from granting this security interest to KBK to secure the obligations of any Affiliate to KBK. In the event a security interest has heretofore been granted and given to KBK by Seller in a prior agreement(s) or documents to secure certain obligations, then, in such event, and not withstanding anything in this Agreement to the contrary, including paragraph 19 hereof, the lien and security interest herein granted and given to KBK is in renewal and extension, and not in extinguishment of, all such prior liens and security interests and are valid and subsisting liens and security interests to secure all prior, existing and new obligations of Seller to KBK hereunder and under any such prior agreements, which obligations are likewise herein renewed and extended, in any manner, including any action required in connection with or by virtue of the United States Bankruptcy Code. 3 4 8. Servicing. KBK hereby appoints Seller as servicing agent for KBK ("Servicer") for the purpose of expediting the payment of accounts purchased by KBK hereunder. Servicer agrees to maintain an active, on-going and regular dialog with each Account Debtor. Servicer further agrees to utilize all powers influences, rights and take every action within its control in accordance with its customary practices and applicable law to expedite the collection of the accounts purchased by KBK and direct such payments in specie exclusively to the Authorized Remittance Address, as herein defined. Seller will furnish to KBK, upon request, any and all papers, documents and records in its possession or control related to accounts purchased by KBK hereunder, or related to Seller's business relationship with the respective account debtors, and agrees to cooperate fully with KBK in all matters related to collection of accounts purchased by KBK hereunder. KBK reserves the right to terminate such Servicer relationship at any time with or without cause and without notice to Servicer. Seller authorizes KBK to forward directly to account debtors statements or invoices on accounts purchased by KBK hereunder, and to request payment at such address or to such bank account as may be designated by KBK. Seller agrees that, if any payment is made to Seller on any account purchased by KBK from Seller hereunder, Seller (i) will hold such payment in trust for KBK, (ii) will not commingle such payment with any funds of Seller, and (iii) will deliver such payment to KBK, in the exact form received, by the close of business on the next business day following receipt thereof by Seller. If any goods relating to an account purchased by KBK hereunder shall be returned to or repossessed by Seller, Seller shall give prompt notice thereof to KBK and shall hold such goods in trust for KBK, separate and apart from Seller's own property, and such goods shall be owned solely by KBK and be subject to KBK's direction and control. Seller shall properly store and protect such goods and agrees to cooperate fully with KBK in any subsequent disposition thereof for the benefit of KBK. Seller authorizes KBK to collect, sue for and give releases for in the name of Seller or KBK in KBK's sole discretion, all amounts due on accounts sold to KBK hereunder. Seller specifically authorizes KBK to endorse, in the name of Seller, all checks, drafts, trade acceptances or other forms of payment tendered by account debtors in payment of accounts sold to KBK hereunder and made payable to Seller. KBK shall have no liability to Seller for any mistake in the application of any payment received with respect to any account; provided KBK has not acted in bad faith or has not been grossly negligent, IT BEING THE SPECIFIC INTENT OF THE PARTIES HERETO THAT KBK SHALL HAVE NO LIABILITY HEREUNDER EXCEPT FOR ITS OWN GROSS NEGLIGENCE AND WILLFUL MISCONDUCT. Seller hereby waives notice of nonpayment of any accounts old to KBK hereunder as well as any and all other notices with respect to such accounts, demands or presentations for payment, and agrees that KBK may extend or renew from time to time the payment of, or vary, reduce the amount payable under or compromise any of the terms of, any account purchased by KBK, in each case without notice to or the consent of Seller. Seller further authorizes KBK (or its designee) to open and remove the contents of any post office box of Seller or KBK (or its designee) which KBK believes contains mail relating to accounts, and in connection therewith or otherwise, to receive, open and dispose of mail addressed to Seller which KBK believes may relate to accounts, and in order to further assure receipt by KBK (or its designee) of mail relating to such accounts, to notify other parties including customers and postal authorities to change the address for delivery of such mail addressed to Seller to such address as KBK may designate. KBK agrees to use reasonable measures to preserve the contents of any such mail which does not relate to accounts purchased hereunder and to deliver same to Seller (or, at the election of KBK, to notify Seller of the address where Seller may take possession of such contents; provided, if Seller does not take possession of such contents within 30 days after notice from KBK to take possession thereof, KBK may dispose of such contents without any liability to Seller). Seller hereby irrevocably appoints KBK (and any employee, agent or other person designated by KBK, any of whom may act without joinder of the others) as Seller's attorneys-in-fact and agents, in Seller's name, place and stead, to take all actions, execute and deliver all notices, negotiate such instruments and other documents, as may be necessary or advisable to permit KBK (or its designee) to take any and all of the actions described in this paragraph or to carry out the purpose and intent thereof, as fully and for all intents and purposes as Seller could itself do, and hereby ratifies and confirms all that said attorneys-in-fact and agents may do or cause to be done by virtue hereof. This power of attorney is irrevocable and deemed coupled with an interest. 9. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents and warrants to KBK with respect to each account offered by Seller to KBK hereunder that (i) Seller is the sole owner of such account, which account is free and clear of any liens, claims, equities or encumbrances whatsoever, and upon each purchase by KBK of such account, KBK will own such account free and clear of any liens, claims, equities or encumbrances whatsoever and the consideration received by Seller from KBK for such Account is fair and adequate, (ii) Seller is the sole obligee under such account, and has full power and is duly authorized to sell, assign and transfer such account to KBK hereunder, and the date of sale of such account is not more than 30 days after the date of the original invoice relating to such account, (iii) Seller has no knowledge of any fact which would lead it to expect that, at the date of sale of such account to KBK, such account will not be paid in the full stated amount when due, (iv) such account arises out of a bona fide sale of conforming goods or the bona fide rendition of services by Seller, and all underlying goods have been delivered to the account debtor, or all underlying services have been rendered by Seller, in complete fulfillment of all of the terms and conditions of a fully executed, delivered and unexpired contract with the account debtor, and the account debtor has accepted the goods or services to which the account relates, (v) such account is denominated and payable only in United States dollars and constitutes the legal, valid and binding payment obligation of the account debtor, enforceable in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium 4 5 or other similar laws affecting the enforcement of creditors' rights generally), (vi) such account is current and not past due, has not been paid by or on behalf of the account debtor in whole or in part, and is not and will not be subject to any dispute, recision, set-off, recoupment, defense or claim by the account debtor, whether relating to price, quality, quantity, workmanship, delay in delivery, set off, counterclaim or otherwise, and the account debtor has not and will not claim any defense of any kind or character (other than bankruptcy or insolvency arising after the date of sale of such account to KBK hereunder) against payment of such account, and (vii) as of the date of purchase by KBK of such account, the account debtor with respect to such account is located (within the meaning of Section 9-103 of the applicable UCC) and has its principal executive offices within the United States. Seller further represents and warrants to KBK that (a) the execution, delivery and performance of this Agreement by Seller have been duly authorized and this Agreement constitutes the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, (b) Seller is not a debtor in any bankruptcy proceedings, insolvent, undergoing composition or adjustment of debts or unable to make payment of its obligations when due and no petition in bankruptcy has been filed by or against Seller or any affiliate thereof nor has Seller or any of its affiliates filed any petition seeking an arrangement of its debts or for any other relief under the United States Bankruptcy Code (the "Bankruptcy Code"), and no application for appointment of a receiver or trustee for all or a substantial part of the property of Seller or any affiliate thereof is pending, nor has Seller or any affiliate thereof made any assignment for the benefit of creditors, (c) Seller is not in default of any debt or obligation to any lender or other creditor, and (d) Seller's principal place of business, chief executive office, location where the records concerning its books of account and contract rights are kept, and location of any property subject to the security interest granted in Section 7 hereof is, unless changed upon notice to KBK complying with the next following sentence and Section 17 of this Agreement, its "Address for Notices" described in Section 17 hereof. Seller agrees not to change the location of its principal place of business or chief executive office, the location where its records concerning its books of account or contract rights are kept, or the location of any property subject to the security interest granted in Section 7 hereof, without giving at least 15 days advance notice thereof to KBK. Each representation and warranty of Seller contained in this Agreement shall be deemed to be made at and as of the date hereof and at and as of the date of each sale of accounts to KBK hereunder. Seller agrees to indemnify and hold KBK harmless against any breach by Seller of any representation, warranty or agreement of Seller contained in this Agreement, and against any claims or damages arising out of the manufacture, sale, possession or use of, or otherwise relating to, goods, or the performance of services, associated with or relating to accounts or related rights purchased (or with respect to which a security interest is granted) hereunder. Seller agrees to notify KBK immediately of any breach by Seller of any representation, warranty or agreement of Seller contained herein or should any representation, warranty or agreement made herein become untrue or false at any time. Seller further agrees to notify KBK immediately of the assertion by any account debtor of any dispute or other claim (including any defense or offset asserted by any account debtor) with respect to any account sold to KBK hereunder, or with respect to any related goods or services ("Disputed Accounts"). Upon KBK's request, Seller agrees to settle, at its own expense and for the benefit of KBK, all such Disputed Accounts; provided, that any such settlement shall be made only with the prior written consent of KBK. Unless KBK is advised in writing by Seller to the contrary, any account that has not been approved by the account debtor within sixty (60) days from the date of the invoice upon which the account is based, shall be deemed to be a Disputed Account. As to any Disputed Account, KBK shall have the right, in its sole discretion, (i) to settle at the expense of Seller and for the benefit of KBK any such dispute or claim upon such terms as KBK may in its sole discretion deem advisable or (ii) to assign the related account to Seller, without recourse to KBK, and charge any unpaid balance with respect thereto (up to the amount of the Initial Payment with respect thereto and KBK's Discounts (through the date of such charge) with respect thereto) against the Reserve, deduct such unpaid balance from any Initial Payments or against any funds of Seller in the possession or control of KBK, from whatever source. Seller agrees that in lieu of KBK charging any such unpaid balance against the Reserve, Initial Payments or against such other funds, KBK may require Seller to pay (and Seller hereby agrees to pay) to KBK on demand any such unpaid balance. An account with respect to which the account debtor has asserted an Insolvency Claim is not a Disputed Account. As used herein, "Insolvency Claim" means any defense or other claim by an account debtor with respect to an account sold to KBK hereunder arising solely out of the bankruptcy or insolvency of the account debtor or the financial inability of the account debtor to pay, if Seller has not breached its representation contained in clause (vi) of the first paragraph of this Section 9. Notwithstanding anything herein to the contrary, KBK shall have the right to charge all accounts not paid because of an Insolvency Claim against the Reserve and such charge shall have priority over and be paid before any Disputed Account charge. 10. FINANCIAL STATEMENTS. Seller represents and warrants that all financial and other information provided by Seller to KBK in connection with or in Seller's application to KBK or to induce KBK to enter into this Agreement is true, complete and correct in all material respects. Seller agrees to furnish to KBK (i) within 90 days after the last day of each fiscal year of Seller a consolidated statement of income and a consolidated statement of cash flows of Seller for such fiscal year, and a consolidated balance sheet of Seller as of the last day of such fiscal year, together with an auditors' report thereon by an independent certified public accountant (if Seller generally obtains such an auditors' report), (ii) within 45 days after the last day of each fiscal quarter of Seller, an unaudited consolidated statement of income and statement of cash flows of Seller for such fiscal 5 6 quarter, and an unaudited consolidated balance sheet of Seller as of the last day of such fiscal quarter, and (iii) within 30 days after the last day of each month, monthly unaudited consolidated statements of income and statements of cash flows of Seller and any affiliates for each month and unaudited consolidated balance sheets of Seller and any affiliates as of the end of each month. Seller represents and warrants that each such statement of income and statement of cash flows will fairly present, in all material respects, the results of operations and cash flows of Seller for the period set forth therein, and that each such balance sheet will fairly present, in all material respects, the financial condition of Seller as of the date set forth therein, all in accordance with generally accepted accounting principles applied on a consistent basis, except as otherwise noted in the accompanying auditors' report (or, with respect to unaudited financial statements, in the notes thereto). Seller also agrees to furnish to KBK, upon request, such additional financial and business information concerning Seller and its business as KBK may reasonably request, including copies of its Form 941 returns filed with the Internal Revenue Service and evidence of payment of related taxes. KBK and its agents, representatives and accountants shall have the right, at all times during normal business hours and without prior notice to Seller, to conduct an audit or other examination of the financial and business records of Seller and to examine and make copies of all books and records of Seller for the purpose of assuring or verifying compliance by Seller with the terms of this Agreement, and Seller agrees to cooperate fully with KBK and its agents, representatives and accountants in connection therewith and to timely pay all KBK reasonable audit fees and expense. Seller agrees to properly reflect the effect of this Agreement, and all sales related thereto, in all financial reports and disclosures, written or otherwise, provided to Seller's creditors and other interested parties. Seller specifically agrees that all accounts purchased by KBK will be excluded from Seller's reported accounts receivable balances. Seller also specifically agrees to immediately notify KBK of any material adverse change in Seller's financial condition or business. 11. TAXES. All taxes and governmental charges of any kind imposed with respect to the sale of goods or the rendering of services relating to accounts purchased by KBK hereunder shall be for the account of, and paid by, Seller. 12. COMMITMENT, FACILITY, AND TERMINATION FEES; TERMINATION. Seller hereby agrees to pay to KBK, concurrently with the first purchase of an account hereunder, a commitment fee (the "Commitment Fee") of THIRTY THOUSAND and no/100 dollars ($30,000). On August l5, 1997, and each anniversary thereafter, Seller hereby agrees to pay to KBK an additional THIRTY THOUSAND and no/100 dollars ($30,000.00) on each such date as a facility fee ("Facility Fee"). Seller and KBK acknowledge and agree that the Commitment Fee and the Facility Fee are intended as reasonable compensation to KBK for making the facility available under the terms of this Agreement and for no other purpose. Seller hereby agrees to pay to KBK a termination fee equal to TWO percent (2.0%) of the maximum dollar amount of aggregate outstanding accounts allowed according to Section 1 (the "Termination Fee") and the payment shall be an obligation of Seller secured under Section 7 hereof. This Termination Fee is payable upon termination of this Agreement by Seller for any reason or upon termination by KBK at its election for the reasons set forth in Sections 12(i) through 12(iv) below. However, if this Agreement is terminated as above set forth after the expiration of 12 months from the date of its execution, but before the expiration of 24 months, three-quarters of the Termination Fee shall be waived. If the Agreement is terminated more than twenty-four (24) months after the date of its execution, all of the Termination Fee shall be waived. Notwithstanding anything to the contrary, if, at any time, the Base Rate should exceed the "Prime Rate" published in the Western Edition of the Wall Street Journal, on the first business day of each of Seller's fiscal quarters, by more than 100 basis points, Seller shall have five (5) business days thereafter to terminate this Agreement without having to pay any Termination Fee. This Agreement may be terminated by either party hereto by delivery of written notice of termination of this Agreement to the other party specifying the date of termination, which date shall be at least 30 days after the date such notice is given. KBK may, at its election, terminate this Agreement immediately and without the requirement of notice to Seller if (i) Seller shall fail to perform any of its obligations hereunder or shall breach any of its representations and warranties hereunder, (ii) Seller or any of its Affiliates shall become insolvent or suspend all or a substantial part of its or their business, (iii) a petition under the Bankruptcy Code or any other insolvency or debtor statute shall be filed by or against Seller or any affiliate or any receivership proceedings with respect thereto shall commence, (iv) any guarantee of any of Seller's obligations hereunder shall be terminated or become impaired, or (v) KBK otherwise determines that it is insecure hereunder. Termination of this Agreement shall not affect the rights and obligations of the parties hereunder with respect to transactions occurring on or prior to the date of such termination, and this Agreement shall continue to govern the rights and obligations of the parties hereto with respect to accounts purchased by KBK from Seller on or prior to the date of such termination. All security interests granted or contemplated by this Agreement shall survive the termination of this Agreement until all amounts payable to KBK with respect to transactions occurring on or prior to the date of termination have been paid to KBK, and Seller has performed all its obligations to KBK with respect to such transactions, and all obligations under this Agreement including but not limited to payment of the Fees. 13. NOTICE OF PROPOSED REFINANCING. Seller hereby agrees that in the event Seller receives a written proposal from any third party to provide financing or factoring ("Proposed Refinancing"), Seller will immediately 6 7 advise KBK in writing of the identity of the offeror ("Offeror") the complete terms and conditions of the Proposed Refinancing and provide KBK a full and complete copy of all written correspondence between Seller and Offeror describing the Proposed Refinancing. 14. Attorney's Fees, Litigation Expense. Seller agrees to reimburse KBK upon demand for KBK's attorneys' fees, court costs and other fees and expenses incurred in collecting any sums due or to become due to KBK hereunder, enforcing any of KBK's rights under this Agreement and all actions taken by KBK that it deems necessary or desirable under the United States Bankruptcy Code or should any provisions of the United States Bankruptcy Code be applicable to any rights or obligations of any party to this Agreement, as well as all appearances, motions and actions to which KBK may be or become a party in any bankruptcy case. 15. Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. SELLER HEREBY SUBMITS (IF FEDERAL JURISDICTION IS AVAILABLE) TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, FORT WORTH DIVISION, OR (IF FEDERAL JURISDICTION IS NOT AVAILABLE) TO THE EXCLUSIVE JURISDICTION OF ANY TEXAS STATE COURT SITTING IN FORT WORTH, TEXAS FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SELLER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. SELLER HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 16. Amendments; Waivers. This Agreement may be amended only in writing signed by the parties hereto. No failure on the part of KBK to exercise, and no delay by KBK in exercising, and no course of dealing by KBK with respect to, any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder by KBK preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies of KBK hereunder are cumulative and not exclusive of any remedies provided by law. 17. Notices. All notices and other communications provided for herein shall be given or made in writing and telecopied or delivered by courier or mail to the intended recipient at the "Address for Notices" specified opposite its name on the signature page hereto, or at such other address or telecopy number as shall be designated by a party to the other party in the manner specified in this Section 17. All such notices and other communications shall be deemed to have been duly given when transmitted by telecopier (with receipt thereof confirmed by telecopier) or personally delivered or, in the case of a mailed notice, upon deposit in the United States Postal System postage prepaid and properly addressed, in each case given or addressed as aforesaid. 18. Indemnification. Seller agrees to indemnify, defend and hold KBK harmless from and against any and all loss, liability, obligation, damage, penalty, judgment, claim, deficiency and expense (including interest, penalties, attorneys' fees and amounts paid in settlement) owing to any third party to which KBK may become subject arising out of or based upon this Agreement as well as any prior relationship of Seller with KBK, WHETHER BY ALLEGED OR ACTUAL NEGLIGENCE OR OTHERWISE, except and to the extent caused by the gross negligence or willful misconduct of KBK. 19. Waiver and Release. Seller, by its execution of this Agreement, does hereby covenant, warrant and represent that, (i) Seller is not in default and no default exists under any prior agreements or transactions with KBK; (ii) Seller releases, relinquishes and waives any and all defenses to the enforceability of any prior agreements or transactions with KBK in connection therewith to which Seller may have otherwise been entitled as of the date hereof; (iii) Seller relinquishes, waives and releases KBK from any and all claims known or unknown which Seller may or might have against KBK arising directly or indirectly out of or from any prior agreements or transactions between Seller and KBK; (iv) the benefit received and to be received by Seller as a result of this Agreement shall and does constitute sufficient and valuable consideration to Seller for entering into and performing its obligations under this Agreement; (v) the execution and delivery by Seller of this Agreement and the Limited Guaranty executed by, inter alia, Seller of even date herewith, the performance by Seller of this Agreement and the consummation of the transaction contemplated thereby are, (a) not prohibited by any indenture, contract or agreement, law or corporate documents, including, but not limited to, By-Laws and Articles of Incorporation, (b) duly authorized by appropriate corporate action of Seller, and (c) legally valid and binding obligations of Seller and will continue to be such and enforceable against the Seller according to their terms; (vi) that this Agreement will be executed and delivered by properly authorized officers of Seller; (vii) KBK has no obligation to continue the prior agreements or enter into this Agreement except for the considerations herein expressed; and (viii) the representations and warranties set forth herein will survive the execution and delivery 7 8 of this Agreement. 20. CAPTIONS; FINAL AGREEMENT; COUNTERPARTS; SUCCESSORS AND ASSIGNS. Captions and headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. This Agreement represents the final agreement between the parties hereto with respect to the subject matter hereof, and supersedes all prior proposals, negotiations, agreements and understandings, oral or written, related to such subject matter. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument. This Agreement may not be assigned by Seller without the prior written consent of KBK. This Agreement may be assigned by KBK, and any accounts purchased by KBK hereunder, together with all rights and interests related thereto granted to KBK hereunder, may be assigned by KBK, all without notice to or the consent of Seller. This Agreement shall be binding upon the parties hereto and their respective successors and permitted assigns. IN WITNESS WHEREOF, the parties hereto, heretofore duly authorized, have executed this Agreement as of the date first set forth above. Address for Notices: VOICE POWERED TECHNOLOGY 15260 Ventura Boulevard INTERNATIONAL, INC. Suite 2200 SHERMAN OAKS, CA 91403 Fax No.: (818) 905-0950 By: /s/ EDWARD M. KRAKAUER ---------------------------- Name: Edward M. Krakauer Title: President By: /s/ MITCHELL RUBIN ---------------------------- Name: Mitchell Rubin Title: Vice President Finance & Operations Address for Notices: KBK FINANCIAL, INC. 2200 CITY CENTER 301 COMMERCE STREET FORT WORTH, TEXAS 76102 By: /s/ KENNETH H. JONES, JR. Fax No.:(817) 335-9339 ---------------------------- Name: Kenneth H. Jones, Jr. Title: Vice Chairman Date: August 22, 1996 8 9 Exhibit "A" The terms of sale offered by Seller to the following account debtors with respect to all accounts (owing by such account debtors) that are offered to KBK for purchase under the Agreement shall be no longer than NET 60 DAYS: 1. Best Distributors 2. Day Mark 3. Montgomery Ward 4. Macy's 5. Office Max 6. Staples 7. Clockwise Inc. 8. Daytons/Marshall Fields 9. Fedco 10. Let's Talk Cellular 11. State Street Discount 12. Ultimate Electronics 13. Service Merchandise (provided that with respect to accounts owing from Service Merchandise terms of sale which do not exceed NET 90 DAYS for any goods shipped prior to October 15, 1996, shall be acceptable). 9 10 PERFORMANCE BASED PRICING ADDENDUM to Account Transfer and Purchase Agreement between KBK Financial, Inc, dba VPT/KBK Acceptance Corporation ("KBK"), and Voice Powered Technology International, Inc. ("Seller") dated August 20, 1996. This Addendum sets forth the criteria for and the amount of any adjustment in the Fixed Discount and the Variable Discount (collectively the "Discount Rates") as set forth in the above referenced Account Transfer and Purchase Agreement (the "Agreement"), the rates set forth therein being referred to herein as the "Contract Rates". The Discount Rates set for the initial purchases under the Agreement and until changed according to this Addendum ("Initial Rates") are the following: Fixed Discount 1.25% Variable Discount: Base Rate Plus 2.00% Beginning after the first three (3) full calendar months after the date of the Agreement ("Initial Quarter") and every three (3) months thereafter, Seller may apply for a change in the Discount Rates (an "Adjustment"), based on Seller achieving certain financial conditions set forth in the following table:
# PROFIT ROLLING 6 ROLLING MOS. VARIABLE FIXED CURRENT MOS. OUT OF CUMM. DISC. DISC. RATIO(1) DEBT/TNW(2) LAST6(3) PROFIT(4) ---------- ----- ------- --------- ----------- --------- BASE+1.00 .25 *2.25:1 <2.50:1 6 >$250,000 1.25 .50 2.00:1 3.00:1 5 $250,000 1.50 .75 1.75:1 3.50:1 4 $150,000 1.75 1.00 1.50:1 4.00:1 2 $50,000 2.00 1.25 1.25:1 4.50:1 0 $<0 2.00 1.50 0.75:1 5.00:1 0 $ - ------------------ 1. Current Ratio = Current Assets/Current Liabilities 2 Debt/TNW = Total Liabilities/Tangible Net Worth calculated on a proforma basis (i.e., add back purchased A/R and Factored Balance) 3. Profit = Net Income After Tax and before any extraordinary gains 4. Sixth Months Cumulative Profit = Last Six Months Net Income After Tax 11 Within 30 days, after the end of Initial Quarter or any successive quarter, if Seller believes it qualifies for an Adjustment, the attached, completed certificate shall be prepared by Seller and submitted to KBK. KBK shall have until the 15th day of the following month to verify the qualifications for the requested Adjustment. If KBK shall determine, in its reasonable discretion, that Seller does qualify for the Adjustment, the adjustment shall become effective for purchases on and after the 1st day of the next month. Once the Initial Rates have been adjusted as set forth herein, monthly certificates shall be submitted certifying the continued qualification for the Adjustment or another Adjustment as the case may be. Once an Adjustment has been made, in the event Seller thereafter fails to timely submit monthly certificates, breaches any one or more of the Representations and Warranties contained in paragraph 9 of the Agreement or fails to comply with the provisions of paragraph 10 of the Agreement, the current Discount Rates shall automatically and without notice adjust to the Contract Rates, effective immediately and shall remain at such rate until Seller cures all defaults under the Agreement and shall request and qualify for a new Adjustment. KBK shall be under no duty to notify Seller of any change to the Contract Rates and KBK shall not have any liability for any failure to timely adjust, nor shall such failure constitute a waiver on the part of KBK of its rights to adjust Discount Rates. VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. By: /s/ EDWARD M. KRAKAUER ---------------------------------- Name: Edward M. Krakauer Title: President By: /s/ MITCHELL RUBIN ---------------------------------- Name: Mitchell Rubin Title: Vice President Finance & Operations KBK FINANCIAL, INC. By: /s/ KENNETH H. JONES, JR. ---------------------------------- Name: Kenneth H. Jones, Jr. ------------------------------- Title: Vice President ------------------------------- EX-10.5 16 LETTER OF INTENT 1 Exhibit 10.5 VOICE IT WORLDWIDE, INC. 2643 MIDPOINT DRIVE, SUITE A FORT COLLINS, COLORADO 80525 TELEPHONE: 970/221-1705 FACSIMILE: 970/221-2058 December 17, 1996 Voice Powered Technology International, Inc. 15260 Ventura Boulevard, Suite 220 Sherman Oaks, California 91403 Attn: Edward M. Krakauer President and CEO Re: Merger with Voice It Worldwide, Inc. Dear Ed: This letter of intent (the "Letter of Intent") will confirm the various discussions which representatives of Voice It Worldwide, Inc. ("Voice It") have recently conducted with you as representative of Voice Powered Technology International, Inc. ("VPTI") relative to the merger of VPTI into Voice It (or the merger of Voice It into VPTI). Except with respect to Paragraphs 9, 11, 12 and 13 hereof, the provisions of this Letter of Intent do not at this time constitute a binding agreement between Voice It and VPTI, and do not create legal rights in favor of Voice It or VPTI, but merely set forth a basis on which further negotiations may be commenced with a view to the execution of a definitive merger agreement (the "Agreement") in a form satisfactory to Voice It and VPTI. This Letter of Intent shall evidence the willingness of Voice It and VPTI to continue to negotiate in good faith toward a definitive Agreement. However, both parties understand and agree that there can be no assurance that a definitive Agreement can be successfully negotiated or completed, in which event the transactions contemplated hereby would not be completed. In such event, both parties waive any claims for damages of any type in the event of failure to complete the transactions contemplated hereby. It is expected that the Agreement will provide, among other provisions, for the following: 1. Merger Transaction. Subject to the terms and provisions of the Agreement, Voice It and VPTI agree to merge as of the Closing on the Closing Date (as hereinafter defined). It is understood that the surviving entity of the Merger will be determined by mutual agreement of the parties prior to the execution of the Agreement. It is further understood and agreed that, in the event that VPTI will be the surviving entity, VPTI will issue 3.15 shares of its $.001 par value common stock ("VPTI Common Stock") for each share of $.10 par value common stock of Voice It ("Voice It Common Stock") outstanding as of the Closing Date and that, in the event that Voice It will be the surviving entity, Voice It will issue 0.3174 shares of Voice It Common Stock for each share of VPTI Common Stock outstanding as of the Closing Date (the "Transaction"). 2 Voice Powered Technology International, Inc. December 17, 1996 Page 2 2. Voice It Capitalization. As of the Closing Date, Voice It shall have not more than 5,054,802 shares of Voice It Common Stock issued and outstanding and not more than 2,720,000 options, warrants and other dilutive securities outstanding with the amounts and exercise prices thereof substantially similar to the information set forth on Exhibit A attached hereto. In the event that VPTI is the surviving entity of the Merger, it is understood and agreed that the foregoing dilutive securities will be adjusted by the 3.15 for 1 exchange ratio, with a pro rata reduction in exercise prices. 3. VPTI Capitalization. As of the Closing Date, VPTI shall have not more than 13,949,072 shares of VPTI Common Stock issued and outstanding and not more than 3,184,819 options, warrants and other dilutive securities outstanding with the amounts and exercise prices thereof substantially similar to the information set forth on Exhibit B attached hereto. It is understood and agreed that, in addition to the foregoing 13,949,072 shares of VPTI Common Stock, VPTI shall be entitled to issue (or reserve for issuance upon conversion of convertible securities) not more than 5,000,000 additional shares of VPTI Common Stock pursuant to its proposed pending short term financing. $1 million of which transaction shall be completed prior to December 31, 1996 and an additional $500,000 of which transaction shall be completed by March 31, 1997. In the event that Voice It is the surviving entity of the Merger, it is understood and agreed that the foregoing dilutive securities will be adjusted by the 0.3174 exchange ratio, with a pro rata increase in exercise prices. 4. The Agreement. Upon execution and acceptance of this Letter of Intent by both parties, counsel, accountants, advisors and representatives of Voice It and VPTI, respectively, shall commence the due diligence inspection of the other party's business and the preparation of the Agreement, which Agreement shall be subject in all aspects to the approval of each party. It is understood that this Letter of Intent is intended to be, and shall be construed only as, a summary of the present discussions between Voice It and VPTI to the date hereof, and that the respective rights and obligations of Voice It and VPTI remain to be defined in the Agreement, into which this Letter of Intent and all discussions prior to the execution of the Agreement shall merge. The Agreement shall contain customary representations, warranties, agreements and covenants normally found in a merger agreement, including, but not limited to, representations, warranties, agreements and covenants of each of the parties relating to the status of its business (including its assets, liabilities, contracts and related matters), the financial statements and other financial information and data related to each party, covenants of indemnification against certain risks and claims, the continuation of current levels of business operations of each party, and restrictions on business operations of each party to the normal course of their respective business between the date of execution of the Agreement and the Closing. The Agreement shall also contain representations and warranties of each party that (i) all shares of Voice It Common Stock and VPTI Common Stock, respectively, are duly issued, fully paid and nonassessable, (ii) each of the parties has good, marketable and indefeasible title to its assets free and clear of all liens, pledges, security interests and restrictions whatsoever, except as set forth in the Agreement, and (iii) each party is a corporation duly organized, validly existing, and in good standing and has the requisite corporate power and authority to conduct its business as and in the places where such business currently is conducted. 3 Voice Powered Technology International, Inc. December 17, 1996 Page 3 5. Conditions to Merger. The Agreement shall provide that the respective obligations of Voice It and VPTI thereunder are subject to, among other provisions, the following conditions: (a) The favorable review and approval of the Agreement by the Board of Directors of Voice It and VPTI, respectively; (b) The favorable approval of the Agreement by the shareholders of Voice It and VPTI, respectively (with not more than 5% of either party's shareholders exercising appraisal or dissenters rights); (c) The receipt of such consents, approvals and/or authorizations from governmental authorities or third parties as may be required to consummate the transactions contemplated in the Agreement; (d) The receipt of satisfactory "fairness opinions" by each party's Board of Directors, at their option, as to the fairness of the Transaction to the shareholders of the respective parties; (e) The absence of any material liability of any nature, direct or indirect, contingent or otherwise, or in any amount not adequately reflected or reserved upon the financial statements of the respective party as of September 30, 1996; (f) There shall not have been any event or condition of any character which adversely affects the business or assets of VPTI or Voice It, including, but not limited to, any material adverse change in the condition, assets, liabilities, business or operations of VPTI or Voice It from that reflected on the respective financial statements as of September 30, 1996; (g) The accuracy of the representations, warranties, agreements and covenants of each party contained in the Agreement; (h) The acceptance and approval by each party of the financial condition, business operations and good standing of the other party as of the Closing Date; (i) Each party shall have performed and complied with all agreements and conditions required by the Agreement to be performed and complied with by such party prior to or on the Closing Date; (j) Each party shall have achieved an operating profit for the fiscal quarter ended December 31, 1996 before any non-recurring expenses, write-offs of assets or other expenditures related to the Transaction; (k) Each party shall have achieved mutually satisfactory fourth quarter 1996 revenue and retail sell-through of its products; 4 Voice Powered Technology International, Inc. December 17, 1996 Page 4 (l) Prior to the date of the first public announcement of the principal financial terms and conditions of the Agreement (which announcement includes the share exchange ratio for the Transaction), the quotient resulting from the Average Closing Stock Price (as hereinafter defined) of the Voice It Common Stock divided by the Average Closing Stock Price of the VPTI Common Stock shall be not less than 2.4 nor greater than 3.0. The "Average Closing Stock Price" is defined as one-thirtieth (1/30) of the sum total of the daily closing stock price published by Nasdaq for the most recent thirty (30) consecutive trading days; and (m) At any time subsequent to the date at the first public announcement of the principal financial terms and conditions of the Agreement, the quotient resulting from the Average Closing Stock Price of the Voice It Common Stock divided by the Average Closing Price of the VPTI Common Stock shall be not less than 2.75 nor greater than 3.50. 6. Conditions Precedent to Execution of Agreement. It is understood and agreed that the following contingencies shall be resolved to the mutual satisfaction of Voice It and VPTI prior to the execution of the Agreement: (a) Voice It shall re-negotiate the provisions applicable to the outstanding Convertible Debenture issued to Renaissance Capital Growth & Income Fund III, Inc.; (b) VPTI shall be required to reduce its existing outstanding debt to Flextronics from the proceeds of its proposed short term financing and without the assumption of additional debt to an amount not greater than $800,000 by March 31, 1997, with such amount to be reduced by $50,000 per month thereafter commencing April 1, 1997; (c) VPTI shall receive a waiver, release and satisfaction from Everen Securities regarding their investment banking agreement with VPTI; and (d) VPTI shall complete a financing transaction pursuant to which it shall receive not less than $1,000,000 in gross proceeds by December 31, 1996 and an additional $500,000 by March 31, 1997, which transaction shall provide for the issuance (or reservation for issuance upon exercise of convertible securities) of an aggregate of not more than 5,000,000 newly issued shares of VPTI Common Stock valued at not less than $0.30 per share. 7. Due Diligence Inspection. Upon reasonable prior notice to the other party, each party and its agents and representatives shall have reasonable access to the business and related records of the other party during the period commencing on the Effective Date hereof and ending on January 31, 1997 (the "Inspection Period") to inspect the business and related records (and make copies thereof) during normal business hours of the other party. At any time during the Inspection Period, either party may upon written notice to the other party terminate this Letter of Intent or the Agreement, as applicable, without liability to the other party. 5 Voice Powered Technology International, Inc. December 17, 1996 Page 5 8. Post-Merger Board of Directors. Upon completion of the merger, the Board of Directors of the surviving entity will consist of three (3) representatives of Voice It, three (3) representatives of VPTI, and one (1) outside director to be selected prior to execution of the Agreement by mutual agreement of Voice It and VPTI. Each of the foregoing directors will agree to serve a full one-year term as a director, subject to re-election thereafter. 9. Expenses. Voice It and VPTI agree to bear and be solely responsible for their respective costs and expenses incurred and to be incurred in the negotiation and consummation of the transactions contemplated hereby, including the preparation of this Letter of Intent, the definitive Agreement, the Joint Proxy Statement/Prospectus and Registration Statement on Form S-4. 10. Interim Conduct of Businesses. The definitive Agreement will provide for the continuation of each party's business in the usual and ordinary course after the definitive Agreement is executed and prior to the Closing contemplated thereby. During the interim period of time between the Effective Date hereof and the date of execution of the definitive Agreement, the parties hereto agree that each party (i) will operate and conduct its business only in the usual and ordinary course consistent with prior practices; (ii) will devote its best efforts to promote and preserve its goodwill and customer business base; (iii) will not amend or otherwise modify its articles of incorporation or bylaws, declare any dividend on its capital stock, issue any capital stock or any warrant, option or right to acquire any of its capital stock (other than the proposed short-term financing set forth in Paragraph 6(d) above), enter into any contract or waive any liability or make any capital expenditure except in the ordinary course of its business; or sell any assets other than in the ordinary course of business; and (iv) shall continue to pay major vendors and manufacturers in a manner materially consistent with its current practices. 11. Exclusive Agreement; Standstill Agreement. Voice It and VPTI agree to diligently and timely negotiate in good faith toward a definitive Agreement mutually satisfactory to each. During the term hereof and until this Letter of Intent is terminated as herein provided, it is expressly understood that neither party will enter into or otherwise undertake similar negotiations or enter into similar agreements with any third party, it being expressly agreed, however, that all negotiations between Voice It and NCI are permitted. Further, during the term hereof and until this Letter of Intent is terminated as herein provided, neither party shall solicit, initiate or encourage submission of any inquiry, proposal, or offer relating to any acquisition, purchase or sale of its assets, or any merger, consolidation or business combination with it, subject to fiduciary obligations under applicable law, provided, however, that if during the term of this Letter of Intent either party is contacted, on an unsolicited basis, by a third party making an inquiry, proposal or offer relating to an acquisition, purchase or sale of its assets, or a merger, consolidation or business combination, this section shall not prohibit the board of directors of the receiving party from entertaining and accepting any such inquiry, proposal or offer if, in the opinion of legal counsel to such party, it is required to fulfill the fiduciary obligations of the members of the board of directors. 12. Term. This Letter of Intent shall expire upon the earlier of (i) the date of execution of the definitive Agreement, (ii) the close of business (5:00 p.m. Fort Collins, Colorado time), on the ninetieth (90th) day following the effective date of this Letter of Intent; (iii) the date either party notifies 6 Voice Powered Technology International, Inc. December 17, 1996 Page 6 the other that it has elected to terminate this Letter of Intent pursuant to the provisions of Paragraph 7 hereof, or (iv) the date of termination of this Letter of Intent by mutual consent of Voice It and VPTI. 13. Closing and Schedule. Voice It and VPTI agree to use their best efforts to diligently and timely negotiate in good faith toward accomplishing the Closing of the Transaction contemplated hereby on the following proposed time schedule: (a) To negotiate and execute a definitive Agreement mutually satisfactory to each party on or before January 15, 1997; (b) To prepare and file the Registration Statement on Form S-4 with the SEC containing December 31, 1996 audited financial statements of each party on or before February 28, 1997, (c) To amend the Registration Statement on Form S-4 and obtain the effectiveness of the Joint Proxy Statement/Prospectus from the SEC on or before May 8, 1997; (d) To obtain approval of the shareholders of each party at meetings thereof on or before June 19, 1997; and (e) To effectuate the Closing on or about June 20, 1997 (the "Closing Date"). 14. Effective Date. The Effective Date of this Letter of Intent shall be deemed to be the date of agreement and acceptance hereof by VPTI as set forth above the signature of VPTI on the signature page hereto. 15. Confidentiality. All information furnished by either party to the other in accordance with the provisions of this Letter of Intent or the Agreement or obtained by either party in the course of its investigation of the other party shall be deemed and treated as confidential information by such party and shall not be disclosed by such party to any third party unless the same shall become available through non-confidential means or shall otherwise be or come into the public domain or shall be required by law; provided, however, that each party may disclose such information to prospective lenders and the attorneys, accountants and other professional advisors representing each party in connection with the Transaction. Upon the termination of this Letter of Intent or the Agreement, upon the written request of the disclosing party, the other party agrees to return to the disclosing party all tangible expressions (including copies) of all such information. 16. Press Release. Each party agrees that it shall not issue any press release or, except as may be required under law, make any other public disclosure of this Letter of Intent (other than its termination) without the prior written approval of the other, which approval shall not be unreasonably withheld. 17. Causes of Action; Forum. If either party hereto institutes an action or proceeding to interpret or enforce any provision of this Letter of Intent or an alleged breach of any provision of this 7 Voice Powered Technology International, Inc. December 17, 1996 Page 7 Letter of Intent, the party instituting such action or proceeding shall file the action or proceeding in the State court for the county in which the other party's principal office is located. If the foregoing meets with your approval, please so signify by executing this Letter of Intent in the place provided below for your signature and return an executed copy of this Letter of Intent immediately via facsimile transmission and the executed duplicate hereof by U.S. Mail to the undersigned. The offer to enter into this Letter of Intent shall remain available for your approval and acceptance for a period of ten (10) days from the date first above written, after which time it shall expire. We shall await your prompt reply. Very truly yours, VOICE IT WORLDWIDE, INC. By: /s/ DENNIS W. ALTBRANDT ------------------------------------ DENNIS W. ALTBRANDT, Chief Executive Officer ACCEPTED and AGREED to this 18TH day of December, 1996. VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. By: /s/ EDWARD KRAKAUER ------------------------------------------- EDWARD KRAKAUER, President and CEO 8 EXHBIT B Voice Powered Technology International Inc. Warrants and Options Outstanding
# of Shares Description Exercise Price Reserved ----------- -------------- ----------- Employee Stock Option $0.375 - $0.69 236,000 Program $1.218 - $1.50 189,070 $1,625 - $1.875 358,511 $2.250 - $2.8125 3,088 $3.00 and over 1,019,633 --------- 1,806,302 Warrants from Initial Public Offering $6.375 747,500 Warrants - Preferred C $6.375 286,017 Unit Purchase Options $5.525 195,000 --------- Total Warrants 1,228,517 --------- Total Warrants/0ptions Outstanding 3,034,819 ========= Contingent Warrants Evern Securities TBD 150,000 --------- Grand Total 3,184,819 =========
EX-10.5.1 17 TERMINATION LETTER 1 EXHIBIT 10.5.1 VOICE IT WORLDWIDE, INC. 2643 MIDPOINT DRIVE, SUITE A FORT COLLINS, COLORADO 80525 TELEPHONE: 970/221-1705 FACSIMILE: 970/221-2058 February 18, 1997 Voice Powered Technology International, Inc. 15260 Ventura Boulevard, Suite 220 Sherman Oaks, California 91403 Attn: Edward M. Krakauer President and CEO Re: Termination of Letter of Intent Dear Ed: This letter will serve to confirm out mutual understanding that the Letter of Intent dated December 17, 1996 concerning a potential business combination of Voice Powered Technology International, Inc. and Voice It Worldwide, Inc. is deemed terminated effective January 1, 1997. Please signify your agreement with this termination of the Letter of Intent by your signature below and return an executed copy of this letter to me by facsimile transmission (and the executed duplicate hereof by U.S. Mail). Very truly yours, VOICE IT WORLDWIDE, INC. By: /s/ DENNIS W. ALTBRANDT -------------------------------- DENNIS W. ALTBRANDT, Chief Executive Officer ACCEPTED and AGREED to this 18th day of February, 1997. VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. By: /s/ EDWARD KRAKAUER -------------------------------- EDWARD KRAKAUER, President and CEO EX-10.6 18 LETTER OF INTENT 1 Exhibit 10.6 Letter of Intent February 25, 1997 Franklin Electronic Publishers, Inc., a Pennsylvania corporation ("Franklin"), and Voice Powered Technology International, Inc., a California corporation ("VPTII"), hereby set forth their present intention to enter into an agreement regarding a merger of VPTII with Franklin or a wholly-owned subsidiary of Franklin upon the following principal terms and conditions: 1. Structure; Timing. VPTII will merge (the "Merger") with Franklin or Franklin's wholly-owned subsidiary pursuant to a mutually agreed upon definitive Agreement and Plan of Merger (the "Agreement") containing terms and conditions customary for transactions of this size and nature. 2. Effect of Merger; Purchase Price. The Agreement will provide that Franklin will pay $0.25 per share for each issued and outstanding share of VPTII Common Stock, payable in cash or in shares of common stock of Franklin as mutually agreed to by the parties hereto. 3. Corporate Approval; Shareholder Approval. VPTII represents that its Board of Directors has authorized and approved the execution of this Letter of Intent. VPTII shareholder approval will be required for the Merger. 4. Representations and Warranties; Covenants. The Agreement will provide for customary representations, warranties and covenants. 5. Due Diligence. Franklin and its attorneys and accountants will have full access to the books and records of VPTII from the date hereof through and including April 30, 1997 (the "Inspection Period") to complete a due diligence investigation of VPTII. At any time during the Inspection Period, Franklin may upon written notice to VPTII terminate this Letter of Intent or the Agreement, as applicable, without liability to VPTII. If the parties agree that Franklin will pay for the VPTII Common Stock in shares of common stock of Franklin, VPTII and its attorneys and accountants will have such access to the books and records of Franklin during the Inspection Period as shall be appropriate to conduct a due diligence investigation of Franklin. 6. Post Merger Employment Benefits. Employees of VPTII who become employed by Franklin after the Merger will become eligible to participate in comparable employee benefit plans as are generally available to similarly situated employees of Franklin. 2 7. Closing Conditions; Covenants. Each party's obligations will be subject to customary closing conditions, including, without limitation, (i) those required to implement the deal terms described above, (ii) the negotiation of payment terms in respect of the accounts payable and other commitments owed by VPTII to third parties on terms satisfactory to Franklin, and (iii) such other conditions as the parties shall mutually agree upon. 8. No-Shop Provision. VPTII will immediately cease any existing discussions or negotiations with any third parties conducted prior to the date hereof with respect to any merger, business combination, sale of a significant amount of its assets outside of the ordinary course of business, change of control or similar transaction involving such party or any of its subsidiaries or divisions (an "Acquisition Transaction"). Franklin acknowledges that VPTII is engaged in discussions regarding the raising of funds, and that the raising of funds may involve the sale of shares of capital stock of VPTII outside the ordinary course of business. VPTII agrees that it will not complete a transaction involving the sale of shares of capital stock of VPTII nor enter into a commitment to do so without Franklin's concurrence until the earlier of the mutual abandonment of the transaction contemplated hereby or April 30, 1997. The parties will immediately advise each other of any determination by their respective Boards of Directors not to proceed with the transactions contemplated hereby. VPTII agrees that, until April 30, 1997 or the earlier mutual abandonment of the transaction contemplated hereby, VPTII will not, and will not authorize any officer, director or affiliate of VPTII or any other person on its behalf to, directly or indirectly, solicit, initiate or encourage (including by way of furnishing information), any offer or proposal from any party concerning a possible Acquisition Transaction; provided, however, that nothing in this Section 8 shall preclude VPTII's Board of Directors, pursuant to its fiduciary duties under applicable law, from entering into, or causing the officers of VPTII from entering into negotiations with or furnishing information to a third party which has initiated contact with VPTII, from passing on to VPTII's shareholders information regarding any such third party offer or from otherwise fulfilling such fiduciary duties. VPTII will promptly notify Franklin in writing of any such inquiries or proposals. VPTII shall have no obligations under this Section if Franklin unilaterally decides not to proceed with the proposed merger or causes it not to occur other than as a result of VPTII's breach of its obligations hereunder. 9. Break-up Fee. In the event that VPTII breaches the agreements contained in Section 8 above and/or enters into an agreement for an Acquisition Transaction with a third party, then, whether or not such Acquisition Transaction is consummated, (i) if Franklin shall have made the $500,000 loan to VPTII described in Section 11 below, such loan and any and all interest 2 3 accrued thereon shall immediately become due and payable, and (ii) VPTII shall immediately pay to Franklin $100,000 in cash. 10. Continuation of Business. From the date hereof until the earlier of the mutual abandonment of the transaction contemplated hereby or April 30, 1997, except as Franklin and VPTII mutually agree in writing, VPTII (i) will preserve and operate its business in the ordinary course and will not enter into any transaction or agreement or take any action out of the ordinary course or enter into any transaction or make any commitment involving an individual expense or capital expenditure by VPTII in excess of $50,000, (ii) will not declare any dividends, grant new stock options (except that VPTII may issue new stock options to its employees after conferring with Franklin), accelerate any options or issue new shares of stock or other securities (other than pursuant to exercise of events of outstanding options, warrants or rights) or rights to acquire any such options, shares or securities, or make any commitments with respect to any of the foregoing, and (iii) will not borrow more than $3,000,000 (including existing borrowings) under its line of credit with KBK Financial Inc. 11. Loan to VPTII. Franklin shall make a $500,000 loan to VPTII on or prior to March 12, 1997, which loan shall be evidenced by a promissory note, on which interest shall accrue on the outstanding principal amount at a rate of 9% per annum from the date of issuance. The principal and interest due on the note shall be payable (whether or not the Agreement is executed) on December 31, 1997, and shall be secured by all of VPTII's tangible and intangible assets, subordinate only to KBK Financial Inc.'s security interest therein. 12. Term. This Letter of Intent shall expire upon the earlier of (i) March 12, 1997, if the $500,000 loan from Franklin to VPTII described in Section 11 above is not made on or prior to March 12, 1997, (ii) the date of execution of the definitive Agreement, (iii) the close of business (5:00 p.m. E.S.T.) on April 30, 1997, (iv) the date Franklin notifies VPTII that it has elected to terminate this Letter of Intent pursuant to the provisions of Section 5 hereof, and (v) the date of termination of this Letter of Intent by mutual consent of Franklin and VPTII. 13. Fees and Expenses. All costs and expenses incurred in connection with the transaction shall be paid by the party incurring such expenses. 14. Public Disclosure. Except as a party may reasonably determine is required by law (in which event, it shall give to the other party notice and an opportunity to review and approve the proposed release or other publication), neither party shall, or shall permit any of its subsidiaries to, issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement 3 4 without prior approval of the other party, which approval shall not be unreasonably withheld. 15. Counterparts; Governing Law. This Letter of Intent may be executed in counterparts and the counterparts together will constitute a single, fully-executed original. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 16. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which shall remain in full force and effect. If any of the covenants or provisions of this Agreement shall be deemed to be unenforceable by reason of its extent, duration, scope or otherwise, the parties contemplate that the court making such determination shall reduce such extent, duration, scope or other provision, and shall enforce them in their reduced form for all purposes contemplated by this Agreement. 17. Nonbinding Document. This Letter of Intent does not constitute an offer and is not binding (except for Sections 5, 8, 9, 10, 12, 13 and 14 above, which the parties hereby represent and warrant and acknowledge are binding and enforceable and not subject to further corporate or shareholder approval). Except as expressly provided in the previous sentence, all rights and obligations of the parties are subject to execution of definitive mutually satisfactory agreements and obtaining all required corporate approvals. Neither VPTII nor Franklin will be under any legal obligation of any kind whatsoever in respect of the Merger by virtue of this Letter of Intent except for the matters specifically agreed to herein. A binding commitment with respect to the Merger will result only from the execution of a definitive agreement. This Letter of Intent is executed as of the date first set forth above. FRANKLIN ELECTRONIC VOICE POWERED TECHNOLOGY PUBLISHERS, INC. INTERNATIONAL, INC. By [SIG] By /s/ EDWARD KRAKAUER ----------------------------- -------------------------------- Name: G. Winsky Name: Edward Krakauer Title: SVP Title: Pres. and CEO 4 EX-10.6.1 19 SECURITY AGREEMENT 1 EXHIBIT 10.6.1 SECURITY AGREEMENT SECURITY AGREEMENT (this "Agreement"), dated as of March 10, 1997, between VOICE POWERED TECHNOLOGY INTERNATIONAL, INC., a California corporation (the "Debtor"), and FRANKLIN ELECTRONIC PUBLISHERS, INC., a Pennsylvania corporation (the "Secured Party"). WITNESSETH: WHEREAS, the Secured Party and the Debtor have entered into a Letter of Intent dated February 25, 1997, (the "Letter of Intent"); WHEREAS, pursuant to the Letter of Intent, the Secured Party has made a $500,000 loan to the Debtor and the Debtor has issued a Promissory Note (the "Note") of even date herewith to the Secured Party; and WHEREAS, in order to induce the Secured Party to make the loan described in the Note and to secure the Debtor's performance and payment under the Note, the Debtor has agreed to execute this Agreement. NOW THEREFORE, the parties hereto agree as follows: 1. Security Interest. As collateral security for the prompt and complete payment and performance when due of its obligations under the Note and the prompt performance and observance of all the covenants contained therein and in this Agreement, the Debtor hereby grants to the Secured Party a continuing security interest in and lien on all of the Debtor's right, title and interest in, to and under all of the Debtor's assets (collectively, the "Collateral"), including all accessions to the Collateral, substitutions and replacements thereof, now owned or existing and hereafter acquired, created or arising, and all products and proceeds thereof (including, without limitation, claims of the Debtor against third parties for loss or damage to or destruction of any Collateral), including, without limitation, all of the Debtor's right, title and interest in, to and under, the following: (a) all equipment in all of its forms, wherever located, now or hereafter existing, including, but not limited to, all fixtures and all parts thereof and all accessions thereto; (b) all inventory in all of its forms, wherever located, now or hereafter existing, including, but not 2 limited to, (i) all raw materials, work in process and finished products, intended for sale or lease or to be furnished under contracts of service in the ordinary course of business, of every kind and description; (ii) goods in which the Debtor has an interest in mass or a joint or other interest or right of any kind (including, without limitation, goods in which the Debtor has an interest or right as consignee); and (iii) goods which are returned to or repossessed by the Debtor, and all accessions thereto and products thereof and documents (including, without limitation, all warehouse receipts, negotiable documents, bills of lading and other title documents) therefor; (c) all accounts, contract rights, chattel paper, instruments, letters of credit, deposit accounts, insurance policies, general intangibles (including, without limitation, all pension reversions, tax refunds, and intellectual property) and other obligations of any kind, now or hereafter existing, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights now or hereafter existing in and to all security agreements, leases, and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, instruments, letters of credit, deposit accounts, insurance policies, general intangibles or other obligations; (d) all original works of authorship fixed in any tangible medium of expression, all mask works fixed in a chip product, all right, title and interest therein and thereto, and all registrations and recordings thereof, including, without limitation, applications, registrations and recordings in the United States Copyright Office or any other country or any political subdivision thereof, all whether now or hereafter owned or licensable by the Debtor, and all extensions or renewals thereof; (e) all letters patent, design and plant patents, utility models, industrial designs, interior certificates and statutory invention registrations of the United States or any other country, and all registrations and recordings thereof, including, without limitation, applications, registrations and recordings in the United States Patent and Trademark office or any other country or any political subdivision thereof, all whether now or hereafter owned or licensable by the Debtor, and all reissues, continuations, continuations-in-part, tern restorations or extensions thereof; (f) all trademarks, trade names, trade styles, service marks, prints and labels on which said trademarks, trade names, trade styles and service marks have appeared or -2- 3 appear, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, all right, title and interest therein and thereto, and all registrations and recordings thereof, including, without limitation, applications, registrations and recordings in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof, or any other country or any political subdivision thereof, all whether now or hereafter owned or licensable by the Debtor, and all reissues, extensions or renewals thereof; (g) all other goods and personal property, whether tangible or intangible, or whether now owned or hereafter acquired and wherever located; and (h) all proceeds of every kind and nature, including proceeds of proceeds, of any and all of the foregoing Collateral (including, without limitation, proceeds which constitute property of the types described in clauses (a) through (g) of this paragraph 1) and, to the extent not otherwise included, all (i) payments under insurance or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral and (ii) money and cash. 2. Representations and Warranties. The Debtor hereby represents and warrants that: (a) Except for the security interest granted pursuant to this Agreement and as set forth on Schedule A hereto, the Debtor is the sole owner of the Collateral, having good and valid title thereto, free and clear of any and all liens and encumbrances. (b) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby to be performed by the Debtor have been duly and validly authorized by the Board of Directors of the Debtor and no other corporate proceedings on the part of the Debtor are necessary to authorize this Agreement or to consummate the transactions so contemplated. The Debtor has all corporate power and authority to execute and deliver this Agreement, to consummate the transactions hereby contemplated and to take all other actions required to be taken by it pursuant to the provisions hereof; and, this Agreement is the legal, valid and binding obligation of the Debtor, enforceable against the Debtor in accordance with its terms. (c) No consent, approval, authorization or notification of, or declaration, filing or registration with, any governmental entity is required on behalf of or on the part of the Debtor in connection with the execution, delivery, or performance of this Agreement and the consummation of the -3- 4 transactions contemplated hereby by the Debtor. Neither the execution and delivery of this Agreement by the Debtor nor the consummation of the transactions hereby contemplated to be performed by the Debtor will (i) constitute any violation or breach of the Certificate of Incorporation or By-Laws of the Debtor, (ii) violate, or constitute a default under, or permit the termination or acceleration of the maturity of, any indebtedness for borrowed money of the Debtor, (iii) violate, or constitute a default under, or permit the termination of, any license, contract, lease or other instrument to which the Debtor is a party or by which the Debtor or any of its properties is subject or by which any of them is bound, or (iv) violate any order, writ, injunction, decree, statute, rule or regulation, governmental license or permit, to which the Debtor or any of its properties is subject or by which any of them is bound. (d) Schedule B hereto sets forth the location(s) where the books and accounts of the Debtor are maintained and where the Collateral is used, stored or located. 3. Covenants. The Debtor hereby covenants as follows: (a) The Debtor shall pay all expenses and reimburse the Secured Party for any expenditure, including reasonable attorneys' fees, including attorneys' fees incurred in any appellate or insolvency proceedings, in connection with the Secured Party's exercise of its rights and remedies herein or contained in the Note. (b) The Debtor shall execute and deliver, or cause to be executed and delivered, to the Secured Party those documents and agreements, including without limitation, Uniform Commercial Code financing statements, and shall take or cause to be taken those actions that the Secured Party may, from time to time, reasonably request to carry out the terms and conditions of this Agreement and the Note. (c) Except as set forth on Schedule A hereto, the Debtor shall not assign, convey, sell, mortgage, pledge, hypothecate, transfer, encumber or otherwise dispose of, or grant a security interest in, the Collateral or any interest therein, or enter into an agreement to do so, without the prior written consent of the Secured Party. (d) The Debtor will not change its name, identity or organizational structure in any manner which might make any financing or continuation statement filed in connection herewith seriously misleading within the meaning of section 9-402(7) of the UCC (as hereinafter defined), or any other then applicable provision of the UCC unless the Debtor shall have given the Secured Party at least 30 days' prior written notice thereof and shall have taken all action necessary or reasonably requested by -4- 5 the Secured Party to amend such financing statement or continuation statement so that it is not seriously misleading. Except as set forth on Schedule B hereto, the Debtor will not change its principal place of business or remove its records from such place unless the Debtor shall have given the Secured Party at least 30 days' prior written notice thereof and shall have taken such action as is necessary to cause the security interest of the Secured Party in the Collateral to continue to be perfected. The Collateral shall not be used, stored or located at any location except such locations as are specified in Schedule B hereto without the prior written consent of the Secured Party. 4. Continuing Security Interest. This Agreement shall create a continuing security interest in the Collateral securing the Debtor's obligations under the Note and shall (a) remain in full force and effect until the payment in full of the Debtor's obligations under and pursuant to the terms of the Note, (b) be binding upon the Debtor and its successors and assigns and (c) inure to the benefit of the Secured Party and its successors, transferees and assigns. Upon the termination of the security interest created hereby pursuant to clause (a) above, the Secured Party shall, at the Debtor's request and expense, deliver to the Debtor a release of all security interests granted by the Debtor to the Secured Party pursuant to this Agreement. 5. Realization Upon Collateral. If the Debtor shall fail to perform any of its obligations under the Note when due (an "Event of Default"), the Secured Party shall have all of the rights of a secured party under the Uniform Commercial Code as in effect in the State of New Jersey (the "UCC"), including, without limitation, the right to sell the Collateral at public or private sale for cash or credit and on such terms as the Secured Party deems reasonable. The Secured Party shall apply the proceeds of any realization on the whole or any part of the Collateral after deducting all of its reasonable expenses and costs incurred in collection and realization (including, without limitation, reasonable counsel's fees and expenses) to the payment of the Debtor's obligations under the Note; the balance, if any, of such proceeds shall be paid to Debtor. 6. The Secured Party's Appointment as Attorney-in-Fact. (a) The Debtor hereby irrevocably constitutes and appoints the Secured Party and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Debtor and in the name of the Debtor or in its own name, from time to time in the Secured Party's discretion, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute and deliver any and -5- 6 all documents and instruments which may be reasonably necessary or desirable to accomplish the purposes of this Agreement. (b) The Secured Party agrees that, except upon the occurrence and during the continuation of an Event of Default and until any necessary consents have been obtained, it will forbear from exercising the power of attorney or any rights granted to the Secured Party pursuant to this Section 6. The Debtor hereby ratifies, to the extent permitted by law, all that said attorney shall lawfully do or cause to be done by virtue hereof. The power of attorney granted pursuant to this Section 6 is a power coupled with an interest and shall be irrevocable until the Note is paid in full. (c) The powers conferred on the Secured Party hereunder are solely to protect the Secured Party's interests in the Collateral and shall not impose any duty upon it to exercise any such powers. The Secured Party shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and neither it nor any of its officers, directors, employees or agents shall be responsible to the Debtor for any act or failure to act, except for its own gross negligence or willful misconduct. 7. Severability and Enforceability. If any of the provisions of this Agreement, or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such provision or provisions to persons or circumstances other than those to whom or which it is held invalid or unenforceable, shall not be affected thereby and every provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 8. Governing Law; Severability. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to principles of conflicts of law. Any action or proceedings to enforce or arising out of this Agreement may be commenced in any court of the State of New Jersey or in the United States District Court for the District of New Jersey. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9. Notices. (a) All notices or other communications to be given pursuant to this Agreement shall be in writing and shall be deemed sufficiently given on (i) the day on which delivered personally or by telecopy (with prompt confirmation by mail) -6- 7 during a business day to the appropriate location listed as the address below, (ii) three business days after the posting thereof by United States registered or certified first class mail, return receipt requested with postage and fees prepaid, or (iii) one business day after deposit thereof for overnight delivery. Such notices or other communications shall be addressed respectively: As to the Debtor: Voice Powered Technology, International, Inc. 15260 Ventura Boulevard Suite 2200 Sherman Oaks, California 91403 Attention: Mr. Mitchell Rubin Vice President Telecopy No.: (818) 905-0564 with a copy to: Cox, Castle & Nicholson LLP 2049 Century Park East, 28th Floor Los Angeles, California 90067 Attention: Samuel Gruenbaum, Esq. Telecopy No.: (310) 277-7889 As to the Secured Party: Franklin Electronic Publishers, Inc. One Franklin Plaza Burlington, New Jersey 08016-4907 Attention: Mr. Gregory J. Winsky Senior Vice President Telecopy No.: (609) 387-0082 with a copy to: Rosenman & Colin LLP 575 Madison Avenue New York, New York 10022 Attn: Edward H. Cohen, Esq. Telecopy No.: (212) 940-8776 or to any other address or telecopy number which such party may have subsequently communicated to the other parties in writing. 10. Counterparts. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original and all of which when taken together shall constitute one and the same instrument. 11. Captions. The captions in this Agreement are for convenience only, and in no way limit or amplify the provisions hereof. -7- 8 IN WITNESS WHEREOF, the undersigned have executed this document as of the date first above written. FRANKIN ELECTRONIC PUBLISHERS, INC. By: /s/ [SIGNATURE] ------------------------------ Name: [NAME] Title: SR. VP. VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. By: /s/ [SIGNATURE] ------------------------------ Name: [NAME] Title: VICE PRES. -8- 9 Schedule A Permitted Liens See the liens on the Debtor's property described in the attached financing statements in favor of (i) Crown Credit Company, (ii) VPT/KBK Acceptance Corporation, and (iii) Telogy, Inc. 10 SCHEDULE B LOCATION OF BOOKS AND RECORDS AND COLLATERAL I. LOCATION OF BOOKS AND RECORDS (a) CORPORATE OFFICES THROUGH MARCH 31, 1997: 15260 VENTURA BOULEVARD, SUITE 2200 SHERMAN OAKS, CALIFORNIA 91403 PHONE: 818-905-0950 FAX: 818-905-0564 (b) CORPORATE OFFICES EFFECTIVE APRIL 1, 1997: 18425 BURBANK BOULEVARD, SUITE 506-508 TARZANA, CALIFORNIA 91356 II. LOCATION OF INVENTORY AND OTHER COLLATERAL (a) SERVICE CENTER 20816 PLUMMER STREET CHATSWORTH, CALIFORNIA 91311 (b) WAREHOUSE - U.S. MOULTON DATA 11949 SHERMAN ROAD NORTH HOLLYWOOD, CALIFORNIA 91605 (c) WAREHOUSE - EUROPE PRECISION FULFILLNENT SERVICES PROOSDIJSTRAAT 15, 6191 AH BEEK (I) POSTBUS 1661, 6201 BR MAASTRICHT, HOLLAND 11 This FINANCING STATEMENT is presented for filing and will remain effective with certain exceptions for a period of five years from the date of filing pursuant to section 9403 of the California Uniform Commercial Code.
- ----------------------------------------------------------------------------------------------------------------------------------- 1. DEBTOR LAST NAME FIRST IF AN INDIVIDUAL: 1A. SOCIAL SECURITY OR FEDERAL TAX NO. VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. - ----------------------------------------------------------------------------------------------------------------------------------- 1B. MAILING ADDRESS 1C. CITY, STATE 1D. ZIP CODE 15280 VENTURA BLVD. SUITE 2200 SHERMAN OAKS, CA 91403 - ----------------------------------------------------------------------------------------------------------------------------------- 2. ADDITIONAL DEBTOR (IF ANY) LAST NAME FIRST--IF AN INDIVIDUAL 2A. SOCIAL SECURITY OR FEDERAL TAX NO. - ----------------------------------------------------------------------------------------------------------------------------------- 2B. MAILING ADDRESS 2C. CITY, STATE 2D. ZIP CODE - ----------------------------------------------------------------------------------------------------------------------------------- 3. DEBTOR'S TRADE NAMES OR STYLES (IF ANY) 3A. FEDERAL TAX NUMBER =================================================================================================================================== 4. SECURED PARTY 4A. SOCIAL SECURITY NO. FEDERAL TAX NO. OR BANK TRANSIT AND ???? NO. NAME TELEOGY, INC. MAILING ADDRESS 38885 BOHANNON DRIVE 94-3033646 CITY MENLO PARKN STATE CA ZIP CODE 94025 - ----------------------------------------------------------------------------------------------------------------------------------- 5. ASSIGNEE OF SECURED PARTY (IF ANY) 5A. SOCIAL SECURITY NO. FEDERAL TAX NO. OR BANK TRANSIT AND ???? NO. NAME MAILING ADDRESS CITY STATE ZIP CODE - ----------------------------------------------------------------------------------------------------------------------------------- 6. This FINANCING STATEMENT covers the following types or items of property (include description of real property on which located and owner of record when required by instruction 4). ITEM (1) CROWN MODEL 30WRTL-150 WALKIE PALLET TRUCK NEW 3000 LBS. CAPACITY, 24 VOLT ELECTRICAL SYSTEM S/N: 1A133099 (2) TROJAN 12-85-13 BATTERY INDUSTRIAL TYPE NEW 510 AH LEAD ACID S/N: 34805 (3) HOBART 540B1-12R/350C CHARGER INDUSTRIAL TYPE NEW 320 SINGLE PHASE S/N: 29??69 EQUIPMENT BEING FINANCED FOR 36 MONTHLY PAYMENTS. - ----------------------------------------------------------------------------------------------------------------------------------- 7B. DEBTOR(S) SIGNATURE NOT REQUIRED IN ACCORDANCE WITH INSTRUCTION ITEM: (illegible) 5.00 7. CHECK [X] 7A. PRODUCTS OF COLLATERAL IF APPLICABLE [X] ARE ALSO COVERED [ ] (1) [ ] (2) [ ] (3) [ ] (4) - ----------------------------------------------------------------------------------------------------------------------------------- 8. CHECK [X] IF APPLICABLE [ ] DEBTOR IS A "TRANSMITTING UTILITY" IN ACCORDANCE WITH UCC 1.2105.???? - ----------------------------------------------------------------------------------------------------------------------------------- 9. DATE C 10 THIS SPACE FOR USE OF FILING OFFICER [SIG] O (DATE, TIME, FILE NUMBER AND FILING OFFICER) 5/5/93 D SIGNATURE(S) OF DEBTOR(S) E - --------------------------------------------------------------- VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. 1 ???????? NAME(S) OF DEBTOR(S) - --------------------------------------------------------------- 2 [SIG] 3 SIGNATURE(S) OF ??????? ????? - --------------------------------------------------------------- 4 BARRY BOHMAN - FINANCE COORDINATOR CROWN CREDIT COMPANY 5 TYPE OR PRINT NAME(S) OF SECURED PARTY(IES) 93180708 - --------------------------------------------------------------- 6 FILED ??? Return copy to: SACRAMENTO, CALIF. 1993 SEP. 3 7 MARCH FONG EU NAME: DATA FTIS SERVICES, INC. 8 ADDRESS: P.O. BOX 275 CITY: VAN NUYS STATE: CA 9 ZIP CODE: 91408-0275 0 - ----------------------------------------------------------------------------------------------------------------------------------- FORM UCC ???? APPROVED BY THE SECRETARY OF STATE
12
STATE OF CALIFORNIA This FINANCING STATEMENT is presented for filing and will remain effective, with certain exceptions, for five years from the date of filing, pursuant to section 9403 of the California Uniform Commercial Code. - ----------------------------------------------------------------------------------------------------------------------------------- 1. DEBTOR LAST NAME FIRST IF AN INDIVIDUAL: 1A. SOCIAL SECURITY OR FEDERAL TAX NO. VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. 95-3977501 - ----------------------------------------------------------------------------------------------------------------------------------- 1B. MAILING ADDRESS (Additional addresses of Debtor set forth 1C. CITY, STATE 1D. ZIP CODE on Exhibit A attached hereto) 15260 Ventura Boulevard, Suite 2200 Sherman Oaks, CA 91403 - ----------------------------------------------------------------------------------------------------------------------------------- 2. ADDITIONAL DEBTOR (IF ANY) LAST NAME FIRST--IF AN INDIVIDUAL 2A. SOCIAL SECURITY OR FEDERAL TAX NO. - ----------------------------------------------------------------------------------------------------------------------------------- 2B. MAILING ADDRESS 2C. CITY, STATE 2D. ZIP CODE - ----------------------------------------------------------------------------------------------------------------------------------- 3. DEBTOR'S TRADE NAMES OR STYLES (IF ANY) 3A. FEDERAL TAX NUMBER =================================================================================================================================== 4. SECURED PARTY 4A. SOCIAL SECURITY NO. FEDERAL TAX NO. OR BANK TRANSIT AND ???? NO. NAME VPT/KBK ACCEPTANCE CORPORATION MAILING ADDRESS P.O. BOX 1117 CITY Fort Worth STATE Texas ZIP CODE 76101 - ----------------------------------------------------------------------------------------------------------------------------------- 5. ASSIGNEE OF SECURED PARTY (IF ANY) 5A. SOCIAL SECURITY NO. FEDERAL TAX NO. OR BANK TRANSIT AND ???? NO. NAME MAILING ADDRESS CITY STATE ZIP CODE - ----------------------------------------------------------------------------------------------------------------------------------- 6. This FINANCING STATEMENT covers the following types or items of property (include description of real property on which located and owner of record when required by instruction 4). ALL ACCOUNTS AND INVENTORY NOW OWNED OR EXISTING AS WELL AS ANY AND ALL THAT MAY HEREAFTER ARISE OR BE ACQUIRED BY DEBTOR, AND ALL THE PROCEEDS AND PRODUCTS THEREOF, AND ALL RETURNED OR REPOSSESSED GOODS ARISING FROM OR RELATING TO ANY SUCH ACCOUNTS, OR OTHER PROCEEDS OF ANY SALE OR OTHER DISPOSITION OF INVENTORY, ALL CONTRACTS, CONTRACT RIGHTS, NOTES, DRAFTS, ACCEPTANCES, DOCUMENTS, INSTRUMENTS, GENERAL INTANGIBLES AND CHATTEL PAPER. COUNTER RECEIPT - ----------------------------------------------------------------------------------------------------------------------------------- 7. CHECK [ X ] 7A. [ X ] PRODUCTS OF COLLATERAL 7B. DEBTOR(S) SIGNATURE NOT REQUIRED IN ACCORDANCE WITH IF APPLICABLE ARE ALSO COVERED INSTRUCTION ITEM: [ ] (1) [ ] (2) [ ] (3) [ ] (4) - ----------------------------------------------------------------------------------------------------------------------------------- 8. CHECK [ X ] IF APPLICABLE [ ] DEBTOR IS A "TRANSMITTING UTILITY" IN ACCORDANCE WITH UCC 1.2105. - ----------------------------------------------------------------------------------------------------------------------------------- 9. DATE August 14, 1996 C 10. THIS SPACE FOR USE OF FILING OFFICER [SIG] O (DATE, TIME, FILE NUMBER AND FILING OFFICER) SIGNATURE(S) OF DEBTOR(S) D - --------------------------------------------------------------- E VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. 9623361031 1 NAME(S) OF DEBTOR(S) - --------------------------------------------------------------- 2 [SIG] 3 SIGNATURE(S) OF SECURED PARTY(IES) FILED - --------------------------------------------------------------- 4 SACRAMENTO, CA AUG 20, 1996 AT 1406 VPT/KBK ACCEPTANCE CORPORATION 5 BILL JONES TYPE OR PRINT NAME(S) OF SECURED PARTY(IES) SECRETARY OF STATE - --------------------------------------------------------------- 6 Return copy to: NAME: P6-0000-058-2 7 ADDRESS: CALIFORNIA LENDERS' & ATTORNEYS' SERVICES CITY: 1000 G STREET, SUITE 225 8 STATE: SACRAMENTO, CALIFORNIA 95814 (916) 447-6237 ZIP CODE: TOLL FREE IN CALIFORNIA ONLY: (800) 952-5696 9 Account Number 1779 ----------- =============== 0 FILING OFFICER COPY FORM UCC: Approved by the Secretary of State - -----------------------------------------------------------------------------------------------------------------------------------
13 846515-41 This FINANCING STATEMENT is presented for filing and will remain effective with certain exceptions for a period of five years from the date of filing pursuant to section 9403 of the California Uniform Commercial Code
- ----------------------------------------------------------------------------------------------------------------------------------- 1. DEBTOR LAST NAME FIRST IF AN INDIVIDUAL: 1A. SOCIAL SECURITY OR FEDERAL TAX NO. VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. - ----------------------------------------------------------------------------------------------------------------------------------- 1B. MAILING ADDRESS 1C. CITY, STATE 1D. ZIP CODE 15280 VENTURA BLVD. SUITE 2200 SHERMAN OAKS, CA 91403 - ----------------------------------------------------------------------------------------------------------------------------------- 2. ADDITIONAL DEBTOR (IF ANY) LAST NAME FIRST--IF AN INDIVIDUAL 2A. SOCIAL SECURITY OR FEDERAL TAX NO. - ----------------------------------------------------------------------------------------------------------------------------------- 2B. MAILING ADDRESS 2C. CITY, STATE 2D. ZIP CODE - ----------------------------------------------------------------------------------------------------------------------------------- 3. DEBTOR'S TRADE NAMES OR STYLES (IF ANY) 3A. FEDERAL TAX NUMBER =================================================================================================================================== 4. SECURED PARTY 4A. SOCIAL SECURITY NO. FEDERAL TAX NO. OR BANK TRANSIT AND ???? NO. NAME TELEOGY, INC. MAILING ADDRESS 3885 BOHANNON DRIVE 94-3033646 CITY MENLO PARK STATE CA ZIP CODE 94025 - ----------------------------------------------------------------------------------------------------------------------------------- 5. ASSIGNEE OF SECURED PARTY (IF ANY) 5A. SOCIAL SECURITY NO. FEDERAL TAX NO. OR BANK TRANSIT AND ???? NO. NAME MAILING ADDRESS CITY STATE ZIP CODE - ----------------------------------------------------------------------------------------------------------------------------------- 6. This FINANCING STATEMENT covers the following types or items of property (include description of real property on which located and owner of record when required by instruction 4). Qty 1 - HP 85024A High Freq. Probe 3GHZ s/n 2801A05624 "Together with all attachments and replacements thereof provided under lease accomodations by Telogy, Inc. This financing statement is filed in connection with a lease of goods between the Secured Party as Lessor, and the Debtor as Lessee." RA# 282038-001 "Together with all attachments and replacements thereof provided under lease accomodations by Telogy, Inc. This financing statement is filed in connection with a lease of goods between the Secured Party as Lessor, and the Debtor as Lessee." RA # 282038 - ----------------------------------------------------------------------------------------------------------------------------------- 7B. DEBTOR(S) SIGNATURE NOT REQUIRED IN ACCORDANCE WITH INSTRUCTION 5 ??? ITEM: 5.00 7. CHECK [X] 7A. PRODUCTS OF COLLATERAL IF APPLICABLE [ ] ARE ALSO COVERED [ ] (1) [ ] (2) [ ] (3) [ ] (4) - ----------------------------------------------------------------------------------------------------------------------------------- 8. CHECK [X] IF APPLICABLE [ ] DEBTOR IS A "TRANSMITTING UTILITY" IN ACCORDANCE WITH UCC 1.2105.???? - ----------------------------------------------------------------------------------------------------------------------------------- 9. DATE C 10 THIS SPACE FOR USE OF FILING OFFICER [SIG] O (DATE, TIME, FILE NUMBER D AND FILING OFFICER) SIGNATURE(S) OF DEBTOR(S) E - --------------------------------------------------------------- ATTORNEY-IN-FACT 9627460960 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. 1 ???????? NAME(S) OF DEBTOR(S) - --------------------------------------------------------------- 2 FILED [SIG] SACRAMENTO, CA 3 SEP 26, 1996 AT 0800 SIGNATURE(S) OF ??????? ????? - --------------------------------------------------------------- 4 BILL JONES BARRY BONMAN - FINANCE COORDINATOR SCRETARY OF STATE CROWN CREDIT COMPANY 5 TYPE OR PRINT NAME(S) OF SECURED PARTY(IES) - --------------------------------------------------------------- 6 ??? Return copy to: 7 NAME: DATA FILM SERVICES, INC. 8 ADDRESS: P.O. BOX 275 CITY: VAN NUYS STATE: CA 9 ZIP CODE: 91408-0275 0 - ----------------------------------------------------------------------------------------------------------------------------------- FORM UCC ???? APPROVED BY THE SECRETARY OF STATE
EX-10.7 20 LEASE FOR EXECUTIVE OFFICES 1 EXHIBIT 10.7 OFFICE BUILDING LEASE THIS LEASE is made and executed this 3rd day of March, 1997, at Encino, California, by and between GEORGE E. Moss ("Lessor") and Voice Powered Technology International Inc., A California Corporation (hereinafter "Lessee"). For and in consideration of the covenants hereinafter mentioned, Lessor leases to Lessee and Lessee hereby leases from Lessor the premises known as Suite 506,508 (the "Premises"), as more particularly described in the plans attached hereto as Exhibit "_A " and made a part hereof, on the 5th floor of the Tarzana Financial Complex Building, located at 18425_Burbank Boulevard in the City of Tarzana California (the "Building"). 1 BASIC TERMS. 1.1 Term: The initial term of this Lease shall be for a period of three (3) years commencing on the "Commencement Date" as defined in Article 2.1 hereof. 1.2 MONTHLY RENT: (Initial). The Rent payable pursuant to Article 3.1 hereof at the commencement of this Lease shall be the sum of Nine Thousand Six Hundred Twenty Nine Dollars ($9,629.00) per month. 1.3 SECURITY DEPOSIT. Lessee has deposited with Lessor the sum of Twenty-Eight Thousand Eight Hundred Eighty Seven Dollars ($28,88700) as security deposit pursuant to Article 5 hereof 1.4 USE. Lessee shall use the Premises for the purpose of conducting therein general offices and for no other purpose, subject to the provisions of Article 6 hereof. 1.5 ADDRESSES FOR NOTICES: Lessee: Voice Powered Technology International 18425 Burbank Blvd, #506.508 Tarzana, CA 91356 Attn: Mitchell Rubin, Vice President Lessor: George E. Moss 6345 Balboa Blvd. #310 Encino, CA 91316 2 TERM. 2.1 TERM. The term of this Lease shall be for a period of time as set forth in Article 1.1 hereinabove, and shall run for such period of time as measured from the Commencement Date as hereinafter defined; provided however, that in the event the Commencement Date falls on a date other than the first day of a month, the initial term hereof shall be extended by that partial month from the Commencement Date to the first day of the following month. In such event, Lessee shall pay rent and other charges as defined in the Lease for the period from the Commencement Date to the first day of the following month pro-rated based on the number of days in such period versus the number of days in the entire month. The Commencement Date shall be April 1, 1997 (the "Commencement Date"). The expiration date of the Lease shall be March 31, 2000 (the "Expiration Date"). If the Commencement Date is delayed, the parties, upon ascertaining the Commencement Date, shall immediately execute a confirmation of the dates of the term of Lease in the form of a letter agreement signed by both parties. Failure to execute such a confirmation of term of Lease shall not prevent this Lease from expiring on the last day of the last month of the last year of the Lease term. 2.2 Delay in Possession. Notwithstanding the Commencement Date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date, Lessor shall not be subject to any liability therefore, nor shall such failure affect the Initial_______ 1 2 validity of this Lease or the obligation of Lessee hereunder. However, in such a case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until the time that Lessor tenders possession of the Premises to Lessee. The term of this Lease shall be extended by such delay. Notwithstanding the foregoing, if Lessor fails to deliver possession of the Premises to Lessee within One Hundred Twenty (120) business days from said Commencement Date, Lessee may, at Lessee's option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) days, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. If Lessee elects to cancel said Lease by written notice after the expiration of the One Hundred Twenty (120) business day period, Lessor shall incur no liability or penalty to Lessee for Lessor's failure to tender possession of the Premises to Lessee. No change in the commencement of term of the Lease shall occur if the delay is caused by or on behalf of Lessee. 23 EARLY OCCUPANCY. In the event Lessor permits Lessee to occupy the Premises before the Commencement Date, such occupancy shall be subject to all the provisions of this Lease, including, without limitation, the payment of Rent, unless otherwise agreed by the parties. 2.4 TERMINATION. This Lease shall terminate at the expiration of the lease term without the necessity of notice from either party to the other party. Lessee shall, upon the expiration or sooner termination of this Lease hereof, surrender the Premises to Lessor in good condition, broom clean, ordinary wear and tear, and damage from causes beyond the reasonable control of Lessee excepted. Any damage to the Premises and/or any adjacent premises caused by Lessee's use of the Premises shall be repaired at the sole cost and expense of Lessee; if Lessee fails to repair such damage after notice from Lessor, Lessor may cause the damage to be repaired and Lessee will immediately reimburse Lessor for the costs of such repair. Lessee will repair and/or replace any damage to the Premises caused by breaking and entering. 3 RENT. 3.1 RENT. 3.1.1 Lessee shall pay Lessor rent ("Rent") for the Premises in monthly payments in advance commencing on the Commencement Date and thereafter, in advance, on the first (1st) day of each succeeding calendar month in the sum as prescribed in Article 1.2 of this Lease and as hereinafter adjusted, without notice or demand, deduction or offset; provided, however, that the first month's rent shall be paid prior to occupancy but in no event later than March 31, 1997. In the event that the Commencement Date is not the first (1st) day of a calendar month, Rent will be prorated for the period from the Commencement Date to the first (1st) day of the next month. Rent shall be paid to Lessor in lawful money of the United States of America and at such place as Lessor may from time to time designate in writing. 3.1.2 The Rent will be increased, but in no event decreased, on the first day of the month of each anniversary of the Commencement Date (each such anniversary, an "Adjustment Date") in accordance with the provisions of this Article and with reference to the Los Angeles-Riverside- Anaheim, California Area Consumer Price Index (All Items) for Urban Wage Earners and Clerical Workers as published by the Bureau of Labor Statistics of the United States Department of Labor (1982-84=100) (the "Index"). The Index published for the date which is one (1) calendar month prior to the Adjustment Date (the "Adjustment Index") shall be compared with the Index published for the date which is one (1) calendar month prior to the Commencement Date (the "Base Index"). If the Adjustment Index is greater than the Base Index, then the annual Rent payable from and after the Adjustment Date (until the next adjustment) shall be determined by multiplying the initial annual Rent as set forth in Article 1.2 by a fraction, the numerator of which shall be the Adjustment Index and the denominator of which shall be the Base Index. When the adjusted annual Rent is determined after each Adjustment Date, Lessor shall give Lessee written notice indicating the amount and method of computation thereof. If, at any Adjustment Date, the Index shall not exist, then Lessor may substitute any official Index published by the Bureau of Labor Statistics or successor or similar agency that is then most nearly equivalent to the Index. In no event shall the rental adjustment provided for in this paragraph exceed six percent (6%) in any one year, during the initial lease term only. The base monthly rent for the purposes of calculating the annual cost of living increase shall be $9,129.00. 3.2 ADDITIONAL RENT. In addition to the Rent, Lessee shall pay as additional rent all other sums of money or charges required to be paid pursuant to the terms of this Lease whether or not the same be designated "additional rent." All Rent and additional Initial_______ 2 3 rent which may become due under this Lease, including but not limited to, attorneys' fees, late charges, interest, parking fees, bank charges, sign charges, tenant improvements, utility charges, any extra goods and services contracted for by Lessee and common area expenses, shall be deemed to be rent hereunder. If such amounts or charges are not paid at the time provided for in this Lease, these shall nevertheless, if not paid when due, be collectible as additional rent upon demand, but nothing herein contained shall be deemed to suspend or delay the payment of any amounts of money or charge at the time the same becomes due and payable hereunder, or limit any remedy of Lessor. 4 POSSESSION AND CONDITION OF THE PREMISES. 4.1 POSSESSION. Subject to Article 2.1, possession of the Premises will be given to Lessee on the Commencement Date, unless Lessee occupies the Premises prior to said Commencement Date, and any such prior occupancy shall not affect the expiration date under Article 2.1. 4.2 "AS IS." By entry hereunder, Lessee acknowledges that it has examined the Premises and has accepted the Premises in their "as is" condition, subject to the completion of Lessor's Work as set forth on Exhibit "A" hereto, as of the date hereof and throughout the term of this Lease. Without limiting the foregoing, Lessee's rights in the Premises are subject to all municipal, county, state and federal laws, ordinances and regulations governing and regulating the use and occupancy of the Premises. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Lessee's business. In no event shall Lessor be liable for any defect in such property or from such limitation on its use. 5. SECURITY DEPOSIT. Lessee, contemporaneously with the execution of this Lease, has deposited with Lessor the sum of $19,258.00 as prescribed in Article 1.3 of this Lease, and shall deposit with Lessor an additional $9,629.00 prior to occupancy but in no event later than March 31, 1997, said deposit being given to secure the faithful performance by Lessee of all of the terms, covenants and conditions of this Lease by Lessee to be kept and performed during the term hereof. Lessee agrees that if Lessee shall fail to pay the rent herein reserved promptly when due, said deposit may, at the option of Lessor (but Lessor shall not be required to) be applied to any rent due and unpaid, and if Lessee violates any of the other terms, covenants, and conditions of this Lease, and after written notice to Lessee advising Lessee of such violation and allowing Lessee ten (10) days to cure such violation, said deposit may be applied to any damages suffered by Lessor as a result of Lessee's default, to the extent of the amount of damages suffered. Nothing in this Article 5 shall in any way diminish or be construed as waiving any of Lessor's other remedies by law or in equity. Should all or any part of the security deposit be applied by Lessor as herein provided, then Lessee shall, on the written demand of Lessor, deposit cash with Lessor within five (5) days of said demand sufficient to restore said security deposit to its original amount. Within two weeks after the termination of this Lease, Lessor shall return said security deposit to Lessee, less any portion of said security deposit which may have been previously applied or expended by Lessor to remedy or cure any default or breach on the part of Lessee hereunder. Lessor shall have the right to commingle or invest said security deposit, and in no event shall Lessee be entitled to receive any interest or income thereon, it being agreed that any interest be deemed to be additional rent. Lessor may deliver the funds deposited under this Article 5 by Lessee to the purchaser of Lessor's interest in the Premises in the event such interest be sold; thereupon Lessor shall be discharged from further liability with respect to such deposit. 6 USE AND LIMITATIONS. 6.1 USE. The Premises shall be used and occupied by Lessee and its approved assignees, sublessees, licensees and concessionaires for the purpose as described in Article 1.4 of this Lease and for no other purpose in accordance with all present and future zoning laws, rules and regulations of governmental authorities having jurisdiction thereof, and subject to all covenants, easements and rights of way of record, if any. 6.2 GOVERNMENTAL ACTIONS. Lessee's consent shall not be required for the creation of any covenants, easements or rights of way which are created by the action of any governmental authority. Initial [SIG] ----- [SIG] ----- 3 4 6.3 USES PROHIBITED. Lessee shall not do or permit anything to be done in or about the Premises nor bring or keep anything therein which is not within the permitted use of the Premises nor which will in any way increase the existing rate or affect any fire or other insurance upon the Building and/or Premises or any part thereof or any of its contents. Lessee shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other Lessees or occupants of the building or injure or annoy them or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Lessee be permitted to conduct any business on the Premises, without the prior written approval of Lessor, that differs from the use specifically set forth in Article 6.1 above. Furthermore, Lessee shall not cause, maintain or permit any nuisance on/or about the Premises, shall not commit or allow to be committed any waste in or about the Premises and shall not use the Premises for cooking, lodging or sleeping. Lessee and Lessee's officers, agents and employees shall not cause or permit any noxious or offensive odors to be emitted from the Premises during the term of this Lease. 7 COMPLIANCE WITH LAW. 7.1 COMPLIANCE. Lessee shall, at Lessee's sole cost and expense, comply promptly with all applicable statutes, ordinances, rules, regulations, laws, orders, restrictions of record, if any, and requirements in effect during the term, or any part hereof, regulating the use or occupancy by Lessee of the Premises. 7.2 ETHICS. If Lessee is a member of any profession, he or she agrees to abide by the code of ethics of the association recognized as representing that particular profession in the County of Los Angeles, State of California. 8 LESSOR'S WORK, MAINTENANCE, REPAIRS AND ALTERATIONS. 8.1 LESSOR'S WORK. Upon execution of this Lease, Lessor shall commence to repaint the premises using building standard materials, more particularly described on Exhibit "A" hereto. 8.2 LESSEE'S WORK, MAINTENANCE AND REPAIRS. Lessee, during the term hereof, shall take good care of the Premises and keep the interior thereof in good order, repair and condition, natural deterioration with careful use and injury by fire, the elements or acts of God excepted. Lessee shall be responsible for the maintenance of any type of plumbing, electrical or light fixtures, heating and air conditioning equipment and any other fixtures and improvements to the Premises which are not building standard materials, and shall hold Lessor harmless from any and all liabilities in connection with the maintenance and operation of such non-building standard materials. Lessee expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or the right to make repairs and deduct the expenses of such repairs from the rent. Lessee shall pay for all cabling, wiring and electrical requirements for Lessee's computer, telecommunications or any other multi-media systems, as well as any equipment therefore, including without limitation, any such requirements and equipment involving the telephone and other utility rooms or vaults at the Building or serving the Building. Lessee shall be responsible for the installation, operation and maintenance of any security systems at the Premises, shall be liable for any expense, penalty or surcharge resulting from the installation, operation and maintenance of any such security system and shall hold Lessor harmless from any and all liabilities in connection therewith. All of Lessee's vendors shall comply with Lessor's minimum requirements pertaining to general liability and worker's compensation insurance coverage set forth herein and shall meet all licensing requirements of the State of California for such vendors. Any such vendors requiring access to the telephone and other utility rooms or vaults at the Building or serving the Building must register with Lessor prior to entering such rooms or vaults. 8.3 ALTERATIONS. The Premises shall not be altered, repaired, or changed without the written consent of Lessor first had and obtained, and all such alterations, improvements or changes shall be at the sole cost of Lessee, and Lessee shall hold Lessor and the Premises harmless and free from any lien or claim therefor, and all other liability, claims, and demands arising out of any work done or material supplied to the Premises at the instance of Lessee, and from all actions, suits and costs of suit by any person to enforce any such lien or claim of lien, liability, claims or demands, together with the cost of suit and attorney's fees incurred by Lessor in connection therewith. Initial [SIG] ----- [SIG] ----- 4 5 8.4 COMPLIANCE. Lessee shall give Lessor not less than twenty (20) days' notice in writing prior to the commencement of any improvements, repairs or alterations (collectively, the "Work"), and Lessor shall have the right to post Notice of Non Responsibility in or on the Premises, as provided by law. Any and all such Work shall be made in compliance with all applicable zoning and building codes and shall only be permitted by Lessor provided they do not diminish the fair market value of the improvements on the Premises. Any and all such Work requiring governmental approval or permits will have such a permit issued, at Lessee's sole cost and expense, and Lessee shall provide a copy of same to Lessor before work commences and a copy of final approval when obtained. Any and all such Work, except trade fixtures, appliances, and movable partitions placed therein by Lessee for the requirement of business, shall, unless otherwise provided by written agreement, become the property of Lessor and shall remain upon and be surrendered with the Premises upon the expiration of this Lease or any sooner termination thereof. On completion of any and all such Work by Lessee, Lessee shall supply Lessor with "as built" drawings accurately reflecting all such work. Lessee shall pay when due, all claims for labor and materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises, or any interest therein, and Lessee agrees to indemnify and hold Lessor and Premises harmless from and against any and all liability arising out of any such claims. 8.5 REMOVAL. At the expiration of the term of this Lease, and provided that Lessee is not in default hereunder, all such trade fixtures, appliances and movable partitions may be removed as Lessee's personal property, at Lessee's sole expense; provided, however, Lessee will pay for any damages caused to the Premises by the removal of said items so that after the removal of said items, the Premises will be in the same condition at the time prior to the said installations, if any, reasonable wear and tear expected. In any event, at the sole option of Lessor, Lessee must remove the said items at its expense. Carpeting, and/or window coverings, for which allowances are given by Lessor to Lessee, shall become the property of Lessor and remain in the Premises. 8.6 SCOPE. All of the foregoing provisions of this Article shall fully apply to any sublessee of Lessee. 9 UTILITIES. Lessor agrees to supply, 8:00 A.M. to 8:00 PM., Monday through Friday, reasonable amounts of water, heat, air conditioning and electric current for lighting purposes and power for a reasonable number of fractional horsepower office machines, together with reasonable janitorial services five times each week. Any services mentioned in this Article may be curtailed or restricted by action of government regulations or authority, and in this event, Lessor will not be held responsible or liable for any inconvenience or loss to Lessee, and Lessee does hereby release Lessor from any and all claims of liability by Lessee, its agents, servants, successors and assigns arising out of any disruption of utility services, including but not limited to, telephone, electric, gas, water, cable or telecommunications services. Lessee agrees to pay a reasonable surcharge for utilities consumed due to Lessee's use of any dedicated circuits or electric outlets used for any type of computer or electrical device other than fractional horsepower office machines and PC computers or other devices used in office operations. In addition, Lessee agrees to pay a reasonable surcharge for any utilities consumed due to the installation of any additional air conditioning, heating, electric outlets, telephone outlets or light fixtures after Lessee has taken initial possession of the Premises. In addition, Lessee agrees to pay a reasonable surcharge for any overtime utility or maintenance services requested by Lessee and provided to Lessee with Lessor's approval. In lieu of levying a surcharge for additional utility consumption as stated herein, Lessor has the option to require Lessee to install a meter at Lessee's expense to measure the additional utilities consumed and to pay for said utilities immediately upon presentation of an invoice therefore. 10 PERSONAL PROPERTY TAXES. Lessee shall pay, during the term hereof, all taxes assessed against the personal property of Lessee; and all taxes assessed against the trade fixtures or leasehold improvements installed by Lessee in which the Premises are situated. Should any such taxes be assessed against the Land, the amount of such taxes shall become a part of the rent due hereunder and shall be payable upon the first rent due date after demand for payment has been made. 11 COMMON AREAS AND PARKING. 11.1 COMMON AREAS. All areas and facilities outside the Premises (whether inside or outside the Building) that are provided and designated for the general use and convenience of Lessee in common with other Lessees of Lessor, and their respective Initial [SIG] ----- [SIG] ----- 5 6 employees, agents, customers and invitees, are referred to herein as the "common areas". The common areas shall not include any portion of the Premises or of any portion of the Building or the Land now or hereafter exclusively leased to other lessees. Common areas include, but are not limited to: pedestrian sidewalks, landscape areas, roadways, parking areas, and all entrances and exits to the Building. Lessor reserves the right, from time to time, to make changes in the size, shape, location, number and extent of the Land and improvements constituting the common areas, including the right to change the entrances, exits, traffic lanes and the boundaries and locations of the parking areas. Lessor hereby grants to Lessee, in common with other Lessees in the Building the right to use, during normal business hours, the common areas. 11.2 PARKING. Lessor hereby grants to Lessee, in common with other Lessees in the Building, the right to use during normal business hours, certain designated space in the rear, side or on the inside of the Building, or within a reasonable distance from the Building, the designation and location of such space to be within the discretion of Lessor, for automobile parking purposes. Lessee and its designated employees will be limited to a maximum of 21 cars, parking rates being subject to change by Lessor at any time and being applicable to Lessees during the term upon thirty (30) days written notice, Lessor's right to change said rates being limited to once in any one lease year. Lessor, in establishing such parking rates from time to time, agrees that such rates shall be competitive with parking rates established in other parking areas incorporated in buildings of a similar size and character located in comparable areas. The automobiles entitled to such parking shall be designated to Lessor by Lessee and shall be identified by Lessor's automobile permits and only such designated cars will be permitted to the use of such automobile parking. Additional automobile parking, subject to availability, shall be extended to Lessee's invitees at reasonable parking rates to be established by Lessor. Lessor reserves the sole right and option as to whether or not an attendant will be furnished for such automobile parking area or areas. Parking will be solely for the accommodation of Lessee and Lessee expressly agrees that Lessor assumes no responsibility of any kind whatsoever in reference to such automobile parking areas or the use thereof by Lessee, its designated employees or invitees. Payment of monthly rent shall entitle Lessee to park 12 cars each month. The number of car parking set forth herein shall remain the same throughout the term of this Lease. Lessor may refuse to permit Lessee to utilize any of the parking to which Lessee may otherwise be entitled under this Lease if Lessee is in default under this Lease with respect to the payment of Rent. In such event, Lessor, without obligation and in addition to any other remedy or right of Lessor hereunder, may require Lessee to pay Lessor in advance the monthly parking fee then in effect for the number of cars to be parked by Lessee not to exceed the number of car parking granted herein. 11.3 EXPENSES. Lessee shall also pay to Lessor upon receipt of a statement therefore, as additional rent, such proportion of the following items as the area of space rented by Lessee bears to total net rentable area of the Building: (i) any increase in cost to Lessor of all utilities, insurance,janitorial and maintenance services, operating expenses over and above that incurred during the calendar year of the Commencement Date of this Lease; and (ii) any increase in cost to Lessor due to assessments, taxes or fees of any type imposed on the Land and/or the Building (including parking area and structure ancillary thereto, if any), or its use, by any government agency in excess of those levied against the Land and/or the Building (including parking area and structure ancillary thereto, if any) for the fiscal tax year ending June 30 immediately following the commencement date of this Lease. Notwithstanding the foregoing, in the event any government body or agency adopts any new or additional tax, fee or surcharge after the Commencement Date of this Lease affecting the Premises, Building and/or Land, Lessee agrees to pay its full share as the area of space rented by Lessee bears to total net rentable area of the Building of any such tax, fee or surcharge so assessed. Lessor has the right to increase the monthly rent thereafter for any additional rent due hereunder. Lessee's base year, for the purpose of calculating the annual common area maintenance passthrough charges, shall be 1997. Not included in the calculation of increased costs herein are management fees or capitalized expenditures. 12 INDEMNITY. 12.1 INDEMNITY. Lessee shall defend, indemnify and hold harmless Lessor from and against any and all claims arising from Lessee's use of the Premises, or from the conduct of Lessee's business, or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises, and shall further indemnify and hold Lessor harmless from and against any and all claims arising from any breach or default in the performance of any obligation of Lessee's part to be performed under the terms of the Lease, or arising from any act or negligence of Lessee, or any of Lessee's officers, agents, contractors, customers, licensees, guests, invitees or employees, and from and against all costs, attorneys' fees, expenses and liabilities incurred in or about the defense of any such claim or any action or proceeding brought thereon. In case any action or proceeding be brought against Lessor by reason of any such claim, Lessee, upon written notice from Lessor, shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk to property or injury to persons in, upon or about the Premises arising from any cause, and Lessee hereby waives all claims in respect thereof against Lessor except such claims Initial [SIG] ----- [SIG] ----- 6 7 arising out of Lessor's willful act or omission. Lessee shall give prompt notice to Lessor in case of casualty or accidents in or about the Premises or common areas. In the event Lessee fails to indemnify and hold harmless Lessor as required above, and should Lessor be named as a defendant in any suit brought against Lessee in connection with or arising out of Lessee's occupancy hereunder, in addition to other remedies allowed to Lessor under this Lease, Lessee shall pay to Lessor its costs and expenses incurred in such suit, including without limitation, its actual fees, professional fees, such as appraisers, accountants, attorney's fees, and the like, plus interest at the maximum rate allowed by law from the date such cost was incurred. 12.2 WAIVER. Lessor shall not be liable to Lessee, or to any other person or persons whomsoever, for any damages to the Premises or for or on account of any loss, damage, theft, or injury to any person or property in or about the Premises or approaches or entrances thereto or on the streets, sidewalks, or corridors of the Building or the common areas or the Land, caused or occasioned by the Premises being out of repair, by defects (latent or otherwise) in the Building, common areas, Land or Premises or equipment contained therein, or by the failure to keep the same in good order and repair or by fire, gas, water, electricity or by the breaking, overflowing or leaking of roofs, pipes, or walls of the Building, or for any other damage or injury caused by acts or events whatsoever beyond the control of Lessor. Lessor shall not be liable and Lessee hereby waives all claims for damages that may be caused by Lessor in the entering and taking possession of the Premises as herein provided. 13 INSURANCE. 13.1 LIABILITY AND PROPERTY DAMAGE INSURANCE. Lessee shall carry during the term hereof commercial public liability insurance of $250,000/$500,000 and property damage insurance of $100,000 covering injuries to persons or property in or about the Premises, the Building, the Land and common areas. The limit of any such insurance shall not, however, limit the liability of the Lessee hereunder. Said insurance shall name Lessor as an additional insured, shall be written by companies satisfactory to Lessor (which companies shall be authorized to do business in California), shall be issued as a primary policy, and shall contain an endorsement requiring twenty (20) days' prior written notice to Lessor before cancellation or change in the coverage, scope or amount of such policy or policies. Lessee shall provide Lessor with evidence of such insurance satisfactory to Lessor prior to entry upon the Premises and thereafter upon Lessor's demand. In the event Lessee fails to obtain any insurance as provided in this Lease, Lessor may obtain any such insurance and the cost thereof shall be paid by Lessee as additional rent with the first payment of rent which is due subsequent to Lessor's incurring such cost, and Lessor shall have all remedies to collect the same as rent as provided by this Lease and/or otherwise provided by law for the collection of rent. 13.2 USE. No use shall be made or permitted to be made on the Premises, or acts done, which will increase the existing rate of insurance upon the Building or cause the cancellation of any insurance policy covering the Building, or any part thereof, nor shall Lessee sell, or permit to be kept, used or sold, in or about the Premises, any article which may be prohibited by the standard form of fire insurance policies. Lessee shall, at its sole cost and expense, comply with any and all requirements, pertaining to the Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering the Premises or the Building. Lessee agrees to pay to Lessor as additional rent, any increase in premiums on policies which may be carried by Lessor covering damages to the Building and loss of rent caused by fire and the perils normally included in extended coverage, which increase is attributable to Lessee's particular use of the Premises. 14 WAIVER OF SUBROGATION. Lessee hereby waives as against Lessor, and against the officers, employees, agents and representatives of Lessor, any and all right to recovery for any and all losses and damages insured against under any fire and extended coverage insurance policy, including Lessee's policies described in Article 13, in force at the time of any such loss or damage or required to be in force at such time by the terms and conditions of this Lease. Lessee shall, upon obtaining the policies of insurance required by Article 13, give notice to the insurance carrier or carriers that the foregoing waiver of subrogation is contained in this Lease. 15 DAMAGE, DESTRUCTION AND RESTORATION. Initial_______ 7 8 15.1 DAMAGE TO PREMISES. If the Premises shall be so damaged by fire, other casualty, acts of God or the elements (a "Casualty") so that they cannot be restored or made suitable for Lessee's business needs within one hundred eighty (180) business days from the date of the Casualty, either Lessor or Lessee may terminate this Lease by written notice given to the other party within forty-five (45) days after the date of the Casualty. If the Lease is so terminated, the termination shall be effective as of the date of the Casualty and Rent shall abate from that date, and any Rent paid for any period beyond such date shall be refunded to Lessee. Notwithstanding any contrary provision herein, and regardless of whether caused by casualty, (a) Lessor shall not be required to repair any damage to property with respect to which Lessee is required herein to maintain property insurance, in which event Lessee shall promptly repair any damage at its sole cost and expense within the policy limits of said coverage to the reasonable satisfaction of Lessor; and (b) any damage caused by the negligence or willful misconduct of Lessee or any of its agents, contractors, employees, invitees or guests shall be promptly repaired by Lessee, at its sole cost and expense, to the reasonable satisfaction of Lessor. 15.2 RESTORATION. If this Lease is not terminated as provided in the immediately preceding paragraph, then Lessor shall, at its sole cost and expense, restore the Premises as speedily as practical to the condition existing prior to the Casualty. During the restoration period, Rent shall abate for the period during which the Premises are not materially suitable for Lessee's business needs. If only a portion of the Premises is damaged, Rent shall abate proportionately based upon the portion of the Premises that are not materially suitable for Lessee's business needs. There shall be such a rent abatement only if the damage so repaired is not caused by the negligence or willful misconduct of Lessee or any of its agents, contractors, employees, invitees or guests. Except for abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of (i) any damage to the Premises, (ii) any damage to Lessee's trade fixtures and/or personal property located in the Premises; (iii) such repairs, or (iv) any inconvenience, interruption or annoyance caused by such damage or repair, except to the extent arising from the gross negligence or willful misconduct of Lessor. 15.3 TERMINATION. If Lessor, subject to Force Majeure, does not restore the Premises as required herein within one hundred eighty (180) business days after the date of the Casualty, Lessee may terminate this Lease without incurring any liability to Lessor subsequent to the Casualty, provided (i) Lessee gives Lessor not less than forty-five (45) days prior written notice, and (ii) Lessor does not complete the restoration during such forty-five (45) day period. 16 ASSIGNMENT, SUBLETTING AND RECAPTURE. 16.1 CONSENT. Lessee shall not transfer, assign, hypothecate or encumber this lease or any right or interest therein, nor sublet the Premises or any part thereof, nor permit the use of the Premises, except for Lessee's own purposes, by any person or persons other than Lessee, without in each case obtaining the prior written consent of Lessor. Furthermore, this Lease shall not, nor shall any interest therein, be assignable, as to the interest of Lessee, by operation of law, without the written consent of Lessor first had and obtained, (such consent not to be unreasonably withheld). A consent by Lessor to one assignment, subletting, occupation or use by any other person, whether by operation of law or otherwise, shall not be deemed to be a consent to any subsequent assignment subletting, occupation or use by any other person, nor shall it be deemed as a waiver of the necessity for a consent to any subsequent assignment, subletting or use by persons other than Lessee. Any such assignment or subletting, whether by operation of law or otherwise, without such written consent first had and obtained shall be void, and shall, at the option of Lessor, terminate this lease. If Lessee desires at any time to assign or otherwise transfer this Lease, it shall first notify Lessor of its desire to do so and shall submit in writing to Lessor: (a) the name of the proposed assignee; (b) the nature of the proposed assignee's business to be carried on in the Premises; (c) a copy of any agreements to be entered into concurrently with such assignment; and (d) such financial information as Lessor may reasonably request concerning the proposed assignee. Lessor hereby reserves the right to condition any such approval upon Lessor's determination that the proposed assignee is financially responsible as a Lessee and that the proposed assignee is likely to conduct a business on the Premises of a type and quality substantially equal to that conducted by Lessee. Lessee agrees that it shall be reasonable for Lessor to withhold Lessor's approval of any assignment or sublease of this Lease if the proposed rent is higher than the amount of rent that is stated in this Lease or if Lessee is to receive as a condition of the assignment or Lease any bonus, key money or any other consideration for said assignment or sublease. Lessee's right to assign or sublet the subject premises shall not be unreasonably withheld or delayed by Lessor. The discovery of the fact that any financial statement or any other fact, relied upon by Lessor in giving its consent to an assignment or subletting was materially false shall, at Lessor's election, render Lessor's consent null and void. If Lessor shall consent to any assignment subletting, or use by persons other than Lessee, neither Lessee or any assignee shall be relieved of any liability hereunder. Initial_______ 8 9 16.2 DEFAULT. Upon any default by Lessee under this Lease, Lessor may proceed directly against Lessee, any guarantors or anyone else responsible for the performance of this Lease, including any assignments, amendments or modifications thereto, any guarantors or anyone responsible for the performance of this Lease, including the assignee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor or Lessee. The collection or acceptance of Rent or other payment by Lessor from any person other than Lessee shall not be deemed a waiver of any payment provisions of this Article, the acceptance of any assignee or sublessee as the Lessee hereunder, or a release of Lessee or any assignor from any obligation under this Lease. Furthermore, Lessor's acceptance of rent and/or consent to any assignment of the Premises by Lessee shall not constitute an acknowledgment that no default then exists under this Lease of the obligations to be performed by the Lessee, nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise provided in writing by the Lessor to the Lessee at that time. 17 HOLDING OVER. Should Lessee hold over after the termination of this Lease, Lessee shall become a Lessee from month to month only upon each and all of the terms herein provided as may be applicable to such month-to-month tenancy (except for term) and any such holding over shall not constitute an extension of this Lease. During such period of holding over, Lessee's Rent as set forth in Article 3.1 of this Lease shall be two hundred percent (200%) of the Rent in effect immediately prior to such hold over period. 18 DEFAULT AND REMEDIES. 18.1 DEFAULT. The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Lessee: 18.1.1 The vacating or abandonment of the Premises by Lessee; 18.1.2 The failure by Lessee to make any payment of Rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of five (5) days after written notice thereof from Lessor to Lessee. 18.1.3 The failure of Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee, where such failure shall continue for a period of ten (10) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of the Lessee's default is such that more than ten (10) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commences such cure within said ten (10) day period and thereafter diligently pursues such cure to completion; 18.1.4 The making by Lessee of any general assignment for the benefit of creditors; 18.1.5 The filing by or against Lessee of a petition to have Lessee adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Lessee, the same is dismissed within thirty (30) days); 18.1.6 The appointment of a trustee or receiver to take possession of all or substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; and 18.1.7 The attachment, execution or other judicial seizure of all or substantially all of Lessee's assets located at the Premises, or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. 18.2 REMEDIES. In the event of any such default or breach by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have reason of such default or breach: Initial_______ 9 10 18.2.1 Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession the Premises to Lessor. In such event, Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default, including but not limited to the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees and any real estate commission actually paid; and the worth at the time of award by the court having jurisdiction thereof of (i) the unpaid rent and other charges and adjustments called for under the Lease which had been earned at the time of termination, (ii) the amount by which the unpaid rent and other charges and adjustments called for under the Lease which would have been earned after termination until the time of award exceeds the amount of such rental loss for the same period which the Lessee proves could have been reasonably avoided, (iii) the amount by which the unpaid rent and other charges and adjustments called for under the Lease for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided, and (iv) any and all costs incurred by Lessor for the taking of an inventory of, removal of and/or storage of any and all property left in, upon or about the Premises by Lessee, following Lessee's abandonment vacating or otherwise surrendering of Premises. The worth at the time of award of the sums referred to in clauses (i) and (ii) above, shall be computed by allowing interest from the due date at the highest legal rate attainable. The worth at the time of award of the amount referred to in clause (iii) above, shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). As used herein, rent shall include charges equivalent to Rent and additional rent; 18.2.2 Maintain Lessee's right to possession, in which case this Lease shall continue in effect whether or not Lessee shall have abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent and any other charges and adjustments as it becomes due hereunder; and 18.2.3 Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the State of California, and recover as damage the value of any free rent, lessee improvement, or other Lease concessions which may have been granted to Lessee hereunder prior to any such default. 19 LATE CHARGES; INTEREST. 19.1 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of Rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payments by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 19.2 INTEREST. Unless otherwise specifically provided herein, any sum payable to Lessor which is not paid when due shall bear interest at the rate of ten percent (10%) per annum from the date same becomes due until paid. 19.3 PENALTIES. Should Lessee ever during the term of this Lease, or any extension thereof, tender a check to Lessor which on two (2) or more occasions is not honored by Lessee's bank, Lessor may (without obligation) demand that Lessee remit all future payments to Lessor under this Lease in the form of a cashier's check. Should Lessee's bank ever fail to honor a check by Lessee, Lessee shall be liable for any bank charges incurred. 20 SAFETY AND HEALTH. Lessee covenants at all times during the term of this Lease to comply with the requirements of the Occupational Safety and Health Act of 1970, 29 U.S.C.Section 651 et seq. and any analogous legislation in the State of California, as they may be amended from time to time, and any successor statutes thereto, (collectively the "Act"), to the extent that the Act applies to the Premises and any activities thereon. Lessee agrees to indemnify and hold Lessor harmless from and against any liability, claim or damages, arising as a result of a breach of the foregoing covenant and from all costs, expenses and charges arising therefrom, including without limitation, Initial [SIG] --------- 10 11 reasonable attorneys' fees and court costs incurred by Lessor in connection therewith, which indemnity shall survive the expiration or termination of this Lease. Lessee further covenants to maintain the Premises in a manner which is in compliance with the American With Disabilities Act and/or similar state law at Lessee's sole cost and expense. Lessee agrees to indemnify and hold Lessor harmless from and against any liability, claim or damages, arising as a result of a breach of the foregoing covenant and from all costs, expenses and charges arising therefrom including without limitation, reasonable attorneys' fees and court costs incurred by Lessor in connection therewith, which indemnity shall survive the expiration or termination of this Lease. Lessee, and its agents, servants, partners, officers, directors, shareholders, employees, occupants, permitted sublessees, invitees, successors and/or assigns, shall comply with Section 6404.5 of the California Labor Code, as it may be amended from time to time, and any successor statute thereto, and any other present or future federal, state and local law, act, ordinance, regulation or rule prohibiting or limiting the smoking of tobacco products in enclosed buildings, covered common areas and covered parking areas. In furtherance of the foregoing, Lessee does hereby release Lessor from liability for claims by Lessee and/or by its agents, servants, partners, officers, directors, shareholders, employees, occupants, permitted sublessees, invitees, successors and/or assigns, arising out of the presence of tobacco smoke in or about the Premises, the Building, the common areas and the Land. 21 CONDEMNATION; EMINENT DOMAIN. If there is any taking of, or damage to, all or part of the Premises, the Building or the Land, or any interest therein, because of the exercise of the power of eminent domain or inverse condemnation, whether by condemnation proceedings, or otherwise, or any transfer or any part thereof or any interest herein made in avoidance thereof (all of the foregoing being hereinafter referred to as "taking") before or during the term hereof, this lease shall terminate, at Lessor's option, on the date when Lessor is actually deprived of possession of the Land, the Building or the Premises, or some part thereof (the "Termination Date"), and thereupon the parties hereto shall be released from all further obligations hereunder, and Lessor shall thereupon repay Lessee any rental theretofore paid by Lessee and unearned at the Termination Date. The total and entire award or compensation in such proceedings, whether for a total or partial taking, or for diminution in the value of the leasehold or for the fee or for any other reason shall belong to, and be the property of, Lessor; provided, that Lessee shall be entitled to recover from the condemnor such compensation as may be separately awarded by the condemnor to Lessee or recoverable from the condemnor by Lessee in its own right for the taking of trade fixtures and equipment owned by Lessee in its own right (meaning personal property, whether or not attached to real property, which may be removed without injury to the Premises) and for the expense of removing and relocating them, and for the loss of goodwill to the extent that is severally awardable. Except for any right to recovery by Lessee expressly enumerated herein, Lessee does hereby waive, renounce and quit claim to Lessor any right in and to any award, judgment, payment or compensation which shall or may be made or given because of a taking of the Premises, the Building or the Land. 22 HAZARDOUS MATERIALS. Lessee shall not (either with or without negligence) cause or permit the escape, presence, generation, disposal or release of any biologically or chemically active or other hazardous substances, or materials in or about the Premises, the Building or the Land (sometimes collectively referred to herein as the "Property"). Lessee shall not allow the storage or use of such substances or materials in any manner not sanctioned by law or by the highest standards prevailing in the industry for the storage and use of such substances or materials, nor allow to be brought into the Property any such materials or substances except to use in the ordinary course of Lessee's business, and then only after written notice is given to Lessor of the identity of such substances or materials. Without limitation, hazardous substances and materials shall mean any substance which is toxic, ignitable, reactive, or corrosive and which is regulated by any local government, the State of California, or the United States Government, and shall include, without limitation, those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Article 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Article 6901 et seq., any state or local law applicable to the Property, as they may be amended from time to time, and any successor statutes thereto, and the regulations adopted under any and all of these laws. If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release of hazardous materials, then the reasonable costs thereof shall be reimbursed to Lessor from Lessee upon demand as additional charges if such requirement applies to the Premises. Lessee shall execute affidavits, representations and the like from time to time at Lessor's Initial [SIG] --------- 11 12 request concerning Lessee's best knowledge and belief regarding the presence of hazardous substances or materials on the Property. In addition, Lessee shall undertake to comply with any and all applicable laws, statutes, and ordinances, concerning hazardous substances and materials to which Lessee, in the course of its business in the Premises, is subject, and Lessee hereby agrees to cooperate with Lessor as may be required by Lessor's undertaking to similarly comply. In all events, Lessee shall indemnify and hold Lessor harmless from all liability, claims, penalties, fines, judgments, costs, losses, damages and expenses of any kind, including, without limitation, cleanup costs, a decrease in value of the Premises, Building and/or Land, damages due to loss or restriction of rentable or usable space, or any damages due to adverse impact on marketing of the space, and any and all sums paid for settlement of claims, consultant fees, expert fees, and reasonable attorney's fees incurred by Lessor as a result of Lessee's breach regarding hazardous materials on or about the Property occurring while Lessee is in possession, or elsewhere if caused by Lessee or persons acting under Lessee. This indemnification includes, without limitation, any and all costs incurred due to any investigation of the site or any cleanup, removal or restoration mandated for a federal, state or local agency or political subdivision. Without limitation to the foregoing, if Lessee causes or permits the presence of any hazardous substance on the Property and such results in contamination, Lessee shall promptly, at its sole expense, take any and all necessary actions to return the Property to the condition existing prior to the presence of any hazardous substance on the Property. Lessee shall first obtain Lessor's approval for any such remedial action. The within covenants shall survive the expiration or earlier termination of the Lease term. 23 NO ACCORD AND SATISFACTION. No acceptance by Lessor of a lesser sum than the Rent, additional rent or any other charge then due shall be deemed to be other than on account of whichever installment of such rent or charge due as Lessor, at Lessor's sole discretion, so elects to apply, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as Rent or other charge be deemed an accord and satisfaction, and Lessor may accept such check or payment without prejudice to Lessor's right to recover the balance of such installment or pursue any other remedy as provided in this Lease. 24 GENERAL PROVISIONS. 24.1 FORCE MAJEURE. If any party hereto shall be delayed or prevented from the performance of any act required hereunder by reason of acts of God, strikes, lockouts, labor troubles, inability to procure materials, restrictive governmental laws or regulations or by other cause without fault and beyond the control of the party obligated (financial inability excepted), performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay; provided, however, nothing in this Article contained shall excuse Lessee from the prompt payment of any rental or other charge required of Lessee hereunder except as may be expressly provided elsewhere in this Lease. 24.2 CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 24.3 COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 24.4 BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment or subletting by Lessee, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State of California, any action brought to enforce or nullify this Lease or the provisions hereof must be brought in Los Angeles County. 24.5 SUBORDINATION; ATTORNMENT. 24.5.1 Lessee hereby agrees, upon Lessor's written request to subordinate this Lease and Lessee's rights hereunder to any ground sublease, mortgage, deed of trust, or any other hypothecation of security hereafter placed upon the Land, and to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof, but such subordination shall be only on the condition that Lessee's rights to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease on Lessee's part to be performed, unless this Lease is otherwise terminated pursuant to its terms. Initial [SIG] --------- 12 13 24.5.2 In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by the Lessor covering the Premises, Land and/or Building, the Lessee shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Lessor under this Lease. 24.5.3 In connection with this Article, Lessee shall cooperate with Lessor and any holder of a beneficial interest under a deed of trust covering any portion of Property. Such cooperation shall include execution of a Subordination, Non Disturbance and Attornment Agreement in a form acceptable to Lessor and such lender within ten (10) days from delivery of same to Lessee. Lessee hereby appoints Lessor to be Lessee's attorney-in-fact to execute any such Agreement on Lessee's behalf in the event that Lessee fails to execute any such Agreement in a timely fashion. 24.6 ATTORNEYS' FEES. In the event of any dispute, claim, arbitration or legal proceeding arising out of or relating to this Lease, the prevailing party shall be entitled to reimbursement of all of its reasonable attorneys' fees and costs incurred in connection therewith from the other party or parties to such a proceeding. Notwithstanding the foregoing and without waiver of the same, after default by Lessee hereunder, Lessor shall be entitled to collect all costs of collection, including but not limited to reasonable attorneys' fees, whether or not suit on this Lease is filed, and all such costs and expenses shall be payable to Lessor on demand as additional rent within three (3) days of such demand. 24.7. BUILDING RULES. Lessee hereby promises and agrees to keep and perform each and all of the rules and regulations of the Building attached hereto and made a part hereof. Lessor shall have the right to amend said rules and to make other and different reasonable rules, and regulations limiting, restricting and regulating the privileges of Lessees in the Building, and all such rules and regulations so made by Lessor, after notice thereof to Lessee, shall be binding upon Lessee and become conditions of Lessee's tenancy and covenants on the part of and to be performed by Less". A copy of Lessor's current building rules is attached hereto as Exhibit "C." 24.8 MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work as a merger. 24.9 ESTOPPEL CERTIFICATE. Lessee shall at any time from time to time upon not less than ten (10) days prior written notice from Lessor execute, acknowledge and deliver to Lessor a statement in writing in such form as Lessor, its lender and/or a potential lender may request certifying that this Lease is unmodified and in full force and effect (or if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the dates to which the rental and other charges are paid in advance, if any, the amount of any security deposit, and acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, or specifying such defaults if any are claimed, and setting forth the date of commencement of rents and expiration of the term hereof. It is expressly understood and agreed that any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the Property. Lessee's failure to deliver such statement within such time shall be conclusive upon Lessee that: (i) this Lease is in full force and effect, without modification, except as may be represented by Lessor; (ii) there are not uncured defaults in Lessor's performance; and (iii) not more than two (2) months' rental has been paid in advance. Lessee hereby appoints Lessor to be Lessee's attorney-in-fact to execute any such statement on Lessee's behalf in the event that Lessee fails to execute any such statement in a timely fashion. If Lessor desires to finance or refinance the Property, or any part thereof, then upon compliance by Lessor with the applicable provisions of this Article, Lessee agrees to deliver to any lender designated by Lessor Lessee's published financial statements for the immediately preceding two fiscal years of Lessee. 24.10 SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision thereof. 24.11 TIME OF ESSENCE. Time is of the essence. 24.12 CAPTIONS. Article and Article captions are not a part thereof Initial_______ 13 14 24.13 INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease made a part hereof contains all agreements of parties with respect to any matter mentioned herein. No prior agreement or understanding pertaining to any matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification, it is understood there are no oral agreements between the parties hereto, or their agents, affecting this Lease and this Lease supersedes and cancels any and all previous promises, negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto, and none thereof shall be used to interpret or construe this Lease. 24.14 NO WAIVER. No waiver of a breach of any covenant or condition shall be construed to be a waiver of any succeeding breach. No act, delay or omission done, suffered or permitted by Lessor shall be deemed to exhaust, waive, limit or impair any right, remedy or power of Lessor hereunder. Lessors acceptance of rent shall not constitute an acknowledgment that no default then exists under this Lease of the obligations to be performed by the Lessee or be deemed a waiver of any then existing default, except as may be otherwise provided in writing by the Lessor to the Lessee at that time. 24.15 NOTICE. All notices and demands which may or are to be required or permitted to be given by either party on the other hereunder shall be in writing and shall be deemed to have been given, if mailed by United States Mail, postage prepaid, on the date which is three (3) days after the date posted, or if personally delivered, when delivered to the address shown below, or to such other places Lessee or Lessor may from time to time designate in a notice to the other. 24.16 RIGHTS OF LESSOR. Lessor reserves the following rights: (a) to change the name of the Building without notice or liability to Lessee; (b) to designate all sources furnishing sign painting or lettering, ice and toilet supplies used on the Premises; (c) constantly to have pass keys to the Premises; (d) to grant to anyone the exclusive right to conduct any particular business or undertaking in the Building; (e) to enter the Premises at any time for inspections, repairs, alterations or additions to the Premises or the Building; (f) to exhibit the Premises to others; (g) to affix and display "For Rent" signs and signs for any purpose whatsoever related to the safety, protection, preservation or improvement of the Premises, the Building, or Lessors interest therein, without being deemed guilty of an eviction or disturbance of Lessee's use and possession and without being liable in any manner to Lessee on account thereof; (h) at any time, and from time to time, whether at the instance of Lessor or pursuant to governmental requirements, at Lessors expense, to make repairs. alterations, additions, improvements or decorating, whether structural or otherwise, in or to the Building, or any part thereof, including the Premises. Without limiting the generality of the foregoing rights, Lessor shall specifically have the right to remove, alter, improve or rebuild the commons areas, or any part thereof, including but not limited to the lobby and light court of the Building, as the same is presently or shall hereafter be constituted. Lessor shall not be liable to Lessee for any expense, injury, loss or damage resulting from any work so done in or about the Premises or the Building or any adjacent or nearby building, land, street or alley, all claims against Lessor for any and all such liability being hereby expressly released by Lessee. In connection with making repairs, alterations, decorating, additions or improvements under the terms of this Article, Lessor shall have the right to access through the Premises as well as the right to take into and upon and through the Premises, or any other part of the Building, material that may be required to make such repairs, alterations, decorating, additions or improvements, as well as the right in the course of such work to close entrances, doors, corridors, elevators, or other facilities of the Building or temporarily to abate the operations of such facilities, without being deemed or held guilty of an eviction of Lessee and without liability for damages to Lessee's property, business or person and without liability to Lessee by reason of interference with the business of Lessee or inconvenience or annoyance to Lessee or the customer of Lessee. The rent reserved herein shall in no way abate while said repairs, alterations, decorating, additions or improvements are being made, and Lessee shall not be entitled to maintain any off-set or counterclaim for damages of any kind against Lessor by reason thereof, all such claims being hereby expressly released by Lessee. However, all such work shall be done in such manner as to cause Lessee the least inconvenience practicable. 24.17 RIGHT OF REPOSSESSION. If in compliance with any law or ordinance now or hereafter enacted, if required to comply with the directions or requirements of any public officer board or commission or if because Lessor requires the Premises for any reason whatsoever, it becomes necessary for Lessor to acquire permanently all or any part of the Premises, Lessor or its assigns shall have the right to repossess the Premises, or any portion thereof, at any time upon thirty (30) days written notice to Lessee; and when said space shall have been so permanently repossessed, Lessor shall, in lieu of any and all claims for damages by Lessee, allow Lessee a credit on Lessee's rent in the proportion that space taken bears to the whole of the Premises; provided, however, that if the space taken is of such an amount or size as to make the remaining space undesirable to Lessee, then Lessor, upon thirty (30) days written notice from Lessee, will endeavor, if available, to furnish Lessee with comparable space elsewhere the Building in which the Premises are situated, and to place Lessee in such new space, in which event this Lease and each and all of the terms, covenants and conditions thereof, shall thereupon remain in full force and effect and be deemed applicable to such new space; provided further, Initial_______ 14 15 however, that if Lessor shall be unable to provide Lessee with such other space, then this Lease shall thereupon cease and terminate. No exercise by Lessor of any right herein reserved shall entitle Lessee to damages for any injury or inconvenience occasioned thereby, nor shall Lessee by reason thereof be entitled to an abatement in rent (except as above set forth in case of taking of space permanently). 24.18 CO-LESSEES. All persons comprising Lessees, together with all assignees, should Lessor elect to treat said assignees as Lessees, are to be held and hereby agree to jointly and severally be responsible and liable for the payment of rent and the faithful and timely fulfillment of all the covenants, terms and conditions of this Lease. 24.19 GENDER. Whenever the context so requires herein, the masculine gender herein used shall include the feminine or neuter and the singular number shall include the plural. 24.20 BUSINESS DAYS. All references to business days herein shall exclude Saturdays and Sundays but include other legal holidays. 24.21 MEMORANDUM OF LEASE (SHORT FORM). At Lessor's sole option, Lessor and Lessee will execute and acknowledge in recordable form a Memorandum of Lease (Short Form) sufficient to give notice of the leasehold estate hereby created in a form prescribed by Lessor. Said Memorandum of Lease (Short Form) will not be recorded except by Lessor or with Lessor's consent. 25 SPECIAL CONDITIONS. 25.1 RENTAL CREDIT. Provided that Lessee is not then currently in default, Lessor agrees that Lessee may deduct from each month's rent which is paid on or before the 10th day of each calendar month the sum of $500.00 per month for the months of November, 1997 through March 1998 only. 25.2 TENANT IMPROVEMENT FEE. Upon execution of this lease, Lessee shall remit to Lessor the sum of $3,000.00 to pay for the tenant improvements as shown on the attached Exhibit "A". 25.3 CANCELLATION. Provided Lessee is not in default after receipt of written notice from Lessor of such default allowing ten (10) days to cure such default, Lessee shall have the right to terminate said lease, effective at any time between October 31, 1997 through March 31, 1998, provided Lessor is given at least a prior written ninety (90) day notice of Lessee's intention to terminate said lease. 25.4 CANCELLATION CREDIT. Provided Lessee does not exercise the termination of lease option in Paragraph 25.3 herein. Lessee shall receive a one time rental credit of $4,500.00 to be applied to the April, 1998 monthly rent only. 25.5 RIGHT TO REDUCE SPACE. Provided Lessee is not in default after receipt of written notice from Lessor of such default allowing ten (10) days to cure such default, Lessee shall have the right on April 1, 1998 to reduce the square footage by one suite as shown on the attached Exhibit "D", provided Lessor is given at lease a prior written ninety (90) days notice of Lessee's intention to reduce its space. With regard to said reduction, Lessee's choices are as follows: 1. Retain Suite 506 only, which consists of approximately 2,476 rentable square feet. The monthly rent shall be reduced to $3,851.00 with seven (7) monthly car parking included and a maximum allowance of eight (8) monthly car parking. 2. Retain Suite 508 only, which consists of approximately 3,573 rentable square feet. The monthly rent shall be reduced to $5,607.00 with eleven (11) monthly car parking included and a maximum allowance of thirteen (13) monthly car parking. 25.6 TENANT IMPROVEMENT ALLOWANCE. As of April 1, 1998. Lessor shall grant to Lessee a tenant improvement allowance of $2.50 per rentable square foot to be used for building standard tenant improvements only. Said work must be performed from April 1, 1998 through June 30, 1998 only. Said allowance will be determined as follows: 15 16 1. $15,122.50 if Lessee does not exercise its right to reduce space. 2. $8,932.50 if Lessee retains Suite 508 only. 3. $6,190.00 if Lessee retains Suite 506 only. 25.7 CONTINGENCIES. This lease is subject to and contingent upon the following: 1. The execution of this lease and the remittance of a check in the amount of $22,258.00 delivered to Lessor no later than 5:00 PM Friday, March 7, 1997. IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year first above written. LESSOR: LESSEE: Voice Powered Technology International Inc., A California Corporation GEORGE E. MOSS BY: MITCHELL RUBIN - --------------------- ---------------------------------- GEORGE E. MOSS Mitchell Rubin, Vice President 16 EX-11 21 CALCULATIONS OF EARNINGS PER SHARE 1 EXHIBIT 11 VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
YEAR ENDED YEAR ENDED 12/31/95 12/31/96 ------------ ------------ ENDING MARKET PRICE PER SHARE $ 1.63 $ 0.25 ------------ ------------ AVERAGE MARKET PRICE PER SHARE $ 2.78 $ 1.16 ------------ ------------ EARNINGS: Net loss applicable to common stock $ (2,819,097) $ (4,834,240) PRIMARY EARNINGS (LOSS) PER SHARE: Weighted average number of common shares outstanding 12,549,201 13,720,414 Incremental shares assuming all dilutive options and warrants exercised and proceeds used to purchase shares in the market at the average stock price during the period 0 0 ------------ ------------ Total 12,549,201 13,720,414 ============ ============ Primary loss per share $ (0.22) $ (0.35) ============ ============ FULLY DILUTED EARNINGS (LOSS) PER SHARE: Weighted average number of common shares outstanding 12,549,201 13,720,414 Incremental shares assuming all dilutive options and warrants exercised and proceeds used to purchase shares in the market at the average stock price during the period, or the stock price at the end of the period, whichever is higher 0 0 ------------ ------------ Total 12,549,201 13,720,414 ============ ============ Fully diluted loss per share $ (0.22) $ (0.35) ============ ============
2 EXHIBIT 11 CONTINUED VOICE POWERED TECHNOLOGY INTERNATIONAL, INC. COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
Actual Shares outstanding at 1/1/95 12,435,673 Net weighted average shares issued during 1995 113,528 ---------------- Weighted average shares outstanding for earnings per share computation at 12/31/95 12,549,201 ================ Actual Shares outstanding at 1/1/96 12,486,273 Net weighted average shares issued during 1996 1,234,141 ---------------- Weighted average shares outstanding for earnings per share computation at 12/31/96 13,720,414 ================
Note: Common stock equivalents for 1995 and 1996 have not been considered because their effect would be anti-dilutive. EX-23 22 CONSENT OF BDO SEIDMAN, LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Voice Powered Technology International, Inc. Tarzana, California We consent to the incorporation by reference to the Registration Statements on Form S-3 (SEC file number 33-73778) and Forms S-8 (SEC file numbers 33-58188 and 33-94502) of our report dated March 7, 1997 except for Notes 7(d), 16(d), (e) and (f) as to which the date is May 29, 1997, with respect to the financial statements of Voice Powered Technology International, Inc. included in this Annual Report on Form 10-KSB for the year ended December 31, 1996. BDO SEIDMAN, LLP June 9, 1997 Los Angeles, California EX-27 23 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 DEC-31-1996 226,615 0 1,802,129 0 1,831,217 4,111,456 2,025,081 1,376,449 5,775,574 5,198,903 0 0 0 13,949 27,746,645 5,775,574 10,813,447 10,813,447 7,620,465 7,858,889 168,333 0 0 (4,834,240) 0 (4,834,240) 0 0 0 (4,834,240) (0.35) (0.35)
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