As filed with the Securities and Exchange Commission on November 18, 2004
Registration No. 333-______
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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IVOICE TECHNOLOGY, INC.
(Name of Small Business Issuer in Its Charter)
New Jersey 7373 20-1862731
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
750 Highway 34
Matawan, New Jersey 07747
(732) 441-7700
(Address and telephone number of Principal
Executive Offices and Principal Place of Business)
Jerome R. Mahoney
750 Highway 34
Matawan, New Jersey 07747
(732) 441-7700
(Name, address and telephone number of
agent for service)
with copies to:
Scott Rosenblum, Esq.
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
(212) 715-9100
Telecopier: (212) 715-8000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Proposed
Title of Each Class Maximum
of Securities to be Amount to be Aggregate
Registered Registered (1) Offering Price (2) Amount of Registration Fee
- --------------------------------------------------------------------------------
Class A Common
Stock, no par value 1,235,031,579 $12,350,316 $1,564.79
per share
- --------------------------------------------------------------------------------
(1) Includes 87,500,000 shares of Class A Common Stock issuable upon
conversion of convertible debentures, 1,052,631,579 shares of Class A
Common Stock issuable pursuant to an equity line of credit, 150,000 shares
of Class A Common Stock issuable pursuant to a commitment fee, 1,000,000
shares of Class A Common Stock issuable pursuant to a placement agent fee
and 93,750,000 shares of Class A Common Stock issuable upon conversion of
Series A Preferred Stock.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933
assuming a market value per share of $.01.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and we are
not soliciting offers to buy these securities in any state where the offer or
sale is not permitted.
Subject to completion, dated November 18, 2004
iVoice Technology, Inc.
1,235,031,579 Shares of Class A Common Stock
This prospectus relates to the offering of up to 1,235,031,579 shares of
iVoice Technology, Inc. Class A Common Stock by certain persons who will become
stockholders of iVoice Technology. Please refer to "Selling Stockholders"
beginning on page 17. iVoice Technology is not selling any shares of Class A
Common Stock in this offering and therefore will not receive any proceeds from
this offering. iVoice Technology will, however, receive proceeds from the sale
of Class A Common Stock under an equity line of credit pursuant to a Standby
Equity Distribution Agreement with Cornell Capital Partners, L.P. All costs
associated with this registration will be borne by iVoice Technology. iVoice
Technology has agreed to allow Cornell Capital Partners to retain 6% of the
proceeds raised by us under the equity line of credit.
The shares of Class A Common Stock are being offered for sale by the
selling stockholders at prices established on the Over-the-Counter Bulletin
Board during the term of this offering. These prices will fluctuate based on the
demand for the shares of Class A Common Stock.
The selling stockholders consist of:
o Cornell Capital Partners, as holder of secured convertible
debentures and as investor under the Standby Equity Distribution
Agreement, who intends to sell an aggregate of up to 1,140,281,579
shares of Class A Common Stock;
o iVoice, Inc., as holder of shares of Series A Preferred Stock, who
intends to sell an aggregate of up to 93,750,000 shares of Class A
Common Stock; and
o Sloan Securities Corporation, as holder of shares of Class A Common
Stock, who intends to sell an aggregate of up to 1,000,000 shares of
Class A Common Stock.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933, as amended, in connection with the sale of Class A
Common Stock that it will receive under the Standby Equity Distribution
Agreement and upon conversion of iVoice Technology's 5% secured convertible
debentures due 2006. Under the Standby Equity Distribution Agreement, Cornell
Capital Partners will pay a net purchase price of 95% of iVoice Technology's
market price as calculated in the agreement. iVoice Technology will pay to
Cornell Capital Partners in shares of iVoice Technology Class A Common Stock a
one-time commitment fee of 1.5% of the initial outstanding shares of Class A
Common Stock on or about the date of effectiveness of the registration statement
of which this prospectus is a part. iVoice Technology has also agreed to permit
Cornell Capital Partners to retain an amount equal to 6% of the proceeds
received by iVoice Technology under the Standby Equity Distribution
Agreement. In addition, in August and _____ 2004, iVoice Technology issued an
aggregate of $560,000 in secured convertible debentures to Cornell Capital
Partners. Each of these debentures are convertible into shares of Class A Common
Stock at a price equal to the lesser of (a) an amount equal to one hundred
twenty percent (120%) of the initial bid price of the Class A Common Stock as of
the closing date of the registration of shares or (b) an amount equal to eighty
percent (80%) of the lowest closing bid price of the Class A Common Stock for
the five trading days immediately preceding the conversion date. iVoice
Technology will issue an additional $140,000 of secured convertible debentures
to Cornell Capital Partners within five days after the date of effectiveness of
the registration statement of which this prospectus is a part. Any discount to
market price is an underwriting discount.
Sloan Securities Corporation is an "underwriter" within the meaning of the
Securities Act of 1933, as amended, in connection with the sale of Class A
Common Stock that it will receive as a placement agent fee from iVoice
Technology in connection with the private placement of secured convertible
debentures to Cornell Capital Partners. Under the placement agent agreement,
iVoice Technology agreed to issue to Sloan Securities on or about the date of
effectiveness of the registration statement of which this prospectus is a part a
number of shares of Class A Common Stock equal to $10,000 divided by the closing
bid price of the Class A Common Stock on the date of effectiveness of the
registration statement of which this prospectus is a part. Any discount to
market price, the retained proceeds and commitment fee are underwriting
discounts.
These Securities are speculative and involve a high degree of risk.
Please refer to "Risk Factors" beginning on page 5.
With the exception of Cornell Capital Partners and Sloan Securities, which
are deemed "underwriters" within the meaning of the Securities Act of 1933, as
amended, no other underwriter or person has been engaged to facilitate the sale
of shares of Class A Common Stock in this offering. This offering will terminate
24 months after the accompanying registration statement is declared effective by
the Securities and Exchange Commission.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved of these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ________________, 200_.
TABLE OF CONTENTS
PROSPECTUS SUMMARY...........................................................1
SUMMARY OF THE OFFERING......................................................2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION...................................4
RISK FACTORS.................................................................4
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS...................17
SELLING STOCKHOLDERS........................................................17
USE OF PROCEEDS.............................................................19
DILUTION....................................................................20
EQUITY LINE OF CREDIT.......................................................21
PLAN OF OFFERING............................................................23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................25
DESCRIPTION OF BUSINESS.....................................................34
MANAGEMENT..................................................................41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................42
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND OTHER STOCKHOLDER MATTERS.............................................44
DESCRIPTION OF SECURITIES...................................................45
EXPERTS.....................................................................51
LEGAL MATTERS...............................................................51
HOW TO GET MORE INFORMATION.................................................51
INDEX TO FINANCIAL STATEMENTS..............................................F-1
i
PROSPECTUS SUMMARY
Overview
iVoice Technology, Inc., which we refer to in this prospectus as "iVoice
Technology," "we", "us" or "the Company," was incorporated in New Jersey on
November 10, 2004 as a wholly owned subsidiary of iVoice Inc. ("iVoice"). While
iVoice has been engaged in the speech recognition software and computerized
telephony business since 1997, iVoice management seeks to leverage the value of
underutilized developed technology and believes that the transition to an
independent company will provide iVoice Technology with greater access to
capital. This should provide needed financial resources to potentially penetrate
the market and distribute the product. As such, iVoice Technology's business
will be formed from the contribution of certain assets and related liabilities
on or about the effective date of the registration statement of which this
prospectus is a part. In connection with the iVoice reorganization, iVoice will
transfer to us its Interactive Voice Response (IVR) software and related
liabilities. Following this transfer, iVoice will distribute by dividend to all
of the stockholders of iVoice up to 10,000,000 shares of iVoice Technology, Inc.
Class A Common Stock (the "Distribution"). Following the Distribution, on or
about the time the registration statement of which this prospectus is a part is
declared effective, iVoice Technology will own and operate the Interactive Voice
Response (IVR) software business of iVoice. iVoice Technology will be a
development stage company following the Distribution. iVoice Technology intends
to seek to expand its operations through the acquisition of additional
businesses. These potential acquired additional businesses may be outside the
current field of operations of iVoice Technology. iVoice Technology may not be
able to identify, successfully integrate or profitably manage any such
businesses or operations.
iVoice Technology intends to continue to develop, market and license the
IVR line of computerized telephony software. The IVR software is designed to
enable a caller to obtain requested information in voice form from a local or
non-local database and allow information in PC databases to be accessed from a
standard touch-tone telephone using a telephone keypad or voice command.
About Us
iVoice Technology was incorporated in New Jersey on November 10, 2004 as a
wholly-owned subsidiary of iVoice, Inc. iVoice Technology received by assignment
all of the interests in and rights and title to, and assumed all of the
obligations of, all of the agreements, contracts, understandings and other
instruments of iVoice Technology, Inc., a Nevada corporation and affiliate of
iVoice Technology. When we refer to or describe any agreement, contract or other
written instrument of iVoice Technology in this prospectus, we are referring to
an agreement, contract or other written instrument that had been entered into by
iVoice Technology Nevada and assigned to iVoice Technology.
Our principal office is located at 750 Highway 34, Matawan, New Jersey
07747. Our telephone number is (732) 441-7700.
1
SUMMARY OF THE OFFERING
This offering relates to the sale of Class A Common Stock by certain
persons who are, or will become, stockholders of iVoice Technology. The selling
stockholders consist of:
o Cornell Capital Partners, as holder of secured convertible
debentures and as investor under the Standby Equity Distribution
Agreement, who intends to sell an aggregate of up to 1,140,281,579
shares of Class A Common Stock;
o iVoice, Inc., as holder of shares of Series A Preferred Stock, who
intends to sell an aggregate of up to 93,750,000 shares of Class A
Common Stock; and
o Sloan Securities Corporation, as holder of shares of Class A Common
Stock, who intends to sell an aggregate of up to 1,000,000 shares of
Class A Common Stock.
Pursuant to the Standby Equity Distribution Agreement with Cornell Capital
Partners, L.P., we may, at our discretion, periodically issue and sell to
Cornell Capital Partners shares of Class A Common Stock for a total purchase
price of $10.0 million. The maximum amount of each advance amount is $500,000
per advance notice. A minimum of seven trading days must pass between each
advance notice. Cornell Capital Partners, L.P. will purchase the shares of Class
A Common Stock for a 5% discount to the prevailing market price of our common
stock. In addition, Cornell Capital Partners will retain 6% of each advance
under the equity line of credit, and will receive a one-time commitment fee,
payable in shares of iVoice Technology Class A Common Stock, of 1.5% of the
initial outstanding shares of Class A Common Stock (exclusive of shares issuable
under the equity line of credit or upon conversion of the secured convertible
debentures) on the date that the registration statement of which this prospectus
is a part becomes effective. Cornell Capital Partners has informed us that it
intends to sell any shares purchased under the equity line of credit at the then
prevailing market price. The obligation of Cornell Capital Partners to purchase
shares under the equity line of credit terminates upon the suspension of the
effectiveness of the registration statement of which this prospectus is a part
for an aggregate of fifty days or the failure of iVoice Technology to remedy a
material breach of the Standby Equity Distribution Agreement within thirty days
of receipt of notice. The initial closing under the Standby Equity Distribution
Agreement and each subsequent closing of a purchase and sale of shares are
conditioned upon the satisfaction of customary conditions.
In August and _______, 2004, iVoice Technology issued an aggregate of
$560,000 in secured convertible debentures, with interest payable at 5% per
annum, to Cornell Capital Partners. Each of the debentures are convertible into
shares of Class A Common Stock at a price equal to the lesser of (a) an amount
equal to one hundred twenty percent (120%) of the initial bid price of the Class
A Common Stock on the date of effectiveness of the registration statement of
which this prospectus is a part or (b) an amount equal to eighty percent (80%)
of the lowest closing bid price of the Class A Common Stock for the five trading
days immediately preceding the conversion date. The secured convertible
debentures have a term of two years with all accrued interest due at the
expiration of the term. At our option, these debentures may be redeemed at a 20%
premium prior to August 12, 2006. The secured convertible debentures are secured
by a first priority security interest in substantially all of the assets of
iVoice Technology. iVoice Technology will issue an additional $140,000 of
secured convertible debentures to
2
Cornell Capital Partners on or about the date of effectiveness of the
registration statement of which this prospectus is a part.
In August 2004, iVoice Technology entered into an agreement with Sloan
Securities Corporation to act as an agent for the private placement of secured
convertible debentures to Cornell Capital Partners. Under the placement agent
agreement, iVoice Technology agreed to issue to Sloan Securities on or about the
date of effectiveness of the registration statement of which this prospectus is
a part a number of shares of Class A Common Stock equal to $10,000 divided by
the closing bid price of the Class A Common Stock on the date of effectiveness
of the registration statement of which this prospectus is a part.
In consideration of and exchange for the assets that iVoice Technology
will receive pursuant to the spin-off of the IVR business, iVoice Technology
will issue 30 shares of Series A 5% Convertible Preferred Stock to iVoice. Each
share of Series A 5% Convertible Preferred Stock has a stated value of $25,000
per share. Each share of Series A 5% Convertible Preferred Stock will be
convertible into shares of Class A Common Stock at a price equal to the lesser
of (a) an amount equal to one hundred twenty-five percent (125%) of the closing
bid price of the Class A Common Stock as of the conversion date or (b) an amount
equal to eighty percent (80%) of the lowest closing bid price of the Class A
Common Stock for the five trading days immediately preceding the conversion
date.
This prospectus relates to the shares of Class A Common Stock to be issued
to Cornell Capital Partners under the equity line of credit (including the
one-time commitment fee) and upon conversion of the secured convertible
debentures, the shares of Class A Common Stock to be issued to Sloan Securities
as a placement agent fee and the shares of Class A Common Stock to be issued to
iVoice upon conversion of the Series A Preferred Stock.
Class A Common Stock Offered 1,235,031,579 shares by selling
stockholders
Offering Price Market price
Class A Common Stock Outstanding 100 shares of Class A Common Stock
Before the Offering
Use of Proceeds We will not receive any proceeds of the
shares offered by the selling
stockholders. Any proceeds we receive from
the sale of common stock under the equity
line of credit will be used for sales and
marketing, payment of administrative
services, working capital purposes and
acquisitions. See "Use of Proceeds."
Risk Factors The securities offered hereby involve a
high degree of risk and immediate
substantial dilution. You should read
carefully the factors discussed under
"Risk Factors" beginning on page 5.
Several of the most significant risk
factors include:
3
o Future sales by our stockholders may
adversely affect our stock price and
our ability to raise funds in new
stock offerings.
o Existing stockholders will
experience significant dilution from
our sale of shares under the equity
line of credit.
o The investor under the equity line
of credit will pay less than the
then-prevailing market price for our
common stock.
o The selling stockholders have
informed us that they intend to sell
their shares of common stock in the
public market, which sales may cause
our stock price to decline.
o The sale of our stock under our
equity line of credit could
encourage short sales by third
parties, which could contribute to
the further decline of our stock
price.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
For the Nine
Months Ended For the Nine For the Year For the Year
September 30, Months Ended Ended Ended
2004 September 30, 2003 December 31, 2003 December 31, 2002
------------ ------------------ ----------------- -----------------
Statement of Operation Data:
- ----------------------------------------- ------------------ ------------------- ------------------ ------------------
Sales $177,484 $239,306 $303,756 $366,004
- ----------------------------------------- ------------------ ------------------- ------------------ ------------------
Cost of sales 59,263 90,813 123,091 94,296
- ----------------------------------------- ------------------ ------------------- ------------------ ------------------
Gross profit 118,221 148,493 180,665 271,708
- ----------------------------------------- ------------------ ------------------- ------------------ ------------------
Selling, general, and administrative
expenses 757,066 674,232 965,341 1,323,008
- ----------------------------------------- ------------------ ------------------- ------------------ ------------------
Loss from operations (638,845) (525,739) (784,676) (1,051,300)
- ----------------------------------------- ------------------ ------------------- ------------------ ------------------
Net Loss (1,295,337) (729,040) (1,131,420) (1,197,964)
- ----------------------------------------- ------------------ ------------------- ------------------ ------------------
September 30, 2004 December 31, 2003
------------------ -----------------
Balance Sheet Data:
- ------------------------------------------------------------ ---------------------------- ----------------------------
Current Assets $213,872 $52,077
- ------------------------------------------------------------ ---------------------------- ----------------------------
Intangibles 98,000 --
- ------------------------------------------------------------ ---------------------------- ----------------------------
Liabilities 302,178 23,662
- ------------------------------------------------------------ ---------------------------- ----------------------------
Stockholders' equity (deficiency) 12,112 73,815
- ------------------------------------------------------------ ---------------------------- ----------------------------
4
RISK FACTORS
You should carefully consider each of the following risk factors and all
of the other information in this information statement. The following risks
relate principally to the offering and iVoice Technology's business.
If any of the following risks and uncertainties develops into actual
events, the business, financial condition or results of operations of iVoice
Technology could be materially adversely affected. If that happens, the trading
price of iVoice Technology Class A Common Stock could decline significantly.
The risk factors below contain forward-looking statements regarding the
offering and iVoice Technology. Actual results could differ materially from
those set forth in the forward-looking statements. See "Cautionary Statement
Regarding Forward-Looking Statements" below.
Risks Related to Our Business
iVoice Technology will face many of the difficulties that companies in the early
stage may face.
As a result of the Company's limited operating history, the currently
difficult economic conditions of the telecommunications marketplace, government
restrictions on telemarketing activities and the emerging nature of the
interactive voice response industry, it may be difficult for you to assess our
growth and earnings potential. The Company believes that, due primarily to the
relatively brief time IVR has been available to the general public, there has
not yet been developed, implemented and demonstrated a commercially viable
business model from which to successfully operate any form of business that
relies on the products and services that we intend to market, sell, and
distribute. Therefore, we have faced many of the difficulties that companies in
the early stages of their development in new and evolving markets often face.
These have included, among others:
o Substantial delays and expenses related to testing and development
of our new products;
o Marketing and distribution problems encountered in connection with
our new and existing products and technologies;
o Competition from larger and more established companies;
o Delays in reaching our marketing goals;
o Difficulty recruiting qualified employees for management and other
positions;
o Lack of sufficient customers, revenues and cash flow; and
o Limited financial resources.
5
We may continue to face these and other difficulties in the future, some
of which may be beyond our control. If we are unable to successfully address
these problems, our future growth and earnings will be negatively affected.
iVoice Technology has no operating history as an independent public company and
may be unable to operate profitably as a stand-alone company.
Although iVoice has operated as a reporting public company since 2000 and
has sold computerized telephony software since 1997, iVoice Technology does not
have an operating history as an independent public company. Historically, since
the businesses that comprise each of iVoice Technology and iVoice have been
under one ultimate parent, they have been able to rely, to some degree, on the
earnings, assets, and cash flow of each other for capital requirements. After
the Distribution, iVoice Technology will be able to rely only on the IVR
software business for such requirements. The IVR software business has operated
at a loss in the past for iVoice, and as an independent company such losses may
continue or increase. Additionally, iVoice Technology's business has relied on
iVoice for financial, administrative and managerial expertise in conducting its
operations. Following the Distribution, iVoice Technology will maintain its own
credit and banking relationships and perform its own financial and investor
relations functions. iVoice Technology may not be able to successfully put in
place the financial, administrative and managerial structure necessary to
operate as an independent public company, and the development of such structure
will require a significant amount of management's time and other resources.
iVoice's operations demonstrate a history of net losses and cash flow shortfalls
and iVoice Technology's likely will as well.
iVoice, of which iVoice Technology was part, has incurred recurring
operating losses. iVoice used cash in operations of approximately $1,142,000 and
$352,000 during the years ended December 31, 2003 and 2002, respectively, and
has a history of net losses. iVoice had a cash balance of approximately
$4,500,000 and $560,000 at December 31, 2003 and 2002, respectively, and current
assets exceeded current liabilities by approximately $3,200,000 at December 31,
2003 and current liabilities exceeded current assets by approximately $720,000
at December 31, 2002. iVoice had stockholders' equity of approximately
$3,400,000 at December 31, 2003 and a stockholders' deficit of approximately
$382,000 at December 31, 2002. iVoice has been and may, in the future, be
dependent upon outside and related party financing to develop and market their
software products, perform their business development activities, and provide
for ongoing working capital requirements. During the year ended December 31,
2003, substantially all of this financing has been provided by Cornell Capital
Partners. There can be no assurance that iVoice Technology will have operations
separately that fare any better than those of iVoice.
iVoice Technology has received a going concern opinion from its independent
auditors that describes the uncertainty regarding its ability to continue as a
going concern.
iVoice Technology has received a report from its independent auditors for
the fiscal year ended December 31, 2003 containing an explanatory paragraph that
describes the uncertainty regarding the Company's ability to continue as a going
concern due to its historical negative cash
6
flow and because, as of the date of the auditors' opinion, the Company did not
have access to sufficient committed capital to meet its projected operating
needs for at least the next 12 months.
There can be no assurance that management's plans will be successful, and
other unforeseeable actions may become necessary. Any inability to raise capital
may require us to reduce the level of our operations. Such actions could have a
material adverse effect on our business and operations and result in charges
that could be material to our business and results of operations.
iVoice Technology's future revenue and operating results are unpredictable and
may fluctuate.
Our short operating history and the rapidly changing nature of the market
in which we compete make it difficult to accurately forecast our revenues and
operating results. Our operating results are unpredictable and we expect them to
fluctuate in the future due to a number of factors. These factors may include,
among others:
o the timing of sales of our products and services, particularly in
light of our minimal sales history;
o difficulty in keeping current with changing technologies;
o unexpected delays in introducing new products, new product features
and services;
o increased expenses, whether related to sales and marketing, product
development or administration;
o deferral of recognition of our revenue in accordance with applicable
accounting principles due to the time required to complete projects;
o the mix of product license and services revenue; and
o costs related to possible acquisitions of technology or businesses.
iVoice's earnings and stock price will be subject to significant fluctuations.
Due to the factors noted in this prospectus, our earnings and stock price
will be subject to significant volatility, particularly on a quarterly basis.
iVoice has previously experienced shortfalls in revenue and earnings from levels
expected by investors, which have had an immediate and material adverse effect
on the trading price of its common stock. This may occur for iVoice Technology
in the future.
If either iVoice or iVoice Technology lose the services of any key personnel,
including our chief executive officer or our directors, our business may suffer.
We are dependent on our key officers and directors, including Jerome R.
Mahoney and Arie Seidler, our Chairman of the Board and our President and Chief
Executive Officer,
7
respectively, and our key employees in our finance, technology, sales and
marketing operations. The loss of any of our key personnel could materially harm
our business because of the cost and time necessary to retain and train a
replacement. Such a loss would also divert management attention away from
operational issues. To minimize the effects of such loss, both of iVoice and
iVoice Technology have entered into employment contracts with Jerome Mahoney and
iVoice Technology has entered into an employment contract with Arie Seidler.
However, Mr. Seidler's employment agreement has a term of only one year.
Our potential future business acquisitions may be unpredictable and may cause
our business to suffer.
iVoice Technology intends to seek to expand its operations through the
acquisition of additional businesses. These potential acquired additional
businesses may be outside the current field of operations of iVoice Technology.
iVoice Technology may not be able to identify, successfully integrate or
profitably manage any such businesses or operations. The proposed expansion may
involve a number of special risks, including possible adverse effects on iVoice
Technology's operating results, diversion of management attention, inability to
retain key personnel, risks associated with unanticipated events and the
financial statement effect of potential impairment of acquired intangible
assets, any of which could have a materially adverse effect on iVoice
Technology's business, financial condition and results of operations. In
addition, if competition for acquisition candidates or assumed operations were
to increase, the cost of acquiring businesses or assuming customers' operations
could increase materially. The inability of iVoice Technology to implement and
manage its expansion strategy successfully may have a material adverse effect on
the business and future prospects of iVoice Technology. Furthermore, through the
acquisition of additional businesses, iVoice Technology may effect a business
acquisition with a target business which may be financially unstable,
under-managed, or in its early stages of development or growth. While iVoice
Technology may, under certain circumstances, seek to effect business
acquisitions with more than one target business, as a result of its limited
resources, iVoice Technology, in all likelihood, will have the ability to effect
only a single business acquisition at one time.
Members of iVoice Technology's Board of Directors and management may have
conflicts of interest after the Distribution; iVoice Technology does not have
any formal procedure for resolving conflicts in the future.
After the Distribution, Mr. Mahoney, a member of the board of directors,
will own iVoice shares and have the right to convert $190,000 of indebtedness
into 190,000 shares of iVoice Technology Class B Common Stock which are
convertible into an indeterminate number of shares of iVoice Technology Class A
Common Stock. In addition, following the Distribution, we anticipate that Mr.
Mahoney, the Chairman of the Board of iVoice Technology will also continue to
serve as the Chairman of the Board and Chief Executive Officer of iVoice. These
relationships could create, or appear to create, potential conflicts of interest
when iVoice Technology's directors and management are faced with decisions that
could have different implications for iVoice Technology and iVoice. Examples of
these types of decisions might include decisions relating to the potential
business acquisitions made by iVoice Technology or the resolution of disputes
arising out of the agreements governing the relationship between iVoice and
iVoice Technology following the Distribution. Also, the appearance of conflicts,
even if such conflicts
8
do not materialize, might adversely affect the public's perception of iVoice
Technology following the Distribution. Furthermore, iVoice Technology does not
have any formal procedure for resolving such conflicts of interest should they
arise following the Distribution.
In addition, after the Distribution, iVoice will own shares of iVoice
Technology Series A 5% Convertible Preferred Stock. In some circumstances, such
as in the event of a sale of iVoice Technology, iVoice could have interests that
are different from the Company's or yours.
iVoice Technology's industry is characterized by rapid technological change and
failure to adapt our product development to these changes may cause our products
to become obsolete.
We participate in a highly dynamic industry characterized by rapid change
and uncertainty relating to new and emerging technologies and markets. Future
technology or market changes may cause some of our products to become obsolete
more quickly than expected.
iVoice Technology stockholders may experience significant dilution if future
equity offerings are used to fund operations or acquire businesses.
If working capital or future acquisitions are financed through the
issuance of equity securities, such as through the Standby Equity Distribution
Agreement with Cornell Capital Partners, LP (see "Certain Relationships and
Related Transactions" beginning on page 42), iVoice Technology stockholders
would experience significant dilution. In addition, securities issued in
connection with future financing activities or potential acquisitions may have
rights and preferences senior to the rights and preferences of the iVoice
Technology Class A Common Stock. Further, the conversion of outstanding debt
obligations into equity securities could have a dilutive effect on iVoice
Technology shareholders.
The trend toward consolidation in iVoice Technology's industry may impede its
ability to compete effectively.
As consolidation in the software industry continues, fewer companies
dominate particular markets, changing the nature of the market and potentially
providing consumers with fewer choices. Also, many of these companies offer a
broader range of products than us, ranging from desktop to enterprise solutions.
We may not be able to compete effectively against these competitors.
Furthermore, we may use strategic acquisitions, as necessary, to acquire
technology, people and products for our overall product strategy. The trend
toward consolidation in our industry may result in increased competition in
acquiring these technologies, people or products, resulting in increased
acquisition costs or the inability to acquire the desired technologies, people
or products. Any of these changes may have a significant adverse effect on our
future revenues and operating results.
iVoice Technology faces intense price-based competition for licensing of its
products which could reduce profit margins.
Price competition is often intense in the software market, especially for
computerized telephony software products. Many of our competitors have
significantly reduced the price of
9
their products. Price competition may continue to increase and become even more
significant in the future, resulting in reduced profit margins.
iVoice Technology may be unsuccessful in adapting to changes in the dynamic
technological environment of telecommunications in a timely manner.
Critical issues concerning the commercial use of telecommunications,
including security, reliability, cost, ease of use, accessibility, quality of
service or potential tax or other government regulation, remain unresolved and
may affect the use of telecommunications as a medium to distribute or support
our software products and the functionality of some of our products. If we are
unsuccessful in timely assimilating changes in the telecommunications
environment into our business operations and product development efforts, our
future net revenues and operating results could be adversely effected.
iVoice Technology may be unsuccessful in developing new distribution channels.
Due to our limited operating history, we currently offer products directly
to end-users and through dealer and reseller channels established by iVoice. We
may not be able to effectively develop our own network of resellers to
distribute our software products. We may also be unsuccessful in utilizing
rapidly evolving distribution and marketing technologies to develop these
distribution channels. The adoption of new channels may adversely impact
existing channels and/or product pricing, which may reduce our future revenues
and profitability.
Product returns may exceed established reserves and affect iVoice Technology's
revenues.
Product returns can occur when we introduce upgrades and new versions of
products or when distributors or retailers have excess inventories. Our return
policy allows distributors, subject to various limitations, to return products
in exchange for new products or for credit towards future products. End users
may return our products through dealers and distributors within a reasonable
period from the date of license for a full refund. In addition, retailers may
return older versions of our products. We estimate and maintain reserves for
product returns. However, future returns could exceed the reserves we have
established, which could have a material adverse effect on our operating
results.
iVoice Technology may depend on distribution by resellers and distributors for a
significant portion of revenues.
We may distribute some of our products through resellers and distributors.
To effectively do so, we must establish and maintain good working relationships
with resellers and distributors. No such relationships currently exist. If we
are unsuccessful in establishing and maintaining relationships with resellers
and distributors, or if these resellers and distributors are unsuccessful in
reselling our products, our future net revenues and operating results may be
adversely affected.
The results of iVoice Technology's research and development efforts are
uncertain.
We believe that we will need to make research and development expenditures
to create new uses and new features to our products to remain competitive. While
we perform usability
10
and beta testing of new products, the products we are currently developing or
may develop in the future may not be technologically successful. If they are not
technologically successful, our resulting products may not achieve market
acceptance and our products may not compete effectively with products of our
competitors currently in the market or introduced in the future.
The greater than expected length of the product development cycle may adversely
affect our future revenues.
The length of our product development cycle has generally been greater
than we originally expected. We are likely to experience delays in future
product development. These delays could have a material adverse effect on the
amount and timing of future revenues.
If iVoice Technology must restructure its operations, valuable resources will be
diverted from other business objectives.
We intend to continually evaluate our product and corporate strategy. We
have in the past undertaken, and will in the future undertake, organizational
changes and/or product and marketing strategy modifications. These
organizational changes increase the risk that objectives will not be met due to
the allocation of valuable limited resources to implement changes. Further, due
to the uncertain nature of any of these undertakings, these efforts may not be
successful and we may not realize any benefit from these efforts.
iVoice Technology must attract and retain personnel while competition for
personnel in this industry is intense.
We believe that our future success will depend in part on our ability to
recruit and retain highly skilled management, sales and marketing and technical
personnel. Competition in recruiting personnel in the software industry is
intense. To accomplish this, we believe that we must provide personnel with a
competitive compensation package, including stock options, which may require
ongoing stockholder approval. Failure to provide a competitive compensation
package may adversely affect our ability to attract and retain highly qualified
personnel.
Potential software defects and product liability could result in delays in
market acceptance, unexpected costs and diminished operating results.
Software products frequently contain errors or defects, especially when
first introduced or when new versions or enhancements are released. Defects and
errors could be found in current versions of our products, future upgrades to
current products or newly developed and released products. Software defects
could result in delays in market acceptance or unexpected reprogramming costs,
which could materially adversely affect our operating results. Most of our
license agreements with customers contain provisions designed to limit our
exposure to potential product liability claims. It is possible, however, that
these provisions limiting our liability may not be valid as a result of federal,
state, local or foreign laws or ordinances or unfavorable judicial decisions. A
successful product liability claim may have a material adverse effect on our
business, operating results and financial condition.
11
iVoice Technology relies on third party technologies which may not support
iVoice Technology products.
Our software products are designed to run on the Microsoft(R) Windows(R)
operating system and with industry standard hardware. Although we believe that
the operating systems and necessary hardware are and will be widely utilized by
businesses in the corporate market, businesses may not actually adopt such
technologies as anticipated or may in the future migrate to other computing
technologies that we do not support. Moreover, if our products and technology
are not compatible with new developments from industry leaders such as
Microsoft, our business, results of operations and financial condition could be
materially and adversely affected.
iVoice Technology faces aggressive competition in many areas of the business,
and the business will be harmed if iVoice Technology fails to compete
effectively.
We encounter aggressive competition from numerous competitors in many
areas of our business. Many of our current and potential competitors have longer
operating histories, greater name recognition and substantially greater
financial, technical and marketing resources than we have. We may not be able to
compete effectively with these competitors. To remain competitive, we must
develop new products and periodically enhance our existing products in a timely
manner. We anticipate that we may have to adjust the prices of many of our
products to stay competitive. In addition, new competitors may emerge, and
entire product lines may be threatened by new technologies or market trends that
reduce the value of these product lines. The market in which we compete is
influenced by the strategic direction of major computer hardware manufacturers
and operating system software providers. Our competitiveness depends on our
ability to enhance existing products and to offer successful new products on a
timely basis. We have limited resources and must restrict product development
efforts to a relatively small number of projects.
We may not be able to access sufficient funds when needed.
We are dependent on external financing to fund our operations. Our
financing needs are expected to be provided, in large part, from the equity line
of credit of up to $10.0 million under the Standby Equity Distribution Agreement
with Cornell Capital Partners. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." No assurances can be given that such financing will be available in
sufficient amounts or at all when needed.
Quarterly financial results are subject to significant fluctuations which could
cause iVoice Technology's stock price to decline.
We expect that we will be subject to substantial fluctuations in quarterly
net revenues and operating results. Fluctuations may be caused by a number of
factors including, but not limited to, the following:
o the timing and volume of customer orders, customer cancellations,
and reductions in orders by our distributors;
12
o the timing and amount of our expenses;
o the introduction of competitive products by existing or new
competitors;
o reduced demand for any given product;
o seasonality in the end-of-period buying patterns of foreign and
domestic software markets; and
o the market's transition between operating systems.
Due to these factors, forecasts may not be achieved, either because
expected revenues do not occur or because they occur at lower prices or on terms
that are less favorable to us. In addition, these factors increase the chances
that our results could diverge from the expectations of investors and analysts.
If so, the market price of our stock would likely decline.
iVoice Technology's management team is new and its working relationships are
untested.
We have only recently assembled our management team as part of the
Distribution and changes in our operating structure. Some members of our
management team have worked with each other in the past, although at this time
we cannot assess the effectiveness of their working relationships after the
Distribution. As a result, we may be unable to effectively develop and sell our
software products and iVoice Technology, as a business, may fail.
iVoice Technology relies on intellectual property and proprietary rights which
may not remain unique to iVoice Technology.
We regard our software as proprietary and underlying technology as
proprietary. We seek to protect our proprietary rights through a combination of
confidentiality agreements and copyright, patent, trademark and trade secret
laws.
We do not have any patents or statutory copyrights on any of our
proprietary technology that we believe to be material to our future success. Our
future patents, if any, may be successfully challenged and may not provide us
with any competitive advantages. We may not develop proprietary products or
technologies that are patentable and other parties may have prior claims.
In selling our products, we rely primarily on shrink-wrap licenses that
are not signed by licensees. Therefore, such licenses may be unenforceable under
the laws of some jurisdictions. In addition, existing copyright laws afford
limited practical protection. Furthermore, the laws of some foreign countries do
not offer the same level of protection of our proprietary rights as do the laws
of the United States.
Patent, trademark and trade secret protection is important to us because
developing and marketing new technologies and products is time-consuming and
expensive. We do not own any U.S. or foreign patents or registered intellectual
property. We may not obtain issued patents or other protection from any future
patent applications owned by or licensed to us.
13
Our competitive position is also dependent upon unpatented trade secrets.
Trade secrets are difficult to protect. Our competitors may independently
develop proprietary information and techniques that are substantially equivalent
to ours or otherwise gain access to our trade secrets, such as through
unauthorized or inadvertent disclosure of our trade secrets.
There can be no assurance that our means of protecting our proprietary
rights will be adequate or that our competitors will not independently develop
similar technology substantially equivalent or superseding proprietary
technology. Furthermore, there can be no assurance that any confidentiality
agreements between us and our employees will provide meaningful protection of
our proprietary information, in the event of any unauthorized use or disclosure
thereof. As a consequence, any legal action that we may bring to protect
proprietary information could be expensive and may distract management from
day-to-day operations.
iVoice Technology may become involved in future litigation, which may result in
substantial expense and may divert our attention from the implementation of our
business strategy.
We believe that the success of our business depends, in part, on obtaining
intellectual property protection for our products, defending our intellectual
property once obtained and preserving our trade secrets. Litigation may be
necessary to enforce our intellectual property rights, to protect our trade
secrets and to determine the validity and scope of our proprietary rights. Any
litigation could result in substantial expense and diversion of our attention
from our business, and may not adequately protect our intellectual property
rights.
In addition, we may be sued by third parties which claim that our products
infringe the intellectual property rights of others. This risk is exacerbated by
the fact that the validity and breadth of claims covered in technology patents
involve complex legal and factual questions for which important legal principles
are unresolved. Any litigation or claims against us, whether valid or not, could
result in substantial costs, place a significant strain on our financial
resources, divert management resources and harm our reputation. Such claims
could result in awards of substantial damages, which could have a material
adverse impact on our results of operations. In addition, intellectual property
litigation or claims could force us to:
o cease licensing, incorporating or using any of our products that
incorporate the challenged intellectual property, which would
adversely effect our revenue;
o obtain a license from the holder of the infringed intellectual
property right, which license may not be available on reasonable
terms, if at all; and
o redesign our products, which would be costly and time-consuming.
iVoice Technology may incur increased expenses after the administrative services
agreement with iVoice is terminated.
In connection with its spin-off, iVoice Technology has entered into an
administrative services agreement with iVoice. Under this agreement, iVoice is
providing iVoice Technology with services in such areas as inventory purchasing,
material and inventory control, employee benefits administration, payroll,
financial accounting and reporting, and other areas where iVoice
14
Technology needs assistance and support. The agreement will terminate upon
completion of the Distribution. Upon termination of the agreement, iVoice
Technology will be required to obtain such services from a third party or
increase its headcount to provide such services. This could be more expensive
than the fees which iVoice Technology has been required to pay under the
administrative services agreement.
Government regulation of telemarketing activities may diminish iVoice
Technology's earning potential.
On December 18, 2002, the U.S. Federal Trade Commission (FTC) announced a
decision to create the national "do not call" registry. Consumers are able to
sign up for the national "do not call" registry. The FTC has begun to enforce
the registry, and telemarketers who call a number on the registry could be fined
up to $11,000 for each call. This law may affect our ability to market our
application as a marketing tool. The negative economic effect to our business
may be significant.
Risks related to this Offering
Future sales by our stockholders may adversely affect our stock price and our
ability to raise funds in new stock offerings.
Sales of our common stock in the public market following this offering
could lower the market price of our Class A Common Stock. Sales may also make it
more difficult for us to sell equity securities or equity-related securities in
the future at a time and price that our management deems acceptable or at all.
The 100 shares of Class A common stock outstanding as of September 30, 2004 are
"restricted securities" and may be resold in the public market only if
registered or pursuant to an exemption from registration. Some of these shares
may be resold under Rule 144.
In addition, we have secured convertible debentures and Series A Preferred
Stock that are convertible into an aggregate of 181,250,000 shares of Class A
common stock (assuming a market price of $0.01 per share used in calculating the
conversion price) and a placement agent fee payable in up to 1,000,000 shares of
Class A common stock.
Upon issuance of the maximum number of shares being registered in
connection with the equity line of credit (including the commitment fee), there
will be an additional 1,052,781,579 shares of Class A Common Stock outstanding;
including the shares available for issuance upon conversion of the secured
convertible debentures and the Series A Preferred Stock and the shares to be
paid as the placement agent fee, there will be an additional 1,235,031,579
shares of Class A Common Stock outstanding. All of these shares of Class A
Common Stock may be immediately resold in the public market upon effectiveness
of the registration statement of which this prospectus is a part, the sale of
Class A Common Stock to the investor, or the payment of the commitment fee,
under the terms of the Standby Equity Distribution Agreement, the payment of the
placement agent fee and upon conversion of the secured convertible debentures
and the Series A Preferred Stock.
15
Existing stockholders will experience significant dilution from our sale of
shares under the equity line of credit.
The sale of shares under the equity line of credit will have a dilutive
impact on our stockholders. As a result, our net income per share could decrease
in future periods, and the market price of our Class A Common Stock could
decline. In addition, if our stock price declines, in order to receive a given
advance, we will need to issue a greater number of shares of Class A Common
Stock under the Standby Equity Distribution Agreement. If our stock price is
lower, then our existing stockholders would experience greater dilution.
The investor under the line of credit will pay less than the then-prevailing
market price of our Class A Common Stock.
The Class A Common Stock to be issued under the equity line of credit will
be issued at a 5% discount to the lowest closing bid price for the five days
immediately following the notice date of an advance. These discounted sales
could cause the price of our common stock to decline.
Further, because the investor under the equity line of credit will acquire
our Class A Common Stock at a discount, it will have an incentive to sell
immediately in order to realize a gain on the difference. This incentive to sell
immediately into the public market to realize a gain on the difference
accelerates if the market price of our Class A Common Stock declines.
The selling stockholders intend to sell their shares of Class A Common Stock in
the public market, which sales may cause our stock price to decline.
The selling stockholders intend to sell the shares of Class A Common Stock
being registered in this offering in the public market. That means that up to
1,235,031,579 shares of Class A Common Stock, the number of shares being
registered in this offering, may be sold. Such sales may cause our stock price
to decline.
The sale of our stock under our equity line of credit could encourage short
sales by third parties, which could contribute to the further decline of our
stock price.
The significant downward pressure on the price of our Class A Common Stock
caused by the sale of material amounts of Class A Common Stock under the equity
line of credit could encourage short sales by third parties. Such an event could
place further downward pressure on the price of our common stock.
There has been no trading market for our Class A Common Stock, it will likely be
relatively thinly traded and we cannot predict the extent to which a trading
market will develop.
Before the Distribution and this offering, our Class A Common Stock has
not traded on any market. We expect that, if and when a trading market develops
in our Class A Common Stock, it will be thinly traded compared to larger more
widely known companies. Thinly traded Class A Common Stock can be more volatile
than common stock trading in an active public market. We cannot predict the
extent to which an active public market for the Class A Common Stock will
develop or be sustained after the Distribution and this offering.
16
The price you pay in this offering will fluctuate and may be higher or lower
than the prices paid by other people participating in this offering.
The price in this offering will fluctuate based on the prevailing market
price of the Class A Common Stock on the Over-the-Counter Bulletin Board.
Accordingly, the price you pay in this offering may be higher or lower than the
prices paid by other people participating in this offering.
The issuance of shares of Class A Common Stock in connection with this offering
could result in a change of control.
We are registering 1,235,031,579 shares of Class A Common Stock in this
offering. These shares represent greater than 99.9% of our outstanding Class A
Common Stock, and we anticipate all such shares will be sold in this offering.
If all or any significant block of these shares are held by one or more
stockholders working together, then such stockholder or stockholders would have
enough shares to assume control of iVoice Technology by electing its or their
own directors.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Information included in this prospectus may contain forward-looking
statements. This information may involve known and unknown risks, uncertainties
and other factors which may cause our actual results, performance or
achievements to be materially different from the future results, performance or
achievements expressed or implied by any forward-looking statements.
Forward-looking statements, which involve assumptions and describe our future
plans, strategies and expectations, are generally identifiable by use of the
words "may," "will," "should," "expect," "anticipate," "estimate," "believe,"
"intend" or "project" or the negative of these words or other variations on
these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans and (e) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Description of Business," as well as
in this prospectus generally. Actual events or results may differ materially
from those discussed in forward-looking statements as a result of various
factors, including, without limitation, the risks outlined under "Risk Factors"
and matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. The table identifies the selling stockholders. None of the selling
stockholders have held a position or office, or had any other material
relationship, with iVoice Technology, except as follows:
Cornell Capital Partners has outstanding loans to iVoice Technology in the
aggregate amount of $560,000 as of ________, 2004, which is evidenced by secured
convertible
17
debentures. iVoice Technology has agreed to issue an additional $140,000 of
secured convertible debentures to Cornell Capital Partners on or about the date
of effectiveness of the registration statement of which this prospectus is a
part. The secured convertible debentures are convertible into shares of Class A
Common Stock at a price equal to the lesser of (a) an amount equal to one
hundred twenty percent (120%) of the initial bid price of the Class A Common
Stock on the date of effectiveness of the registration statement of which this
prospectus is a part or (b) an amount equal to eighty percent (80%) of the
lowest closing bid price of the Class A Common Stock for the five trading days
immediately preceding the conversion date. The secured convertible debentures
have a term of two years with all accrued interest due at the expiration of the
term. At our option, these debentures may be redeemed at a 20% premium prior to
August 12, 2006. The secured convertible debentures are secured by a first
priority security interest in substantially all of the assets of iVoice
Technology.
In addition, iVoice Technology and Cornell Capital Partners have entered
into a Standby Equity Distribution Agreement dated as of August 12, 2004 to
obtain an equity line of credit. Under this agreement, iVoice Technology may
issue and sell to Cornell Capital Partners Class A Common Stock for a total
purchase price of up to $10.0 million. iVoice Technology will be entitled to
commence drawing funds under this agreement when the Class A Common Stock
issuable under the equity line of credit is registered for resale by Cornell
Capital Partners with the Securities and Exchange Commission and the
authorization for quotation on the National Association of Securities Dealers
Over-the-Counter Bulletin Board is obtained and maintained, and the equity line
of credit will remain outstanding for two years thereafter. To date, iVoice
Technology has not drawn down on the equity line of credit. All investment
decisions of Cornell Capital Partners are made by its general partner, Yorkville
Advisors, LLC. Mark Angelo, the managing partner of Yorkville Advisors, makes
the investment decisions on behalf of Yorkville Advisors.
In August 2004, iVoice Technology entered into an agreement with Sloan
Securities to act as an agent for the private placement of secured convertible
debentures to Cornell Capital Partners. Under the placement agent agreement,
iVoice Technology agreed to issue to Sloan Securities on or about the date of
effectiveness of the registration statement of which this prospectus is a part a
number of shares of Class A Common Stock equal to $10,000 divided by the closing
bid price of the Class A Common Stock on the date of effectiveness of the
registration statement of which this prospectus is a part.
In consideration of and exchange for the assets that iVoice Technology
will receive pursuant to the spin-off of the IVR business, iVoice Technology
will issue 30 shares of Series A 5% Convertible Preferred Stock to iVoice. Each
share of Series A 5% Convertible Preferred Stock has a stated value of $25,000
per share. Each share of Series A 5% Convertible Preferred Stock will be
convertible into shares of Class A Common Stock at a price equal to the lesser
of (a) an amount equal to one hundred twenty-five percent (125%) of the closing
bid price of the Class A Common Stock as of the conversion date or (b) an amount
equal to eighty percent (80%) of the lowest closing bid price of the Class A
Common Stock for the five trading days immediately preceding the conversion
date.
The table follows:
18
Percentage of
Shares to be Acquired Outstanding Shares
Shares Beneficially under the Line of Shares to be Sold in Beneficially Owned
Selling Stockholder Owned Before Offering Credit the Offering After Offering
------------------- --------------------- --------------------- -------------------- ------------------
Cornell Capital
Partners, L.P. 87,500,000(1) 1,052,781,579(2) 1,140,281,579(2) 0%
iVoice, Inc. 93,750,000(1) 0 93,750,000 0%
Sloan Securities
Corporation 1,000,000(1) 0 1,000,000 0%
Total 182,250,000(1) 1,052,781,579 1,235,031,579 0%
(1) The shares of Class A Common Stock indicated are issuable upon payment of
the placement agent fee and the conversion of secured convertible
debentures and Series A 5% Convertible Preferred Stock at the sale price
or conversion price, respectively, described above based upon an assumed
average closing bid price of $.01. Once a market price is determined, the
sale price for the placement agent fee, the conversion price for the
debentures and the preferred stock and then the sale price for the shares
available under the equity line of credit can be determined by reference
to the formula described above.
(2) Includes the 150,000 shares of Class A Common Stock issuable as a
commitment fee.
USE OF PROCEEDS
This prospectus relates to shares of our Class A Common Stock that may be
offered and sold from time to time by certain selling stockholders. There will
be no proceeds to us from the sale of shares of Class A Common Stock by the
selling stockholders in this offering. However, we will receive the proceeds
from the sale of shares of Class A Common Stock to Cornell Capital Partners
under the equity line of credit. The purchase price of the shares purchased
under the equity line of credit will be equal to 95% of the lowest closing bid
price of our common stock on the Over-the-Counter Bulletin Board for the five
days immediately following the notice date. Cornell Capital Partners will retain
6% of each advance made to us under the equity line of credit.
For illustrative purposes, iVoice Technology has set forth below its
intended use of proceeds for the range of net proceeds indicated below to be
received under the equity line of credit. For the purposes of this table, iVoice
Technology assumes a purchase price per share of Class A Common Stock of $.0095,
equal to 95% of an assumed market price of $.01 per share (526,315,789 and
1,052,631,579 shares of Class A Common Stock, respectively). The table assumes
estimated offering expenses of $113,500, plus the 6% retainage fee.
Gross Proceeds $5,000,000 $10,000,000
Net Proceeds 4,586,500 9,286,500
- --------------------------------------------------------------------------------
Use of Proceeds: Amount Amount
- --------------------------------------------------------------------------------
Sales and Marketing $500,000 $1,000,000
Working Capital and general corporate
purposes which include employee salaries, cost of
additional personnel, support and management
systems, legal and professional costs, and
capital costs for computers, related equipment,
and, potentially, acquisitions of other companies 4,086,500 8,286,500
---------- ----------
Total $4,586,500 $9,286,500
========== ==========
19
Except for the equity line of credit and the issuance of the secured
convertible debentures, the Company has no other significant sources of working
capital or cash commitments. In addition, management cannot be certain that it
will generate significant revenue from product sales. No assurance can be given
that iVoice Technology will raise sufficient funds from such financing
arrangements, or that the Company will ever produce sufficient revenues to
sustain its operations or, that a market will develop for its common stock upon
which a significant amount of the Company's financing is dependant. If iVoice
Technology is unable to recognize sufficient proceeds from these arrangements,
however, management believes that iVoice Technology can limit its operations,
defer payments to management and maintain its business at nominal levels until
it can identify alternative sources of capital. In such event, assuming the
receipt of the minimum $500,000 proceeds from the equity line of credit,
management believes that iVoice Technology could maintain its operations for 12
months.
DILUTION
The net tangible book value of iVoice Technology as of September 30, 2004
was ($85,888) or ($858.88) per share of Class A Common Stock. Net tangible book
value per share is determined by dividing the tangible book value of iVoice
Technology (total tangible assets less total liabilities) by the number of
outstanding shares of our common stock. Since this offering is being made solely
by the selling stockholders and none of the proceeds will be paid to iVoice
Technology, our net tangible book value will be unaffected by this offering. Our
net tangible book value, however, will be impacted by the common stock to be
issued under the equity line of credit. The amount of dilution will depend on
the offering price and number of shares to be issued under the equity line of
credit. The following example shows the dilution to new investors at an offering
price of $0.01 per share.
If we assume that iVoice Technology had issued 1,052,631,579 shares of
Class A Common Stock under the equity line of credit at an assumed offering
price of $0.01 per share (i.e., the maximum number of shares needed in order to
raise a total of $10.0 million under the equity line of credit, excluding the
commitment fee), less a retention fee of $600,000 and offering expenses of
$113,500, our net tangible book value as of September 30, 2004 would have been
$9,200,612 or $0.00874 per share. Such an offering would represent an immediate
increase in net tangible book value to existing stockholders of $858.8874 per
share and an immediate dilution to new stockholders of $0.00126 per share, or
12.6%. The following table illustrates the per share dilution:
Assumed public offering price per share $ 0.01
Net tangible book value per share before this
offering ($858.88)
Increase attributable to new investors $858.8874
----------
Net tangible book value per share after this
offering $ 0.00874
-----------
Dilution per share to new stockholders $ 0.00126
===========
20
The offering price of our Class A Common Stock is based on the
then-existing market price. In order to give prospective investors an idea of
the dilution per share they may experience, we have prepared the following table
showing the dilution per share at various assumed offering prices:
Assumed Offering No. of Shares to Dilution Per Share
Price be Issued (1) to New Investors
---------------- ---------------- ------------------
$0.010 1,052,631,579 $0.00126
$0.008 1,315,789,474 $0.00101
$0.006 1,754,385,965 $0.00076
$0.004 2,631,578,947 $0.00050
(1) This represents the maximum number of shares of Class A Common Stock
that will be required to issue in order to raise a total of $10.0 million under
the equity line of credit at that price, excluding the shares of Class A Common
Stock issuable under the commitment fee. This does not give effect to the
payment of the placement agent fee or the conversion of the secured convertible
debentures or the Series A Preferred Stock.
EQUITY LINE OF CREDIT
Summary
On August 12, 2004, we entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. Pursuant to this agreement, we
may, at our discretion, periodically sell to Cornell Capital Partners shares of
Class A Common Stock for a total purchase price of up to $10.0 million. For each
share of Class A Common Stock purchased under the equity line of credit, Cornell
Capital Partners will pay 95% of the lowest closing bid price on the
Over-the-Counter Bulletin Board or other principal market on which our common
stock is traded during the five trading days following the date that iVoice
Technology delivers to Cornell Capital Partners a notice requiring it to advance
funds to us. Cornell Capital Partners is a private limited partnership whose
business operations are conducted through its general partner, Yorkville
Advisors, LLC. Further, Cornell Capital Partners will retain 6% of each advance
under the equity line of credit. The sale of the shares under the equity line of
credit is conditioned upon us registering the shares of Class A Common Stock
with the Securities and Exchange Commission. The costs associated with this
registration will be borne by us.
Equity Line of Credit Explained
Pursuant to the Standby Equity Distribution Agreement, we may periodically
sell shares of Class A Common Stock to Cornell Capital Partners, L.P. to raise
capital to fund our working capital needs. The periodic sale of shares is known
as an advance. We may request an advance every seven trading days. A closing
will be held six trading days after such written notice at which time we will
deliver shares of Class A Common Stock to Cornell Capital Partners and Cornell
Capital Partners will pay the advance amount.
21
We may request advances under the equity line of credit once the
underlying shares are registered with the Securities and Exchange Commission.
Thereafter, we may continue to request advances until Cornell Capital Partners
has advanced $10.0 million or two years after the effective date of the
accompanying registration statement, whichever occurs first.
The amount of each maximum advance amount is $500,000 per advance notice.
The amount available under the equity line of credit is not dependent on the
price or volume of our Class A Common Stock. Cornell Capital Partners may not
own more than 9.9% of our outstanding common stock at any time. Because Cornell
Capital Partners can repeatedly acquire and sell shares, this limitation does
not limit the potential dilutive effect or the total number of shares that
Cornell Capital Partners may receive under the equity line of credit.
We cannot predict the actual number of shares of Class A Common Stock that
will be issued pursuant to the equity line of credit, in part, because the
purchase price of the shares will fluctuate based on prevailing market
conditions and we have not determined the total amount of advances we intend to
draw. Nonetheless, we can estimate the number of shares of our Class A Common
Stock that will be issued using certain assumptions. For example, if iVoice
Technology issued 1,052,781,579 shares of Class A Common Stock to Cornell
Capital Partners (i.e., the number of shares needed to raise the maximum amount
available under the equity line of credit at a price of $0.01 per share,
including the commitment fee) for gross proceeds of $10,000,000, these shares
would represent greater than 99.9% of our outstanding Class A Common Stock upon
issuance.
iVoice Technology is registering for resale by Cornell Capital Partners a
total of 1,140,281,579 shares of Class A Common Stock issuable under the equity
line of credit and the conversion of the debentures. Up to 1,052,781,579 of
these shares of Class A Common Stock could be issued under the equity line of
credit. The issuance of the shares under the equity line of credit may result in
a change of control. If all or a significant block of these shares are held by
one or more stockholders working together, then such stockholder or stockholders
would have enough shares to assume control of iVoice Technology by electing its
or their own directors. This could happen, for example, if Cornell Capital
Partners sold the shares purchased under the equity line of credit to the same
purchaser.
Proceeds used under the equity line of credit will be used in the manner
set forth in the "Use of Proceeds" section of this prospectus. We cannot predict
the total amount of proceeds to be raised in this transaction because we have
not determined the total amount of the advances we intend to draw.
We expect to incur expenses of approximately $113,500 consisting primarily
of professional fees incurred in connection with this registration. In addition,
Cornell Capital Partners will retain 6% of each advance. In connection with the
equity line of credit, iVoice Technology will pay Cornell Capital Partners in
shares of iVoice Technology Class A Common Stock a one-time commitment fee of
1.5% of the initial outstanding shares of Class A Common Stock on or about the
date of effectiveness of the registration statement of which this prospectus is
a part.
22
PLAN OF OFFERING
The selling stockholders have advised us that the sale or distribution of
iVoice Technology's Class A Common Stock owned by the selling stockholders may
be effected directly to purchasers by the selling stockholders or by pledgees,
donees, transferees or other successors in interest, as principals or through
one or more underwriters, brokers, dealers or agents from time to time in one or
more transactions (which may involve crosses or block transactions) (i) on the
over-the-counter market or in any other market on which the price of iVoice
Technology's shares of Class A common stock are quoted or (ii) in transactions
otherwise than on the over-the-counter market or in any other market on which
the price of iVoice Technology's shares of Class A Common Stock are quoted.
However, the selling stockholders are advised that the registration statement of
which this prospectus is a part may not cover sales by pledges or transferees of
the selling stockholders and if this prospectus is to be used in connection with
the resale of any of the shares acquired by Cornell Capital Partners, a
post-effective amendment to the registration statement of which this prospectus
is a part must be filed to include disclosure required by Item 507 of Regulation
S-B with respect to additional selling stockholders and such post-effective
amendment must be declared effective prior to its use.
Any transactions by the selling stockholders may be effected at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at varying prices determined at the time of sale or at negotiated
or fixed prices, in each case as determined by the selling stockholders or by
agreement between the selling stockholders and underwriters, brokers, dealers or
agents, or purchasers. If the selling stockholders effect such transactions by
selling their shares of iVoice Technology's Class A Common Stock to or through
underwriters, brokers, dealers or agents, such underwriters, brokers, dealers or
agents may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders or commissions from purchasers of
Class A Common Stock for whom they may act as agent (which discounts,
concessions or commissions as to particular underwriters, brokers, dealers or
agents may be in excess of those customary in the types of transactions
involved). The selling stockholders and any brokers, dealers or agents that
participate in the distribution of the Class A Common Stock may be deemed to be
underwriters, and any profit on the sale of Class A Common Stock by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act in connection with the sale of Class A Common Stock under the
equity line of credit and the secured convertible debentures. Cornell Capital
Partners will pay iVoice Technology 95% of the lowest closing bid price of
iVoice Technology's Class A Common Stock on the Over-the-Counter Bulletin Board
or other principal trading market on which our Class A Common Stock is traded
during the five trading days following the date that iVoice Technology delivers
to Cornell Capital Partners a notice requiring it to advance funds to us. In
addition, Cornell Capital Partners will retain 6% of the proceeds received by
iVoice Technology under the equity line of credit. In August 2004 and _______,
2004, iVoice Technology issued an aggregate of $560,000 in secured convertible
debentures, with interest payable at 5% per annum, to Cornell Capital Partners.
iVoice Technology has agreed to issue an additional $140,000 of secured
convertible debentures to Cornell Capital Partners on or about the date of
effectiveness of the registration
23
statement of which this prospectus is a part. Each of the debentures are
convertible into shares of Class A Common Stock at a price equal to the lesser
of (a) an amount equal to one hundred twenty percent (120%) of the initial bid
price of the Class A Common Stock as of the closing date of the registration of
shares or (b) an amount equal to eighty percent (80%) of the lowest closing bid
price of the Class A Common Stock for the five trading days immediately
preceding the conversion date. The 5% and potential 20% discounts, the 6%
retained amount, and the one-time commitment fee of 1.5% of the initial
outstanding shares of Class A Common Stock are underwriting discounts.
Cornell Capital Partners was formed in February 2000 as a Delaware limited
partnership. Cornell Capital Partners is a domestic hedge fund in the business
of investing in and financing public companies. Cornell Capital Partners does
not intend to make a market in iVoice Technology's stock or to otherwise engage
in stabilizing or other transactions intended to help support the stock price.
Prospective investors should take these factors into consideration before
purchasing iVoice Technology's common stock.
Sloan Securities is an "underwriter" within the meaning of the Securities
Act of 1933, as amended, in connection with the sale of Class A Common Stock
that it will receive as a placement agent fee from iVoice Technology in
connection with the private placement of secured convertible debentures to
Cornell Capital Partners. Under the placement agent agreement, iVoice Technology
agreed to issue to Sloan Securities on or about the date of effectiveness of the
registration statement of which this prospectus is a part a number of shares of
Class A Common Stock equal to $10,000 divided by the closing bid price of the
Class A Common Stock on the date of effectiveness of the registration statement
of which this prospectus is a part. Any discount to market price is an
underwriting discount.
Sloan Securities is a privately owned investment bank and brokerage firm.
Sloan Securities does not intend to make a market in iVoice Technology's stock
or to otherwise engage in stabilizing or other transactions intended to help
support the stock price. Prospective investors should take these factors into
consideration before purchasing iVoice Technology's common stock.
Under the securities laws of certain states, the shares of Class A Common
Stock may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of Class A Common Stock may not be sold unless the
shares have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify Cornell Capital Partners and its controlling persons
against certain liabilities, including liabilities under the Securities Act. We
estimate that the expenses of the offering to be borne by us will be
approximately $113,500, as well as retention of 6% of the gross proceeds
received under the equity line of credit. The estimated offering expenses
consist of: a SEC registration fee of $1,565, printing expenses of $25,000,
accounting fees of $8,000, legal fees of $50,000 and miscellaneous expenses of
24
$28,935. We will not receive any proceeds from the sale of any of the shares of
common stock by the selling stockholders. We will, however, receive proceeds
from the sale of Class A Common Stock under the equity line of credit.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Securities Exchange Act of 1934 will apply
to purchases and sales of shares of Class A Common Stock by the selling
stockholders, and that there are restrictions on market-making activities by
persons engaged in the distribution of the shares. Under Regulation M, the
selling stockholders or their agents may not bid for, purchase, or attempt to
induce any person to bid for or purchase, shares of Class A Common Stock of
iVoice Technology while such selling stockholders are distributing shares
covered by this prospectus. Accordingly, except as noted below, the selling
stockholders are not permitted to cover short sales by purchasing shares while
the offering is taking place. Cornell Capital Partners can cover any short
positions only with shares received from iVoice Technology under the equity line
of credit. The selling stockholders are advised that if a particular offer of
Class A Common Stock is to be made on terms constituting a material change from
the information set forth above with respect to this Plan of Distribution, then,
to the extent required, a post-effective amendment to the accompanying
registration statement must be filed with the Securities and Exchange
Commission.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our audited
financial statements and related notes included elsewhere in this prospectus.
Our fiscal year currently ends on December 31, and each of our fiscal quarters
ends on the final day of a calendar quarter (each March 31, June 30 and
September 30). The following discussion contains forward-looking statements.
Please see "Cautionary Statement Regarding Forward-Looking Statements" for a
discussion of uncertainties, risks and assumptions associated with these
statements.
Separation From iVoice
iVoice Technology was incorporated under the laws of the State of New
Jersey on November 10, 2004, as a wholly-owned subsidiary of iVoice. iVoice
Technology will have no material assets or activities until the contribution of
the IVR software business described in this prospectus. After the Distribution,
iVoice Technology will be an independent public company, with iVoice having no
continuing ownership interest in iVoice Technology.
iVoice Technology received by assignment all of the interests in and
rights and title to, and assumed all of the obligations of, all of the
agreements, contracts, understandings and other instruments of iVoice
Technology, Inc., a Nevada corporation and affiliate of iVoice Technology. When
we refer to or describe any agreement, contract or other written instrument of
iVoice Technology in this prospectus, we are referring to an agreement, contract
or other written instrument that had been entered into by iVoice Technology
Nevada and assigned to iVoice Technology.
25
iVoice Technology's financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, and reflect
the historical financial position, results of operations, and cash flows of the
business to be transferred to iVoice Technology from iVoice as part of the
Distribution. The financial information included in this prospectus, however, is
not necessarily indicative of what iVoice Technology's results of operations or
financial position would have been had it operated as an independent company
during the periods presented, nor is it necessarily indicative of its future
performance as an independent company.
iVoice Technology will operate the IVR software business. This business
has historically operated as a non-reportable segment of iVoice. Even if iVoice
Technology was to operate the IVR business on a stand alone basis, management is
uncertain that sufficient cash to sustain its operations will be generated in
the next twelve months, or beyond, by the sales activity of IVR. iVoice
Technology intends to use a portion of the proceeds from any financing
arrangements, on sales and marketing efforts for IVR. It is unclear whether such
efforts will result in a reasonably successful operating business due to
iVoice's previous lack of sales and marketing efforts on IVR, iVoice
Technology's lack of operating history, the current economic environment and,
more specifically, the uncertainty of the telecommunications market.
Upon effectiveness of the registration statement of which this prospectus
is a part, iVoice Technology will be allocated the iVoice corporate assets,
liabilities and expenses related to the IVR software business based on an
estimate of the proportion of such amounts allocable to iVoice Technology,
utilizing such factors as total revenues, employee headcount and other relevant
factors. iVoice Technology believes that these allocations have been made on a
reasonable basis. iVoice Technology believes that all costs allocated to iVoice
Technology are a reasonable representation of the costs that iVoice Technology
would have incurred if iVoice Technology had performed these functions as a
stand-alone company.
To provide for an orderly transition to the status of two independent
companies, iVoice and iVoice Technology have entered into an administrative
services agreement. Under this agreement, iVoice is providing iVoice Technology
services in such areas as inventory purchasing, material and inventory control,
sharing of office space, source code management, employee benefits
administration, payroll, electronic data processing services, financial
accounting and reporting, claims administration and reporting, and other areas
where iVoice Technology needs transitional assistance and support. Under the
administrative services agreement, iVoice is providing iVoice Technology
substantially the same level of service and use substantially the same degree of
care as iVoice's personnel provided and used in providing such services prior to
the execution of the agreement. For these services, iVoice Technology pays
iVoice a fee of $7,000 per month. iVoice Technology believes that the terms and
conditions of the administrative services agreement are as favorable to iVoice
Technology as those available from unrelated parties for a comparable
arrangement.
The agreement will terminate upon completion of the Distribution.
Following completion of the Distribution and termination of the administrative
services agreement, iVoice Technology will operate on a completely stand-alone
basis from iVoice and there will be no relationship between iVoice and iVoice
Technology. However, following the Distribution, iVoice will retain some
ownership interest in iVoice Technology. In partial consideration of and
26
exchange for the assets that iVoice Technology will receive in the spin-off of
iVoice's IVR business, iVoice Technology will issue 30 shares of its Series A 5%
Convertible Preferred Stock to iVoice. See "Certain Relationships and Related
Transactions."
Upon termination of the administrative services agreement, iVoice
Technology would be required to obtain such services from a third party or
increase its headcount to provide such services. This could be more expensive
than the fees which iVoice Technology has been required to pay under the
administrative services agreement.
iVoice announced in September 2004 its intention to distribute our shares
to its stockholders upon effectiveness of required Securities and Exchange
Commission filings, including this registration statement.
Results of Operations for the Nine Months Ended September 30, 2004 as Compared
with the Nine Months Ended September 30, 2003
All revenues reported by iVoice Technology are derived from the sale or
license of our interactive voice response software products, which enable a
caller to obtain requested information in voice form from a local or non-local
database. Total revenues for the nine months ended September 30, 2004 and
September 30, 2003 were $177,484 and $239,306 respectively. The IVR business has
only operated as a division of iVoice and has never operated on a stand-alone
basis. The low sales volume of the IVR business is attributable to the minimal
resources made available by iVoice for the sales and marketing of the
interactive voice response software products. Management feels that the sales of
the interactive voice response software products may increase as greater
financial and operational resources are made available for the sales and
marketing of the products.
Gross margin for the nine months ended September 30, 2004 and September
30, 2003 was $118,221 and $148,493, respectively. In an attempt to garner
increased market share, iVoice Technology implemented a strategy of reducing the
prices at which it sold its products to end-users, dealers, and resellers. In
addition, iVoice Technology also offered demonstration units for free to
selected dealers and value added resellers.
Total operating expenses increased to $757,066 for the nine months ended
September 30, 2004 from $674,232 for the nine months ended September 30, 2003,
an increase of $82,834. This increase in the current year nine-month period is
attributable to accrued compensation due to Messrs. Mahoney and Seidler pursuant
to their employment contracts dated as of August 1, 2004, as well as legal and
professional fees incurred in connection with the anticipated registration of
shares of iVoice Technology. These costs were not incurred in the prior period.
As of September 30, 2004, iVoice Technology had six employees, five of
whom are full-time and one of whom is part-time. iVoice Technology is pursuing
additions to its sales and management staff, which will increase operating
expenditures for payroll and related benefit costs in future quarters.
The loss from operations for the nine months ended September 30, 2004 was
$(638,845) compared to $(525,739) for the nine months ended September 30, 2003,
an increase of $113,106. As discussed above, the material changes in operations
result from accrued salary to iVoice
27
Technology's Chairman and President and Chief Executive Officer and legal and
professional fees incurred in connection with the anticipated registration of
shares of iVoice Technology.
Other expenses for the nine months ended September 30, 2004 were $656,492
as compared to $203,301 for the nine-month period ending September 30, 2003, an
increase of $453,191. During the current year nine-month period, iVoice
Technology recorded interest expense on and $28,000 in fees related to the
issuance of $280,000 in 5% secured convertible debentures. In future periods,
iVoice Technology will incur significant additional expenses related to its
financings. Such expenses will include interest expense and charges for the
beneficial conversion feature of its convertible debentures. Additionally, the
Company will also incur charges for the market discount provided pursuant to its
Standby Equity Distribution Agreement with Cornell Capital Partners, L.P.
Results of Operations for Year Ended December 31, 2003, as Compared with the
Year Ended December 31, 2002.
Revenues are derived primarily from the license of our interactive voice
response software products, which enable a caller to obtain requested
information in voice form from a local or non-local database. Total revenues for
the twelve months ended December 31, 2003 and December 31, 2002 were $303,756
and $366,004, respectively, a decrease of 17.0%. The decrease in sales for the
twelve month period is attributable to the sluggish demand for speech
recognition telecommunications products as well as minimal resources made
available by iVoice for the sales and marketing of the IVR software products.
Management feels that the sales of the IVR software products may increase as
greater financial and operational resources are made available for the sales and
marketing of the products.
Gross margin for the twelve months ended December 31, 2003 and December
31, 2002 was $180,665 and $271,708, respectively. In an attempt to garner
increased market share, iVoice Technology implemented a strategy of reducing the
prices at which it sold its products to end-users, dealers, and resellers. In
addition, iVoice Technology also offered demonstration units for free to
selected dealers and value added resellers.
Total operating expenses decreased, from $1,323,008 for the twelve months
ended December 31, 2002 to $965,341 for the twelve months ended December 31,
2003, a decrease of $357,667, or 21.0%. Specific line items that reflect the
reduction in total operating expenses for the twelve months ended December 31,
2003, include reduced general and administrative expenses of $229,932, reduced
research and development costs of $1,038, and reduced selling expenses of
$4,892.
As of December 31, 2003, iVoice Technology had no full-time employees.
iVoice Technology is pursuing additions to its sales and management staff, which
will increase operating expenditures for payroll and related benefit costs in
future quarters.
The loss from operations for the twelve months ended December 31, 2003 was
$(1,131,420) compared to $(1,197,964) for the twelve months ended December 31,
2002, a decrease of 5.6%.
28
Liquidity and Capital Resources
To date, iVoice Technology has incurred substantial losses, and will
require financing for working capital to meet its operating obligations. We
anticipate that we will require financing on an ongoing basis for the
foreseeable future.
We intend to sell shares of Class A Common Stock immediately following the
completion of the Distribution in order to generate capital necessary to sustain
our operations. In the event that, in the judgment of the Board of Directors,
sufficient capital has not been raised from the proceeds of the public offering
for iVoice Technology to both sustain its business operations and to make
payment to each of Mr. Mahoney and Mr. Seidler, Mr. Mahoney has agreed to accept
shares of iVoice Technology Class B Common Stock in satisfaction of iVoice
Technology's obligations.
In August 2004, the Company entered into an agreement with Sloan
Securities Corporation to act as an agent for the private placement of secured
convertible debentures to Cornell Capital Partners, L.P. Under the placement
agent agreement, the Company agreed to issue to Sloan on or about the date of
effectiveness of the registration statement of which this prospectus is a part a
number of shares of Class A Common Stock equal to $10,000 divided by the closing
bid price of the Class A Common Stock on the date of effectiveness of the
registration statement of which this prospectus is a part. On August 12 and
_______, 2004, iVoice Technology issued an aggregate of $560,000 in secured
convertible debentures, with interest payable at 5% per annum, to Cornell
Capital Partners. Each of the debentures are convertible into shares of Class A
Common Stock at a price equal to the lesser of (a) an amount equal to one
hundred twenty percent (120%) of the initial bid price of the Class A Common
Stock on the date of effectiveness of the registration statement of which this
prospectus is a part or (b) an amount equal to eighty percent (80%) of the
lowest closing bid price of the Class A Common Stock for the five trading days
immediately preceding the conversion date. The secured convertible debentures
have a term of two years with all accrued interest due at the expiration of the
term. At our option, these debentures may be redeemed at a 20% premium prior to
August 12, 2006. The secured convertible debentures are secured by a first
priority security interest in substantially all of the assets of iVoice
Technology. iVoice Technology will issue an additional $140,000 of secured
convertible debentures to Cornell Capital Partners on or about the date of
effectiveness of the registration statement of which this prospectus is a part.
Effective August 12, 2004, iVoice Technology entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners to obtain an equity line of
credit. Under this agreement, iVoice Technology may issue and sell to Cornell
Capital Partners Class A Common Stock for a total purchase price of up to $10.0
million. iVoice Technology will be entitled to commence drawing funds under this
agreement when the resale of the Class A Common Stock issuable under the equity
line of credit is registered with the Securities and Exchange Commission, and
the equity line of credit will remain outstanding for two years thereafter. The
purchase price for the shares will be equal to 95% of the market price, which is
defined as the lowest closing bid price of the Class A Common Stock during the
five trading days following the date that iVoice Technology delivers to Cornell
Capital Partners a notice requiring it to advance funds to us. A cash fee equal
to six percent (6%) of the cash proceeds of the draw down is also payable at the
time of funding. In addition, Cornell Capital Partners will receive, as
additional compensation,
29
the number of shares of Class A Common Stock equal to one and one half percent
(1.5%) of the number of shares of Class A Common Stock outstanding on the date
that the registration statement in respect of the shares to be distributed
pursuant to the equity line of credit becomes effective. To date, iVoice
Technology has not drawn down on the equity line of credit.
Except for these two financing agreements, the Company has no other
significant sources of working capital or cash commitments. However, no
assurance can be given that iVoice Technology will raise sufficient funds from
such financing arrangements, or that iVoice Technology will ever produce
sufficient revenues to sustain its operations, or that a market will develop for
its common stock for which a significant amount of iVoice Technology's financing
is dependent upon.
Management believes that the financing arrangements in place are
sufficient to satisfy iVoice Technology's cash requirements for the next twelve
months. If iVoice Technology is unable to recognize sufficient proceeds from
these arrangements, management believes that iVoice Technology can limit its
operations, defer payments to management and maintain its business at nominal
levels until it can identify alternative sources of capital.
Upon the date of this prospectus, iVoice Technology will assume an
aggregate of $190,000 in liabilities from iVoice and iVoice will assign to
iVoice Technology assets having an aggregate book value of $750,000. iVoice
Technology believes that the fair value of these assets may be greater than the
book value, although it has not undertaken an appraisal. The assumed obligations
are described below.
In consideration of and exchange for the assets that iVoice Technology
will receive pursuant to the spin-off of the IVR business, iVoice Technology
will issue 30 shares of Series A 5% Convertible Preferred Stock to iVoice. Each
share of Series A 5% Convertible Preferred Stock has a stated value of $25,000
per share. Each share of Series A 5% Convertible Preferred Stock will be
convertible into shares of Class A Common Stock at a price equal to the lesser
of (a) an amount equal to one hundred twenty-five percent (125%) of the closing
bid price of the Class A Common Stock as of the conversion date or (b) an amount
equal to eighty percent (80%) of the lowest closing bid price of the Class A
Common Stock for the five trading days immediately preceding the conversion
date.
iVoice Technology has agreed to assume from iVoice upon the date of this
prospectus an outstanding promissory note in the amount of $190,000 payable to
Jerry Mahoney. This amount is related to funds loaned to iVoice and unrelated to
the operations of iVoice Technology. iVoice Technology, for value received, will
promise to pay to Mr. Mahoney the principal sum of $190,000 that will bear
interest at the prime rate plus 2% per annum on the unpaid balance until paid or
until default. Interest payments will be due annually. All accrued interest
becomes due on the date of any payment of the promissory note. At the time of
default (if any) the interest rate shall increase to 20% until the principal
balance has been paid. Under the terms of the promissory note, at the option of
the note holder, principal and interest can be converted into either (i) one
share of Class B Common Stock of iVoice Technology, par value $0.01, for each
dollar owed, (ii) the number of shares of Class A Common Stock of iVoice
Technology calculated by dividing (x) the sum of the principal and interest that
the note holder has requested to have prepaid by (y) eighty percent (80%) of the
lowest issue price of Class A Common Stock
30
since the first advance of funds under this note, or (iii) payment of the
principal of this note, before any repayment of interest. iVoice Technology has
yet to record this liability on its financial statements, as the promissory note
will not be assumed by iVoice Technology until the effectiveness of the
registration statement.
Mr. Mahoney has agreed to forego receiving any shares of iVoice Technology
Class A Common Stock or iVoice Technology Class B Common Stock he is or would be
entitled to receive in the Distribution by virtue of his ownership of either
iVoice Class A Common Stock or iVoice Class B Common Stock.
iVoice Technology has entered into employment contracts with its
Non-Executive Chairman of the Board of Directors and its President and Chief
Executive Officer. As consideration, iVoice Technology agreed to pay Mr. Mahoney
the sum of $85,000 the first year with an annual increase based on the Consumer
Price Index every year thereafter. Mr. Mahoney will also be entitled to
incentive compensation based upon acquisitions completed by iVoice Technology.
The employment agreement with Mr. Mahoney provides for a severance payment to
him of three hundred percent (300%), less $100, of his gross income for services
rendered to iVoice Technology in each of the five prior calendar years (or
shorter period during which Mr. Mahoney shall have been employed by iVoice
Technology) should his employment be terminated following a change in control,
as defined in the employment agreement.
iVoice Technology entered into an employment agreement as of August 1,
2004 with Mr. Seidler. Mr. Seidler will serve as iVoice Technology's President
and Chief Executive Officer for a term of one year. As consideration, iVoice
Technology agreed to pay Mr. Seidler a base salary of $85,000 during the term.
iVoice Technology also agreed to pay Mr. Seidler incentive compensation based on
the amount of total revenues collected by the Company. Mr. Seidler will also be
entitled to additional incentive compensation based upon acquisitions completed
by iVoice Technology.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP). The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate these estimates, including
those related to bad debts, inventory obsolescence, intangible assets, payroll
tax obligations, and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of certain assets and liabilities. Actual results may differ
from these estimates under different assumptions or conditions.
We have identified below the accounting policies, revenue recognition and
software costs, related to what we believe are most critical to our business
operations and are discussed throughout Management's Discussion and Analysis of
Financial Condition and Results of Operations where such policies affect our
reported and expected financial results.
31
Revenue Recognition
With respect to the sale of software license fees, the Company recognizes
revenue in accordance with Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2), as amended, and generally recognizes revenue when all of
the following criteria are met: (1) persuasive evidence of an arrangement exists
generally evidenced by a signed, written purchase order from the customer, (2)
delivery of the software product on Compact Disk (CD) or other means to the
customer has occurred, (3) the perpetual license fee is fixed or determinable
and (4) collectibility, which is assessed on a customer-by-customer basis, is
probable.
With respect to customer support services, upon the completion of one year
from the date of sale, the Company offers customers an optional annual software
maintenance and support agreement for subsequent one-year periods. Sales of
purchased maintenance and support agreements are recorded as deferred revenues
and recognized over the respective terms of the agreements.
The Company derives its revenues from the licensing of its software
product and optional customer support (maintenance) services. Presently, 100% of
the revenues reported by the Company are derived from the licensing of the
Company's IVR software. No revenues have been derived from the sale of optional
customer support services. The Company's standard license agreement provides for
a one-time fee for use of the Company's product in perpetuity for each computer
or CPU in which the software will reside. The Company's software application is
fully functional upon delivery and implementation and does not require any
significant modification or alteration. The Company also offers customers an
optional annual software maintenance and support agreement for the subsequent
one-year periods. Such maintenance and support services are free for the first
year the product is licensed. The software maintenance and support agreement
provides free software updates, if any, and technical support the customer may
need in deploying or changing the configuration of the software. Generally, the
Company does not license its software in multiple element arrangements whereby
the customer purchases a combination of software and maintenance. In a typical
arrangement, software maintenance services are sold separately from the software
product; are not considered essential to the functionality of the software and
are purchased at the customer's option upon the completion of the first year
licensed.
The Company does not offer any special payment terms or significant
discount pricing. Normal and customary payment terms require payment for the
software license fees when the product is shipped. Payment for software
maintenance is due prior to the commencement of the maintenance period. It is
also the Company's policy not to provide customers the right to refund any
portion of its license fees. The Company accepts Visa and MasterCard as well as
company checks.
Customers may license the Company's products through our telesales
organization and through promotions or reseller agreements with independent
third parties. A customer may return a product under very limited circumstances
during the first thirty days for a replacement if the media is damaged or for a
full refund if the software does not perform in accordance with written
specifications. Accordingly, the Company records a provision for product returns
and allowances
32
against product revenue in the same period the revenue is recorded. The
estimates are based on historical sales returns and other known data as well as
market and economic conditions.
Our current products are not sold through retail distribution channels.
Current reseller agreements do not provide for a contractual right of return,
future price concessions, minimum inventory commitments nor is payment
contingent upon the reseller's future sales or our products. Revenues generated
from products licensed through marketing channels where the right of return
exists, explicitly or implicitly, is reduced by reserves for estimated product
returns. Such reserves are estimates based on returns history and current
economic and market trends.
Software Costs
Software license costs are recorded at cost, which approximates fair
market value as of the date of purchase. These costs represent the purchase of
various exploitation rights to certain software, pre-developed codes and systems
developed by a non-related third party. These costs are capitalized pursuant to
Statement of Financial Accounting Standards ("SFAS") 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed". The
Company has adopted SFAS No. 121. The carrying value of software license costs
are regularly reviewed by the Company and a loss would be recognized if the
value of the estimated undiscounted cash flow benefit related to the asset falls
below the unamortized cost. The Company develops software for licensing to its
customers and capitalizes software development costs when technological
feasibility has been established. Software development costs not qualifying for
capitalization are expensed and classified as research and development expenses
in the statements of operations. Research and development expenses and the
capitalization rate will fluctuate from period to period depending upon the
number and status of software development projects that are in process and the
related number of people assigned to those projects.
Purchased software and capitalized software development costs are
amortized using the greater of the revenue method or the straight-line method
with useful lives ranging from three to five years. Amortization expense is
classified in costs of revenue on the statements of operations. Our products
operate on or with other third party software and operating systems. When
determining the useful life of a product we consider factors such as the current
state of the technology, operating systems on which our products run,
competitive products and the potential use of our products by the end user.
Technological advances in software operating systems and other software
technologies on which our products rely may shorten the expected life cycle of
our products. We make an assessment of the useful lives of our products at each
balance sheet date. If that assessment determines that a shortened product life
has occurred, we amortize the remaining unamortized balances over the new
estimated useful life of the product and provide disclosure regarding a change
in estimate in the notes to the financial statements pursuant to Accounting
Principles Board Opinion No. 20 "Accounting Changes."
The Company evaluates the estimated net realizable value of each software
product at each balance sheet date. The estimate is based on historical and
forecasted net revenue for each product. Net revenue is the product revenue
reduced by the estimated costs of revenue and, if in development, the estimated
cost to complete the development of the product. When the net book value exceeds
the estimate of net realizable value, the Company records a write-down to net
33
realizable value on each product affected. Management's ability to achieve its
revenue forecast is subject to judgment, competitive pressures, market and
economic conditions and management's ability to successfully license its
products to its customers. A change in one or more of these factors may
influence management's estimates. Accordingly, currently estimated net
realizable values are subject to being reduced resulting in corresponding
charges for impairment in the future.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which requires
variable interest entities to be consolidated by the primary beneficiary of the
entity if certain criteria are met. FIN 46 is effective for all new variable
interest entities created after January 31, 2003. For variable interest entities
created or acquired before February 1, 2003, the provisions of FIN 46 become
effective for the Company on September 1, 2003. The Company does not expect that
the adoption of FIN 46 will have a material impact on its financial position,
results of operations or cash flows.
In April, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." Except
as noted below, the Company is required to adopt this statement by the first
quarter of the fiscal year, 2004. Certain provisions of this statement relating
to SFAS No. 133 implementation issues that have been effective for prior fiscal
quarters will continue to be applied in accordance with their respective
effective dates. The Company does not expect that the adoption of SFAS No. 149
will have a material impact on its financial position, results of operations or
cash flows.
In May, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for the Company on September 1, 2003. The Company does not
expect that the adoption of SFAS No. 150 will have a material impact on the
Company's financial position, results of operations or cash flows.
DESCRIPTION OF BUSINESS
Background
iVoice Technology, Inc. (the "Company") was incorporated in New Jersey on
November 10, 2004 as a wholly-owned subsidiary of iVoice, Inc. It is engaged in
the design, manufacture, and marketing of specialized telecommunication
equipment. As of September 30, 2004, the Company employed five full-time
employees and one part-time employee. iVoice Technology intends to seek to
expand its operations through the acquisition of additional businesses. These
potential acquired additional businesses may be outside the current field of
operations of iVoice Technology. iVoice Technology may not be able to identify,
successfully integrate or profitably manage any such businesses or operations.
34
The following description of our business is intended to provide an
understanding of our product and the direction of our initial marketing
strategy. As the Company is in its developmental stages, any focus described in
the following pages may change and different initiatives may be pursued, at the
discretion of Management.
Products
Our flagship product is IVR, an application generator that allows full
connectivity to many databases, including Microsoft Access, Microsoft Excel,
Microsoft Fox Pro, DBase, Btrieve, and Paradox, or to standard text files. IVR
can be used to read information from, and write information to, databases, as
well as query databases and return information. The IVR software is sold as an
application generator that gives the end user the ability to develop their own
customized IVR application or as a customized turnkey system. IVR performs over
40 different customizable commands. Examples of IVR range from simply selecting
announcements from a list of options stored in the computer (also known as audio
text) to more complex interactive exchanges such as querying a database for
information.
Properties can be set up for each command, as if the commands were being
executed manually. IVR links a phone system to a database to provide customers
with 24-hour immediate access to account information, via telephone. With IVR,
polished IVR applications are quick and easy to install. No knowledge of
computer programming and minimal database knowledge is needed. IVR will execute
any created application when a caller dials in. Using DTMF (touch-tone
telephones) or speech activation allows callers to interact with the system.
Advanced database technology permits reading, writing, appending, searching and
seeking database information. A user can record product inventory, set up games,
keep a record of patients or customers, and perform other applications. The
advanced, innovative technology, backed by a simple, easy-to-use drag-and-drop
interface, makes writing applications simple.
The IVR software also incorporates an Internet access tool, which can be
either connected to the IVR system or run as a standalone. This IVR system also
has a graphical user interface and provides for Internet access to the system.
Once logged onto the Internet, a user can gain access to the IVR system by
clicking on a hypertext link for the user's browser. Upon entering the IVR
system, the response prompts are in text form rather than voice form. The user
can enter selections and get information by clicking on icons or choosing items
from menus. Some of the Internet applications available are order processing and
transactions, database integration, questions and queries, account status,
delivery information, funds transfer, and claims information.
Distribution
As a product line of iVoice, Inc., IVR has produced sales revenues for the
past three fiscal years. In the past, iVoice devoted limited resources to the
marketing of IVR. The Company's future revenues depend on its ability to develop
a customer base through the establishment of a reseller channel using various
marketing and sales promotions.
iVoice Technology will market its products directly, with a sales force,
and through more than 100 domestic and international re-sellers. iVoice
Technology intends to enter into
35
arrangements with resellers to broaden distribution channels and to increase its
sales penetration to specific markets and industries. Distributors will be
selected based on their access to the markets, industries and customers that are
candidates for the products.
Competition
The Company competes generally with a number of other manufacturers of
supplemental telecommunications software, telecommunications integrators, as
well as application service providers (ASPs), which provide IVR software to
other businesses and organizations either through internet servers or
telecommunication servers. System design and engineering, application technical
features, built-in speech recognition capabilities and simplicity of user
implementation and administration are the principal characteristics of our IVR
that differentiates it from competing products.
The IVR enterprise market is fragmented and highly competitive. The
Company's major competitors in this market are Avaya Inc., IBM Corporation,
Nortel Networks Limited, Aspect Communications Corporation and Security First
Corp. (formerly Edify Corporation). The principal competitive factors in this
market include breadth and depth of solution, product features, product
scalability and reliability, client services, the ability to implement
solutions, and the creation of a referenceable customer base. The Company
believes that its product line of solutions, combined with its professional and
technical services and its extensive customer base, allow it to compete
favorably in this market. However, this market is evolving rapidly, and the
Company anticipates intensified competition not only from traditional IVR
vendors but also from emerging vendors with non-traditional technologies and
solutions.
Competition in the IVR enhanced network services market ranges from large
telecommunication suppliers offering turnkey, multi-application solutions to
"niche" companies that specialize in a particular enhanced service such as
prepaid or voicemail. The Company's primary competitors in this market are
suppliers such as Comverse Technology, Inc., Unisys Corporation and Lucent
Technologies Inc. that provide a suite of enhanced services. Smaller niche
players that compete with the Company in various geographies and/or products
include GlenAyre Electronics Inc. The Company anticipates that competition will
continue from existing and new competitors, some of which have greater
financial, technological and marketing resources and greater market share than
the Company.
No assurance can be given that our competitors will not develop new
technologies or enhancements to their existing products or introduce new
products that will offer superior price or performance features. We expect our
competitors to offer new and existing products at prices necessary to gain or
retain market share. Certain of our competitors have substantial financial
resources, which may enable them to withstand sustained price competition or a
market downturn better than us. There can be no assurance that we will be able
to compete successfully in the pricing of our products, or otherwise, in the
future.
As is customary in the telecommunications industry, the Company produces
its products from readily available components purchased from a variety of
manufacturers. Printed circuit boards and housings are contracted for
manufacture according to Company specifications from among many available
suppliers. The business of the Company is not seasonal. The Company
36
maintains no special arrangements relating to working capital items, and as far
as it is aware this is standard in the industry. The Company is not subject to
environmental protection regulations during the foreseeable future. The Company
has spent nothing on research and development in the last three fiscal years.
None of the Company's present business is subject to renegotiation of profits or
termination of contracts or subcontracts at the election of the government.
Product Development
In order to remain competitive, we will have an ongoing need to develop
new features and enhancements to our product. The introduction of new features
and enhancements will be critical for us to expand the potential market for our
products outside of a traditional appointment setting businesses or professional
organization. We will also strive to meet the following standards in product
development:
o Ease of Use. Our products are designed to function without extensive
and continual user involvement. The aim is to simplify, not
complicate, the user's work environment.
o Schedules for the development of technology products are inherently
difficult to predict, and there can be no assurance that we will
achieve targeted initial customer shipment dates for any of our
products, or at all.
o We plan to capitalize on our existing computerized telephony
technology and our expertise in research, development and marketing
to expand our business into products that address the growing market
for automated call processing.
o Our internal development work will be a key component of bringing
new product lines to market. In addition, we may pursue a partnering
strategy to develop new products.
Business Development
Business development objectives at iVoice Technology will be to focus on
three primary functions as listed below:
1. Negotiate and secure strategic alliances related to our IVR products;
2. Negotiate, secure and manage Original Equipment Manufacturer (OEM) and
reseller accounts; and
3. Provide leads for a sales staff which will need to be hired.
Strategic Alliances
iVoice Technology's business development efforts will seek to engage and
secure strategic alliances with related telecommunications businesses and
professional organizations in order to develop co-marketing programs that will
expand market share for our products and develop brand recognition. By entering
into strategic alliances with companies that offer
37
telecommunications devices or services to businesses or professional
organizations whereby appointment setting and scheduling are of vital
importance, we will seek to obtain access to an installed customer base as well
as new sales opportunities of our products. iVoice Technology has recently
entered into certain of these strategic alliances, and is currently negotiating
additional strategic alliances.
Manage OEM and Reseller Accounts
While we have traditionally sold our product primarily on a direct basis,
we will seek to obtain new OEM and reseller relationships that will serve as an
extension of our sales team which has yet to be hired. Ideally, an OEM
agreement, which provides distribution of our software product along with the
manufacturers own telecommunication equipment, could produce the most widespread
distribution and acceptance of our product at minimal distribution costs. Many
of the OEMs have extensive and established reseller channels that could provide
an avenue of distribution for our software. To effectively manage these
accounts, we will need to provide these resellers with product literature,
pricing, and sales leads as well as technical training and support. iVoice
Technology is currently negotiating agreements with OEMs and/or resellers.
Sales Leads
Through alliances and marketing relationships, we will constantly be
looking for ways to increase the number of leads that can be cultivated by a
iVoice Technology sales team which will be hired. By working with the sales
teams of third parties we believe that we can increase the number of sales staff
that sell iVoice Technology products, and provide qualified customer leads for
the future insides sales staff at iVoice Technology.
Sales and Marketing
The IVR enterprise market is characterized by a business environment that
has goals to improve customer communication and personalization as well as
reduce the costs of customer contact, a historically time-and-money intensive
operation. Furthermore, consumers are increasingly taking charge of this
important interaction between enterprise and consumer; deciding where, when and
how they want this communication. To address this new business paradigm,
enterprises are increasingly applying innovative wireless, speech and web
technologies to leverage existing customer service infrastructures in the
creation of interactive, self-directed service applications. These new
applications are designed to put the customer in control of the delivery of the
information while allowing the enterprise control of the data. This serves to
address the enterprise's objectives of improving the customer experience and
reducing operating costs.
The Company's strengths are reflected in the IVR enterprise market as part
of a suite of offerings that can be delivered as components or as part of a
total, turnkey solution. These IVR solutions use the latest in technology to
allow enterprises to automate increasingly complex interactions, enabling
businesses to provide quick and timely communications with customers and
business partners. Such technology enables enterprises to communicate with their
customers
38
through voice, web, e-mail, facsimile and other forms of communication on a
variety of devices, including telephones, PCs, mobile phones and personal
digital assistants ("PDAs").
iVoice Technology will market its products directly, with a sales force,
and through more than 100 domestic and international re-sellers. The Company
intends to enter into arrangements with resellers to broaden distribution
channels and to increase its sales penetration to specific markets and
industries. Distributors will be selected based on their access to the markets,
industries and customers that are candidates for the products.
The Company is actively seeking strategic relationships with companies to
build its developing partner program. The partner program will be built by
establishing relationships in basic areas consisting of software and technology
solution partners and system integration partners. These relationships will
enhance the Company's technological strength, improve its market position,
facilitate shorter time-to-market, enhance its ability to deliver end-to-end
solutions, and broaden its market coverage.
Developing market possibilities will be crucial to our success. However,
we cannot provide any assurance that we will be able to effectively market and
sell our products for these uses or that they will be accepted by our perceived
market.
Intellectual Property Rights
We regard some features of our IVR software and documentation to be
proprietary intellectual property. We have been and will be dependent in part on
our ability to protect our proprietary technology. We will seek to use
copyright, trademarks, trade secret laws, confidentiality agreements and other
measures if necessary to establish and protect our rights in our proprietary
technology. We have not filed any provisional patent applications with respect
to some of our application and intellectual property rights. We are currently
reviewing our technologies and processes with our patent attorneys to determine
if it is possible to obtain any patents or statutory copyrights on any of our
proprietary technology which we believe to be material to our future success. If
we were to file for any patent or copyright protection, we cannot be certain
that others will not develop substantially equivalent or superseding proprietary
technology before any patent or copyright protection is awarded to us. Any
provisional patent application requires that we file one or more non-provisional
patent applications within 12 months from the date of filing to specify the
claims asserted for patent protection. Furthermore, there can be no assurance
that any confidentiality agreements between our employees and us will provide
meaningful protection of our proprietary information in the event of any
unauthorized use or disclosure of such proprietary information.
There can be no assurance that we will not become the subject of claims of
infringement with respect to intellectual property rights associated with our
products. In addition, we may initiate claims or litigation against third
parties for infringement of our proprietary rights or to establish the validity
of our proprietary rights. Any such claims could be time consuming and could
result in costly litigation or lead us to enter into royalty or licensing
agreements rather than disputing the merits of such claims.
39
Employees
As of September 30, 2004, we had five full-time employees and one
part-time employee. We have entered into employment agreements with our
President and Chief Executive Officer (Mr. Seidler) and our Chairman of the
Board (Mr. Mahoney). Mr. Mahoney will not provide services to iVoice Technology
on a full-time basis; Mr. Seidler will devote substantially all of his time to
iVoice Technology. Many services that would be provided by employees are
currently being provided to iVoice Technology by iVoice under the administrative
services agreement. Our future success depends in significant part upon
obtaining and retaining highly qualified, key technical and senior management
personnel following the Distribution.
Competition for such personnel is intense, and there can be no assurance
that we can retain our future key technical and managerial employees or that we
can assimilate or retain other highly qualified technical and managerial
personnel in the future.
Government Regulation
We are subject to licensing and regulation by a number of authorities in
the state and municipality in which we conduct operations. These may include
health, safety, and fire regulations. Our operations are also subject to federal
and state minimum wage laws governing such matters as working conditions and
overtime.
We are not subject to any necessary government approval or license
requirement in order to market, distribute or sell our principal or related
products other than ordinary federal, state, and local laws that govern the
conduct of business in general.
On December 18, 2002, the U.S. Federal Trade Commission (FTC) announced a
decision to create the national "do not call" registry. Consumers are able to
sign up for the national "do not call" registry. The FTC has begun to enforce
the registry, and consumers who have signed up will be able to file a complaint
with the FTC online or by calling a toll-free number. A telemarketer who calls a
number on the registry could be fined up to $11,000 for each call. This law may
affect our ability to market our application as a marketing tool. The negative
economic effect to our business may be significant.
Legal Proceedings
iVoice Technology is not party to any material legal proceedings, nor to
the knowledge of iVoice Technology, is any such proceeding threatened against
it.
Properties
We do not own any real property. We currently co-occupy the same space as
iVoice and are subleasing from iVoice some of the office space located at 750
Highway 34, Matawan, New Jersey. The rent payment for the sublease is currently
included in the administrative services agreement.
40
MANAGEMENT
iVoice Technology initially intends to have a board of directors that will
consist of two directors. Listed below is certain information concerning
individuals who are expected to serve as directors and executive officers of
iVoice Technology following the Distribution. Mr. Mahoney is currently a
director of iVoice and we anticipate that Mr. Mahoney will remain a director of
both iVoice and iVoice Technology following the Distribution.
Position with Director Term
Name Age iVoice Technology, Inc. since expires
- ------------------ --- ----------------------------------- -------- -------
Jerome R. Mahoney 43 Non-Executive Chairman of the Board 2004 2005
Arie Seidler 63 President and Chief Executive Officer 2004 2005
Jerome R. Mahoney. Mr. Mahoney is iVoice Technology's Chairman of the
Board. He has been a director of iVoice since May 21, 1999. Mr. Mahoney is also
the Chairman of the Board of Trey Resources, Inc. and has been a director of
Trey Resources since January 1, 2002. He is also the Chairman of the Board of
Deep Field Technologies, Inc. and SpeechSwitch, Inc. and has been a director of
Deep Field Technologies and SpeechSwitch since November 2004. Mr. Mahoney
started at Executone Information Systems, a telephone systems manufacturer, and
was Director of National Accounts from 1988 to 1989. In 1989, Mr. Mahoney
founded Voice Express, Inc., a New York company that sold voicemail systems and
telephone system service contracts and installed these systems. Mr. Mahoney sold
Voice Express Systems in 1993. From 1993 to 1997, Mr. Mahoney was President of
IVS Corp., and on December 17, 1997, he established International Voice
Technologies, with which we merged on May 21, 1999. Mr. Mahoney received a B.A.
in finance and marketing from Fairleigh Dickinson University, Rutherford, N.J.
in 1983.
Arie Seidler. Mr. Seidler is iVoice Technology's President and Chief
Executive Officer and a director of iVoice Technology. In 1994, Mr. Seidler
founded Vertical Solutions, Inc., a management consulting and business advisory
services firm, and was Chief Executive Officer of Vertical Solutions from 1994
to 2004. In 1979, Mr. Seidler founded The Wheatley Group and served as Chief
Executive Officer of The Wheatley Group until 1990. From 1974 to 1979, Mr.
Seidler was a management consultant with KPMG Peat Marwick.
Compensation of Executive Officers
No officers or directors of iVoice Technology received any compensation
for services to iVoice Technology during any of the last three fiscal years.
Employment Agreements
iVoice Technology entered into a five-year employment agreement with Mr.
Mahoney as of August 1, 2004. Mr. Mahoney will serve as iVoice Technology's
Non-Executive Chairman of the Board for a term of five years. As consideration,
iVoice Technology agreed to pay Mr. Mahoney the sum of $85,000 the first year
with an annual increase based on the Consumer Price Index every year thereafter.
iVoice Technology also agreed to pay Mr. Mahoney a bonus for each merger or
acquisition completed by the Company equal to six percent (6%) of the gross
consideration paid or received by iVoice Technology in a merger or acquisition
completed by the Company during the term of the agreement. This bonus would be
payable in the form of cash,
41
debt or shares of Class B Common Stock at the option of Mr. Mahoney. The
employment agreement with Mr. Mahoney provides for a severance payment to him of
three hundred percent (300%), less $100, of his gross income for services
rendered to iVoice Technology in each of the five prior calendar years (or
shorter period during which Mr. Mahoney shall have been employed by iVoice
Technology) should his employment be terminated following a change in control,
as defined in the employment agreement. The employment agreement restricts Mr.
Mahoney from competing with iVoice Technology during the term of the agreement
and for one year after he is no longer employed by the Company; provided that
Mr. Mahoney is receiving severance or other compensation from the Company
pursuant to the employment agreement for at least one year.
iVoice Technology entered into an employment agreement with Mr. Seidler as
of August 1, 2004. Mr. Seidler will serve as iVoice Technology's President and
Chief Executive Officer for a term of one year. As consideration, iVoice
Technology agreed to pay Mr. Seidler a base salary of $85,000 during the term.
In addition, iVoice Technology agreed to pay Mr. Seidler incentive compensation
based on the amount of total revenues collected by iVoice Technology. If iVoice
Technology records and collects total revenues in an amount greater than
$300,000 but less than $2,000,000, Mr. Seidler will receive a bonus equal to
7.5% of the total revenues of the Company. If iVoice Technology records and
collects total revenues in an amount greater than $2,000,000, in addition to the
7.5% bonus, Mr. Seidler will also receive a bonus equal to 3.5% of the total
revenues of the Company in excess of $2,000,000. However, if the Company's
pre-tax profit margin for the year is less than 35%, Mr. Seidler's aggregate
bonus will be reduced by 35%. iVoice Technology also agreed to pay Mr. Seidler a
bonus for each merger or acquisition brought to the Company exclusively by Mr.
Seidler and completed by the Company equal to six percent (6%) of the gross
consideration paid or received by iVoice Technology, net of any debt or other
liabilities assumed by the Company, in a merger or acquisition completed by the
Company during the term of the agreement. This merger or acquisition bonus would
be payable in the form of cash, debt or shares of Class A Common Stock at the
option of iVoice Technology. The employment agreement restricts Mr. Seidler from
competing with iVoice Technology during the term of the agreement and for
eighteen months after he is no longer employed by the Company.
Stock Option Plan
None.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective August 12, 2004, iVoice Technology entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners to obtain an equity line of
credit. Under this agreement, iVoice Technology may issue and sell to Cornell
Capital Partners Class A Common Stock for a total purchase price of up to $10.0
million. iVoice Technology will be entitled to commence drawing funds under this
agreement when the resale of the Class A Common Stock issuable under the equity
line of credit is registered with the Securities and Exchange Commission, and
the equity line of credit will remain outstanding for two years thereafter. The
purchase price for the shares will be equal to 95% of the market price, which is
defined as the lowest closing bid price of the Class A Common Stock during the
five trading days following the date that iVoice Technology delivers to Cornell
Capital Partners a notice requiring it to advance funds to us. A cash fee equal
to six percent (6%) of the cash proceeds of the draw down is also payable at the
42
time of funding. In addition, Cornell Capital Partners will receive, as
additional compensation, the number of shares of Class A Common Stock equal to
one and one half percent (1.5%) of the number of shares of Class A Common Stock
outstanding on the date that the registration statement in respect of the shares
to be distributed pursuant to the equity line of credit becomes effective. To
date, iVoice Technology has not drawn down on the equity line of credit.
In August and _______, 2004, iVoice Technology issued an aggregate of
$560,000 in secured convertible debentures, with interest payable at 5% per
annum, to Cornell Capital Partners. Each of the debentures are convertible into
shares of Class A Common Stock at a price equal to the lesser of (a) an amount
equal to one hundred twenty percent (120%) of the initial bid price of the Class
A Common Stock on the date of effectiveness of the registration statement of
which this prospectus is a part or (b) an amount equal to eighty percent (80%)
of the lowest closing bid price of the Class A Common Stock for the five trading
days immediately preceding the conversion date. The secured convertible
debentures have a term of two years with all accrued interest due at the
expiration of the term. At our option, these debentures may be redeemed at a 20%
premium prior to August 12, 2006. The secured convertible debentures are secured
by a first priority security interest in substantially all of the assets of
iVoice Technology. iVoice Technology will issue an additional $140,000 of
secured convertible debentures to Cornell Capital Partners on or about the date
of effectiveness of the registration statement of which this prospectus is a
part.
Upon the effective date of this prospectus, iVoice Technology will assume
an aggregate of $190,000 in liabilities from iVoice and iVoice will assign to
iVoice Technology assets having an aggregate book value of $750,000. iVoice
Technology believes that the fair value of these assets may be greater than the
book value, although it has not undertaken an appraisal. The assumed obligations
are described below.
In consideration of and exchange for the assets that iVoice Technology
will receive pursuant to the spin-off of the IVR business, iVoice Technology
will issue 30 shares of Series A 5% Convertible Preferred Stock to iVoice. Each
share of Series A 5% Convertible Preferred Stock has a stated value of $25,000
per share. Each share of Series A 5% Convertible Preferred Stock will be
convertible into shares of Class A Common Stock at a price equal to the lesser
of (a) an amount equal to one hundred twenty-five percent (125%) of the closing
bid price of the Class A Common Stock as of the conversion date or (b) an amount
equal to eighty percent (80%) of the lowest closing bid price of the Class A
Common Stock for the five trading days immediately preceding the conversion
date.
In connection with the assumption of assets and liabilities by iVoice
Technology from iVoice, iVoice Technology will assume from iVoice immediately
prior to the date of this prospectus $190,000 of outstanding indebtedness from
iVoice to Jerry Mahoney. The debt will be subject to a promissory note having
substantially the same terms as the note from iVoice to Mr. Mahoney. iVoice
Technology, upon the date of this prospectus, will issue a promissory note in
the amount of $190,000 payable to Mr. Mahoney that will bear interest at the
prime rate plus 2% per annum on the unpaid balance until paid or until default.
Interest payments are due and payable annually. Under the terms of the
promissory note, at the option of the note holder, principal and interest can be
converted into either (i) one share of Class B Common Stock of iVoice
Technology, par value $0.01, for each dollar owed, (ii) the number of shares of
Class A
43
Common Stock of iVoice Technology calculated by dividing (x) the sum of the
principal and interest that the note holder has requested to have prepaid by (y)
eighty percent (80%) of the lowest issue price of Class A Common Stock since the
first advance of funds under this note, or (iii) payment of the principal of
this note, before any repayment of interest.
Mr. Mahoney has agreed to forego receiving any shares of iVoice
Technology's Class A Common Stock or Class B Common Stock he is or would be
entitled to receive in the Distribution by virtue of his ownership of either
iVoice Class A Common Stock or iVoice Class B Common Stock.
iVoice Technology entered into two separate employment agreements with Mr.
Mahoney, its Chairman of the Board, and Mr. Seidler, its President and Chief
Executive Officer, respectively, as of August 1, 2004. Mr. Mahoney's agreement
provides for annual compensation of $85,000 per annum with an annual increase
based on the Consumer Price Index every year thereafter. Mr. Seidler's agreement
provides for compensation of $85,000 plus additional incentive compensation.
Each of Mr. Mahoney and Mr. Seidler will also be entitled to additional
incentive compensation based upon acquisitions completed by iVoice Technology.
iVoice Technology believes that the compensation provided to each of Mr. Mahoney
and Mr. Seidler are commensurate with compensation levels paid by other
companies to management having equivalent experiences and capabilities.
In August 2004, iVoice Technology entered into a temporary administrative
services agreement with iVoice. Pursuant to that agreement, iVoice is providing
iVoice Technology with physical premises, inventory purchasing services,
material and inventory control services, source code management and other
personnel and data processing services for a period ending upon completion of
the Distribution. For these services iVoice Technology is paying iVoice $7,000
per month during the term of the agreement. Following completion of the
Distribution and termination of the administrative services agreement, we expect
that iVoice Technology will operate on a completely stand-alone basis from
iVoice and there will be no business or operating relationship between iVoice
and iVoice Technology.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND OTHER STOCKHOLDER MATTERS
We anticipate that our common stock will be quoted on the OTC Bulletin
Board under the symbol "____." There has been no trading market for our shares
prior to the date of this prospectus.
Holders of common equity
As of September 30, 2004, there was one record holder of our common
shares.
Dividend information
To date, iVoice Technology has never paid a dividend. We have no plans to
pay any dividends in the near future. We intend to retain all earnings, if any,
for the foreseeable future, for use in our business operations.
44
Security Ownership
The following table sets forth, as of September 30, 2004, information with
respect to the beneficial ownership of our common stock by (i) persons known by
us to beneficially own more than five percent of the outstanding shares, (ii)
the director, (iii) each executive officer and (iv) all directors and executive
officers as a group.
Common Stock Common Stock
Beneficially Beneficially
Owned Before Percentage Owned After Percentage
Name Title of Class Distribution Ownership Distribution Ownership
- ---------------------------- ------------------------- --------------- --------------- --------------- ---------------
Jerome R. Mahoney Class A Common Stock 0(1) 0%(1) 0(1) 0%(1)
- ---------------------------- ------------------------- --------------- --------------- --------------- ---------------
Class B Common Stock 190,000(2) 100%(2) 190,000(2) 100%(2)
- ---------------------------- ------------------------- --------------- --------------- --------------- ---------------
Class C Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- --------------- ---------------
Arie Seidler Class A Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- --------------- ---------------
Class B Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- --------------- ---------------
Class C Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- --------------- ---------------
iVoice, Inc. Class A Common Stock 100 100% 0 0%
- ---------------------------- ------------------------- --------------- --------------- --------------- ---------------
Class B Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- --------------- ---------------
Class C Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- --------------- ---------------
All directors and Class A Common Stock 0(1) 0%(1) 0(1) 0%(1)
executive officers as a
group (2 persons)
- ---------------------------- ------------------------- --------------- --------------- --------------- ---------------
Class B Common Stock 190,000(2) 100%(2) 190,000(2) 0%(2)
- ---------------------------- ------------------------- --------------- --------------- --------------- ---------------
Class C Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- --------------- ---------------
(1) Does not give effect to the right of Mr. Mahoney pursuant to the
promissory note to be executed by Mr. Mahoney and iVoice Technology in the
amount of $190,000 to convert $190,000 of indebtedness into 190,000 shares
of Class B Common Stock which is convertible into an indeterminate number
of shares of Class A Common Stock.
(2) Mr. Mahoney may at his option convert the $190,000 promissory note held by
him into Class B Common Stock of iVoice Technology at a rate of one dollar
per share. The Class B Common Stock is convertible at any time into Class
A Common Stock at a rate equal to 80% of the lowest price that iVoice
Technology issues shares of Class A Common Stock subsequent to the date of
the note. Thus by virtue of Mr. Mahoney's right to convert $190,000 of
indebtedness into 190,000 shares of Class B Common Stock, Mr. Mahoney is
deemed to beneficially own such shares for the purpose of computing the
percentage of ownership by him, but such shares are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person.
DESCRIPTION OF SECURITIES
Pursuant to iVoice Technology's articles of incorporation, as amended, we
are authorized to issue 10,000,000,000 shares of Class A Common Stock, no par
value per share, 50,000,000 shares of Class B Common Stock, par value $0.01 per
share, 20,000,000 shares of Class C Common Stock, par value $0.01 per share, and
1,000,000 shares of Preferred Stock, par value of
45
$1.00 per share. Below is a description of iVoice Technology's outstanding
securities, including Class A Common Stock, Class B Common Stock, Class C Common
Stock, and Preferred Stock.
Class A Common Stock
Each holder of our Class A Common Stock is entitled to one vote for each
share held of record. Holders of our Class A Common Stock have no preemptive,
subscription, conversion, or redemption rights. Upon liquidation, dissolution or
winding-up, the holders of Class A Common Stock are entitled to receive our net
assets pro rata. Each holder of Class A Common Stock is entitled to receive
ratably any dividends declared by our board of directors out of funds legally
available for the payment of dividends. We have not paid any dividends on our
Common Stock and do not contemplate doing so in the foreseeable future. We
anticipate that any earnings generated from operations will be used to finance
our growth. As of September 30, 2004, there is one record holder of Class A
Common Stock and iVoice Technology had 100 shares of Class A Common Stock
outstanding. There will be 10,000,000 outstanding shares of iVoice Technology
Class A Common Stock immediately following the 100,000-for-one split to be
effectuated prior to the Distribution.
Class B Common Stock
Each holder of Class B Common Stock has voting rights equal to 100 shares
of Class A Common Stock. Holders of Class B Common Stock are entitled to receive
dividends in the same proportion as the Class B Common Stock conversion rights
have to Class A Common Stock. There are 50,000,000 shares authorized and 0
shares issued and outstanding as of September 30, 2004. A holder of Class B
Common Stock has the right to convert each share of Class B Common Stock into
the number of shares of Class A Common Stock determined by dividing the number
of shares of Class B Common Stock being converted by a 20% discount of the
lowest price that iVoice Technology had ever issued its Class A Common Stock.
Upon our liquidation, dissolution, or winding-up, holders of Class B Common
Stock will be entitled to receive distributions.
Class C Common Stock
Each holder of our Class C Common Stock is entitled to 1,000 votes for
each one share held of record. Holders of our Class C Common Stock have no
preemptive, subscription, conversion, or redemption rights. Shares of Class C
Common Stock are not convertible into Class A Common Stock. There are 20,000,000
shares authorized and 0 shares issued and outstanding as of September 30, 2004.
Upon liquidation, dissolution or winding-up, the holders of Class C Common Stock
are not entitled to receive our net assets pro rata. We have not paid any
dividends on our common stock and do not contemplate doing so in the foreseeable
future. We anticipate that any earnings generated from operations will be used
to finance our growth.
Preferred Stock
iVoice Technology is authorized to issue 1,000,000 shares of Preferred
Stock, par value $1.00 per share, 30 shares of which have been designated as
Series A 5% Convertible Preferred Stock. As of September 30, 2004, iVoice
Technology has not issued any shares of Preferred Stock. In partial
consideration of and exchange for the assets that iVoice Technology will
46
receive pursuant to the spin-off of the IVR business, iVoice Technology will
issue 30 shares of Series A 5% Convertible Preferred Stock to iVoice. iVoice
Technology has no current plans to issue any other shares of preferred stock.
Our board of directors is authorized (by resolution and by filing an
amendment to our articles of incorporation and subject to limitations prescribed
by the New Jersey Business Corporation Act) to issue, from to time, shares of
Preferred Stock in one or more series, to establish from time to time the number
of shares to be included in each series, and to fix the designation, powers,
preferences and other rights of the shares of each such series and to fix the
qualifications, limitations and restrictions thereon, including, but without
limiting the generality of the foregoing, the following:
o the number of shares constituting that series and the distinctive
designation of that series;
o the dividend rate on the shares of that series, whether dividends
are cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on
shares of that series;
o whether that series has voting rights, in addition to voting rights
provided by law, and, if so, the terms of those voting rights;
o whether that series has conversion privileges, and, if so, the terms
and conditions of conversion, including provisions for adjusting the
conversion rate in such events as our board of directors determines;
o whether or not the shares of that series are redeemable, and, if so,
the terms and conditions of redemption, including the dates upon or
after which they are redeemable, and the amount per share payable in
case of redemption, which amount may vary under different conditions
and at different redemption dates;
o whether that series has a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount
of that sinking fund;
o the rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of iVoice
Technology, and the relative rights of priority, if any, of payment
of shares of that series; and
o any other relative powers, preferences and rights of that series,
and qualifications, limitations or restrictions on that series.
If we liquidate, dissolve or wind up our affairs, whether voluntarily or
involuntarily, the holders of Preferred Stock of each series will be entitled to
receive only that amount or those amounts as are fixed by the Company's articles
of incorporation or the certificate of designations or by resolution of the
board of directors providing for the issuance of that series.
47
Series A 5% Convertible Preferred Stock
General
In partial consideration of and exchange for the assets that iVoice
Technology will receive in the spin-off of the IVR business, iVoice Technology
will issue 30 shares of Series A 5% Convertible Preferred Stock to iVoice.
Dividends
Dividends are payable quarterly on the Series A 5% Convertible Preferred
Stock on the last day of each calendar quarter in an amount equal to 5% per
annum of the stated value of the Series A 5% Convertible Preferred Stock.
Dividends are payable, at the option of iVoice Technology, in cash or, with the
consent of the holders of Series A 5% Convertible Preferred Stock, in shares of
Class A Common Stock valued at the lowest closing bid price of the Class A
Common Stock for the five trading days immediately preceding the dividend
payment date.
Conversion
Subject to the limitations described below, the Series A 5% Convertible
Preferred Stock is convertible at any time and from time to time at the option
of the holder into a number of shares of Class A Common Stock determined by
dividing the applicable conversion price into the aggregate stated value of the
Series A 5% Convertible Preferred Stock held by that holder. The conversion
price will be a price equal to the lesser of (a) an amount equal to one hundred
twenty-five percent (125%) of the closing bid price of the Class A Common Stock
as of the conversion date or (b) an amount equal to eighty percent (80%) of the
lowest closing bid price of the Class A Common Stock for the five trading days
immediately preceding the conversion date.
The Series A 5% Convertible Preferred Stock is not convertible by a holder
who, upon conversion of the shares, would beneficially own (as determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13D and 13G thereunder) at that time, after giving
effect to the conversion, in excess of 4.99% of the outstanding shares of Class
A Common Stock. The terms of Series A 5% Convertible Preferred Stock are
convertible only to the extent that the number of shares of Class A Common Stock
issuable upon conversion, together with the number of shares of Class A Common
Stock then owned by the holder, would not exceed 4.99% of the then outstanding
shares of Class A Common Stock as determined in accordance with Section 13(d) of
the Exchange Act. The 4.99% limitation does not prevent any holder from
converting its Series A 5% Convertible Preferred Stock into 4.99% of our then
outstanding Class A Common Stock, subsequently selling its shares of Class A
Common Stock, then converting additional Series A 5% Convertible Preferred Stock
into an additional number of shares of Class A Common Stock not to exceed 4.99%
of our outstanding Class A Common Stock. Thus, the total number of shares of
Class A Common Stock potentially issuable to the holder of Series A 5%
Convertible Preferred Stock in the aggregate may exceed 4.99% of our outstanding
Class A Common Stock.
In addition, if a court determines that, regardless of the limitation
described above, a holder of Series A 5% Convertible Preferred Stock would still
be deemed the beneficial owner of more than 4.99% of the outstanding Class A
Common Stock, then iVoice Technology will be
48
required to redeem the number of that holder's shares of Series A 5% Convertible
Preferred Stock that would allow that holder to be deemed a beneficial owner of
not more than 4.99% of the outstanding Class A Common Stock. iVoice Technology
would redeem the Series A 5% Convertible Preferred Stock at a redemption price
in cash equal to the stated value of the shares being so redeemed plus any
accrued and unpaid dividends on such shares up to the redemption date.
Liquidation
In the event of the liquidation of iVoice Technology, the holders of
Series A 5% Convertible Preferred Stock will be entitled to receive a
liquidation preference before any amounts are paid to holders of any class of
iVoice Technology common stock. The liquidation preference is an amount equal to
125% of the stated value of the Series A 5% Convertible Preferred Stock plus any
accrued and unpaid dividends on that stock through the liquidation date.
Voting Rights
The holders of Series A 5% Convertible Preferred Stock will have no right
to vote, except as otherwise provided by law. However, each holder of Series A
5% Convertible Preferred Stock is entitled to receive prior notification of a
meeting of the stockholders, including copies of any information sent to the
stockholders. To the extent the holders of Series A 5% Convertible Preferred
Stock are entitled by law to vote on any matter as a class, the affirmative vote
of a majority of the Series A 5% Convertible Preferred Stock is required to
approve the matter.
Rights in the Event of Merger or Consolidation
If iVoice Technology enters into (a) a sale of all or substantially all of
its assets, (b) a consolidation or merger with any other entity (other than a
consolidation or merger in which iVoice Technology is the surviving entity or
(c) a transaction in which more than 50% of the voting power of iVoice
Technology is disposed of, then, at the option of each holder of Series A 5%
Convertible Preferred Stock, any of these transactions will be deemed a
liquidation of iVoice Technology in which iVoice Technology will be required to
distribute to the holder the liquidation preference described above.
Options and Warrants
None.
Debt
On August 12 and _______, 2004, iVoice Technology issued an aggregate of
$560,000 in secured convertible debentures, with
49
interest payable at 5% per annum, to Cornell Capital Partners. Each of the
debentures are convertible into shares of Class A Common Stock at a price equal
to the lesser of (a) an amount equal to one hundred twenty percent (120%) of the
initial bid price of the Class A Common Stock on the date of effectiveness of
the registration statement of which this prospectus is a part or (b) an amount
equal to eighty percent (80%) of the lowest closing bid price of the Class A
Common Stock for the five trading days immediately preceding the conversion
date. The secured convertible debentures have a term of two years with all
accrued interest due at the expiration of the term. At our option, these
debentures may be redeemed at a 20% premium prior to August 12, 2006. The
secured convertible debentures are secured by a first priority security interest
in substantially all of the assets of iVoice Technology. iVoice Technology will
issue an additional $140,000 of secured convertible debentures to Cornell
Capital Partners on or about the date of effectiveness of the registration
statement of which this prospectus is a part.
Transfer Agent
iVoice Technology's transfer agent is Fidelity Transfer Company. The
address is 1800 South West Temple, Suite 301, Salt Lake City, Utah 84115. The
telephone number is (801) 484-7222.
Limitation of Liability: Indemnification
Our by-laws include an indemnification provision under which we have
agreed to indemnify directors of iVoice Technology to the fullest extent
possible from and against any and all claims of any type arising from or related
to future acts or omissions as a director of iVoice Technology.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
iVoice Technology pursuant to the foregoing, or otherwise, iVoice Technology has
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
Anti-Takeover Effects Of Provisions Of The Certificate Of Incorporation
Authorized and unissued stock. The authorized but unissued shares of our
capital stock are available for future issuance without our stockholders'
approval. These additional shares may be utilized for a variety of corporate
purposes including but not limited to future public or direct offerings to raise
additional capital, corporate acquisitions and employee incentive plans. The
issuance of such shares may also be used to deter a potential takeover of iVoice
Technology that may otherwise be beneficial to stockholders by diluting the
shares held by a potential suitor or issuing shares to a stockholder that will
vote in accordance with iVoice Technology's board of directors' desires. A
takeover may be beneficial to stockholders because, among other reasons, a
potential suitor may offer stockholders a premium for their shares of stock
compared to the then-existing market price.
For example, after the Distribution, iVoice will own shares of iVoice
Technology Series A 5% Convertible Preferred Stock. In some circumstances, such
as in the event of a sale of iVoice Technology, iVoice could have interests that
are different from the Company's or yours.
50
Some of the provisions of iVoice Technology's certificate of incorporation
and bylaws may have the effect of making the acquisition of control of iVoice
Technology in a transaction not approved by iVoice Technology's board of
directors more difficult.
EXPERTS
The financial statements for the years ended December 31, 2003 and
December 31, 2002, included in this prospectus have been audited by Mendlowitz
Weitsen, LLP, independent certified public accountants to the extent and for the
periods set forth in their report (which contains an explanatory paragraph
regarding iVoice Technology's ability to continue as a going concern) appearing
elsewhere herein and are included in reliance upon such report given upon the
authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
Meritz & Muenz LLP, Washington, D.C. will pass upon the validity of the
shares of common stock offered hereby for us.
HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act with respect to the securities
offered by this prospectus. This prospectus, which forms a part of the
registration statement, does not contain all the information set forth in the
registration statement, as permitted by the rules and regulations of the
Commission. For further information with respect to us and the securities
offered by this prospectus, reference is made to the registration statement. The
registration statement and other information may be read and copied at the
Commission's Public Reference Room at 450 Fifth Street N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. The Commission
maintains a web site at http://www.sec.gov that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the Commission.
51
INDEX TO FINANCIAL STATEMENTS
Contents Page
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM F-2
AUDITED FINANCIAL STATEMENTS
Balance Sheet F-3
Statement of Operations F-4
Statement of Owner's Equity F-5
Statement of Cash Flows F-6
NOTES TO AUDITED FINANCIAL STATEMENTS F-7
UNAUDITED FINANCIAL STATEMENTS
Balance Sheet F-18
Statement of Operations F-19
Statement of Stockholder's Equity F-20
Statement of Cash Flows F-21
NOTES TO UNAUDITED FINANCIAL STATEMENTS F-22
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION F-33
Condensed Unaudited Pro Forma Balance Sheet F-34
Unaudited Pro Forma Statement of Operations F-35
Unaudited Pro Forma Statement of Operations F-36
NOTES TO CONDENSED UNAUDITED PRO FORMA FINANCIAL INFORMATION F-37
F-1
[LOGO]
Mendlowitz Weitsen, LLP, CPAs
K2 Brier Hill Court, East Brunswick, NJ 08816-3341
Tel: 732.613.9700 Fax: 732.613.9705 E-mail: mw@MWLLP.com
www.mwllp.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF iVOICE TECHNOLOGY, INC.
Matawan, New Jersey
We have audited the accompanying balance sheet of the interactive voice response
software business of iVoice, Inc. (iVoice Technology, Inc., a wholly owned
subsidiary of iVoice, Inc.) as of December 31, 2003 and the related statements
of operations, owner's equity and cash flows for the years ended December 31,
2003 and 2002. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the interactive voice response
software business of iVoice, Inc. (iVoice Technology, Inc.) as of December 31,
2003, and the results of its operations and its cash flows for the years ended
December 31, 2003 and 2002, in conformity with accounting principles generally
accepted in the United States of America.
These financial statements have been derived from the consolidated financial
statements and accounting records of iVoice, Inc., and reflect significant
assumptions and allocations. Moreover, as indicated in Note 1, the Company
relies on iVoice, Inc. for administrative, management, research and other
services. Accordingly, these financial statements do not necessarily reflect the
financial position, results of operations, and cash flows of the Company had it
been a stand-alone Company.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3, the Company
had net losses and negative cash flows from operations for the years ended
December 31, 2003 and 2002, and as of those dates had negative working capital,
which raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also discussed in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Mendlowitz Weitsen, LLP
MENDLOWITZ WEITSEN, LLP
East Brunswick, New Jersey
November 11, 2004
F-2
iVOICE TECHNOLOGY, INC.
BALANCE SHEET
December 31, 2003
ASSETS
------
CURRENT ASSETS
Accounts receivables 37,483
Inventory 11,888
Costs in excess of billing 2,706
-----------
Total current assets 52,077
OTHER ASSETS
Software license costs, net 45,400
-----------
TOTAL ASSETS $ 97,477
===========
LIABILITIES AND OWNER'S EQUITY
------------------------------
CURRENT LIABILITIES
Deferred maintenance contracts $ 23,662
-----------
Total current liabilities 23,662
-----------
COMMITMENTS AND CONTINGENCIES
OWNER'S EQUITY
Common stock:
Class A, par value $.00001; Authorized -
10,000,000,000 shares; no shares issued
and outstanding
Class B, par value $.00001; Authorized -
50,000,000 shares; no shares issued and outstanding --
Class C, par value $.00001; Authorized -
20,000,000 shares; no shares issued and outstanding --
Preferred Stock; Par value $1.00; Authorized
1,000,000 shares; no shares issued and outstanding --
Net investment - iVoice, Inc. 6,133,597
Additional paid in capital
Accumulated deficit (6,059,782)
-----------
Total owner's equity 73,815
-----------
TOTAL LIABILITIES AND OWNER'S EQUITY $ 97,477
===========
The Notes to the Financial Statements are an integral part of these statements.
F-3
iVOICE TECHNOLOGY, INC.
STATEMENT OF OPERATIONS
For The Years Ended December 30, 2003 and 2002
2003 2002
----------- -----------
SALES, net $ 303,756 $ 366,004
COST OF SALES 123,091 94,296
----------- -----------
GROSS PROFIT 180,665 271,708
----------- -----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Selling expenses 68,692 73,584
General & administrative 665,473 895,405
Research & development 128,696 129,734
Write off of Goodwill -- 99,697
Bad debt Expense -- 40,006
Depreciation & amortization 102,480 84,582
----------- -----------
Total Selling, General & Administrative expense 965,341 1,323,008
----------- -----------
LOSS FROM OPERATIONS (784,676) (1,051,300)
----------- -----------
OTHER INCOME \(EXPENSE)
Other Income 100,557 102,615
Gain on Sale of Securities held for sale 69,418 --
Interest expense (516,719) (249,279)
----------- -----------
Total other expense (346,744) (146,664)
----------- -----------
LOSS BEFORE INCOME TAXES (1,131,420) 1,197,964)
----------- -----------
PROVISION FOR INCOME TAXES -- --
----------- -----------
NET LOSS $(1,131,420) $(1,197,964)
=========== ===========
PRO FORMA NET LOSS PER COMMON SHARE:
Basic $(11,314.20) $(11,979.64)
=========== ===========
Diluted $(11,314.20) $(11,979.64)
=========== ===========
The Notes to the Financial Statements are an integral part of these statements.
F-4
iVOICE TECHNOLOGY, INC.
STATEMENTS OF OWNER'S EQUITY
For the Years Ended December 31, 2003 and 2002
Common Common Additional Net Total
Stock Stock Paid in Investment Accumulated Owner's
Shares Amount Capital iVoice, Inc. Deficit Equity
------ ------ ------- ------------ ------- ------
Balance at January 1, 2002 $ 4,042,062 $(3,730,398) $ 311,664
Net transactions with iVoice, Inc. 1,066,334 1,066,334
Net loss for the year ended
December 31, 2002 -- -- -- (1,197,964) (1,197,964)
----------- ----------- ----------- ----------- -----------
Balance at January 1, 2003 5,108,396 (4,928,362) 180,034
Sale of convertible debentures
Net transactions with iVoice, Inc. 1,025,201 1,025,201
Net loss for the year ended
December 31, 2003 -- -- -- (1,131,420) (1,131,420)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2003 $ $ $ 6,133,597 $(6,059,782) $ 73,815
=========== =========== =========== =========== ===========
The Notes to the Financial Statements are an integral part of these statements.
F-5
iVOICE TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
For The Years Ended December 31, 2003 and 2002
2003 2002
----------- ----------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(1,033,500) $(1,197,964)
Depreciation and amortization 102,480 84,582
Bad Debt Expense -- 40,006
Changes in operating assets and liabilities
Increase in accounts payable and accrued expenses 3,739 7,042
----------- -----------
Net cash used in operating activities (927,281) (1,066,334)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Allocation of costs by iVoice 927,281 1,066,334
----------- -----------
Net cash provided by financing activities 927,281 1,066,034
----------- -----------
NET INCREASE (DECREASE) IN CASH -- --
CASH - beginning -- --
----------- -----------
CASH - end $ -- $ --
=========== ===========
CASH PAID DURING THE YEAR FOR:
Interest expense $ 516,719 $ 249,279
=========== ===========
Income taxes $ -- $ --
=========== ===========
The Notes to Financial Statements are an integral part of these statements.
F-6
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1 - BACKGROUND
iVoice Technology, Inc. ("iVoice Technology" or the "Company") was incorporated
under the laws of New Jersey on November 10, 2004 as a wholly owned subsidiary
of iVoice, Inc. ("iVoice"). The Company received by assignment all of the
interests in and rights and title to, and assumed all of the obligations of, all
of the agreements, contracts, understandings and other instruments of iVoice
Technology, Inc., a Nevada corporation and affiliate of the Company. When we
refer to or describe any agreement, contract or other written instrument of the
Company in these notes, we are referring to an agreement, contract or other
written instrument that had been entered into by iVoice Technology Nevada and
assigned to the Company.
On September 1, 2004, the Board of Directors of iVoice, Inc. resolved to pursue
the separation of iVoice software business into three publicly owned companies.
iVoice will continue to focus on its own computerized telephony technology and
related business development operations. iVoice Technology will continue to
develop, market and license the Interactive Voice Response line of computerized
telephony software.
The spin-off transaction will be accomplished by the distribution of certain
intellectual property, representing the software codes of Interactive Voice
Response ("IVR"), and certain accrued liabilities and related party debt to
iVoice Technology (the "Distribution"), the shares of common stock of which will
be distributed to iVoice shareholders in the form of a taxable dividend.
In conjunction with the spin-off, iVoice Technology has entered into a temporary
administrative services agreement with iVoice. The agreement will terminate upon
completion of the Distribution. However, if, following the Distribution, iVoice
Technology is unable to replace any or all of the services currently being
provided by iVoice under the administrative services agreement, the
administrative services agreement will be continued with respect to those
services on a month-to-month basis.
iVoice Technology also intends to assume $190,000 in accrued liabilities and
related party debt presently outstanding and incurred by iVoice. The debt being
assumed will be convertible into Class B Common Stock of iVoice Technology at
the option of the holder as later described in these notes.
NOTE 2 - BUSINESS OPERATIONS
The Company will continue to develop, market and license the Interactive Voice
Response line, which was developed by iVoice. The Company's Interactive Voice
Response line is designed to read information from and write information to,
databases, as well as to query databases and return information.
IVR is an application generator that allows full connectivity to many databases,
including Microsoft Access, Microsoft Excel, Microsoft Fox Pro, and Paradox, or
to standard text files.
F-7
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
The IVR software is sold as an application generator that gives the end user the
ability to develop their own customized IVR applications or as a customized
turnkey system. IVR performs over 40 different customizable commands. Examples
of IVR range from simply selecting announcements from a list of options stored
in the computer (also known as audio text) to more complex interactive exchanges
such as querying a database for information.
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates continuation of the Company as a going concern. The Company has
traditionally operated as a non-reporting component of iVoice, Inc. and
accordingly these financial statements have been derived from the consolidated
financial statements and accounting records of iVoice, Inc., and reflect
significant assumptions and allocations. The Company relies on iVoice, Inc. for
administrative, management, research and other services. These financial
statements do not necessarily reflect the financial position, results of
operations, and cash flows of the Company had it been a stand-alone Company.
As of December 31, 2003, the Company had a net loss, a negative cash flow from
operations as well as negative working capital. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Therefore,
recoverability of a major portion of the recorded asset amounts shown in the
accompanying balance sheets is dependent upon continued operations of the
Company, which in turn, is dependent upon the Company's ability to raise capital
and/or generate positive cash flow from operations.
In order to provide necessary working capital, in August 2004, the Company
entered into a subscription agreement, pursuant to which the Company issued
$280,000 of secured convertible debentures in August 2004, and will issue an
additional $280,000 of secured convertible debentures around the time of filing
of the registration statement for the Class A Common Stock and an additional
$140,000 of secured convertible debentures based on the effectiveness of the
registration statement. Interest on the notes is payable at 5% per annum and the
notes are convertible into the Company's Class A Common Stock at a price equal
to the lesser of (a) an amount equal to one hundred twenty percent (120%) of the
initial bid price of the Class A Common Stock on the date of effectiveness of
the registration statement, or (b) an amount equal to eighty percent (80%) of
the lowest closing bid price of the Class A Common Stock for the five (5)
trading days immediately preceding the conversion date. Additionally, the
Company has also entered into a Standby Equity Distribution Agreement where the
Company may, at its discretion, periodically sell to an investor shares of Class
A Common Stock to raise capital to fund working capital needs. These two
financing transactions will require the Company to register its common stock
under Section 12 (g) of the U.S. Securities Exchange Act of 1934 and
subsequently register for resale a number of shares to facilitate these
financing transactions.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
F-8
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The accompanying financial statements have been derived from the
consolidated financial statements and accounting records of iVoice using the
historical results of operations and historical basis of assets and liabilities
of the Company's Interactive Voice Response business. Management believes the
assumptions underlying the financial statements are reasonable. However, the
financial statements included herein may not necessarily reflect the Company's
results of operations, financial position, and cash flows in the future or what
its results of operations, financial position and cash flows would have had the
Company been a stand-alone company during the periods presented.
b) Use of 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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
c) Software License Costs
Software license costs are recorded at cost, which approximates fair
market value as of the date of purchase. These costs represent the purchase of
various exploitation rights to certain software, pre-development codes and
systems developed by a non-related third party. These costs are capitalized
pursuant to Statement of Financial Accounting Standards ("SFAS") 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed".
The Company has adopted SFAS No. 121. The carrying value of software license
costs are regularly reviewed by the Company and a loss would be recognized if
the value of the estimated un-discounted cash flow benefit related to the asset
falls below the unamortized cost. Historically the Interactive Voice Response
software technology has produced limited sales revenue. However, management
believes that the limited sales generated result from a lack of application of
Company sales and marketing resources to the software, It is Management's plan
to devote such resources to its software technology to recognize the
technology's potential value and therefore, no impairment loss has been
recorded.
d) Revenue Recognition
The Company derives its revenues from the licensing of its software
product and optional customer support (maintenance) service. The Company's
standard license agreement provides for a one-time fee for use of the Company's
product in perpetuity for each computer or CPU in which the software will
reside. The Company's software application is fully functional upon delivery and
implementation and does not require any significant modification or alteration.
The Company also offers customers an optional annual software maintenance and
support agreement for the subsequent one-year periods. Such maintenance and
support services are free for the first
F-9
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
year the product is licensed and is considered the warranty period. The software
maintenance and support agreement provides free software updates, if any, and
technical support the customer may need in deploying or changing the
configuration of the software. Generally, the Company does not license its
software in multiple element arrangements whereby the customer purchases a
combination of software and maintenance. In a typical arrangement, software
maintenance services are sold separately from the software product; are not
considered essential to the functionality of the software and are purchased at
the customer's option upon the completion of the first year licensed.
The Company does not offer any special payment terms or significant
discount pricing. Normal and customary payment terms require payment for the
software license fees when the product is shipped. Payment for software
maintenance is due prior to the commencement of the maintenance period. It is
also the Company's policy to not provide customers the right to refund any
portion of its license fees. The Company accepts Visa and MasterCard as well as
company checks.
With respect to the sale of software license fees, the Company recognizes
revenue in accordance with Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2), as amended, and generally recognizes revenue when all of
the following criteria are met: (1) persuasive evidence of an arrangement exists
generally evidenced by a signed, written purchase order from the customer, (2)
delivery of the software product on Compact Disk (CD) or other means to the
customer has occurred, (3) the perpetual license fee is fixed or determinable
and (4) collectibility, which is assessed on a customer-by-customer basis, is
probable.
With respect to customer support services, upon the completion of one year
from the date of sale, considered to be the warrantee period, the Company offers
customers an optional annual software maintenance and support agreement for
subsequent one-year periods. Sales of purchased maintenance and support
agreements are recorded as deferred revenue and recognized over the respective
terms of the agreements.
e) Product Warranties
The Company estimates its warranty costs based on historical warranty
claims experience in estimating potential warranty claims. Due to the limited
sales of the Company's products, management has determined that warranty costs
are immaterial and has not included an accrual for potential warranty claims.
Presently, costs related to warranty coverage are expensed as incurred. Warranty
claims are reviewed quarterly to verify that warranty liabilities properly
reflect any remaining obligation based on the anticipated expenditures over the
balance of the obligation period.
f) Research and development costs
Research and development costs will be charged to expense as incurred.
g) Inventory
F-10
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
Inventory, consisting primarily of system components such as computer
components, voice cards, and monitors, is valued at the lower of cost or market.
Cost is determined on a first-in, first-out basis.
h) Income Taxes
The Company accounts for income taxes under the Financial Accounting
Standards Board ("FASB") of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" ("Statement 109"). Under Statement 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The Company, not being a separate reporting entity, will not receive any
benefit from the approximately $6,000,000 net operating loss allocated to the
IVR software business contained in these financial statements.
i) Organization Costs
Organization costs consist primarily of professional and filing fees
relating to the formation of the Company. These costs have been expensed.
j) Earnings Per Share
SFAS No. 128, "Earnings Per Share" requires presentation of basic earnings
per share ("basic EPS") and diluted earnings per share ("diluted EPS").
The computation of basic pro forma EPS is computed by dividing income
available to common shareholders by the expected number of shares to be issued
in connection with the Company's proposed spin-off from iVoice, Inc. Diluted
earnings per share gives effect to all dilutive potential Common shares
outstanding during the period. The computation of diluted EPS does not assume
conversion, exercise or contingent exercise of securities that would have an
anti-dilutive effect on earnings resulting from the Company's net loss position.
Since the earnings per share information is being shown on a pro forma basis,
only the most recent year has been presented. The shares used in the computation
are as follows:
As of December 31, 2003
-----------------------
Pro Forma Basis and diluted purposes 100
k) Comprehensive Income
F-11
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
the reporting and display of comprehensive income and its components in the
financial statements. The items of other comprehensive income that are typically
required to be displayed are foreign currency items, minimum pension liability
adjustments, and unrealized gains and losses on certain investments in debt and
equity securities, As of December 31, 2003 and 2002, the Company has no items
that represent comprehensive income, and thus, has not included a statement of
comprehensive income.
l) Recent Accounting Pronouncements
In December 2003, the FASB issued Interpretation No. 46-R, "Consolidation
of Variable Interest Entities" ("FIN 46-R"). FIN 46-R, which modifies certain
provisions and effective dates of FIN No. 46, sets forth criteria to be used in
determining whether an investment in a variable interest entity should be
consolidated, and is based on the general premise that companies that control
another entity through interests other than voting interests should consolidate
the controlled entity. The provisions of FIN 46 became effective for the Company
during the third quarter of Fiscal 2004. The adoption of this new standard did
not have any impact on the Company's financial position, results of operations
or cash flows.
In December 2003, the FASB issued a revision to SFAS No. 132 "Employers'
Disclosures about Pensions and Other Post retirement Benefits." This revised
statement requires additional annual disclosures regarding types of pension plan
assets, investment strategy, future plan contributions, expected benefit
payments and other items. The statement also requires quarterly disclosure of
the components of net periodic benefit cost and plan contributions. This
currently has no effect on the Company.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of software source codes originally purchased by
iVoice for $454,000 in May 1999. The asset is reflected at its original cost net
of accumulated amortization of $408,600, from the date acquired by iVoice. The
asset is being amortized over a 5-year period.
In accordance with FAS 142 goodwill and indefinite-lived intangible assets are
reviewed for impairment at least annually, and whenever events or changes in
circumstances indicate the carrying amounts of the assets may be impaired. We
have elected to perform our impairment review during the fourth quarter of each
year, in conjunction with our annual planning cycle. At December 31, 2003, we
found no impairment of goodwill or other indefinite-lived intangible assets.
NOTE 6 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2003 and December 31, 2002, iVoice allocated
operating costs of $965,341 and $1,323,008, respectively to iVoice Technology.
These allocations are reflected in the selling, general and administrative, cost
of revenue and research and development line items in our statements of
operations. The general corporate expense allocation is primarily for cash
management, selling expense, legal, accounting, tax, insurance, public
F-12
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
relations, advertising, and human resources. The amortization of the Interactive
Voice Response software has been reflected as cost of sales. Other general
categories of operating expense, as well as other income and expense, have been
allocated to iVoice Technology by iVoice based upon a ratio of revenue of the
Interactive Voice Response software over total iVoice revenue for the applicable
periods. Management believes the costs of these services charged are a
reasonable representation of the costs that would have been incurred if iVoice
Technology had performed these functions as a stand-alone company.
In conjunction with the spin-off, iVoice Technology has entered into a temporary
administrative services agreement with iVoice. The agreement will terminate upon
completion of the Distribution.
NOTE 7 - INCOME TAXES
The reconciliation of the effective income tax rate to the Federal Statutory
rate is as follows:
Federal Income Tax Rate (34.0)%
Deferred Tax charge (Credit) -
Effect on Valuation Allowance 38.1 %
State Income Tax, Net of Federal Benefits ( 4.1)%
Effective Income Tax Rate 0.0 %
Prior to the spin-off, the Company was included as part of iVoice's consolidated
federal income tax return. However, the income tax expense presented in these
financial statements has been computed on a separate return basis.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
As discussed in Note 3, the Company has entered into a subscription agreement
with certain purchasers for the sale of $700,000 in convertible debentures. The
notes will be convertible into Class A Common Stock at the discretion of the
holders. Additionally, the Company has entered into a Standby Equity
Distribution Agreement whereby the Company, at their discretion, may
periodically sell to an investor shares of Class A Common Stock to raise capital
to fund its working capital needs. These transactions will require the Company
to register its common stock under Section 12(g) of the Securities Exchange Act
of 1934 and subsequently register for resale a number of shares to facilitate
these financial transactions.
The Company will also assume an outstanding promissory note in the amount of
$190,000 payable to Jerry Mahoney, President and Chief Executive Officer of
iVoice and Non-Executive Chairman of the Board of iVoice Technology. This amount
is related to funds loaned to iVoice and is unrelated to the operations of
iVoice Technology. The note will bear interest at the rate of Prime plus 2.0%
per annum on the unpaid balance until paid. Under the terms of the Promissory
Note, at the option of the Note holder, principal and interest can be converted
into either (i) one share of Class B Common Stock of iVoice Technology, Inc.,
par value $.01, for each dollar owed, (ii) the number of shares of Class A
Common Stock of iVoice Technology, Inc. calculated by dividing (x) the sum of
the principal and interest that the Note holder has requested to have
F-13
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
prepaid by (y) eighty percent (80%) of the lowest issue price of Class A Common
Stock since the first advance of funds under this Note, or (iii) payment of the
principal of this Note, before any repayment of interest.
Effective August 1, 2004, the Company entered into a one year employment
contract with Arie Seidler, its President and Chief Executive Officer. The
Company will pay Mr. Seidler a base salary of $85,000 during the term. Mr.
Seidler can earn bonuses based on the Company achieving certain levels of sales
and profitability and will also be entitled to certain bonuses based on mergers
and acquisitions completed by the Company.
The Company entered into a five-year employment agreement with Jerome Mahoney,
its non-executive Chairman of the Board of Directors, effective August 1, 2004.
The Company will compensate Mr. Mahoney with a base salary of $85,000 for the
first year with annual increases based on the Consumer Price Index. Mr. Mahoney
will also be entitled to certain bonuses based on mergers and acquisitions
completed by the Company.
NOTE 9 - CAPITAL STOCK
Pursuant to iVoice Technology's certificate of incorporation, as amended, the
Company is authorized to issue 10,000,000,000 shares of Class A Common Stock, no
par value per share, 50,000,000 shares of Class B Common Stock, par value $0.01
per share, 20,000,000 shares of Class C Common Stock, par value $0.01 per share,
and 1,000,000 shares of Preferred Stock, par value of $1.00 per share. Below is
a description of iVoice Technology's outstanding securities, including Class A
Common Stock, Class B Common Stock, Class C Common Stock, and Preferred Stock.
a) Class A Common Stock
As of September 30, 2004, there are 2,000 shares of Class A Common Stock
authorized, no par value, and 100 shares were issued and outstanding.
Each holder of Class A Common Stock is entitled to receive ratably
dividends, if any, as may be declared by the Board of Directors out of funds
legally available for payment of dividends. The Company has never paid any
dividends on its common stock and does not contemplate doing so in the
foreseeable future. The Company anticipates that any earnings generated from
operations will be used to finance its growth objectives.
b) Class B Common Stock
As of September 30, 2004, there are 50,000,000 shares of Class B Common
Stock authorized, par value $.01 per share. Each holder of Class B Common Stock
has voting rights equal to 100 shares of Class A Common Stock. A holder of Class
B Common Stock has the right to convert each share of Class B Common Stock into
the number of shares of Class A Common Stock determined by dividing the number
of Class B Common Stock being converted by a 20% discount of the lowest price
that iVoice Technology, Inc. had ever issued its Class A Common Stock. Upon our
liquidation, dissolution, or winding-up, holders of Class B Common Stock will
F-14
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
be entitled to receive distributions. As of September 30, 2004, no shares were
issued or outstanding.
c) Class C Common Stock
As of September 30, 2004, there are 20,000,000 shares of Class C Common
Stock authorized, par value $.01 per share. Each holder of Class C Common Stock
is entitled to 1,000 votes for each share held of record. Shares of Class C
Common Stock are not convertible into Class A Common Stock. Upon liquidation,
dissolution or wind-up, the holders of Class C Common Stock are not entitled to
receive our net assets pro rata. As of September 30, 2004, no shares were issued
or outstanding;
d) Preferred Stock
iVoice Technology is authorized to issue 1,000,000 shares of Preferred
Stock, par value $1.00 per share, 30 shares of which have been designated as
Series A 5% Convertible Preferred Stock. As of September 30, 2004, iVoice
Technology has not issued any shares of Preferred Stock.
e) Series A 5% Convertible Preferred Stock
In partial consideration of and exchange for the assets that iVoice
Technology will receive pursuant to the spin-off of the IVR business, iVoice
Technology will issue 30 shares of Series A 5% Convertible Preferred Stock to
iVoice.
The par value of each share of Series A 5% Convertible Preferred Stock is
$1.00 per share and the stated value of each share is Twenty-Five Thousand
Dollars ($25,000) per share. Dividends are payable quarterly on the Series A 5%
Convertible Preferred Stock on the last day of each calendar quarter in an
amount equal to 5% per annum of the stated value of the Series A 5% Convertible
Preferred Stock. Dividends are payable, at the option of iVoice Technology, in
cash or, with the consent of the holders of Series A 5% Convertible Preferred
Stock, in shares of Class A Common Stock valued at the lowest closing bid price
of the Class A Common Stock for the five trading days immediately preceding the
dividend payment date.
Each dividend shall be payable in equal quarterly amounts on each March
31, June 30, September 30 and December 31 of each year, commencing December 31,
2004 (provided that such initial dividend payment shall include all dividends
accrued from the Closing Date until the initial Dividend Payment Due Date.
Each share of Series A 5% Convertible Preferred Stock is convertible into
shares of Class A Common Stock of the Company at a price equal to the lesser of
(a) an amount equal to one hundred twenty-five percent (125%) of the closing bid
price of the Class A Common Stock as of the conversion date, or (b) an amount
equal to 80% of the lowest closing bid price of Class A Common Stock for the
five trading days immediately preceding the conversion date.
F-15
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
In the event of the liquidation of iVoice Technology, the holders of
Series A 5% Convertible Preferred Stock will be entitled to receive a
liquidation preference before any amounts are paid to holders of any class of
iVoice Technology common stock. The liquidation preference is an amount equal to
125% of the stated value of the Series A 5% Convertible Preferred Stock plus any
accrued and unpaid dividends on that stock through the liquidation date.
The holders of Series A 5% Convertible Preferred Stock will have no right
to vote, except as otherwise provided by law.
NOTE 10 - SUBSEQUENT EVENTS
On September 7, 2004, iVoice, Inc. announced that it intends to distribute to
distribute to the Company's shareholders all common stock shares of its
subsidiary iVoice Technology, Inc.
The following two financing transactions will require the Company to register
its common stock under Section 12(g) of the Securities Exchange Act of 1934 and
subsequently register for resale a number of shares to facilitate these
financing transactions.
In August 2004, the Company entered into an agreement with Sloan Securities
Corporation to act as an agent for the private placement of secured convertible
debentures to Cornell Capital Partners, L.P. Under the placement agent
agreement, the Company agreed to issue to Sloan on or about the date of
effectiveness of the registration statement for the Class A Common Stock a
number of shares of Class A Common Stock equal to $10,000 divided by the closing
bid price of the Class A Common Stock on the date of effectiveness of such
registration statement. In August 2004, the Company issued $280,000 of secured
convertible debentures and will issue an additional $280,000 of secured
convertible debentures around the time of filing of the registration statement
for the Class A Common Stock and an additional $140,000 of secured convertible
debentures based on the effectiveness of the registration statement, to Cornell
Capital Partners. Each of the debentures are convertible into shares of Class A
Common Stock at a price equal to the lesser of (a) an amount equal to one
hundred twenty percent (120%) of the initial bid price of the Class A Common
Stock on the date of effectiveness of the registration statement of which this
prospectus is a part or (b) an amount equal to eighty percent (80%) of the
lowest closing bid price of the Class A Common Stock for the five trading days
immediately preceding the conversion date. The secured convertible debentures
have a term of two years with all accrued interest due at the expiration of the
term. At our option, these debentures may be redeemed at a 20% premium prior to
August 12, 2006. The secured convertible debentures are secured by a first
priority security interest in substantially all of the assets of iVoice
Technology.
Effective August 12, 2004, iVoice Technology entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners to obtain an equity line of
credit. Under this agreement, iVoice Technology may issue and sell to Cornell
Capital Partners Class A Common Stock for a total purchase price of up to $10.0
million. iVoice Technology will be entitled to commence drawing funds under this
agreement when the resale of the Class A Common Stock issuable under the equity
line of credit is registered with the Securities and Exchange Commission, and
the equity line of credit will remain outstanding for two years thereafter. The
purchase price for the shares will be equal to 95% of the market price, which is
defined as the lowest closing bid
F-16
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
price of the Class A Common Stock during the five trading days following the
date that iVoice Technology delivers to Cornell Capital Partners a notice
requiring it to advance funds to the Company. A cash fee equal to six percent
(6%) of the cash proceeds of the draw down is also payable at the time of
funding. In addition, Cornell Capital Partners will receive, as additional
compensation, the number of shares of Class A Common Stock equal to one and one
half percent (1.5%) of the number of shares of Class A Common Stock outstanding
on the date that the registration statement in respect of the shares to be
distributed pursuant to the equity line of credit becomes effective. To date,
iVoice Technology has not drawn down on the equity line of credit.
F-17
iVOICE TECHNOLOGY, INC.
BALANCE SHEET
September 30, 2004
(Unaudited)
ASSETS
------
CURRENT ASSETS
Cash 205,710
Inventory 8,162
Prepaid expenses 98,000
-----------
Total current assets 311,872
PROPERTY AND EQUIPMENT, net
Property and Equipment, net 2,418
-----------
TOTAL ASSETS $ 314,290
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expense $ 8,698
Deferred maintenance contracts 13,480
5% Convertible debentures 280,000
-----------
Total current liabilities 302,178
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock:
Class A, par value $.00001; Authorized -
10,000,000,000 shares; 100 shares issued
and outstanding
Class B, par value $.00001; Authorized -
50,000,000 shares; no shares issued and outstanding --
Class C, par value $.00001; Authorized -
20,000,000 shares; no shares issued and outstanding --
Preferred Stock; Par value $1.00; Authorized -
1,000,000 shares; no shares issued and outstanding --
Net investment - iVoice, Inc. 7,297,231
Additional paid in capital 70,000
Accumulated deficit (7,355,119)
-----------
Total stockholder's equity 12,112
-----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 314,290
===========
The Notes to the Financial Statements are an integral part of these statements.
F-18
iVOICE TECHNOLOGY, INC.
STATEMENT OF OPERATIONS
For The Nine Months Ended September 30, 2004 and 2003
(Unaudited)
2004 2003
----------- -----------
SALES, net $ 177,484 $ 239,306
COST OF SALES 59,263 90,813
----------- -----------
GROSS PROFIT 118,221 148,493
----------- -----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
Selling expenses 51,979 52,780
General & administrative 618,042 439,268
Research & development 50,787 107,098
Depreciation & amortization 36,258 75,086
----------- -----------
Total Selling, General & Administrative
expense 757,066 674,232
----------- -----------
LOSS FROM OPERATIONS (638,845) (525,739)
----------- -----------
OTHER INCOME \(EXPENSE)
Other Income 164,384 739
Interest expense (820,876) (204,040)
Total other expense (656,492) (203,301)
----------- -----------
LOSS BEFORE INCOME TAXES (1,295,337) (729,040)
----------- -----------
PROVISION FOR INCOME TAXES -- --
----------- -----------
NET LOSS $(1,295,337) $ (729,040)
=========== ===========
PRO FORMA NET LOSS PER COMMON SHARE:
Basic $(12,953.37) $ (7,290.40)
Diluted $(12,953.37) $ (7,290.40)
The Notes to the Financial Statements are an integral part of these statements.
F-19
iVOICE TECHNOLOGY, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
For the Nine Months Ended September 30, 2004
(Unaudited)
Common Common Additional Net Total
Stock Stock Paid in Investment Accumulated Owner's
Shares Amount Capital iVoice, Inc. Deficit Equity
------ ------ ------- ------------ ----------- -------
Balance at January 1, 2004 $ 6,133,597 $(6,059,782) $ 73,815
Issuance of common stock 100 -- --
Sale of convertible debentures 70,000 70,000
Net transactions with iVoice, Inc. -- 1,163,634 1,163,634
Net loss for the nine months ended
September 30, 2004 -- -- -- (1,295,337) (1,295,337)
---- ------ ---------- ----------- ----------- -----------
Balance at September 30, 2004 100 -- $ 70,000 $ 7,297,231 $(7,355,119) $ 12,112
The Notes to the Financial Statements are an integral part of these statements.
F-20
iVOICE TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
For The Nine Months Ended September 30, 2004 and 2003
(Unaudited)
2004 2003
----------- ----------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(1,295,337) $ (729,040)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities
Depreciation and amortization 36,258 75,086
Changes in operating assets and liabilities
Increase in accounts payable and accrued expenses (46,427) 30,683
----------- -----------
Net cash used in operating activities (1,305,506) (623,271)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property plant and equipment (2,418) --
----------- -----------
Net cash used in investing activities (2,418) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Investment in iVoice Technology 1,163,634 623,271
Sale of convertible debentures 280,000
Paid in Capital 70,000 --
----------- -----------
Net cash provided by financing activities 1,513,634 623,271
----------- -----------
NET INCREASE (DECREASE) IN CASH 205,710 --
CASH - beginning -- --
----------- -----------
CASH - end $ 205,710 $ --
=========== ===========
CASH PAID DURING THE YEAR FOR:
Interest expense $ 820,876 $ 204,040
=========== ===========
Income taxes $ -- $ --
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
For the Nine Months Ended September 30, 2003
- --------------------------------------------
a) The Company issued $280,000 on August 12, 2004 of its 5% Convertible
Debentures with a 20% beneficial conversion feature. The beneficial
conversion has been recorded as a prepaid financing cost until such
time as the Company's Class A common stock into which the debentures
are convertible is registered. Upon effective registration of the
Company's common stock, any amounts capitalized as beneficial
conversion feature will be charged to expense in accordance with
EITF Issue 98-5.
The Notes to the Financial Statements are an integral part of these statements
F-21
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
NOTE 1 - BACKGROUND
iVoice Technology, Inc. ("iVoice Technology" or the "Company") was
incorporated under the laws of New Jersey on November 10, 2004 as a wholly owned
subsidiary of iVoice, Inc. ("iVoice"). The Company received by assignment all of
the interests in and rights and title to, and assumed all of the obligations of,
all of the agreements, contracts, understandings and other instruments of iVoice
Technology, Inc., a Nevada corporation and affiliate of the Company. When we
refer to or describe any agreement, contract or other written instrument of the
Company in these notes, we are referring to an agreement, contract or other
written instrument that had been entered into by iVoice Technology Nevada and
assigned to the Company.
On September 1, 2004, the Board of Directors of iVoice, Inc. resolved to
pursue the separation of iVoice software business into three publicly owned
companies. iVoice will continue to focus on its own computerized telephony
technology and related business development operations. iVoice Technology, Inc.
will continue to develop, market and license the Interactive Voice Response line
of computerized telephony software.
The spin-off transaction will be accomplished by the distribution of
certain intellectual property, representing the software codes of Interactive
Voice Response ("IVR"), and certain accrued liabilities and related party debt
to iVoice Technology (the "Distribution"), the shares of common stock of which
will be distributed to iVoice shareholders in the form of a taxable dividend.
In conjunction with the spin-off, iVoice Technology has entered into a
temporary administrative services agreement with iVoice. The agreement will
terminate upon completion of the Distribution. However, if, following the
Distribution, iVoice Technology is unable to replace any or all of the services
currently being provided by iVoice under the administrative services agreement,
the administrative services agreement will be continued with respect to those
services on a month-to-month basis.
iVoice Technology also intends to assume $190,000 in accrued liabilities
and related party debt presently outstanding and incurred by iVoice. The debt
being assumed will be convertible into Class B Common Stock of iVoice Technology
at the option of the holder as later described in these notes.
NOTE 2 - BUSINESS OPERATIONS
The Company will continue to develop, market and license the Interactive
Voice Response line, which was developed by iVoice. The Company's Interactive
Voice Response line is designed to read information from and write information
to, databases, as well as to query databases and return information.
F-22
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
IVR is an application generator that allows full connectivity to many
databases, including Microsoft Access, Microsoft Excel, Microsoft Fox Pro, and
Paradox, or to standard text files. The IVR software is sold as an application
generator that gives the end user the ability to develop their own customized
IVR applications or as a customized turnkey system. IVR performs over 40
different customizable commands. Examples of IVR range from simply selecting
announcements from a list of options stored in the computer (also known as audio
text) to more complex interactive exchanges such as querying a database for
information.
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplates continuation of the Company as a going concern. The Company
has traditionally operated as a non-reporting component of iVoice, Inc. and
accordingly these financial statements have been derived from the consolidated
financial statements and accounting records of iVoice, Inc., and reflect
significant assumptions and allocations. The Company relies on iVoice, Inc. for
administrative, management, research and other services. These financial
statements do not necessarily reflect the financial position, results of
operations, and cash flows of the Company had it been a stand-alone Company.
As of September 30, 2004, the Company had a net loss, a negative cash flow
from operations as well as negative working capital. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Therefore, recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheets is dependent upon continued operations of the
Company, which in turn, is dependent upon the Company's ability to raise capital
and/or generate positive cash flow from operations.
In order to provide necessary working capital, in August 2004, the Company
entered into a subscription agreement, pursuant to which the Company issued
$280,000 of secured convertible debentures in August 2004, and will issue an
additional $280,000 of secured convertible debentures around the time of filing
of the registration statement for the Class A Common Stock and an additional
$140,000 of secured convertible debentures based on the effectiveness of the
registration statement. Interest on the notes is payable at 5% per annum and the
notes are convertible into the Company's Class A Common Stock at a price equal
to the lesser of (a) an amount equal to one hundred twenty percent (120%) of the
initial bid price of the Class A Common Stock on the date of effectiveness of
the registration statement, or (b) an amount equal to eighty percent (80%) of
the lowest closing bid price of the Class A Common Stock for the five (5)
trading days immediately preceding the conversion date. Additionally, the
Company has also entered into a Standby Equity Distribution Agreement where the
Company may, at its discretion, periodically sell to an investor shares of Class
A Common Stock to raise capital to fund working capital needs. These two
financing transactions will require the Company to register its common stock
under Section 12 (g) of the U.S. Securities Exchange Act of 1934 and
subsequently register for resale a number of shares to facilitate these
financing transactions.
F-23
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The accompanying financial statements have been derived from the
consolidated financial statements and accounting records of iVoice using the
historical results of operations and historical basis of assets and liabilities
of the Company's Interactive Voice Response business. Management believes the
assumptions underlying the financial statements are reasonable. However, the
financial statements included herein may not necessarily reflect the Company's
results of operations, financial position, and cash flows in the future or what
its results of operations, financial position and cash flows would have had the
Company been a stand-alone company during the periods presented.
b) Use of 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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
c) Software License Costs
Software license costs are recorded at cost, which approximates fair
market value as of the date of purchase. These costs represent the purchase of
various exploitation rights to certain software, pre-development codes and
systems developed by a non-related third party. These costs are capitalized
pursuant to Statement of Financial Accounting Standards ("SFAS") 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed".
The Company has adopted SFAS No. 121. The carrying value of software license
costs are regularly reviewed by the Company and a loss would be recognized if
the value of the estimated un-discounted cash flow benefit related to the asset
falls below the unamortized cost. Historically the Interactive Voice Response
software technology has produced limited sales revenue. However, management
believes that the limited sales generated result from a lack of application of
Company sales and marketing resources to the software, It is Management's plan
to devote such resources to its software technology to recognize the
technology's potential value and therefore, no impairment loss has been
recorded.
d) Revenue Recognition
The Company derives its revenues from the licensing of its software
product and optional customer support (maintenance) service. The Company's
standard license agreement provides
F-24
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
for a one-time fee for use of the Company's product in perpetuity for each
computer or CPU in which the software will reside. The Company's software
application is fully functional upon delivery and implementation and does not
require any significant modification or alteration. The Company also offers
customers an optional annual software maintenance and support agreement for the
subsequent one-year periods. Such maintenance and support services are free for
the first year the product is licensed and is considered the warranty period.
The software maintenance and support agreement provides free software updates,
if any, and technical support the customer may need in deploying or changing the
configuration of the software. Generally, the Company does not license its
software in multiple element arrangements whereby the customer purchases a
combination of software and maintenance. In a typical arrangement, software
maintenance services are sold separately from the software product; are not
considered essential to the functionality of the software and are purchased at
the customer's option upon the completion of the first year licensed.
The Company does not offer any special payment terms or significant
discount pricing. Normal and customary payment terms require payment for the
software license fees when the product is shipped. Payment for software
maintenance is due prior to the commencement of the maintenance period. It is
also the Company's policy to not provide customers the right to refund any
portion of its license fees. The Company accepts Visa and MasterCard as well as
company checks.
With respect to the sale of software license fees, the Company recognizes
revenue in accordance with Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2), as amended, and generally recognizes revenue when all of
the following criteria are met: (1) persuasive evidence of an arrangement exists
generally evidenced by a signed, written purchase order from the customer, (2)
delivery of the software product on Compact Disk (CD) or other means to the
customer has occurred, (3) the perpetual license fee is fixed or determinable
and (4) collectibility, which is assessed on a customer-by-customer basis, is
probable.
With respect to customer support services, upon the completion of one year
from the date of sale, considered to be the warrantee period, the Company offers
customers an optional annual software maintenance and support agreement for
subsequent one-year periods. Sales of purchased maintenance and support
agreements are recorded as deferred revenue and recognized over the respective
terms of the agreements.
e) Product Warranties
The Company estimates its warranty costs based on historical warranty
claims experience in estimating potential warranty claims. Due to the limited
sales of the Company's products, management has determined that warranty costs
are immaterial and has not included an accrual for potential warranty claims.
Presently, costs related to warranty coverage are expensed as incurred. Warranty
claims are reviewed quarterly to verify that warranty liabilities properly
reflect any remaining obligation based on the anticipated expenditures over the
balance of the obligation period.
F-25
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
f) Research and development costs
Research and development costs will be charged to expense as incurred.
g) Inventory
Inventory, consisting primarily of system components such as computer
components, voice cards, and monitors, is valued at the lower of cost or market.
Cost is determined on a first-in, first-out basis.
h) Income Taxes
The Company accounts for income taxes under the Financial Accounting
Standards Board ("FASB") of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" ("Statement 109"). Under Statement 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The Company, not being a separate reporting entity, will not receive any
benefit from the approximately $7,300,000 net operating loss allocated to the
IVR software business contained in these financial statements.
i) Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method based upon the estimated useful lives of the assets,
generally five to seven years. Maintenance and repairs are charged to expense as
incurred.
j) Organization Costs
Organization costs consist primarily of professional and filing fees
relating to the formation of the Company. These costs have been expensed.
k) Earnings Per Share
SFAS No. 128, "Earnings Per Share" requires presentation of basic earnings
per share ("basic EPS") and diluted earnings per share ("diluted EPS").
The computation of basic pro forma EPS is computed by dividing income
available to common shareholders by the expected number of shares to be issued
in connection with the Company's proposed spin-off from iVoice, Inc. Diluted
earnings per share gives effect to all
F-26
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
dilutive potential Common shares outstanding during the period. The computation
of diluted EPS does not assume conversion, exercise or contingent exercise of
securities that would have an anti-dilutive effect on earnings resulting from
the Company's net loss position. Since the earnings per share information is
being shown on a pro forma basis, only the most recent year has been presented.
The shares used in the computation are as follows:
As of September 30, 2004
------------------------
Pro Forma Basis and diluted purposes 100
l) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
the reporting and display of comprehensive income and its components in the
financial statements. The items of other comprehensive income that are typically
required to be displayed are foreign currency items, minimum pension liability
adjustments, and unrealized gains and losses on certain investments in debt and
equity securities, As of September 30, 2004, the Company has no items that
represent comprehensive income, and thus, has not included a statement of
comprehensive income.
m) Recent Accounting Pronouncements
In December 2003, the FASB issued Interpretation No. 48-R, "Consolidation
of Variable Interest Entities" ("FIN 46-R"). FIN 46-R, which modifies certain
provisions and effective dates of FIN No. 46, sets forth criteria to be used in
determining whether an investment in a variable interest entity should be
consolidated, and is based on the general premise that companies that control
another entity through interests other than voting interests should consolidate
the controlled entity. The provisions of FIN 46 became effective for the Company
during the third quarter of Fiscal 2004. The adoption of this new standard did
not have any impact on the Company's financial position, results of operations
or cash flows.
In December, 2003, the FASB issued a revision to SFAS No. 132 "Employers'
Disclosures about Pensions and Other Post retirement Benefits." This revised
statement requires additional annual disclosures regarding types of pension plan
assets, investment strategy, future plan contributions, expected benefit
payments and other items. The statement also requires quarterly disclosure of
the components of net periodic benefit cost and plan contributions. This
currently has no effect on the Company.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of software source codes originally purchased by
iVoice for $454,000 in May 1999. As of September 30,2004 the asset has been
fully amortized.
F-27
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
In accordance with FAS 142 goodwill and indefinite-lived intangible assets
are reviewed for impairment at least annually, and whenever events or changes in
circumstances indicate the carrying amounts of the assets may be impaired. We
have elected to perform our impairment review during the fourth quarter of each
year, in conjunction with our annual planning cycle. At September 30, 2004, the
Company found no impairment of goodwill or other indefinite-lived intangible
assets.
NOTE 6 - CONVERTIBLE DEBENTURES AND EQUITY LINE OF CREDIT
The following two financing transactions will require the Company to
register its common stock under Section 12(g) of the Securities Exchange Act of
1934 and subsequently register for resale a number of shares to facilitate these
financing transactions.
In August 2004, the Company entered into an agreement with Sloan
Securities Corporation to act as an agent for the private placement of secured
convertible debentures to Cornell Capital Partners, L.P. Under the placement
agent agreement, the Company agreed to issue to Sloan on or about the date of
effectiveness of the registration statement for the Class A Common Stock a
number of shares of Class A Common Stock equal to $10,000 divided by the closing
bid price of the Class A Common Stock on the date of effectiveness of such
registration statement. In August 2004, the Company issued $280,000 of secured
convertible debentures and will issue an additional $280,000 of secured
convertible debentures around the time of filing of the registration statement
for the Class A Common Stock and an additional $140,000 of secured convertible
debentures based on the effectiveness of the registration statement, to Cornell
Capital Partners. Each of the debentures are convertible into shares of Class A
Common Stock at a price equal to the lesser of (a) an amount equal to one
hundred twenty percent (120%) of the initial bid price of the Class A Common
Stock on the date of effectiveness of the registration statement of which this
prospectus is a part or (b) an amount equal to eighty percent (80%) of the
lowest closing bid price of the Class A Common Stock for the five trading days
immediately preceding the conversion date. The secured convertible debentures
have a term of two years with all accrued interest due at the expiration of the
term. At our option, these debentures may be redeemed at a 20% premium prior to
August 12, 2006. The secured convertible debentures are secured by a first
priority security interest in substantially all of the assets of iVoice
Technology.
Effective August 12, 2004, iVoice Technology entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners to obtain an equity line of
credit. Under this agreement, iVoice Technology may issue and sell to Cornell
Capital Partners Class A Common Stock for a total purchase price of up to $10.0
million. iVoice Technology will be entitled to commence drawing funds under this
agreement when the resale of the Class A Common Stock issuable under the equity
line of credit is registered with the Securities and Exchange Commission, and
the equity line of credit will remain outstanding for two years thereafter. The
purchase price for the shares will be equal to 95% of the market price, which is
defined as the lowest closing bid price of the Class A Common Stock during the
five trading days following the date that iVoice Technology delivers to Cornell
Capital Partners a notice requiring it to advance funds to the Company. A cash
fee equal to six percent (6%) of the cash proceeds of the draw down is also
F-28
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
payable at the time of funding. In addition, Cornell Capital Partners will
receive, as additional compensation, the number of shares of Class A Common
Stock equal to one and one half percent (1.5%) of the number of shares of Class
A Common Stock outstanding on the date that the registration statement in
respect of the shares to be distributed pursuant to the equity line of credit
becomes effective. To date, iVoice Technology has not drawn down on the equity
line of credit.
NOTE 7 - RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2004 and 2003, iVoice allocated
operating costs of $816,329 and $765,045 respectively to iVoice Technology.
These allocations are reflected in the selling, general and administrative, cost
of revenue and research and development line items in our statement s of
operations. The general corporate expense allocation is primarily for cash
management, selling expense, legal, accounting, tax, insurance, public
relations, advertising, and human resources. The amortization of the Interactive
Voice Response software has been reflected as cost of sales. Other general
categories of operating expense, as well as other income and expense, have been
allocated to iVoice Technology by iVoice based upon a ratio of revenue of the
Interactive Voice Response software over total iVoice revenue for the applicable
periods. Management believes the costs of these services charged are a
reasonable representation of the costs that would have been incurred if iVoice
Technology had performed these functions as a stand-alone company.
In conjunction with the spin-off, iVoice Technology has entered into a
temporary administrative services agreement with iVoice. The agreement will
terminate upon completion of the Distribution.
NOTE 8 - INCOME TAXES
The reconciliation of the effective income tax rate to the Federal
Statutory rate is as follows:
Federal Income Tax Rate (34.0)%
Deferred Tax charge (Credit) -
Effect on Valuation Allowance 38.1 %
State Income Tax, Net of Federal Benefits ( 4.1)%
Effective Income Tax Rate 0.0 %
Prior to the spin-off, the Company was included as part of iVoice's
consolidated federal income tax return. However, the income tax expense
presented in these financial statements has been computed on a separate return
basis.
F-29
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
NOTE 9 - COMMITMENTS AND CONTINGENCIES
As discussed in Note 3, the Company has entered into a subscription
agreement with certain purchasers for the sale of $700,000 in convertible
debentures. The notes will be convertible into Class A Common Stock at the
discretion of the holders. Additionally, the company has entered into a Standby
Equity Distribution Agreement whereby the Company, at its discretion, may
periodically sell to an investor shares of Class A Common Stock to raise capital
to fund its working capital needs. These transactions will require the Company
to register its common stock under Section 12(g) of the Securities Exchange Act
of 1934 and subsequently register for resale a number of shares to facilitate
these financial transactions.
The Company will also assume an outstanding promissory note in the amount
of $190,000 payable to Jerry Mahoney, President and Chief Executive Officer of
iVoice and Non-Executive Chairman of the Board of iVoice Technology. This amount
is related to funds loaned to iVoice and is unrelated to the operations of
iVoice Technology. The note will bear interest at the rate of Prime plus 2.0%
per annum on the unpaid balance until paid. Under the terms of the Promissory
Note, at the option of the Note holder, principal and interest can be converted
into either (i) one share of Class B Common Stock of iVoice Technology, Inc.,
par value $.01, for each dollar owed, (ii) the number of shares of Class A
Common Stock of iVoice Technology, Inc. calculated by dividing (x) the sum of
the principal and interest that the Note holder has requested to have prepaid by
(y) eighty percent (80%) of the lowest issue price of Class A Common Stock since
the first advance of funds under this Note, or (iii) payment of the principal of
this Note, before any repayment of interest.
Effective August 1, 2004, the Company entered into a one year employment
contract with Arie Seidler, its President and Chief Executive Officer. The
Company will pay Mr. Seidler a base salary of $85,000 during the term. Mr.
Seidler can earn bonuses based on the Company achieving certain levels of sales
and profitability and will also be entitled to certain bonuses based on mergers
and acquisitions completed by the Company.
The Company entered into a five-year employment agreement with Jerome
Mahoney, its non-executive Chairman of the Board of Directors, effective August
1, 2004. The Company will compensate Mr. Mahoney with a base salary of $85,000
for the first year with annual increases based on the Consumer Price Index. Mr.
Mahoney will also be entitled to certain bonuses based on mergers and
acquisitions completed by the Company.
NOTE 10 - CAPITAL STOCK
Pursuant to iVoice Technology's certificate of incorporation, as amended,
the Company is authorized to issue 10,000,000,000 shares of Class A Common
Stock, no par value per share, 50,000,000 shares of Class B Common Stock, par
value $0.01 per share, 20,000,000 shares of Class C Common Stock, par value
$0.01 per share, and 1,000,000 shares of Preferred Stock, par value of $1.00 per
share. Below is a description of iVoice Technology's outstanding securities,
F-30
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
including Class A Common Stock, Class B Common Stock, Class C Common Stock, and
Preferred Stock.
a) Class A Common Stock
As of September 30, 2004, there are 2,000 shares of Class A Common Stock
authorized, no par value, and 100 shares were issued and outstanding.
Each holder of Class A Common Stock is entitled to receive ratably
dividends, if any, as may be declared by the Board of Directors out of funds
legally available for payment of dividends. The Company has never paid any
dividends on its common stock and does not contemplate doing so in the
foreseeable future. The Company anticipates that any earnings generated from
operations will be used to finance its growth objectives.
b) Class B Common Stock
As of September 30, 2004, there are 50,000,000 shares of Class B Common
Stock authorized, par value $.01 per share. Each holder of Class B Common Stock
has voting rights equal to 100 shares of Class A Common Stock. A holder of Class
B Common Stock has the right to convert each share of Class B Common Stock into
the number of shares of Class A Common Stock determined by dividing the number
of Class B Common Stock being converted by a 20% discount of the lowest price
that iVoice Technology, Inc. had ever issued its Class A Common Stock. Upon our
liquidation, dissolution, or winding-up, holders of Class B Common Stock will be
entitled to receive distributions. As of September 30, 2004, no shares were
issued or outstanding.
c) Class C Common Stock
As of September 30, 2004, there are 20,000,000 shares of Class C Common
Stock authorized, par value $.01 per share. Each holder of Class C Common Stock
is entitled to 1,000 votes for each share held of record. Shares of Class C
Common Stock are not convertible into Class A Common Stock. Upon liquidation,
dissolution or wind-up, the holders of Class C Common Stock are not entitled to
receive our net assets pro rata. As of September 30, 2004, no shares were issued
or outstanding.
d) Preferred Stock
iVoice Technology is authorized to issue 1,000,000 shares of Preferred
Stock, par value $1.00 per share, 30 shares of which have been designated as
Series A 5% Convertible Preferred Stock. As of September 30, 2004, iVoice
Technology has not issued any shares of Preferred Stock.
e) Series A 5% Convertible Preferred Stock
F-31
iVOICE TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
In partial consideration of and exchange for the assets that iVoice
Technology will receive pursuant to the spin-off of the IVR business, iVoice
Technology will issue 30 shares of Series A 5% Convertible Preferred Stock to
iVoice.
The par value of each share of Series A 5% Convertible Preferred Stock is
$1.00 per share and the stated value of each share is Twenty-Five Thousand
Dollars ($25,000) per share. Dividends are payable quarterly on the Series A 5%
Convertible Preferred Stock on the last day of each calendar quarter in an
amount equal to 5% per annum of the stated value of the Series A 5% Convertible
Preferred Stock. Dividends are payable, at the option of iVoice Technology, in
cash or, with the consent of the holders of Series A 5% Convertible Preferred
Stock, in shares of Class A Common Stock valued at the lowest closing bid price
of the Class A Common Stock for the five trading days immediately preceding the
dividend payment date.
Each dividend shall be payable in equal quarterly amounts on each March
31, June 30, September 30 and December 31 of each year, commencing December 31,
2004 (provided that such initial dividend payment shall include all dividends
accrued from the Closing Date until the initial Dividend Payment Due Date.
Each share of Series A 5% Convertible Preferred Stock is convertible into
shares of Class A Common Stock of the Company at a price equal to the lesser of
(a) an amount equal to one hundred twenty-five percent (125%) of the closing bid
price of the Class A Common Stock as of the conversion date, or (b) an amount
equal to 80% of the lowest closing bid price of Class A Common Stock for the
five trading days immediately preceding the conversion date.
In the event of the liquidation of iVoice Technology, the holders of
Series A 5% Convertible Preferred Stock will be entitled to receive a
liquidation preference before any amounts are paid to holders of any class of
iVoice Technology common stock. The liquidation preference is an amount equal to
125% of the stated value of the Series A 5% Convertible Preferred Stock plus any
accrued and unpaid dividends on that stock through the liquidation date.
The holders of Series A 5% Convertible Preferred Stock will have no right
to vote, except as otherwise provided by law.
F-32
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed statements of operations for the
nine months ended September 30, 2004 and for the year ended December 31, 2003
and the unaudited pro forma condensed balance sheet at December 31, 2003 present
the results of operations and financial position of iVoice Technology, Inc.,
assuming that the transactions contemplated by the spin-off had been completed
as of the beginning of 2003 with respect to the pro forma consolidated income
statements for the nine months ended September 30, 2004 and for the year ended
December 31, 2003 with respect to the pro forma consolidated balance sheet. The
pro forma adjustments give effect of a spin-off transaction whereby shareholders
of the Company's former parent, iVoice Inc., will receive a pro-rata
distribution of the Company's shares in the form of a taxable dividend. Under
the spin-off transaction, the Company will receive certain intellectual property
and liabilities of the Company's former parent, iVoice, Inc. In the opinion of
management, they include all material adjustments necessary to reflect, on a pro
forma basis, the impact of transactions contemplated by the spin-off on the
historical financial information of iVoice Technology, Inc.
The pro forma financial information is presented for informational purposes and
does not purport to represent what our financial position and our results of
operations actually would have been had the separation and related transactions
occurred on the dates indicated. Actual results might have differed from pro
forma results if iVoice Technology had operated independently. The pro forma
financial information should not be relied upon as being indicative of results
iVoice Technology would have had or of future results after the spin-off. The
historical selected financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the combined financial statements and notes thereto included
elsewhere in this prospectus.
F-33
CONDENSED UNAUDITED PRO FORMA BALANCE SHEETS
(UNAUDITED)
AS OF SEPTEMBER 30, 2004
As Pro Forma
Reported Adjustments Pro Forma
-------- ----------- ---------
Current Assets
Cash $ 205,710 $ 205,710
Inventory 8,162 $ -- 8,162
Prepaid expenses 98,000 -- 98,000
--------- --------- ---------
Total Current Assets 311,872 -- 311,874
Property and Equipment, net 2,418 -- 2,418
Total Assets $ 314,290 $ -- $ 314,290
========= ========= =========
Current Liabilities
Accounts payable and accrued
liabilities:
Due to iVoice, Inc. 22,178 -- 22,718
Due to related party -- 190,000 190,000
Convertible debentures 280,000 -- 280,000
--------- --------- ---------
Total current liabilities 302,178 190,000 492,178
Stockholder's equity 12,112 (190,000) (177,888)
--------- --------- ---------
Total Liabilities and
Stockholder's Deficit $ 314,290 $ -- $ 314,290
========= ========= =========
See accompanying Notes to Condensed Unaudited Pro Forma Financial Information.
F-34
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2004
As Pro Forma
Reported Adjustments Pro Forma
-------- ----------- ---------
Sales, net $ 177,484 $ -- $ 177,484
Cost of Sales 59,263 -- 59,263
----------- ----------- -----------
Gross Profit 118,221 118,221
Selling General and
Administrative Expenses 757,066 63,000 820,066
----------- ----------- -----------
Income (Loss) from Operations (638,845) (63,000) (701,845)
Other Income (Expense) (656,492) (759,263) (1,415,755)
----------- ----------- -----------
Income (Loss) before Income Taxes (1,295,337) (822,263) (2,117,600)
Provision for Income Taxes -- -- --
----------- ----------- -----------
Net Income (Loss) $(1,295,337) $ (822,263) $(2,117,600)
=========== =========== ===========
Net Loss Per Common Share:
Basic $ (0.21)
===========
Diluted $ (0.21)
===========
See accompanying Notes to Condensed Unaudited Pro Forma Financial Information.
F-35
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 2003
As Pro Forma
Reported Adjustments Pro Forma
-------- ----------- ---------
Sales, net $ 303,756 $ 303,756
Cost of Sales 123,091 -- 123,091
----------- ----------- -----------
Gross Profit 180,665 -- 180,665
Selling General and
Administrative Expenses 965,341 84,000 1,049,341
----------- ----------- -----------
Income (Loss) from Operations (784,676) (84,000)- (868,676)
Other Income (Expense) (346,744) (12,350) (359,094)
----------- ----------- -----------
Income (Loss) before Income Taxes (1,131,420) (96,350) (1,227,770)
Provision for Income Taxes -- -- --
----------- ----------- -----------
Net Income (Loss) $(1,131,420) $ (96,350) $(1,227,770)
=========== =========== ===========
Net Loss Per Common Share:
Basic $ (0.12)
Diluted $ (0.12)
===========
See accompanying Notes to Condensed Unaudited Pro Forma Financial Information.
F-36
NOTES TO CONDENSED UNAUDITED PRO FORMA FINANCIAL INFORMATION
NOTE 1.
The historical financial statements of iVoice Technology, Inc. reflect
periods during which iVoice Technology did not operate as a separate,
independent public company. Certain estimates, assumptions and allocations were
made in preparing such financial statements. Therefore, the historical financial
statements do not necessarily reflect the results of operations or financial
position that would have occurred had iVoice Technology been a separate,
independent public company during the periods presented, nor are they indicative
of future performance.
Management believes that the estimates, assumptions and allocations made
in preparing the historical financial statements are reasonable.
NOTE 2.
The pro forma unaudited balance sheet was prepared assuming the
distribution occurred on September 30, 2004 and includes "Pro Forma Adjustments"
for transactions that occurred subsequent to September 30, 2000 as follows:
(a) The Company is also assuming an outstanding promissory note in
the amount of $190,000 payable to Jerry Mahoney, President and
Chief Executive Officer of iVoice. The note will bear interest
at the rate of prime plus 2.0% per annum on the unpaid balance
until paid or until default. Under the terms of the Promissory
Note, at the option of the Note holder, principal and interest
can be converted into either (i) one Class B common stock
share of iVoice Technology, Inc., par value $.01, for each
dollar owed, (ii) the number of Class A common stock shares of
iVoice Technology, Inc. calculated by dividing (x) the sum of
the principal and interest that the Note holder has requested
to have prepaid by (y) eighty percent (80%) of the lowest
issue price of Series A common stock since the first advance
of funds under this Note, or (iii) payment of the principal of
this Note, before any repayment of interest.
NOTE 3.
The pro forma unaudited statement of operations for the nine months ended
September 30, 2004 was prepared assuming the distribution occurred on January 1,
2003 and includes "Pro Forma Adjustments" for transactions that would have
occurred subsequent to January 1, 2003 as follows:
(a) $63,000 in administrative services provided by iVoice, Inc.
pursuant to an administrative service agreement between iVoice
Technology and iVoice, Inc.
F-37
(b) $9,263 in interest at 6.5% per annum on $190,000 in
outstanding amounts due to a related party being assumed by
iVoice Technology.
The pro forma unaudited statement of operations for the year ended
December 31, 2003 was prepared assuming the distribution occurred on January 1,
2003 and includes "Pro Forma Adjustments" for transactions that would have
occurred subsequent to January 1, 2003 as follows:
(c) $84,000 in administrative services provided by iVoice, Inc.
pursuant to an administrative service agreement between iVoice
Technology and iVoice, Inc. The administrative services
agreement sets forth charges generally intended to allow the
providing company to fully recover the allocated direct costs
of providing the services, plus all out-of-pocket costs and
expenses. In conjunction with the spin-off, iVoice Technology
has entered into a temporary administrative service agreement
with iVoice. The agreement will terminate upon completion of
the Distribution. However, if, following the Distribution,
iVoice Technology is unable to replace any or all of the
services currently being provided by iVoice under the
administrative service agreement, the administration service
agreement will be continued with respect to those services on
a month-to-month basis.
(d) $12,350 in interest at 6.5% per annum on $190,000 in
outstanding amounts due to a related party being assumed by
iVoice Technology.
(e) Write off of $740,000 in intangible assets which were
transferred from iVoice to iVoice Technology and were subject
to evaluation.
NOTE 4.
The average number of shares of iVoice Technology common stock used in the
computation of basic and diluted net income per share was 10,000,100 for the
nine months ended September 30, 2004 and the year ended December 31, 2003, based
on a distribution ratio of one share of iVoice Technology Class A common stock
for every 874 shares of iVoice common stock. Since the Company is in a net loss
position, all common stock equivalents are considered anti-dilutive and are
therefore not included in the calculation of earnings per share.
F-38
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
iVoice Technology's bylaws provide that it will indemnify a person who was
or is a party, or is threatened to be made a party, to any proceeding (other
than an action by or in the right of iVoice Technology) by reason of the fact
that such person is or was a director or an officer of iVoice Technology against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with such proceeding if that person acted in
good faith and in a manner that that person reasonably believed to be in the
best interests of iVoice Technology and, in the case of a criminal proceeding,
had no reasonable cause to believe the conduct of that person was unlawful.
iVoice Technology's bylaws also provide that it will indemnify a person who was
or is a party, or is threatened to be made a party, to any threatened, pending
or completed action by or in the right of iVoice Technology to procure a
judgment in its favor by reason of the fact that said person is or was a
director or an officer of iVoice Technology against expenses actually and
reasonably incurred in connection with the defense or settlement of that action
if that person acted in good faith, in a manner that that person reasonably
believed to be in the best interests of iVoice Technology and with such care,
including reasonable inquiry, that such action would not be deemed grossly
negligent on the part of such person.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth estimated expenses expected to be incurred in
connection with the issuance and distribution of the securities being
registered. iVoice Technology will pay all expenses in connection with this
offering.
Securities and Exchange Commission Registration Fee $1,565
Printing and Engraving Expenses $25,000
Accounting Fees and Expenses $8,000
Legal Fees and Expenses $50,000
Miscellaneous $28,935
-------
TOTAL $113,500
========
Item 26. Recent Sales of Unregistered Securities
In August 2004, the Company entered into an agreement with Sloan
Securities Corporation to act as an agent for the private placement of secured
convertible debentures to Cornell Capital Partners, L.P. Under the placement
agent agreement, the Company agreed to issue to Sloan on or about the date of
effectiveness of the registration statement of which this prospectus is a part a
number of shares of Class A Common Stock equal to $10,000 divided by the closing
bid price of the Class A Common Stock on the date of effectiveness of the
registration statement of which this prospectus is a part. On August 12 and
_______, 2004, iVoice Technology issued an aggregate of $560,000 in secured
convertible debentures, with
II-2
interest payable at 5% per annum, to Cornell Capital Partners. Each of the
debentures are convertible into shares of Class A Common Stock at a price equal
to the lesser of (a) an amount equal to one hundred twenty percent (120%) of the
initial bid price of the Class A Common Stock on the date of effectiveness of
the registration statement of which this prospectus is a part or (b) an amount
equal to eighty percent (80%) of the lowest closing bid price of the Class A
Common Stock for the five trading days immediately preceding the conversion
date. The secured convertible debentures have a term of two years with all
accrued interest due at the expiration of the term. At our option, these
debentures may be redeemed at a 20% premium prior to August 12, 2006. The
secured convertible debentures are secured by a first priority security interest
in substantially all of the assets of iVoice Technology. iVoice Technology will
issue an additional $140,000 of secured convertible debentures to Cornell
Capital Partners on or about the date of effectiveness of the registration
statement of which this prospectus is a part.
Effective August 12, 2004, iVoice Technology entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners to obtain an equity line of
credit. Under this agreement, iVoice Technology may issue and sell to Cornell
Capital Partners Class A Common Stock for a total purchase price of up to $10.0
million. iVoice Technology will be entitled to commence drawing funds under this
agreement when the resale of the Class A Common Stock issuable under the equity
line of credit is registered with the Securities and Exchange Commission, and
the equity line of credit will remain outstanding for two years thereafter. The
purchase price for the shares will be equal to 95% of the market price, which is
defined as the lowest closing bid price of the Class A Common Stock during the
five trading days following the date that iVoice Technology delivers to Cornell
Capital Partners a notice requiring it to advance funds to us. A cash fee equal
to six percent (6%) of the cash proceeds of the draw down is also payable at the
time of funding. In addition, Cornell Capital Partners will receive, as
additional compensation, the number of shares of Class A Common Stock equal to
one and one half percent (1.5%) of the number of shares of Class A Common Stock
outstanding on the date that the registration statement in respect of the shares
to be distributed pursuant to the equity line of credit becomes effective. To
date, iVoice Technology has not drawn down on the equity line of credit.
In consideration of and exchange for the assets that iVoice Technology
will receive pursuant to the spin-off of the IVR business, iVoice Technology
will issue 30 shares of Series A 5% Convertible Preferred Stock to iVoice. Each
share of Series A 5% Convertible Preferred Stock has a stated value of $25,000
per share. Each share of Series A 5% Convertible Preferred Stock will be
convertible into shares of Class A Common Stock at a price equal to the lesser
of (a) an amount equal to one hundred twenty-five percent (125%) of the closing
bid price of the Class A Common Stock as of the conversion date or (b) an amount
equal to eighty percent (80%) of the lowest closing bid price of the Class A
Common Stock for the five trading days immediately preceding the conversion
date.
iVoice Technology has agreed to assume from iVoice upon the date of this
prospectus an outstanding promissory note in the amount of $190,000 payable to
Jerry Mahoney. This amount is related to funds loaned to iVoice and unrelated to
the operations of iVoice Technology. iVoice Technology, for value received, will
promise to pay to Mr. Mahoney the principal sum of $190,000 that will bear
interest at the prime rate plus 2% per annum on the unpaid balance until paid or
until default. Interest payments will be due annually. All accrued interest
becomes due on the date of any payment of the promissory note. At the time of
default (if any) the interest rate
II-2
shall increase to 20% until the principal balance has been paid. Under the terms
of the promissory note, at the option of the note holder, principal and interest
can be converted into either (i) one share of Class B Common Stock of iVoice
Technology, par value $0.01, for each dollar owed, (ii) the number of shares of
Class A Common Stock of iVoice Technology calculated by dividing (x) the sum of
the principal and interest that the note holder has requested to have prepaid by
(y) eighty percent (80%) of the lowest issue price of Class A Common Stock since
the first advance of funds under this note, or (iii) payment of the principal of
this note, before any repayment of interest. iVoice Technology has yet to record
this liability on its financial statements, as the promissory note will not be
assumed by iVoice Technology until the effectiveness of the registration
statement.
We relied upon the exemption provided in Section 4(2) of the Securities
Act and/or Rule 506 thereunder, which cover "transactions by an issuer not
involving any public offering," to issue securities discussed above without
registration under the Securities Act of 1933. iVoice Technology made a
determination in each case that the person to whom the securities were issued
did not need the protections that registration would afford. The certificates
representing the securities issued displayed a restrictive legend to prevent
transfer except in compliance with applicable laws, and our transfer agent was
instructed not to permit transfers unless directed to do so by iVoice
Technology, after approval by our legal counsel. iVoice Technology believes that
the investors to whom securities were issued had such knowledge and experience
in financial and business matters as to be capable of evaluating the merits and
risks of the prospective investment. iVoice Technology also believes that the
investors had access to the same type of information as would be contained in a
registration statement.
Item 27. Exhibits
No. Description
- --- -----------
3.1* Certificate of Incorporation of iVoice Technology, Inc.
3.2* Amendment to Certificate of Incorporation of iVoice
Technology, Inc.
3.3* By-laws of iVoice Technology, Inc.
4.1* Form of iVoice Technology, Inc. 5% Secured Convertible
Debenture due August 12, 2006 issued to Cornell Capital
Partners, LP
5.1* Opinion of Meritz & Muenz LLP
10.1* Standby Equity Distribution Agreement, dated August 12,
2004, between Cornell Capital Partners, LP and iVoice
Technology, Inc.
10.2* Securities Purchase Agreement, dated August 12, 2004,
between iVoice Technology, Inc. and Cornell Capital
Partners, LP.
10.3* Escrow Agreement, dated August 12, 2004, between iVoice
Technology, Inc., Cornell Capital Partners, LP and Butler
Gonzalez LLP
10.4* Registration Rights Agreement, dated August 12, 2004,
between iVoice Technology, Inc. and Cornell Capital
Partners, LP
II-3
10.5* Escrow Agreement, dated August 12, 2004, between iVoice
Technology, Inc., Cornell Capital Partners, LP. and Butler
Gonzalez LLP
10.6* Investor Registration Rights Agreement, dated August 12,
2004, between iVoice Technology, Inc. and Cornell Capital
Partners, LP.
10.7* Security Agreement, dated August 12, 2004, between iVoice
Technology, Inc. and Cornell Capital Partners, LP.
10.8* Employment Agreement, dated as of August 1, 2004, between
iVoice Technology, Inc. and Jerome Mahoney
10.9* Employment Agreement, dated as of August 1, 2004, between
iVoice Technology, Inc. and Arie Seidler
10.10* Administrative Services Agreement, dated August 1, 2004,
between iVoice, Inc. and iVoice Technology, Inc.
23.1 Consent of Mendlowitz Weitsen, LLP
23.2* Consent of Meritz & Muenz LLP
* To be filed by amendment.
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of the
Securities Act of 1933 (the "Act");
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
II-4
(iii) Include any additional or changed material information on the
plan of distribution;
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, on November 18, 2004.
IVOICE TECHNOLOGY, INC.
By: /s/ Jerome R. Mahoney
-------------------------------------
Name: Jerome R. Mahoney
Title: Non-Executive Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates stated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Jerome R. Mahoney Non-Executive Chairman of November 18, 2004
- ----------------------- the Board
Jerome R. Mahoney
/s/ Arie Seidler President (Principal November 18, 2004
- ----------------------- Executive Officer) and Chief
Arie Seidler Executive Officer (Principal
Accounting Officer)
II-6