SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
AMENDMENT NO. 1 TO
FORM 10
----------------------------
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
VOICE DIARY INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 72-1629948
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
200 Robbins Lane, P.O. Box 30, Jericho, New York 11573
(Address of principal executive offices)
(Zip code)
Registrant's telephone number, including area code: (516) 939-0400
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
(Title of class)
TABLE OF CONTENTS
Page
<BTB>
Item 1. Business 3
Item 2. Financial Information 16
Item 3. Properties 25
Item 4. Security Ownership of Certain Beneficial Owners and Management 25
Item 5. Directors and Executive Officers 26
Item 6. Executive Compensation 27
Item 7. Certain Relationships and Related Transactions 28
Item 8. Legal Proceedings 28
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters 28
Item 10. Recent Sales of Unregistered Securities 30
Item 11. Description of Registrant's Securities to be Registered . 31
Item 12. Indemnification of Directors and Officers 32
Item 13. Financial Statements and Supplementary Data 36
Item 14. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 37
Item 15. Financial Statements and Exhibits 37
CAUTIONARY NOTICE REGARDING
FORWARD LOOKING STATEMENTS
Voice Diary Inc. (the "Company," "VDI", the "Registrant", "we", "our" or
"us") cautions readers that certain important factors may affect our actual
results and could cause such results to differ materially from any
forward-looking statements that may be deemed to have been made in this
Registration Statement or that are otherwise made by us or on our behalf. For
this purpose, any statements contained in the Registration Statement that are
not statements of historical fact may be deemed to be forward-looking
statements. This Registration Statement contains statements that constitute
"forward-looking statements." These forward-looking statements can be
identified by the use of predictive, future-tense or forward-looking
terminology, such as "believes," "anticipates," "expects," "estimates," "plans,"
"may," "will," or similar terms. These statements appear in a number of places
in this Registration Statement and include statements regarding the intent,
belief or current expectations of the Company, its directors or its officers
with respect to, among other things: (i) trends affecting our financial
condition or results of operations for our limited history; (ii) our business
and growth strategies; and (iii) our financing plans. Investors are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and that actual
results may differ materially from those projected in the forward-looking
statements as a result of various factors. Factors that could adversely affect
actual results and performance include, among others, our limited operating
history, potential fluctuations in quarterly operating results and expenses, the
failure of products resulting from engineering faults, our ability to manage
growth, technological change and competition.
The accompanying information contained in this Registration Statement,
including, without limitation, the information set forth under the headings
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" identifies important additional factors that could
materially adversely affect actual results and performance. All of these
factors should be carefully considered and evaluated. All forward-looking
statements attributable to us are expressly qualified in their entirety by the
foregoing cautionary statement. Any forward-looking statements in this
Registration Statement should be evaluated in light of these important risk
factors. We are also subject to other risks detailed herein or set forth from
time to time in our filings with the Securities and Exchange Commission (the
"Commission").
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PART I
ITEM 1. BUSINESS.
We are filing this Registration Statement on Form 10 in order to qualify
our Class A Common Stock to be quoted on the National Association of Securities
Dealers ("NASD") OTC Bulletin Board. In addition we believe that being a
reporting company under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), will provide investors and other persons with additional
information concerning us. We further believe that this might make us more
attractive to an operating business as a potential business combination
candidate. As a result of filing this Registration Statement, we will become
obligated to file with the Commission certain interim and periodic reports,
including an annual report containing audited financial statements.
We are a development stage company and have not generated significant
revenues. Our financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. We have an
accumulated deficit at June 30, 2002 of $2,325,605 and a working capital deficit
at June 30, 2002 of $260,960 that raise substantial doubt about our ability to
continue as a going concern. Our ability to continue as a going concern is
dependent upon the successful completion of our development program and,
ultimately, the attainment of profitable operations which are contingent upon
future events, including maintaining adequate financing to fulfill our
development activities, and achieving a level of sales adequate to support our
expense structure. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
GENERAL
We were incorporated in the state of Delaware on February 26, 2002. In
June and July 2002 we acquired approximately 99.4% of the outstanding shares of
Voice Diary Ltd., an Israeli corporation ("VDL"), through a purchase of shares
from the former controlling stockholder of VDL and an exchange of shares of VDI
with former stockholders of VDL. Under generally accepted accounting principles
the transaction was accounted for as a reorganization under common control and
accordingly, the financial statements represent the consolidated financial
position, operating results and cash flows of the Company and the subsidiary for
all periods from inception of the subsidiary. VDL began operations in October
1993 and has been in the development stage. (Unless otherwise indicated,
references to us herein include VDL.)
We are developing and marketing a line of personal digital assistants
("PDAs") which have a voice user interface and provide to the user a full range
of personal information management, including a talking diary, telephone book,
daily pad and other advanced features. The voice user interface enables the
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visually impaired to use PDA technology by removing obstacles to use inherent in
conventional display-based products.
CURRENT PRODUCTS
We have developed and are marketing a hand-held voice PDA called the "IMP"
specifically designed for blind and visually impaired people. The IMP is used to
make recordings of personal information. The recordings are stored in one of
several "compartments":
- NOTEPAD. In this compartment the recordings are stored one after the
other. The user can browse the Notepad by pressing 3 to move down the
list and 1 to move up the list. The list is browsed cyclically.
Pressing ENTER will play the current recording (with the first
recording being the default recording) reached by browsing with the
1/3 keys. If pressed during play, Enter will pause the play and when
pressed again it will resume the playing. Pressing 5 will announce
Notepad and the number of recordings in Notepad. When a recording is
played its number in the list is announced first. By pressing the MOVE
key a recording is selected to be moved or copied. The user can then
browse to another recording and after pressing MOVE again the selected
recording is moved just before the current recording. To copy the user
needs to press CODE MOVE. Move is used to reprioritize the Notepad
recordings. To erase a recording the user needs to press the ERASE
key, after he plays the recording, and then ENTER for confirmation.
Erased recordings are stored in the ERASED MEMOS compartment and can
be moved out as long as the Memory Recycle procedure was not executed.
This procedure is used to truly erase the memory. The Memory Recycle
procedure is needed because the IMP uses Flash memory, which, unlike
RAM memory, cannot be erased byte by byte but in blocks of 128k bytes.
The number of recordings the IMP can hold is 1,000 and the length of
the recoding time is 90 minutes. A new recording is always added at
the end of the list. Pressing CODE ERASE followed by ENTER will erase
the entire Notepad.
- DAILYPAD. The IMP can hold up to 60 Dailypad compartments. A Dailypad
is like the Notepad with an additional feature that it is associated
with a date. The date can be any date from 1950 to 2049. The date is
announced when pressing 5 together with the announcement DAILYPAD and
the number of recordings in the Dailypad. In the Dailypad associated
with the date of the real date the announcement also includes the word
TODAY. All of the Notepad functions discussed above are similarly
applicable to Dailypad. In addition the user can browse from one
Dailypad to the next by pressing 6 and browse to the previous Dailypad
by pressing 4. When browsing from one Dailypad to another the IMP will
identify the new Dailypad by announcing Dailypad, the date (without
the year), TODAY, if applicable, and the number of recordings in the
Dailypad, if any. If there is no recording in the Dailypad of a
certain date it is not taking up any space in the database, even
though it can be browsed. To browse only through the Dailypads that
contain recordings, the user needs to press ESCAPE followed by either
4 or 6. MOVE, COPY and ERASE operate like in Notepad, with the
additional feature that recordings can be moved or copied from any
Dailypad to any Dailypad or the Notepad. After playing a recording, if
the ALARM key is pressed, the recording becomes a DAY HEADER. It will
be placed at the beginning of the list and be played automatically
upon browsing into the Dailypad. This feature is used to alarm to user
as to a certain engagement that may be conflicting other engagements.
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When a memo is moved or copied to a Dailypad it will placed at the
beginning of the list, or just after the Daily headers, if any.
Dailypads can be accessed directly and not through browsing, by
pressing the ESCAPE TIME keys and entering the desired Dailypad date.
- DIARY. The IMP's diary is a virtual structure that can be browsed
minute by minute from January 1, 1950 to December 31, 2049. The keys 2
and 8 are used to browse backward and forward in any specific day, in
steps ranging from one minute to 4 hours. The keys 4 and 6 are used to
browse from day to day. To make a recording in Diary the user browses
to the day and minute where he wants the recording to be made and,
like in all other compartments, makes the recording by pressing the
RECORD key. To browse the Diary through the recordings the user uses
the 1 or 3 keys. The combination ESCAPE 4 or 6 is used to browse to
the days where there are recordings. To avoid tedious browsing, the
user can use the combination ESCAPE TIME to enter the exact date-time
point where he wants to be positioned. In any date-time position the
user can record several recordings. The recording can have an Alarm
attached that goes off when the time arrives or at a set time before.
Snooze and duration features are also available. Move and Copy of
recordings in the Diary and between the Diary and the Dailypads or the
Notepad is available. Erase and undo work similarly as in the other
compartments.
- REPETITION. This compartment is used to store recurring recordings of
the Diary. The user can decide if the recoding is transparent so that
browsing the diary will not reveal it (this is good for medication
alarms) or opaque (for recurring meetings). The need for a separate
compartment for recurring recordings stems from the fact that the
amount of memory of the IMP is small compared to the memory available
in PC and the recordings themselves are much longer, so that
duplicating recordings is not an option.
- PHONEBOOK. The Phonebook is organized in folders. Each folder has an
associated keyword. The user enters the keyword to the IMP in a
special recording session called TRAINING. The user is prompted to say
the keyword and then to repeat it. The Phonebook can be browsed using
the 4 and 6 keys to browse through the folders and the 2 and 8 keys to
browse through sub-folders of each folder. When a folder is reached
through browsing the IMP announces the keyword associated with this
folder. The user can enter recordings to the folder and browse through
them. Other operations on recordings are executed similarly as in
other compartments. MOVE, COPY and ERASE operations can be executed on
folders as well as recordings. To retrieve a folder the user can press
the FIND key and utter its keyword.
The software implemented in the IMP, except the Voice Recognition and Voice
Compression software, was developed by us. This software is not patented. The
IMP uses a DSP component manufactured by DSP Group for Voice Compression and
Voice Recognition.
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The IMP can communicate with a personal computer ("PC") for back-up and
software update. The IMP features include:
- - Talking-Diary - Talking Daily Pads
- - Talking Phonebook with voice recognition - Move and Undo commands
- - Multiple Talking-Alarms - Talking-Calendar-Clock
- - Talking-Calculator with advanced functions - Superb audio quality
- - Special ergonomic design (form, keys & operation)
The IMP includes a rechargeable battery pack and has a 90-minute recording
memory, a carrying case, a PC connection cable and a charger.
The IMP was launched in December 2001. It is the third model in the line of
Voice Electronic Organizers developed and sold by us. The first model was
launched in November 1997. It was bulkier and had only 1MB Flash memory that
allowed for only 10 minutes of recording time. We sold 1,000 units of this
model. In April 1998 we started shipping our second model that had the same
bulky shape but 2MB Flash memory that allowed for 30 minutes of recording time.
We sold 2,000 units of the second model. The IMP has a smaller form that fits
better to the hand, and 4MB of Flash memory that allows for 90 minutes of
recording time. However, due to its smaller format, the sound quality of the IMP
is less than that of the older models. We have sold 1,000 units of the IMP to
date. Of all versions of our voice organizers we have sold, about 1,300 where
sold in the US, 600 in the UK, 500 in Israel, 250 in Holland, 50 in Australia,
25 in Belgium, and the rest in some 20 countries around the world, in quantities
ranging from 1 to 10 per country. Most sales (over 80%) were made to
distributors that specialize in selling products to the Visually Impaired. In
certain countries, such as Australia and Israel, such distributors are stores or
organizations that serve the blind community. Most of our distributors are
selling directly to the end user. Since the release of the IMP we have offered
customers using the older models of the Voice Diary line, the right to trade in
their units for the newer IMP. We have attempted to sell the traded in units at
a reduced price to customers in third world countries, such as India, but so far
with limited success.
PLANNED PRODUCTS
We have developed a first prototype of the next model in the Voice Diary
line. The planned product is called TOTAL and it will incorporate a cellular
phone and a removable, large flash disk. These added capabilities will enable
the user to make telephone conversations, send voice mail through the Internet
or other voice paging services, and make long recordings (lectures, court
sessions, meetings) and to edit the recordings with operations such as cut and
paste. Using the flash disk, the user will be able to import from the PC or the
Internet information and entertainment products, such as MP3 music and talking
books. (The incorporation of a Text To Speech engine will enable the TOTAL to
play text material in addition to recorded material.) Our goal in developing the
TOTAL is to offer a product with communication and entertainment capabilities.
We believe that there will be a much greater demand for a product with such
capabilities, and with our Voice User Interface, than for the IMP, which is just
a PDA. Our belief in the increased sales potential of the TOTAL as compared to
the IMP is based on our observation, which we have not substantiated by any
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objective survey, that sales of cellular telephones and MP3 players greatly
exceeds sales of PDAs.
To develop the TOTAL we believe we will need to invest about $ 500,000. At
this time we have no commitments for additional financing and there can be no
assurance we will have the funds necessary to develop the TOTAL. We do not
foresee any technical barrier in the development of the TOTAL. However, we know
that our TOTAL will need to be approved as a cellular telephone by cellular
service providers and possibly by communication authorities in the various
countries such as the Federal Communication Commission in the United States. We
have little experience in dealing with the granting of such approvals. We intend
to use for the TOTAL cellular engines provided by major corporations that have
received for their products required approvals, but we still have not contracted
any such provider.
We anticipate that the TOTAL will be sold mainly by cellular service
providers with or without support from distributors of products to the blind and
visually impaired.
We also envision the adaptation of the TOTAL to serve the elderly. This
model of the TOTAL, called GOLDEN, will have fewer, larger buttons for greater
ease of use, and a remote monitoring feature to help program the unit by a
relative or an emergency service. The reason we have for introducing the GOLDEN
as a distinct product from the TOTAL is because we believe that the market of
the elderly will favor a Voice User Interface and that providers of products
that are designed for the general public will avoid designing a product that is
tailored to the needs of a special population. We believe that this will create
a business opportunity for us.
To bring the GOLDEN to the market we will need an additional investment of
$ 250,000 to the investment necessary for the introduction of the TOTAL. At this
time we have no commitments for additional financing and there can be no
assurance that we will have the funds necessary to develop the GOLDEN. We
anticipate that the GOLDEN will be sold mainly through cellular service
providers or providers of caring services for the elderly. We do not foresee any
technical barrier in the development of the GOLDEN.
PLANNED SERVICES
If we can introduce the TOTAL, we plan to establish a service for the
distribution of content to its users. Such distribution of content will be made
through several means: mail (sending flash disc with the content); libraries,
particularly those that serve the visually impaired, who will use PC to download
such content; Internet downloads to PCs from where the content will be
downloaded either by local communication or using a flash disk drive; or
directly to the TOTAL using its wireless communication abilities. As part of our
distribution service, we intend to operate a voice portal accessible through the
Internet, from a PC and directly from the TOTAL. From the portal, users will be
able to download content using their PCs or a TOTAL. The portal will not be used
as a starting point for Internet browsing, but rather as a central location for
obtaining voice and audio content. The portal will be designed to be accessible
by the visually impaired.
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We intend to acquire rights for content distribution from third party
organizations that have such rights. We intend to pay for such rights on a "per
use" basis with no down payments. We intend to provide the content under a
subscription arrangement that will require users to pay an annual fee, and a
"per item" fee. Generating income from subscribers is the main reason for our
plan to establish the content distribution service.
We hope to obtain additional revenues from advertisements in our
distribution channels, a percentage from the communication fees paid to the
wireless communication operator, and a commission from the e-business generated
through our channels. To establish a content distribution business we think that
we will need an investment of $ 1 million. We do not have at this time any
commitments for additional investment in the Company and there can be no
assurance that we will be able to establish our content distribution service. We
have not yet contacted any content provider and we do not know if our business
model as to the way we can acquire content distribution rights is valid.
PLANNED PC MODEL
We plan to develop a voice organizer for the PC with features similar to
those of the IMP. This product will be a stand alone product but will also
operate as backup and synchronization base for those users who will own an IMP
or a TOTAL, enabling them to synchronize automatically their hand-held unit with
the PC counterpart. To achieve this goal we will need to replace the Voice
Recognition and Voice Compression engines we use today with the IMP, with
engines that can operate compatibly both in the PC and in a hand-held device. We
believe that the budget for the development of a first version of the PC model,
first free standing and later IMP compatible, will require an investment of
$100,000. With the development of the PC version will achieve several goals.
This version could serve to introduce our hand held device. It could serve also
as a training station and a reference model with HELP features for users of our
hand held units. Finally it could become a preferred product to the general
community of the PC users increasing our exposure. At first we intend to
distribute the PC version for free from our web site, but later we may require
some payment for it and thus we may generate an additional source of income.
POSSIBLE PALM PILOT MODEL
We may consider in the future developing a version of our PC model to work
on the Palm Pilot or similar PDAs.
POSSIBLE SALES OF SOFTWARE TO OEM
We may consider in the future adapting our software to common cellular
telephones if approached by manufacturers of such products. The reason we
believe that this direction might be advantageous to us is that we may generate
substantial licensing fees and royalties in such transactions.
TECHNOLOGY
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Our technology consists of our software and our know-how in developing
Voice PDA. We use an industry standard DSP component that comes with software
for Voice Recognition and Voice Compression. We pay for this component per piece
and we pay no licensing fee.
INTELLECTUAL PROPERTY
We have rights to a patent in Israel with respect to a Voice Organizer for
the Blind. The patent contains a block diagram of a possible product but no
reference to the software or actual electronic design. We currently do not own
or license any other patents. We may seek patent protection on our technology
where appropriate.
We have a registered trademark in Israel for our logo and design.
BUSINESS STRATEGY
We develop and market the VOICE DIARY line of voice PDAs, including the
newly released IMP, which is tailored and ergonomically designed to the needs of
the visually impaired. The IMP provides the full range of personal information
management, including a talking diary, phonebook, daily pads and many more
advanced features.
We plan to incorporate wireless capabilities (cell-phone or two-way
messaging/e-mailing voice paging) to our platform, with a vision to expand and
become the major provider of wireless mobile computing handsets and related
services in the specific niche markets where we operate.
We intend to expand to niche markets adjacent to the visually impaired
market, which are likewise under-served by brand-name providers of consumer
electronics and IT services, such as the fast growing market of the elderly.
Central to our product vision is the voice user interface, an alternative
paradigm to the prevailing graphic user interface ("GUI") used in conventional
display-based products. The GUI is a recognized obstacle in the way for many
user groups (e.g., visually impaired and the elderly) to adapt and use new
technology products and services. VDI offers an approach that removes this
obstacle and serves the need of many.
Our technology consists of our ability to provide complete hardware and
software systems that answer needs specifically identified by the people in the
addressed niche. We do not get involved in the development of generic technology
(such as voice processing engines). Instead, we implemented in the IMP and
previous products, a component sold by another company that provides for Voice
Recognition and Voice Compression.
We may complement growth in our proprietary line by acquisition of
companies with complementary products and services, a market presence and stable
cash flow.
We operate globally in the sense that we have offices in the United States
and in Israel and have active distributors in the United States., United
Kingdom, Holland, Australia and Israel. We may seek to raise money in the United
States and seek strategic partners in Europe. Of our accumulated sales of
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approximately $622,000, 40% were achieved in the United States, 30% in the
United Kingdom, 15% in Israel, and the balance in other countries.
We manufacture our products mainly through subcontractors that provide
electronic assembly and mechanical assembly work, including packaging. There are
many subcontractors who can qualify for the production of the IMP.
We market our products and services to distributors who mostly sell our
products directly to the end user.
We conduct our research and development activity by a team of trained,
experienced and devoted software and hardware engineers, operating at our
subsidiary, VDL, based in Israel. During the three year and six month period
ended June 30, 2002, and from inception (October 1, 1993) to June 30, 2002, we
spent an aggregate of $464,997 and $1,079,833, respectively, on research and
development.
INDUSTRY ANALYSIS
We operate in two industries: the PDA industry and the industry of
assistive technology that provides technology-based products and services to
disabled people.
Several trends that we have observed in the PDA industry affect our
strategy. First, cellular telephones are now embedding PDA features. Second,
several large technology corporations, such as Siemens, offer complete cellular
telephones engines, in small formats, with no user interface or package, to be
embedded in OEM products. Third, consumer electronic products make an increasing
use of Graphic User Interface. The first two trends direct us and will enable us
to develop the TOTAL. The third trend indicates to us that there is an
opportunity for our products in the market of the visually impaired as this
population cannot make use of products with a Graphic User Interface, and our
products employ a Voice User Interface.
The assistive technology industry is spurred in the United States by the
Americans with Disabilities Act (the "ADA"). This legislation is a conscious
attempt to make technology accessible to people who cannot use mainstream
products because of personal handicaps. Thus, the assistive technology industry
fills a social need to bring the disabled into the mainstream and integrate them
into productive life. For this reason the purchasing of assistive technology
products like the IMP is subsidized by governments and charity organizations all
around the world. We are making use of this approach by bringing to the
attention of the administration the availability of its products and it
usefulness to the visually impaired.
COMPETITION
We believe that we have only one direct competitor, a French company named
Parrot SA. This company already offers several generations of competitive PDAs
for the blind and visually impaired and we believe that this company currently
has an approximately 90% market share.
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We believe that the advantages of Parrot's product, called Voice Mate, are
that it can use 400 voice recognizable keywords, compared to 127 with the IMP,
and such keywords can be linked to diary entries and not only to Phonebook
entries. Also, some users believe that the Voice Recognition of the Voice Mate
is better than the IMP. The Voice Mate allows for periodic repetition
recordings, for example every second Tuesday, which the IMP does not. The Voice
Mate Can turn on quicker than the IMP if you lock the on key of the IMP or if
the IMP is in its DEEP SLEEP mode, which is used for energy saving. The IMP uses
rechargeable batteries and needs to be charged every other day even if not used
at all, to keep it working. The Voice Mate uses regular batteries that last
between two weeks and two months depending on use. Many users seem to prefer the
Voice Mate for this reason. The Voice Mate supports all the major European
languages (for prompts) and the user does not need to download a new language
version to move from one language to the other. The IMP supports only English,
Hebrew, Cantonese and Hungarian, and the user needs to download the language
prompts.
We believe that the IMP has significant advantages over the Voice Mate. The
sound of the IMP is louder and clearer. Its shape is smaller and more ergonomic.
It uses a standard connector to the earphone. The IMP is more robust. The Voice
Mate has parts (like the screen and the batteries compartments doors) that more
easily get broken. In the Phonebook folders of the IMP a user can store many
entries in free format while the Voice Mate allows only for Phone numbers in a
rigid order (home, work, etc.). A user can undo erase operations with the IMP.
The IMP has a back up battery for the clock which the Voice Mate does not. IMP's
communication with the PC seems to be less "temperamental", to quote a user's
observation. The Voice Mate does not have a Dailypad system and you can not
browse the Diary to find the place to make a recording. Rather, you make a
recording and insert its date and time. The Company has various non-direct
competitors, such as companies which market digital voice event recorders. In
addition, companies like Philips, Hewlett-Packard, Casio, Compaq and others have
added voice recording capability to their products, but they remain text and
graphic machines and therefore inappropriate for people with sight problems.
We believe that the disabled market in general and the blind and visually
impaired market in particular, are unattractive markets for large companies like
Palm or Nokia because the market is small and products need special design.
However, there can be no assurance that other companies, with greater resources
than VDI, may not enter the market.
Nokia recently introduced a Voice User Interface on its 9290 cellular
telephone. The software is called TALX and is provided by a third party
manufacturer. The price of this unit is about three times the price of the IMP.
Because of this reason and reasons of ease of use, we believe that this product
does not pose a threat to the IMP. We further believe that our concept of
building the TOTAL with a VUI software that is designed from the beginning for
the visually impaired will prove more user friendly than the approach of the
TALX that is built around the basically GUI approach of the standard PC
software.
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THE MARKET
We estimate that the potential market for our product to be 25 million
blind and visually impaired people in the developed world. Additionally there is
a possibility of sales to people in Third World countries of refurbished
products. We are planning to perform further market research in the second half
of 2003 to learn in detail the market potential and most desirable operating
specifications for our new products.
We believe that the market for our products is continually growing, mainly
due to advances in medical treatment that prolong life expectancy. In the United
States, the baby boomer generation is now entering the age group targeted by us.
Thus, the market potential for our devices is expected to grow.
It is now a major concern worldwide to make sure that the IT revolution
will not increase the gap between the able and the disabled. Many countries have
enacted legislation aimed at this concern. The purchase of products for the
disabled is often partly supported by public grants. In addition, in some cases
there is an obligation on the part of an employer to buy any assistive
technology product that can assist a disabled person to do a job. This practice
is especially implemented in government offices. The U.S. government runs an
Access to Work program, which may pay for special aids that are shown to be
justified. Aids for the disabled are also sometimes tax deductible. An important
recent move is President Bush's "New Freedom Initiative" that includes:
- Increased budgets for developing and implementing assistive
technologies.
- Increased funding for the IDEA, a program that helps students with
disabilities.
- Aid to states to guarantee low-interest loans for people with
disabilities to buy computers and other equipment enabling them to
work from home.
- Providing resources to promote ADA compliance and to help small
businesses hire people with disabilities.
Many of the users of Voice Diary received financial support for their
purchase.
In Western Europe and Japan, public help to people with disabilities for
purchasing products is similar to that in the United States. Furthermore, social
assistance, reimbursement policies and awareness of the disabled are far more
developed, in particular in the Scandinavian and other northern European
countries, as well as in Spain (an historic remnant of the multitude of crippled
survivors of the Spanish Civil War in the 1930s). In such locations assistive
technology can be financed via insurance or social welfare or health
legislation.
DISTRIBUTION CHANNELS
The blind and visually impaired market is characterized by the close
relationship between users, including distributors who are often themselves
blind.
Direct sales activity is done through local distributors, assisted by our
personnel. We have active distributors, operating with us for many years. We do
not sign distribution agreements with our distributors. However, we have
promised them that we will not to nominate another distributor in their
territories as long as they have inventory of our product. Distributors
generally pay at least one third of any order before shipment and the balance in
12
one or two payments 3 months apart. We do not have any price protection
arrangements. We give a one year warrantee on our products.
In the United States we use a single distributor, New York-based Independent
Living Aids ("ILA"), which is one of the larger U.S. catalog distributors for
the blind and visually impaired. ILA also provides us with office space.
Some of our distributors are specialized catalog sellers, providing the
blind and visually impaired with the special products they need, otherwise not
available through regular retail outlets.
We conduct marketing activity to raise customer awareness, education,
promotion, advertisement and public relations through various channels, such as:
- The large number of national and regional organizations and
associations for the blind and visually impaired in the United States,
Europe and elsewhere. Practically every blind person, especially in
the United States, is associated in at least one of these
organizations.
- State and federal agencies for the blind and visually impaired.
- Special clinics that treat vision impairments.
- Exhibitions. There are numerous exhibitions worldwide for the disabled
in general, and for the blind and visually impaired in particular. In
the United States, for example, there are some four to six annual
nation-wide exhibitions, two to four regional exhibitions and many
local ones. The organizers are generally the various dedicated
organizations.
- Research institutes and universities that provide programs on
disabilities.
- Radio programs. Radio is an especially powerful means for blind and
visually impaired.
- Publications. Of special interest are the popular and proliferating
large font issues of publications, like the Readers Digest.
Advertising in such publications will afford access not only to the
blind and visually impaired, but also to elderly people.
- Word of Mouth. This is very important in the market of the blind and
visually impaired since such people tend to communicate very strongly
among themselves.
SALES
Due to their physical challenges, the blind and visually impaired need
special products to assist them in their lives, such as calendars, clocks and
watches, temperature measuring devices, scales, computers, browsers, Braille
displays, and other products. Since such products are not available through
regular retail outlets, special marketing channels exist that distribute
products to this market. These include catalog companies and stores. The catalog
companies usually sell low end products like canes and watches, while the stores
usually sell high-end products such as computer systems.
We will try to cooperate strategically with large corporations that
specialize in this field and whose sales forces sell expensive equipment on a
head-to-head basis. We believe that it would be advantageous for both sides to
add our family of products to the product line of such large corporations.
13
We will also consider the option of direct sales through the Internet. One
of the main considerations in this regard is to avoid competing with local
distributors.
Notwithstanding distributors' operations, software upgrades will be made
available to end-customers directly through the Internet.
Selling through renowned retail outlets could promote widespread
distribution. However, this option will be chosen only if the deal with such
outlets permits a high enough margin for us, and there are no conditions which
could lead to financially harmful outcomes (such as maintaining high stocks in
stores).
We plan to sell the TOTAL and GOLDEN devices by cellular service providers
with or without the support of the traditional distributors to the blind and
visually impaired. The markup of cell phones by the service providers is usually
negligible, as their main income is from the service. As such service providers
are constantly seeking more customers, the TOTAL will give them an added value
of a specific niche market. Cellular service providers usually provide
installment plans to their customers to finance purchased products.
We intend to remain in touch with end-users in order to provide the
software upgrades (a new concept in the cell phone industry) as well as various
specific content.
For the GOLDEN, we plan to use different distribution channels, specialized
in the elderly market.
We are also considering a paging functionality for the TOTAL, mainly as a
voice e-mail service, taking advantage of the big success of two-way messaging /
e-mailing products.
ENVIRONMENTAL COMPLIANCE
We do not anticipate that we will become subject to environmental laws and
regulations since we do not intend to conduct manufacturing operations.
BACKLOG AND SEASONALITY
We generally do not have any backlog of unfilled orders. We do not believe
that our business will be seasonal.
MANUFACTURING OPERATIONS
We manufacture the IMP in Israel through subcontractors controlled from the
operations office of VDL in Yoqneam, Israel. Because the development of the IMP
was supported by grants provided by the State of Israel, we are required by law
to manufacture the IMP in Israel. We believe that the TOTAL and the GOLDEN, as
well as any model designed based on them, will be free from such restrictions.
However, we plan that because of our presence in Israel we will continue to
manufacture our future products there, as long as the quantities manufactured
will be less than 10,000 per batch.
We are presently manufacturing 2,200 units in runs of 550 units each. The
first run is due to be ready for distribution before the end of December 2002.
The manufacturing of the 2,200 units is done by Reshef Technologies Ltd
("Reshef"). Each future run will start only after we pay for the previous run
and after we initiate its start. We have no commitment to complete the
14
manufacturing of the additional 1,650 units. We do plan to do so in 2003.
Reshef holds an inventory of most of the components necessary for the
production of the 2,200 units plus approximately 14,000 pieces of two main
components of the IMP that have become obsolete. Thus, we will not be able to
manufacture more than 14,000 IMP units in addition to the 2,200 we plan to
manufacture in 2003. We have no commitment to purchase the components from
Reshef and Reshef has no commitment to provide us with these components. In the
design of the TOTAL and its derivative the GOLDEN, the obsolete components will
not be used.
Reshef is a subsidiary of Aryt Industries Ltd., who was a major shareholder
in VDL until June 2002. VDI became the major shareholder of VDL after it
purchased Aryt's share in VDL. Prior to this transaction, existing loans that
Aryt gave to VDL were replaced by an agreement of VDL to pay Aryt royalties on
its sales. More information on the history of the relations between VDL, Aryt
and Reshef, is provided in the Management Discussion and Analysis, Background
section below.
15
ITEM 2. FINANCIAL INFORMATION.
The selected financial data presented below has been derived from our
audited financial statements for the six months ended June 30, 2002 and for the
years ended December 31, 2001, 2000, 1999, 1998 and 1997 and our unaudited
financial statements for the six months ended June 30, 2001. The financial data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes included elsewhere herein.
Selected Financial Data:
Six months ended Year ended December 31
-------------------- ----------------------
June 30
-------
2002 2001 2001 2000 1999 1998 1997
------- ----------------------------------------------------------------
Unaudited
---------
Statement of Operations Data:
- ------------------------------
Revenues $15,992 $1,584 $109,963 $5,778 $143,367 $207,771 $100,082
- -------- --------- -------- --------- --------- --------- -------- --------
Costs and operating expenses:
Cost of revenues 30,653 0 81,036 19,062 115,719 181,798 84,219
Research and development expenses 107,720 51,528 174,116 79,700 103,461 153,833 251,934
Marketing, general and administrative expenses 156,397 31,580 86,978 135,831 233,797 98,577 192,362
--------- -------- --------- --------- --------- -------- --------
Total costs and operating expenses 294,770 83,108 342,130 234,593 452,977 434,208 528,515
- ---------------------------------- --------- -------- --------- --------- --------- -------- --------
Operating loss (278,778) (81,524) (232,167) (228,815) (309,610) (226,437) (428,433)
- --------------
Financial expenses (income), net 130,474 (5,346) (1,079) 117,542 50,365 25,777 8,103
Other income, net 0 0 0 1,757 0 0 0
--------- -------- --------- --------- --------- --------- ---------
Net loss $(409,252) $(76,178) $(231,088) $(344,600) $(359,975) $(252,214) $(436,536)
========= ======== ========= ========= ========= ========= =========
Net loss per share - basic $(0.64) $(0.12) $(0.36) $(1.76) $(2.98) $(3.86) $(17.40)
========= ======== ========= ========= ========= ========= =========
Number of shares used in computing loss per share 637,263 637,263 637,263 195,951 120,728 65,417 25,089
========= ======== ========= ========= ========= ========= =========
Balance Sheet Data:
- ------------------
Cash and cash equivalents $39,836 $117,805 $8,097 $2,167 0 $10,253
========= ======== ========= ========= ========= =========
Working capital (deficiency) $(260,960) $(606,875) $(454,011) $(328,165) $(6,386) $(205,474)
========= ======== ========= ========= ========= =========
Total assets $119,827 $224,742 $16,318 $66,528 $196,092 $287,639
========= ======== ========= ========= ========= =========
Long - term debt from banks $75,699 $108,443 $22,742 $25,568 $5,100 0
========= ======== ========= ========= ========= =========
Total shareholders equity (deficiency) $(302,012) $(705,475) $(469,388) $(332,816) $22,370 $(148,140)
========= ======== ========= ========= ========= =========
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
We were incorporated in the state of Delaware on February 26, 2002.
In June and July 2002 we acquired approximately 99.4% of the outstanding shares
of Voice Diary Ltd., an Israeli corporation ("VDL"), through a purchase of
shares from the former controlling stockholder of VDL and an exchange of shares
of VDI with former stockholders of VDL. The balance of 0.6% of the outstanding
shares of VDL are held by an ex-employee, the wife of an ex-employee and three
investors. All were offered the opportunity to swap their shares for shares of
VDI but declined or did not respond to the offer.
Under generally accepted accounting principles the purchase and exchange
transactions were accounted for as a reorganization under common control and
accordingly, the financial statements represent the consolidated financial
position, operating results and cash flows of the Company and the subsidiary for
all periods from inception of the subsidiary. VDL began operations in October
1993 and has been in the development stage. (Unless otherwise indicated,
references to the Company herein include VDL.)
Incorporating VDI in the United States was a move designed to serve several
purposes. First, we believe that we stand a better chance to raise money to
finance our next development stage in the United States if we operate as a
domestic company with local offices and officers. Second, the United States is
our largest market and we wish to be close to it and devote sufficient
management attention to expand our share in it. Finally, we will be looking at
local business opportunities (in the form of Mergers & Acquisitions) that can
strengthen our position in the Blind and Visually Impaired market.
We are developing and marketing a line of personal digital assistants
("PDAs") which have a voice user interface and provide to the user a full range
of personal information management, including a talking diary, telephone book,
daily pad and other advanced features. The voice user interface enables the
visually impaired to use PDA technology by removing obstacles to use inherent in
conventional display-based products.
From its inception VDL used three sources of funding: investments made by
shareholders and third parties in shares and shareholders loans; grants for R&D
made by the Office of the Chief Scientist of the Ministry of Industry and Trade
in Israel; and revenues from product sales. From investors VDL received about
$1.6 million (not including stock-based compensation); from the Chief Scientist
VDL received about $0.7 million; and from sales VDL received about $0.62
million. All of the funds from the Chief Scientist and about $0.8 million from
investors were received during the years 1993-1998. VDL started marketing in
November 1997 and accumulated during the period from November 1997 to March 1999
revenues from sales of about $0.45 million. From March 1999 to June 2001 VDL had
sales of $5,000 only due to lack of inventory and the financial crisis that
prevented any marketing activity or manufacturing. In January 2000 VDL began a
relationship with Aryt (see below) which culminated in Aryt providing the
Company from January 2000 to March 2002 with loans aggregating approximately $
17
0.65 million. In December 2001 VDL renewed its manufacturing and marketing
activities and from that date until June 2002 we had revenues from sales of
about $126,000. We have an agreement with Reshef, a subsidiary of Aryt, which
provides for most of the components needed for the manufacturing of 2,200 IMP
units. We have additional income from outsourcing several of our employees. We
also have received since July 2002 loans from a group of investors with whom the
Company may do an acquisition transaction if our Class A Common Stock becomes
quoted on the OTC Bulletin Board.
Looking forward to year 2003 we have identified certain major risks. The
first risk is that our attempt to get our stock quoted on the OTC Bulletin Board
will fail and further investment as well as a possible acquisition from our new
investment group will not be forthcoming. Another risk is that we will fail to
raise a substantial investment that will permit us to bring to the market the
next generation of our products, including the TOTAL and the GOLDEN. Still
another risk is that some other company, likely with more financial resources
than us, will market a product that will render the IMP and even the TOTAL,
obsolete.
Critical Accounting Policies
Stock-based compensation
VDL accounts for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and the FASB interpretations thereof. Pursuant to those
accounting pronouncements, VDL records compensation for share options granted to
employees at the date of grant based on the difference between the exercise
price of the options and the market value of the underlying shares at that date.
Due to the terms of the grants, the fair value of the compensation in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation" approximates the
values computed in accordance with APB No. 25. VDL accounts for stock-based
compensation to non-employees in accordance with SFAS No. 123.
Under both accounting pronouncements, as part of the necessary
computations, management is required to estimate the fair value of the
underlying shares. Fair value has generally been determined by management as the
price at which the Company's shares were issued at the most recent prior
placement of the Company's common stock. The timing of the grant and measurement
of stock-based awards could have a material effect on the Company's results of
operations and financial position.
Revenue recognition
The Company is developing a line of products based on personal digital
assistant technology. The Company's revenues currently derive solely from a low
volume of consumer product sales at standard terms which are recognized, in
accordance with generally accepted accounting principles, upon shipment of its
products to the customer provided that persuasive evidence of an arrangement
exists, title has transferred, the price is fixed, collection of resulting
receivables is probable and there are no remaining significant obligations.
18
Future results of operations may be affected by the nature of the products that
may be developed and marketed in the future by the Company and by the terms to
be included in the sales agreements. Such matters may have a significant impact
on the timing of the Company's revenue recognition at each reporting date.
Development stage enterprise and going concern issue
The Company is in the development stage and has not generated significant
revenues. The Company's financial statements have been prepared assuming that it
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company has an accumulated deficit at June 30, 2002 of $2,325,605 and a working
capital deficit at June 30, 2002 of $260,960 that raise substantial doubt about
its ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon the successful completion of the
Company's development program and, ultimately, the attainment of profitable
operations which are contingent upon future events, including maintaining
adequate financing to fulfill its development activities, and achieving a level
of sales adequate to support the Company's expense structure. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Background
From our inception until 1999, we were financed by an aggregate of
approximately $780,000 in equity investments made by a group of investors.
During this period we also received about $639,000 in grants for its R&D program
from The Chief Scientist of the Ministry of Industry and Trade of Israel ("the
Chief Scientist"). In return for the grants, VDL is required to pay royalties to
the Chief Scientist equaling 3.5% of sales until an amount equal to the grant
has been paid. VDL also received an aggregate of approximately $60,000 in
unconditional grants from the Fund for the Encouragement of Export (the
"Marketing Fund"). See Note 8 to the Company's Consolidated Financial Statements
for information concerning disputes between VDL and the Chief Scientist and the
payback of part of the Marketing Fund grant.
Towards the end of the first quarter of 1999 we were in a financial crisis
that necessitated in the dismissal of all our employees. The reason for the
financial crisis was that our Founder and former President decided to leave the
company on September 1998 and made what we considered to be unreasonable demands
for severance and other payments. His claims were settled in court in mid 1999,
but before the court settlement was reached the former President blamed us for
misconduct in our dealings with the Office of the Chief Scientist. This caused
all grants from the Chief Scientist to stop and made investors reluctant to
continue investing in the Company. The dispute with the Chief Scientist has not
yet been settled. The Chief Scientist's demand is that we pay back about $40,000
of the grants we received in 1998. We claim that this demand is unjustified and
that actually the Chief Scientist owes us money under our 1998 undertaking.
During 1999 and 2000 VDL managed to survive through the collaboration of
its ex-employees and subcontractors that helped in preserving the Company's
knowledge and in the development of a new model in its series of PDAs, the Voice
19
Diary IMP ("IMP"). VDL issued warrants to purchase VDL stock to its ex-employees
and subcontractors as payment for their support.
In the beginning of 2000 VDL entered into a subcontracting agreement with
Aryt Industries Ltd. ("Aryt") for the manufacturing of the IMP, through Aryt's
subsidiary, Reshef Technologies Ltd. ("Reshef"), with Reshef providing a credit
line of $150,000 to cover manufacturing costs. Under this agreement, VDL sold to
Reshef VDL's entire inventory of components at its full value of about $40,000.
This amount was deducted from the cost of revenues. In the beginning of 2002 the
credit line was replaced by a subcontracting agreement under which Aryt
undertook to cover the costs of components and manufacturing of the IMP, up to
an amount of $425,000. In June 2002 the subcontracting agreement was terminated
and a manufacturing understanding was reached with Reshef under which Reshef
will manufacture for VDL 2,200 IMP units in batches of 550 and VDL will pay for
each batch upon receipt. The price per unit is approximately $45.
During 2000 and 2001, Aryt provided VDL with a loan of $ 350,000 to cover
R&D costs required to finish the development and engineering of the IMP. In the
first quarter of 2002 the loan was increased to $650,000. For its financial
accommodations to VDL, VDL issued to Aryt an aggregate of 3,471,652 shares of
common stock of VDL.
In June 2002, Aryt and VDI agreed, in connection with our acquisition of
VDL, that all of Aryt's shares of VDL be transferred to VDI for $1.00 and the
loans and all other debts payable by VDL to Aryt and Reshef be extinguished. In
return, VDL agreed to pay Aryt on a quarterly basis, royalties on VDL sales up
to an aggregate amount of $751,000. The royalty rate will be 10% of sales for 3
years or until the payment by VDL of an aggregate of $250,000; thereafter, 6% of
sales for two years or until the payment by VDL of an aggregate of $500,000; and
thereafter 1% of sales for two more years or until the payment by VDL of an
aggregate of $751,000.
Results of Operations
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Our revenues increased by approximately $14,400 in the six months ended
June 30, 2002 ("SA 2002") over the six months ended June 30, 2001 (ASA 2001")
due to the continued sales of the IMP that commenced in December 2001. Our
revenues in SA 2001 were derived primarily from the provision of services.
The gross loss as a percentage of sales was approximately (92%) in SA 2002
as compared to a gross loss as a percentage of sales of approximately (100%) in
SA 2001. The decrease in SA 2002 was due to an increase in operating expenses
due to the commencement of sales of the IMP.
Research and development expenses increased by approximately $56,200
(approximately 110%) in SA 2002 over SA 2001 primarily due to expenses incurred
in further developing the software of the IMP and the development of the first
prototype of the Total.
20
Marketing, general and administrative expenses increased by approximately
$124,800 (approximately 395%) in SA 2002 compared to the previous year primarily
due to additional operating expenses (primarily salaries and marketing costs) as
a result of the commencement of sales of the IMP.
In SA 2002 we had net financial expenses of approximately $130,474 as
compared to net financial income of $5,346 in SA 2001. The increase in net
financial expenses in SA 2002 was due to non-cash expenses incurred in
connection with obtaining a credit line.
Our net loss in SA 2002 increased by approximately $333,000 (approximately
437%) from SA 2001. The increase was primarily due the increased operating
expenses following the introduction of the IMP.
Fiscal Year 2001 Compared to Fiscal Year 2000
Our revenues increased by approximately $104,200 (approximately 1,703%) in
the fiscal year ended December 31, 2001 (AFY 2001") over the fiscal year ended
December 31, 2000 (AFY 2000") due to the commencement of sales of the IMP in
December 2001.
The gross profit as a percentage of sales was approximately 26% in FY 2001
as compared to a gross loss as a percentage of sales of approximately 29% in FY
2000. The increase in FY 2001 was due to a reduction in component costs and
increased sales in FY 2001.
Research and development expenses increased by approximately $94,400
(approximately 118%) in FY 2001 over FY 2000 primarily due to expenses incurred
in developing the IMP.
Marketing, general and administrative expenses decreased by approximately
$48,900 (approximately 36%) in FY 2001 compared to the previous year primarily
due to the fact that FY 2000 expenses include non-cash expenses (relating to the
issuance of warrants to employees and subcontractors). Marketing expenses in the
fiscal year ending December 31, 2002 are anticipated to increase as the IMP
marketing plan is implemented.
In FY 2001 we had net financial income of approximately $1,100 as compared
to net financial expenses of $117,542 in FY 2000. The decrease in net financial
expenses in FY 2001 was due to changes in the exchange rate in United States
dollars for Israeli new shekels.
Our net loss in FY 2001 decreased by approximately $113,500 (approximately
33%) from FY 2000. The decrease was primarily due to an increase in revenues and
decreased net financial expenses.
Fiscal Year 2000 Compared to Fiscal Year 1999
Our revenues decreased by approximately $138,000 (approximately 96%) in FY
compared to the fiscal year ended December 31, 1999 ("FY 1999") due to a
21
decrease of sales of the Voice Diary 2MB model, as a result of the decrease in
marketing activity and the lack of inventory.
The gross loss as a percentage of sales was approximately 42% in FY 2000 as
compared to a gross profit as a percentage of sales of approximately 19% in FY
1999. The gross loss in FY 2000 was primarily due to a reduction in sales.
Research and development expenses decreased by approximately $23,500
(approximately 23%) in FY 2000 as compared to FY 1999 due to the reduction in
our activity in FY 2000. Most of the R&D expenses in FY 2000 were non-cash
expenses, partly for issuance of warrants to non-employees and partly for the
recording of a provision due to a demand for repayment made by the Chief
Scientist.
Marketing, general and administrative expenses decreased by approximately
$98,000 (approximately 42%) in FY 2000 compared to the previous year primarily
due to the decrease in our activity. In both years most expenses are non-cash
expenses (relating to the issuance of warrants to employees and subcontractors).
In FY 2000 we had net financial expenses of approximately $117,500 as
compared to net financial expenses of $50,000 in FY 1999. The increase in net
financial expenses in FY 2000 was due to non-cash compensation (the issuance of
warrants to employees and subcontractors).
Our net loss in FY 2000 decreased by approximately $15,300 (approximately
4%) from FY 1999 due to the decrease in operating expenses.
Liquidity
We have limited financial resources to continue our operations. Ultimately,
our ability to continue as a going concern will depend upon our ability to
achieve and maintain profitability in the sale of our products. our independent
certified public accountants, stated in its report on our financial statements
as of June 30, 2002, December 31, 2001 and December 31, 2000 and for certain
periods then ended, that our recurring losses from operations, negative working
capital and shareholders' deficiency raise substantial doubt about our ability
to continue as a going concern.
We had a deficit in working capital of $261,000 as of June 30, 2002. We
plan to meet our obligations by entering into installment arrangements, by
arrangements deferring payments until future financing is obtained or by
settlements with creditors.
Our need to finance the manufacturing of IMP units is met mostly by the
arrangement we made with Reshef in June 2002. We have an arrangement with our
distributors that payments for shipments are made in two or three equal
installments, with the first being made in advance and other installments made 3
months apart. This arrangement will enable us to pay for manufacturing.
Since our disengagement from Aryt has severed our main source of financing
in recent years, we have taken several steps to reduce expenses. We have reduced
the number of our employees from 10 to 4 and we have contracted 2 of our
employees to another company. We estimate that our operating expenses over the
next twelve months will be approximately $200,000. This assumes that we will
22
make no major investments in developing the next model in the Voice Diary line
or in expanding our marketing outside Israel. The development of such model
would require a budget of approximately $500,000.
Since July 1, 2002 we have obtained an aggregate of about $65,000 (of which
$30,000 was received after the date of our auditor`s report on the Financial
Statements) in bridge loan financing from an Israeli company called Nir Or
Israel Ltd ("Nir Or") which is a developer and manufacturer of electronic
systems for defense applications. The loan is provided under an oral agreement
with the lenders. The terms of the loan were established after the date of our
auditor`s report on the Financial Statements and they are: if our Class A Common
Shares become quoted on the OTC BB the lenders will have the right to receive 5%
of the outstanding Class A shares for every $100,000 in principal amount of the
loan, at no cost and the loan will be payable in an amount equal to 3% of the
sales of VDI, without interest, over a period of 5 years. If the Class A Common
Shares do not become quoted in the OTC BB, the loan will be payable after 12
months with interest equal to the Israeli Prime Rate plus 1.5 per annum.
We also negotiate with Nir Or with respect to an acquisition by us through
a share swap of two small Israeli companies. The acquisition is expected to be
for an issuance by us to the shareholders of the two companies of approximately
75% of our Class A Common Shares. The negotiations will be advanced only if and
after our Class A Common Shares become quoted on the OTC BB. We expect that the
acquisition will increase our asset, equity and debt.
On October 1, 2002, after we started receiving loans from Nir Or, Mr. Arie
Hinkis, a director and Chief Executive Officer of our company also became the
Chief Financial Officer of Nir Or. For his services to Nir Or our company is
paid approximately $4,800 a month.
We are committed to pay royalties on sales of the IMP to two parties at the
following annual rates: The Chief Scientist - 3.5%; Aryt - 10% for 3 years, 6%
for additional 2 years and 1% for additional 2 years. Also, the bridge loan we
received from Nir Or is payable based upon a percentage of the sales of VDI.
These commitments place a heavy burden on the Company's cash flow.
Capital Resources
As of the date of this registration statement we have no material
commitments for capital expenditures. However, we do have significant debt
service and royalty commitments, as discussed herein. To meet these obligations,
to finance our negative cash flow from operations and to provide for possible
capital expenditures to develop new models in the Voice Diary line, we will seek
to raise money through the sale of our equity in private or public transactions.
In August 2001 we received a loan in the amount of approximately $102,000
from the Bank for the Development of Industry in Israel Ltd. ("BDII"). The loan
is payable in 36 equal monthly payments of $2,800 starting in September 2002.
23
The loan bears interest at the rate of LIBOR plus 2% per annum paid monthly.
BDII holds a lien on substantially all the assets of the Company. We are in
default on a partial payment.
In August 2001 we received a loan from United Mizrahi Bank Ltd. The balance
of the loan as of August 31, 2002 is about $8,400. The loan is payable in 6
equal monthly payments of $ 1,400 each. The loan bears interest at the Israeli
Prime Interest Rate plus 1.5% per annum. The loan is partially secured by a
deposit in the amount of $4,200. The Israeli Prime Interest Rate is decided from
time to time by the Bank of Israel. As of December 16, 2002 the rate was 9.6%
per annum.
In February 2001 we reached a settlement with Israel Discount Bank Ltd
("IDB"). The settlement finalized a law suit filed by IDB on a debt of about
$22,000 that we were in default of payment. Under this settlement we still have
to pay monthly principal payments of $420 during 2002, monthly principal
payments of $630 during 2003 and a final principal amount of $840 in January
2004. Interest will be paid with the final principal payment in January 2004.
The loan is not secured.
Our monthly operating budget provides for cash expenditures of $30,000 per
month (including approximately $5,000 in debt service payments. We project that
for the year 2002 we will generate approximately $70,000 from sales of the IMP
and $50,000 from sales of engineering and consulting services.
Disclosures About Contractual Obligations as of June 30, 2002
------------ Payments Due by Period ---------------
Contractual Less than
Obligations Total 1 Year 1-3 Years 4-5 Years After 5 Years
Long-Term Debt $129,365 $-- $129,365 $-- $--
Operating Losses $118,900 $-- $78,000 $40,900 $--
Royalties (1) $751,000 $-- $250,000 $250,000 $251,000
Purchase
Commitment $25,000 $25,000 $-- $-- $--
(1) Based on sales volume. See "Background" above.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign
currency exchange rates which may adversely affect its results of operations and
financial condition. Our policy is not to use financial instruments for trading
purposes or other speculative purposes. We do not use any derivative contracts
or other financial instruments to manage risk.
We are exposed to foreign exchange risk to the extent of adverse
fluctuations in the U.S. dollar. Based on historical U.S. currency movement, we
24
do not believe that reasonably possible near-term changes in the U.S. dollar of
10% will result in a material effect on our future earnings, financial position
or cash flows.
We are exposed to financial risks resulting from changes in the exchange
rate between the U.S. dollar and the Israeli new shekel, changes in the prime
interest rate in Israel and changes in the London Interbank Offered Rate
("LIBOR"). About 85% of our revenues are received in U.S. dollars. About 75%
of our debt is linked to the U.S. dollar exchange rate and bears interest based
on LIBOR. Most of our expenses (other than salaries) are linked to the U.S.
dollar exchange rate. The effect of currency exchange rate fluctuations on our
financial results are included in financial expenses (income) net.
The following table provides information about our debt obligations which
are sensitive to changes in interest rates at June 30, 2002. The information is
the principal cash flows and weighted interest rates by expected maturity dates.
<BTB>
LONG-TERM DEBT (IN U.S. DOLLARS)
2002 2003 2004 2005
------------ ------------ ------------ ------------
Variable rate (in U.S. dollars) 12,717 33,845 33,845 19,742
Interest rate LIBOR + 2% LIBOR + 2% LIBOR + 2% LIBOR + 2%
Fixed rate (in new Israeli shekels) 7,494 12,077
Interest rate* IP+1.5% IP+1.5%
Variable rate (in new Israeli shekels) 1,719 7,926
Interest rate 6.85 6.85
------------ ------------ ------------ ------------
21,930 53,848 33,845 19,742
============ ============ ============ ============
*IP-Israel Prime Interest Rate set from time to time by the Bank of Israel. On
June 30, 2002 the IP was 10.6% per annum and as of December 16, 2002 the rate
was 9.6% per annum.
ITEM 3. PROPERTIES.
We lease approximately 400 square feet of office space in the Shaar Yoqneam
Industrial Park, Yoqneam, Israel for approximately $350 per month in rent. The
original term of the lease has expired and we intend to negotiate a new lease
for the premises.
Under oral arrangements with a contractor and distributor, respectively, we
are provided marketing offices in Rosh Aayein, Israel and Jericho, New York on a
rent-free basis. Such arrangements may be terminated immediately at any time.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
25
The following table sets forth as of December 7, 2002 certain information
with respect to the amount and nature of beneficial ownership of the Company's
Class A Common Stock, par value $.01 per share ("Class A Stock") held by: (i)
each person known to us to be a beneficial owner of more than 5% of the
Company's outstanding Class A Stock and (ii) the sole director and executive
officer of the Company.
NAME AND ADDRESS OF
BENEFICIAL OWNER (1) NUMBER OF SHARES PERCENT (2)
Arie Hinkis 684,011(3) 88.4%
Seed Money Holding
Limited Partnership 421,607 66.4%
Robogroup T.E.K. Ltd. 126,154 19.9%
Directors and Executive Officers
As a group (1 person) 684,011(3) 88.4%
- -----------------------------------------------
(1) The business address for each person named is c/o Voice Diary Inc.
(2) Calculated pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act
of 1934. Under Rule 13d-3(d), shares not outstanding which are subject
to options, warrants, rights or conversion privileges exercisable
within 60 days are deemed outstanding for the purpose of calculating
the number and percentage owned by a person, but not deemed
outstanding for the purpose of calculating the percentage owned by
each other person listed. We believe that each individual or entity
named has sole investment and voting power with respect to the shares
of Common Stock indicated as beneficially owned by them (subject to
community property laws where applicable) and except where otherwise
noted.
(3) Includes 421,607 shares of Class A Common Stock owned by Seed Money
Holding (Voice Diary) Limited Partnership, of which Mr. Hinkis is the
sole general partner, and an aggregate of 200,483 shares of Class A
Common Stock which may be issued to Mr. Hinkis upon conversion of an
aggregate of 2,400 shares of Class B Common Stock, par value $.01 per
share ("Class B Stock") held by Mr. Hinkis.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
26
The following table sets forth certain information concerning the Company's
sole director and executive officer as of December 7, 2002.
NAME AGE POSITION WITH COMPANY
Arie Hinkis 54 President, Chief Executive Officer and
Director
Mr. Hinkis has been Chief Executive Officer of VDL since January 1997 and
was elected Chief Executive Officer and a Director of the Company in February
2002.
Directors serve in their respective capacities for a term of one year or
until their successors are duly elected and qualified. The executive officers
are appointed by and serve at the will of the board of directors to serve until
the earlier of their resignation or removal with or without cause by the board
of directors.
There are no family relationships between any two or more directors or
executive officers. There are no arrangements or understandings between any two
or more directors or executive officers.
ITEM 6. EXECUTIVE COMPENSATION.
The following summary compensation table shows the compensation paid during
the last three fiscal years to the Company's chief executive officer. No
executive officer received salary and bonus during the fiscal year ended
December 31, 2001 in an aggregate amount which exceeded $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
OTHER ANNUAL AWARDS
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION RESTRICTED STOCK
Arie Hinkis 2001 $33,280 0 0
President and 2000 0 0 $45,000(1)
Chief Executive Officer 1999 0 0 $161,970(1)
(1) In 2000 and 1999, VDL issued to Mr. Hinkis warrants to purchase an
aggregate of 233,990 ordinary shares of VDL. These warrants were
subsequently exchanged for an aggregate of 2,400 preferred shares of
VDL and such preferred shares were in turn exchanged for an aggregate
of 2,400 shares of Class B Stock of the Company.
EMPLOYMENT AND MANAGEMENT AGREEMENTSand Consulting Contracts
Employment Agreement with Arie Hinkis
27
Arie Hinkis is employed by VDI pursuant to an Employment Agreement dated
July 3, 2002. The agreement provides that Mr. Hinkis will be paid a salary at
the rate of $40,000 per year plus a bonus to be determined in the sole
discretion of the Board of Directors. Mr. Hinkis is employed by VDL pursuant to
an employment agreement dated March, 2001 which agreement was amended in
December 2001. Under such amended agreement Mr. Hinkis is paid a monthly salary
of 20,000 Israeli new shekels (approximately $4,193) and provided certain fringe
benefits including the use of an automobile leased by us. The employment
agreement does not have a stated term.
DIRECTORS' COMPENSATION
We currently have only one director who is also an employee and is not paid
separately for his services as a director. We do not currently have any formal
policy as to the compensation it would offer independent directors.
..
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Since January 1, 2001 we have entered into several transactions with our
former controlling stockholder, Aryt. On June 30, 2002 Aryt sold to VDI Aryt's
entire investment in VDI for $1.00 and also entered into an agreement with us
under which we agreed to pay to Aryt royalties from the sale of VDL's products
up to an aggregate amount of $751,000 in exchange for the cancellation of all
the loans and all other debts payable by VDL to Aryt and Reshef, a subsidiary of
Aryt. On June 30, 2002 Aryt and us also agreed that an agreement entered into on
February 13, 2002 which provided for a one year credit line of $425,000 from
Aryt to VDL be terminated.
For additional information concerning transactions between Aryt and the
Company, see the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in Item 2. Financial
Information, herein and Notes 8A, 9 and 15 of Notes to the Company's
Consolidated Financial Statements contained in Item 13, herein.
ITEM 8. LEGAL PROCEEDINGS.
As of date of this document there were no legal actions pending against us
or any of our officers or directors in their fiduciary capacities, nor, to our
knowledge, was any litigation threatened.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
0
28
No shares of the Company's Class A Stock and Class B Stock
(collectively, the "Common Stock") have previously been registered with the
Commission or any state securities agency or authority. We intend to make
application to the National Association of Securities Dealers, Inc. (the "NASD")
for the Class A Stock to be quoted on the OTC Bulletin Board. Our application to
the NASD will consist of current corporate information, financial statements and
other documents as required by Rule 15c2-11 of the Exchange Act. Inclusion on
the OTC Bulletin Board permits price quotation for the Class A Stock to be
published by such service. The OTC Bulletin Board is scheduled to be phased out
by the end of the fourth quarter of 2002 and to be replaced by the new Bulletin
Board Exchange (the "BBX") which is presently scheduled to be launched in the
second quarter of 2003.
The Company intends to make application to the NASD for the Class A Stock to be
quoted on the BBX at such time as the Company can meet the qualification
standards of the BBX, which are expected to include among other things, that an
issuer have at least 100 round lot holders of its shares (a round lot is 100
shares). The Company currently would not satisfy this requirement. Inclusion on
the BBX would permit price quotation for the Class A Stock to be published by
such exchange. Until such time as the Company's Class A Stock is quoted on the
OTC Bulletin Board or the BBX, quotations for such stock may be available in the
pink sheets.
The Company is not aware of any existing trading market for its Common
Stock. The Company's Common Stock has never traded in a public market. There
are no plans, proposals, arrangements or understandings with any person(s) with
regard to the development of a trading market in any of the Company's
securities.
If and when the Class A Stock is traded in the over-the-counter market,
most likely such shares will be subject to the provisions of Section 15(g) and
Rule 15g-9 of the Exchange Act, commonly referred to as the "penny stock" rule.
Section 15(g) sets forth certain requirements for transactions in penny stocks
and Rule 15g9(d)(1) incorporates the definition of penny stock as that used in
Rule 3a51-1 of the Exchange Act.
The Commission generally defines penny stock to be any equity security that
has a market price less than $5.00 per share, subject to certain exceptions.
Rule 3a51-1 provides that any equity security is considered to be a penny stock
unless that security is: registered and traded on a national securities exchange
meeting specified criteria set by the Commission; authorized for quotation on
The NASDAQ Stock Market; issued by a registered investment company; excluded
from the definition on the basis of price (at least $5.00 per share) or the
issuer's net tangible assets; or exempted from the definition by the Commission.
If our shares are deemed to be a penny stock, trading in the shares will be
subject to additional sales practice requirements on broker-dealers who sell
penny stocks to persons other than established customers and accredited
investors, generally persons with assets in excess of $1,000,000 or annual
income exceeding $200,000, or $300,000 together with their spouse.
For transactions covered by these rules, broker-dealers must make a special
suitability determination for the purchase of such securities and must have
received the purchaser's written consent to the transaction prior to the
29
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document relating to the penny stock market. A broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, and current quotations for the securities. Finally,
the monthly statements must be sent disclosing recent price information for the
penny stocks held in the account and information on the limited market in penny
stocks. Consequently, these rules may restrict the ability of broker dealers to
trade and/or maintain a market in our Common Stock and may affect the ability of
stockholders to sell their shares.
As of December 7, 2002, there were four holders of record of our Class A
Stock and one holder of record of our Class B Stock. As of such date, we had
issued and outstanding 634,863 shares of Class A Stock and 2,400 shares of Class
B Stock.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our Common Stock since
our formation, and do not presently anticipate paying any cash dividends on its
Common Stock in the foreseeable future. We currently intend to retain any future
earnings to finance the expansion and development of its business. The future
payment of cash dividends on the Common Stock will depend on our earnings,
capital requirements and financial position, applicable requirements of the
Delaware General Corporation Law, general economic conditions and other factors
considered relevant by our board of directors.
There are no contractual restrictions on our ability to declare and pay
dividends.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
During the three fiscal years preceding the date of this Registration
Statement, we issued Common Stock in several transactions which were not
registered under the Securities Act.
Based on understandings made in February 2002, on July 2, 2002 and
September 4, 2002 (with respect to Robogroup T.E.K. Ltd.) VDI issued the number
of shares of its Common Stock to the persons indicated in the table below in
exchange for the transfers by each person to VDI indicated opposite the name of
such person in such table. All of the Common Stock issued by VDI was issued in
transactions not subject to the registration requirements under the Securities
Act of 1933, as amended pursuant to Regulation S. All of the shares of VDI were
issued in offshore transaction to non-U.S. Persons.
30
Number of Shares and Number of Shares
Name of Class of Common Stock and Class of Shares
Stockholder of VDI Issued of VDL Exchanged
- -------------------- -------------------------- ----------------------
Seed Money Holding 421,607 shares of
Limited Partnership Class A Stock 46,025 ordinary shares
Gabi Sharir 25,181 Shares of
Class A Stock 25,181 ordinary shares
Arie Hinkis 61,921 shares of
Class A Stock 27,675 ordinary shares
Arie Hinkis 2,400 shares of
Class B Stock 2,400 preferred shares
Robogroup T.E.K. Ltd. 126,154 shares of
Class A Stock 110,421 ordinary shares
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
Our Certificate of Incorporation authorizes 10,010,000 shares of Common
Stock which are divided into two classes as follows: (i) 10,000,000 shares of
Class A Stock and (ii) 10,000 shares of Class B Stock.
CONVERSION RIGHTS
Each share of Class B Stock is convertible at any time at the option of its
holder into such number of shares of Class A Stock as shall equal the quotient
obtained by dividing (a) the number of shares of Class A Stock outstanding at
the close of business on the day immediately preceding the date the holder gives
us a notice of the holder's demand to convert the shares, by (b) 7,600. The
Class A Stock is not convertible into any other security.
VOTING RIGHTS
The holders of our Class B Common Shares, voting as a separate class,
unilaterally shall be entitled to elect one director as well as to amend our
Certificate of Incorporation so as to decrease, but not increase, the number of
shares of Class A Stock into which each share of Class B Stock shall be
convertible. On all other matters the holders of Class A Stock and Class B Stock
shall vote as a single class with each share of Class A Stock entitled to one
vote and each share of Class B Stock entitled to such number of votes as shall
equal the number of whole shares (rounded down) of Class A Stock into which such
share of Class B Stock is convertible. The stockholders are not entitled to
cumulative voting in the election of directors. Accordingly, the holders of
shares with more than 50% of the voting power in the election of directors will
31
be able to elect all the directors (other than the director to be elected solely
by the holders of Class B Stock) if they choose to do so. There are no
redemption or sinking provisions applicable to our Common Stock.
DIVIDEND RIGHTS
Each share of our Common Stock is entitled to share pro rata in dividends
and distributions with respect to the Common Stock when, as and if declared by
our board of directors and from funds legally available therefor. No holder of
any shares of our Common Stock has any preemptive right to subscribe for any of
our securities.
The holders of Class A Stock and Class B Stock participate ratably in
dividends, as if all shares were of a single class, except that for purposes of
determining the ratable participation in dividends of the respective classes of
Common Stock, each share of Class A Stock is deemed to be one share of the
single class and each share of Class B Stock is deemed to be the whole number of
shares (rounded down) of Class A Stock into which such share of Class B Stock is
convertible.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution, or
winding-up of the Company, after all our creditors shall have been paid in full
and after payment of all sums payable in respect of any preferred stock, if any,
having senior liquidation rights, the holders of the Common Stock shall share
ratably as if all shares were of a single class in all distributions of our
assets pursuant to such voluntary or involuntary liquidation, dissolution, or
winding-up. For purposes of determining the ratable participation of the
respective classes of Common Stock in such distributions, each share of Class A
Stock shall be deemed to be one share of the single class and each share of
Class B Stock shall be deemed to be such number of shares of the single class as
shall equal the number of whole shares (rounded down) of the Class A Stock into
which such shares of Class B Common Stock is then convertible.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Law") empowers a Delaware corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
32
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon
plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was lawful.
In the case of an action by or in the right of the corporation, Section 145
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or complete action in
any of the capacities set forth above against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in and not opposed to the best interests of the
corporation, except that indemnification is not permitted in respect of any
claim, issue or matter as to which such person is adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought determines upon application that,
despite the adjudication of liability, but in view of all of the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such court deems proper. Section 145
further provides: that a Delaware corporation is required to indemnify a
director, officer, employee or agent against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with any action,
suit or proceeding or in defense of any claim, issue or matter therein as to
which such person has been successful on the merits or otherwise; that
indemnification provided for by Section 145 not be deemed exclusive of any other
rights to which the indemnified party may be entitled; that indemnification
provided for by Section 145 shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of such person's heirs,
executors and administrators; and empowers the corporation to purchase and
maintain insurance on behalf of a director or officer against any such liability
asserted against him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
liability under Section 145. A Delaware corporation may provide indemnification
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct. Such
determination is to be made (i) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even through less than a quorum or
(ii) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion or (iii) by the stockholders.
Section 8 of our Certificate of Incorporation provides in part that:
33
"The Corporation shall indemnify any person who was, is, or is
threatened to be made a party to a proceeding (as hereinafter defined)
by reason of the fact that he or she (a) is or was a director or
officer of the Corporation or (b) while a director or officer of the
Corporation, is or was serving at the request of the Corporation as a
director, officer, partner, venturer, proprietor, trustee, employee,
agent, or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan, or other enterprise, to the fullest extent
permitted under Delaware Law, as the same exists or may hereinafter be
amended. Such right shall be a contract right and as such shall run to
the benefit of any director or officer who is to serve as a director
or officer of the Corporation while this Article 8 is in effect. Any
repeal or amendment of this Article 8 shall be prospective only and
shall not limit the rights to any such director or officer or the
obligations of the Corporation with respect to any claim arising from
or related to the services of such director or officer in any of the
foregoing capacities prior to any such repeal or amendment to this
Article 8."
Section 102(b)(7) of the Delaware Corporation Law provides that the
Certificate of Incorporation of a Delaware corporation may contain a provision
eliminating the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of a
director for (i) any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) the payment of
unlawful dividends or the making of unlawful stock purchases or redemptions or
(iv) any transaction from which the director derived a personal benefit.
Section 11 of our Certificate of Incorporation contains the following provisions
with respect to the elimination or limitation of liability of our directors:
"A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director except for liability (a) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (b) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (c)
under Section 174 of the Delaware General Corporation Law, or (d) for
any transaction from which the director derived any improper personal
benefit."
Our By-Laws also provide indemnification provisions for the benefit of its
officers similar to those contained in our Certificate of Incorporation.
We have been advised that in the opinion of the Commission indemnification
for liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"), for directors, officers and control persons is against public
policy as expressed in the Securities Act and is therefore, unenforceable.
Claims for indemnification against such liabilities would be limited to the
34
person in the successful defense of any action, suit or proceeding.
payment by us of expenses incurred or paid by a director, officer or control
person in the successful defense of any action, suit or proceedings.
35
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of Voice Diary Inc. and its
subsidiary as of June 30, 2002 and December 31, 2001 and December 31, 2000 and
for periods then ended follow on the next page.
36
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2002
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<BTB>
Page
INDEPENDENT AUDITORS' REPORT F3
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 and
2000 F4
Consolidated Statements of Operations for the six months ended June 30,
2002, for the six months ended June 30, 2001 (unaudited), the years ended
December 31, 2001, 2000 and 1999 and the cumulative period from October 1,
1993 (date of commencement of operations) to June 30, 2002 F5
Statement of Shareholders' Deficiency for the period from October 1, 1993
(date of commencement of operations) to June 30, 2002 F6 - F8
Consolidated Statements of Cash Flows for the six months ended June 30,
2002, for the six months ended June 30, 2001 (unaudited), the years ended
December 31, 2001, 2000 and 1999 and the cumulative period from October 1,
1993 (date of commencement of operations) to June 30, 2002 F9 - F10
Notes to the Consolidated Financial Statements F11 - F27
F2
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Voice Diary Inc.
We have audited the accompanying consolidated balance sheets of Voice Diary Inc.
(a development stage company) ("the Company") and its subsidiary as of June 30,
2002 and December 31, 2001 and 2000, and the related consolidated statements of
operations, shareholders' deficiency, and cash flows for the six month period
ended June 30, 2002 and for each of the three years in the period ended December
31, 2001 and for the cumulative period from October 1, 1993 (date of
commencement of operations) to June 30, 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 auditing standards generally accepted
in the United States of America. 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 the management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company and its subsidiary
as of June 30, 2002 and December 31, 2001 and 2000, and their results of
operations and their cash flows for the six month period ended June 30, 2002 and
for each of the three years in the period ended December 31, 2001 and for the
cumulative period from October 1, 1993 to June 30, 2002 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations, working
capital deficit and shareholders' deficiency raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants
Member firm of Deloitte Touche Tohmatsu
Haifa, Israel
October 3, 2002
F3
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
June 30 December 31
------------ -------------------------
2 0 0 2 2 0 0 1 2 0 0 0
------------ ---------- ----------
CURRENT ASSETS
Cash and cash equivalents $39,836 $117,805 $8,097
Trade accounts receivable 24,308 65,970 233
Other receivables and prepaid expenses (Note 3) 14,863 29,363 623
--------- --------- ---------
79,007 213,138 8,953
--------- --------- ---------
FIXED ASSETS, NET (Note 4) 40,820 11,604 7,365
--------- --------- ---------
$119,827 $224,742 $16,318
========= ========= =========
CURRENT LIABILITIES
Short-term bank credit and current portion of long term debt $64,714 $44,330 $149,480
Short-term loans from Related Party (Note 15) -- 357,672 55,472
Trade accounts payable 32,045 197,249 31,348
Accrued expenses 174,923 180,542 195,204
Related parties -- 4,929 --
Other payables (Note 5) 68,285 35,291 31,460
--------- --------- ---------
339,967 820,013 462,964
--------- --------- ---------
LONG TERM LIABILITIES
Long term loans from banks (Note 6) 75,699 108,443 22,742
Liabilities for severance pay (Note 7) 6,173 1,761 --
--------- --------- ---------
81,872 110,204 22,742
--------- --------- ---------
COMMITMENTS (Note 8)
SHAREHOLDERS' DEFICIENCY (Note 9)
Share capital:
Shares of Class A Common Stock $0.01 par value
(Authorized -10,000,000 shares as of June 30, 2002 and
December 31, 2001 and 2000
Issued and Outstanding - 634,863 shares as of June 30,
2002 and 736,531 shares as of December 31, 2001 and 2000)
Shares of Class B Common Stock $0.01 par value
(Authorized - 10,000 shares, Issued and Outstanding - 2,400
shares as of June 30, 2002 and December 31, 2001 and
2000) 6,373 7,389 7,389
Additional paid-in capital 2,017,220 1,203,489 1,208,489
Deficit accumulated during the development stage (2,325,605) (1,916,353) (1,685,266)
----------- ----------- -----------
(302,012) (705,475) (469,388)
----------- ----------- -----------
$119,827 $ 224,742 $16,318
=========== =========== ===========
October 3, 2002
- - ---------------------------- ----------------------
Approval date of the Director
financial statements
The accompanying notes are an integral part of the financial statements.
F4
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative from
October 1, 1993
(date of
commencement
Six months ended of operations)
June 30 Year ended December 31 to June 30
-------------------- -------------------------------------- ----------------
2 0 0 2 2 0 0 1 2 0 0 1 2 0 0 0 1 9 9 9 2 0 0 2
-------- --------- --------- --------- --------- ---------
Unaudited
---------
Revenues $15,992 $1,584 $109,963 $5,778 $143,367 $622,953
Cost of revenues (Note 10) 30,653 -- 81,036 19,062 115,719 552,486
---------- --------- ---------- ---------- ---------- ------------
Gross profit (loss) (14,661) 1,584 28,927 (13,284) 27,648 70,467
Operating costs and expenses
Research and development
expenses (Note 11) 107,720 51,528 174,116 79,700 103,461 1,079,833
Marketing, general and
administrative expenses
(Note 12) 156,397 31,580 86,978 135,831 233,797 970,690
---------- --------- ---------- ---------- ---------- ------------
Operating loss (278,778) (81,524) (232,167) (228,815) (309,610) (1,980,056)
Financial expenses (Note 13) 141,814 5,573 24,132 117,542 50,365 388,197
Financial income (11,340) (10,919) (25,212) -- -- (40,920)
Other income, net -- -- -- (1,756) -- (1,728)
---------- --------- ---------- ---------- ---------- ------------
Loss for the period $(409,252) $(76,178) $(231,087) $(344,601) $(359,975) $(2,325,605)
========== ========= ========== ========== ========== ============
Loss per share:
Basic and diluted $(0.64) (0.12) $(0.36) $(1.76) $(2.98)
========== ========= ========== ========== ==========
Number of shares used in
computing basic and
diluted loss per share 637,263 637,263 637,263 195,951 120,728
========== ========= ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
F5
VOICE DIARY INC.
A DEVELOPMENT-STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' DEFICIENCY (CONT.)
Number of Shares Number of Shares
--------------------- -------------------
Deficit
accumulated
Class A Class B Additional during the Total
Common Preferred Common Common Share paid-in development shareholders'
Stock Stock Stock Stock Capital capital stage deficiency
-------- --------- --------- --------- --------- --------- --------- ----------
Balance -October 1, 1993 (date of
commencement of operations) -- -- -- -- -- -- -- --
Changes in 1993:
Issuance of Common Stock 15,000 $527 $45,736 $46,263
Net income for the year 1,209 1,209
-------- --------- --------- --------- --------- --------- ---------- -----------
Balance- December 31, 1993 15,000 527 45,736 1,209 $47,472
Changes in 1994:
Loss for the year (51,609) (51,609)
Balance- December 31, 1994 15,000 527 45,736 (50,400) (4,137)
Changes in 1995:
Issuance of Common Stock 1,200 39 43,647 43,686
Loss for the year (99,244) (99,244)
-------- --------- --------- --------- --------- --------- ---------- -----------
Balance- December 31, 1995 16,200 566 89,383 (149,644) (59,695)
Changes in 1996:
Issuance of Common Stock 8,800 273 224,089 224,362
Loss for the year (147,481) (147,481)
-------- --------- --------- --------- --------- --------- ---------- -----------
Balance- December 31, 1996 25,000 839 313,472 (297,125) 17,186
Changes in 1997:
Issuance of Common Stock 8,160 236 265,789 266,025
Loss for the year (405,106) (405,106)
-------- --------- --------- --------- --------- --------- ---------- -----------
Balance- December 31, 1997 33,160 -- -- -- $1,075 $579,261 $(702,231) $(121,895)
======== ========= ========= ========= ========= ========= ========== ==========
The accompanying notes are an integral part of the financial statements.
F6
VOICE DIARY INC.
A DEVELOPMENT-STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' DEFICIENCY (CONT.)
Number of Shares Number of Shares
--------------------- -------------------
Deficit
accumulated
Class A Class B Additional during the Total
Common Preferred Common Common Share paid-in development shareholders'
Stock Stock Stock Stock Capital capital stage deficiency
-------- --------- --------- --------- --------- --------- --------- ----------
Balance- December 31, 1997 33,160 -- -- -- $1,075 $579,261 $(702,231) $(121,895)
Changes in 1998:
Issuance of Common Stock 87,480 2,275 199,838 202,113
Issuance of options to employees 3,600 3,600
Loss for the year (278,459) (278,459)
-------- --------- --------- --------- --------- --------- ----------- ----------
Balance- December 31, 1998 120,640 3,350 782,699 (980,690) (194,641)
Changes in 1999:
Issuance of Common Stock 7,630 179 21,757 21,936
Issuance of options to a related
party 161,970 161,970
Issuance of options to employees 37,894 37,894
Loss for the year (359,975) (359,975)
-------- --------- --------- --------- --------- --------- ------------ ----------
Balance- December 31, 1999 128,270 3,529 1,004,320 (1,340,665) (332,816)
Changes in 2000:
Issuance of Common Stock 213,718 5,238 48,210 53,448
Issuance of Common Stock pursuant
to financing agreement 300,000 7,317 66,722 74,039
Issuance of options for services
rendered 30,145 30,145
Issuance of options to a related
party 45,000 45,000
Issuance of options to employees 5,391 5,391
Issuance of Preferred Stock 2,400 6 -- 6
Loss for the year (344,601) (344,601)
-------- --------- --------- --------- --------- --------- ------------ ----------
641,988 2,400 -- -- 16,090 1,199,788 (1,685,266) (469,388)
Adjustment due to reorganization
under common control (641,988) (2,400) 736,531 2,400 (8,701) 8,701
-------- --------- --------- --------- --------- --------- ----------- ----------
Balance- December 31, 2000 -- -- 736,531 2,400 $7,389 $1,208,489 $(1,685,266) $(469,388)
========= ========= ========= ========= ========= ========= =========== ==========
The accompanying notes are an integral part of the financial statements
F7
VOICE DIARY INC.
A DEVELOPMENT-STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' DEFICIENCY (CONT.)
Number of Shares Number of Shares
--------------------- -------------------
Deficit
accumulated
Class A Class B Additional during the Total
Common Preferred Common Common Share paid-in development shareholders'
Stock Stock Stock Stock Capital capital stage deficiency
-------- --------- --------- --------- --------- --------- ----------- ------------
Balance- December 31, 2000 -- -- 736,531 2,400 $7,389 $1,208,489 $(1,685,266) $(469,388)
Changes in 2001:
Cost related to previous year
Issuances (5,000) (5,000)
Loss for the year (231,087) (231,087)
-------- --------- --------- --------- --------- ---------- ----------- ------------
Balance- December 31, 2001 -- -- 736,531 2,400 $7,389 $1,203,489 (1,916,353) (705,475)
Changes in 2002:
Issuance of Common Stock 65,177 652 64,525 65,177
Issuance of Common Stock
pursuant to financing agreement 98,249 982 97,267 98,249
Waiver of loan by Related Party 649,289 649,289
Waiver of shares by principal
shareholder (265,094) (2,650) 2,650
Loss for the period (409,252) (409,252)
-------- --------- --------- --------- --------- ---------- ----------- ------------
Balance- June 30, 2002 -- -- 634,863 2,400 $6,373 $2,017,220 $(2,325,605) $(951,301)
======== ========= ========= ========= ========= ========== ============ ============
F8
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative from
October 1, 1993
(date of
commencement
Six months ended of operations)
June 30 Year ended December 31 to June 30
--------------------- ------------------------------------ -------------
2 0 0 2 2 0 0 1 2 0 0 1 2 0 0 0 1 9 9 9 2 0 0 2
---------- ---------- ----------- ----------- ----------- -------------
Unaudited
----------
CASH FLOWS - OPERATING
ACTIVITIES
Loss for the period $(409,252) $(76,178) $(231,087) $(344,601) $(359,975) $(2,325,605)
Adjustments to reconcile loss to net
cash used in operating activities
(Appendix A) 16,235 16,148 67,667 289,949 309,545 802,559
---------- ---------- ----------- ----------- ----------- -----------
Net cash used in operating activities (393,017) (60,030) (163,420) (54,652) (50,430) (1,523,046)
---------- ---------- ----------- ----------- ----------- -----------
CASH FLOWS - INVESTING
ACTIVITIES
Purchase of fixed assets (32,541) (8,001) (7,189) -- (1,422) (155,077)
Proceeds from sale of fixed assets -- -- -- 1,805 -- 2,503
---------- ---------- ----------- ----------- ----------- -----------
Net cash (used in) provided by investing
activities (32,541) (8,001) (7,189) 1,805 (1,422) (152,574)
CASH FLOWS - FINANCING
ACTIVITIES
Proceeds from long-term loans -- 124,154 118,114 30,932 33,710 210,858
Repayment of long-term loans (10,104) (8,075) (4,050) (34,896) (15,363) (77,482)
Short-term bank credit, net 899 (130,887) (130,947) (49,911) 8,746 11,048
Short term loans from Related Party, net 291,617 79,528 302,200 55,472 -- 649,289
---------- ---------- ----------- ----------- ----------- -----------
Share issuance 65,177 -- -- 57,180 21,936 926,743
Costs related to previous year issuances -- -- (5,000) -- -- (5,000)
---------- ---------- ----------- ----------- ----------- -----------
Net cash provided by financing activities 347,589 64,720 280,317 58,777 49,029 1,715,456
---------- ---------- ----------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (77,969) (3,311) 109,708 5,930 (2,823) 39,836
Cash and cash equivalents - beginning of
period 117,805 8,097 8,097 2,167 4,990 --
---------- ---------- ----------- ----------- ----------- -----------
Cash and cash equivalents - end of
period $39,836 $4,786 $117,805 $8,097 $2,167 $39,836
========== ========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F9
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative from
October 1, 1993
(date of
commencement
Six months ended of operations)
June 30 Year ended December 31 to June 30
----------------------- ------------------------------------ --------------
2 0 0 2 2 0 0 1 2 0 0 1 2 0 0 0 1 9 9 9 2 0 0 2
Unaudited
---------- ----------- ---------- ----------- ----------- --------------
Appendix A -
Adjustments to reconcile loss to
net cash from operating activities
Income and expense items not
involving cash flows:
Depreciation and amortization $3,325 $1,665 $2,951 $13,503 $29,646 $113,482
Exchange-rate (gain) loss (3,155) (938) (2,567) 277 256 (4,011)
Liabilities for severance pay 4,412 -- 1,761 -- (15,393) 6,173
Loss on sale of fixed assets -- -- -- (1,757) -- (1,728)
Non-cash compensation expenses 98,249 -- -- 150,848 199,864 452,561
---------- ----------- ---------- ----------- ----------- -------------
102,831 727 2,145 162,871 214,373 566,477
---------- ----------- ---------- ----------- ----------- -------------
Changes in operating assets and
liabilities:
Decrease (increase) in trade accounts
receivable 41,662 (579) (65,737) 66 5,075 (24,308)
Decrease (increase) in receivables and
other current assets 14,500 (6,162) (28,740) 2,027 1,850 (14,863)
Decrease in inventories -- -- -- 40,496 93,177 --
Increase (decrease) in trade accounts
payable (165,204) 35,524 165,901 (5,853) (14,509) 32,045
Increase (decrease) in payables and
other current liabilities 22,446 (13,362) (5,902) 90,342 9,579 243,208
---------- ----------- ---------- ----------- ----------- ------------
(86,596) 15,421 65,522 127,078 95,172 236,082
---------- ----------- ---------- ----------- ----------- ------------
$16,235 $16,148 $67,667 $289,949 $309,545 $802,559
========== =========== ========== =========== ============ ============
Appendix B -
Non cash transactions
Waiver of loan by principal shareholder
in exchange for rights to royalties $649,289 -- -- -- -- $649,289
========== =========== ========== =========== ============ ============
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $6,409 $4,936 $12,605 $36,398 $25,430 $132,930
========== =========== ========== =========== ============ ============
The accompanying notes are an integral part of the financial statements.
F10
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
A. General
Voice Diary Inc. ("the Company") was incorporated in the state of
Delaware on February 26, 2002. In June 2002 the Company acquired
approximately 99.43 % of the outstanding shares of Voice Diary Ltd.,
an Israeli corporation ("the Subsidiary"), through an exchange of
shares of the Company with former shareholders of the Subsidiary.
Under generally accepted accounting principles the transaction was
accounted for as a reorganization under common control and
accordingly, the financial statements represent the consolidated
financial position, operating results and cash flows of the Company
and the Subsidiary for all periods from inception of the subsidiary.
The Subsidiary began its operations in 1993 and has been in the
development stage.
The Company through its Subsidiary is developing and marketing a line
of personal digital assistants ("PDAs") which have a voice user
interface and provide to the user a full range of personal information
management, including a talking diary, telephone book, daily pad and
other advanced features. The voice user interface enables the visually
impaired to use PDA technology by removing obstacles to use inherent
in conventional display-based products.
B. Going concern
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. The Company has an accumulated deficit at
June 30, 2002 of $ 2,325,605 and a working capital deficit at June 30,
2002 of $ 260,960 that raise substantial doubt about its ability to
continue as a going concern.
The ability of the Company to continue as a going concern is dependent
upon the successful completion of the Company's development program
and, ultimately, the attainment of profitable operations which are
contingent upon future events, including maintaining adequate
financing to fulfill its development activities, and achieving a level
of sales adequate to support the Company's expenses structure.
The company plans to meet its obligations by entering into installment
arrangements, by arrangements deferring payments until future
financing is obtained or by settlements with creditors.
F11
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
A. General
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America.
B. Principles of consolidation
The Company's consolidated financial statements include the financial
statements of the Company and it's wholly owned subsidiary in Israel,
after elimination of material inter company transactions and balances.
C. Functional currency and foreign currency translation
The currency of the primary economic environment in which the
operations of the Company and its subsidiary are conducted is the U.S.
dollar ("dollar"). Therefore, the Company uses the dollar as its
functional and reporting currency. Certain of the dollar amounts in
the financial statements may represent the dollar equivalent of other
currencies, and may not necessarily be exchangeable for dollars.
Transactions and balances denominated in dollars are presented at
their dollar amounts. Non-dollar transactions and balances are
remeasured into dollars in accordance with the principles set forth in
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation," of the Financial Accounting Standards Board
("FASB"). Transaction gains and losses are reflected in net financing
expenses.
D. Development stage company
Since its inception, the Company's efforts have been devoted to
research and development. The financial statements are therefore
presented in accordance with the principles SFAS No. 7 of the FASB -
"Accounting and Reporting by Development-Stage Enterprises."
E. Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires that management make estimates
and assumptions that affect the reported amounts of assets and
liabilities as well as disclosure of contingent assets and liabilities
at the balance sheet date and the reported amounts of income and
expenses during the reporting period. Actual results may vary from
these estimates.
F12
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
F. Cash and cash equivalents
Cash and cash equivalents include bank demand deposits and short-term
unrestricted deposits having original maturity dates not exceeding
three months from the date of deposit.
G. Fixed assets
1. Fixed assets are presented at cost less depreciation.
2. Annual depreciation is computed based on the straight-line
method over the estimated useful lives, as follows:
Years
Fixtures 10
Office furniture 10
Computer equipment and software 3
Management reviews fixed assets for impairment when
circumstances or events indicate that the carrying amount of
the asset may not be recoverable. If the sum of undiscounted
cash flows is less than the carrying amount, an impairment
loss is recognized at an amount by which the carrying amount
of the asset exceeds its fair value based on discounted cash
flows.
H. Revenue recognition
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101"), as amended in June
2000, which summarizes the staff's views in applying generally
accepted accounting principles to revenue recognition in
financial statements. The Company adopted SAB 101 during the
fourth quarter of 2000, which did not have an effect on its
results of operations or financial position.
The Company recognizes revenue upon the shipment of its products
to the customer provided that persuasive evidence of an
arrangement exists, title has transferred, the price is fixed,
collection of resulting receivables is probable and there are no
remaining significant obligations.
I. Research and development costs
Research and development costs are charged to operations as incurred.
F13
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
J. Deferred income taxes
The Company accounts for income taxes utilizing the asset and
liability method in accordance with SFAS No. 109, "Accounting for
Income Taxes". Current tax liabilities are recognized for the
estimated taxes payable on tax returns for the current year. Deferred
tax liabilities or assets are recognized for the estimated future tax
effects attributable to temporary differences between the income tax
bases of assets and liabilities and their reported amounts in the
financial statements, and for tax loss carryforwards. Measurement of
current and deferred tax liabilities and assets is based on provisions
of enacted tax laws, and deferred tax assets are reduced, if
necessary, by the amount of tax benefits, the realization of which is
not considered likely based on available evidence.
K. Fair value of financial instruments
The financial instruments of the Company consist mainly of cash and
cash equivalents, current accounts receivable, accounts payable and
accruals. Due to the relatively short period to maturity, the fair
value of the financial instruments included in the working capital of
the Company approximates their carrying amounts.
L. Net loss per share
Loss per share has been computed in accordance with SFAS No. 128,
"Earnings per Share". Potential securities have been excluded from the
diluted losses per share computation for the years ended December 31,
2001, 2000, and 1999 and for the six months ended June 30, 2002 and
(unaudited) 2001, respectively, due to the anti-dilutive effect.
M. Stock-based compensation
The Subsidiary accounts for employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and the FASB
interpretations thereon. Pursuant to those accounting pronouncements,
the Subsidiary records compensation for share options granted to
employees at the date of grant based on the difference between the
exercise price of the options and the market value of the underlying
shares at that date. Due to the terms of the grants, the fair value of
the compensation in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation" approximates the values computed in
accordance with APB No. 25. The Subsidiary accounts for stock-based
compensation to non-employees in accordance with SFAS No. 123.
F14
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
N. Effects of recently issued accounting standards
In August of 2001, the FASB issued SFAS No.143, "Accounting for Asset
Retirement Obligations". SFAS No 143 applies to legal
obligations.associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development or
normal operation of a long-lived asset. SFAS No 143 requires that
estimated asset retirement costs be measured at their fair values and
recognized as assets and depreciated over the useful life of the
related asset. Similarly, liabilities for the present value of asset
retirement obligations are to be recognized and accreted as interest
expense each year to their estimated future value until the asset is
retired. These provisions will be applied to existing asset retirement
obligations as of the adoption date as a cumulative effect of a change
in accounting policy. SFAS No. 143 is effective for the Company's
fiscal years beginning January 1, 2003. SFAS No. 143 will not have a
material effect on the Company's consolidated results of operations
and financial position.
In October of 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long- lived assets. This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long- Lived Assets and for
Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Occurring Events
and Transactions" ("APB No. 30"). SFAS No. 144 expands the scope of
accounting for disposals to include all components of an entity. It
requires the gain or loss on disposal to be measured as the difference
between (1) the fair value less the costs to sell and (2) the carrying
value of the component, and such gain or loss cannot include the
estimated future operating losses of the component, which were
included in the gain or loss detemination under APB No. 30. SFAS No.
144 also eliminates the exception to consolidation for a subsidiary
for which control is likely to be temporary. The provisions of SFAS
No. 144 are effective for the Company's fiscal years beginning January
1, 2002, and interim periods within those fiscal years. SFAS No. 144
will not have a meterial effect on the Company's consolidated results
of operations and financial position.
In June of 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 "Accounting for Costs Associated with Exit or
Disposal Activities" (SFAS 146). SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be
recognized only when the liability is incurred, rather than at the
date of an entity's commitment to an exit plan. SFAS 146 requires that
the liability be initially measured at fair value. SFAS No. 146 is
effective for exit or disposal activities that are initiated after
December 31, 2002. The Company has not yet determined the effect of
adopting SFAS No. 146 on its results of operations.
F15
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - OTHER RECEIVABLES AND PREPAID EXPENSES
June 30 As of December 31
------- ---------------------
2 0 0 2 2 0 0 1 2 0 0 0
------- ---------- ---------
Prepaid expenses $8,434 $4,582 $ --
Government institutions 6,429 24,781 623
------- --------- --------
$14,863 $29,363 $623
======= ========= ========
NOTE 4 - FIXED ASSETS, NET
June 30 As of December 31,
----------- ---------------------
2 0 0 2 2 0 0 1 2 0 0 0
----------- ---------- ---------
Cost:
- - -----
Computers and software $ 107,430 $ 99,606 $ 92,645
Fixtures 31,099 6,799 6,799
Office furniture 2,851 2,434 2,205
----------- ---------- ---------
141,380 108,839 101,649
----------- ---------- ---------
Accumulated depreciation:
- - -------------------------
Computers and software (95,434) (93,477) (91,426)
Fixtures (4,296) (3,044) (2,344)
Office furniture (830) (714) (514)
----------- ---------- ----------
(100,560) (97,235) (94,284)
----------- ---------- ----------
Net $ 40,820 $ 11,604 $ 7,365
=========== ========== ==========
NOTE 5 - OTHER PAYABLES
June 30 As of December 31
------- ---------------------
2 0 0 2 2 0 0 1 2 0 0 0
--------- ------------ --------
Employees and payroll accruals $ 48,097 $15,103 $11,035
Fund for the encouragement of
marketing * 20,188 20,188 20,425
--------- ------------ --------
$68,285 $35,291 $31,460
========= ============ ========
* Claim for refund of amounts received by the Subsidiary from the fund of the
Ministry of Industry and Trade.
F16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LONG TERM LOANS FROM BANKS
Rate of June 30, As of December 31
----------- ---------- -----------------------
Interest 2 0 0 2 2 0 0 1 2 0 0 0
----------- ---------- ---------- ------------
%
-----------
Loans in new Israeli shekels
(Fixed rate) 6.85 $9,645 $ 13,134 $ --
Loans in new Israeli shekels
(Variable rate) IP*+1.5% 19,571 27,339 31,126
Loans in U.S. dollars Libor+2% 100,149 102,151 --
---------- ---------- ------------
129,365 142,624 31,126
Less current maturities 53,666 34,181 8,384
----------- ---------- ------------
$75,699 $108,443 $ 22,742
=========== ========== ============
* IP - Israeli Prime Interest Rate, set from time to time by the Bank of
Israel. On June 30, 2002 the IP was 10.6%.
Interest on fixed rate loan will be paid with the final principal payment
in January 2004.
Interest on variable rate loan is payable monthly.
Based on the terms of long term debt, fair value approximates
recorded amounts.
See Note 8C regarding security.
Future payments of long term loans from banks:
Twelve month period ended June 30
- ----------------------------------------
2003 $ 53,366
2004 39,037
2005 36,662
---------
$ 129,365
=========
F17
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LIABILITIES FOR SEVERANCE PAY
The Subsidiary is subject to certain Israeli law and labor agreements
that determine the obligations of the Subsidiary to make severance
payments to dismissed employees and to employees leaving employment
under certain other circumstances. The obligation for severance pay
benefits, as determined by Israeli law, is based upon length of
service and the employee's most recent salary. This obligation is
funded in part by the purchase of managers' insurance policies from
insurance companies.
NOTE 8 - COMMITMENTS
A. Royalties
1. In accordance with agreements for financing research and
development with Office of the Chief Scientist of the
Government of Israel ("O.C.S."), the Subsidiary undertook to
pay royalties at a rate of 3.5 % of the revenues from the
sale of products developed on the research and development
programs, up to the amount of financing. An accrual for the
aforementioned royalties has been recorded in the financial
statements.
2. In June 30, 2002 the Subsidiary signed an agreement with
Aryt Industries Ltd (Subsidiary's former Parent Company)
("Aryt") (see Note 15). The Subsidiary undertook to pay to
Aryt royalties from the sales of the Subsidiary's products
up to an aggregate amount of $751,000, in exchange for the
cancellation by Aryt of all of its rights, title and
interest in and to any obligation of the Subsidiary or any
other entity on its behalf. The rate of the royalties shall
be as follows:
- 10% of the sales of the Subsidiary's products, until
the earlier to occur of: (i) the lapse of 3 years
following the date hereof, or (ii) such time as the
aggregate sum paid by the Subsidiary pursuant to the
terms amounts to $250,000 (the term during which this
10% royalty rate is applicable shall be hereinafter
referred to as the "First Term").
- 6% of the sales of the Subsidiary's products,
commencing at the end of the First Term and ending on
the earlier to occur of: (i) the lapse of 2 years
following the end of the First Term, or (ii) such time
as the aggregate sum paid by Subsidiary amounts to
$500,000 cumulatively (the term during which this 6%
royalty rate is applicable shall be hereinafter
referred to as the "Second Term").
- 1% of the sales of the Subsidiary's products,
commencing at the end of the Second Term and ending on
the earlier to occur of: (i) the lapse of 2 years
following the end of the Second Term, or (ii) such time
as the aggregate sum paid by the Subsidiary amounts to
$751,000 cumulatively.
F18
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - COMMITMENTS (CONT.)
B. According to a decision on August 24, 1999 of O.C.S., the
Subsidiary was requested to repay the O.C.S. an amount of $39,244
(including interest) for amounts received by the Subsidiary in
1998. The Subsidiary recorded a provision in its books for the
full amount.
The Subsidiary has claimed participation by the O.C.S. in
research and development expenses for the period from December
1998 to March 1999. The Subsidiary has not recorded a receivable
in conection with this claim.
C. Liens
A floating lien has been placed on all the Subsidiary's assets,
securities, notes and other documents in favor of the Israel
Industrial Development Bank Ltd.
In addition, a $7,000 deposit is security for repayment of a loan
received from United Mizrahi Bank Ltd.
D. Operating lease
The Subsidiary has rented 3 vehicles under an operating lease
agreement, which expires in 2007.
Future payments of operating lease:
Twelve month period ended June 30
2003 $ 26,000
2004 26,000
2005 26,000
2006 26,000
2007 14,900
---------
$ 118,900
=========
E. Purchase commitment
In June 2002, a subcontracting agreement between Reshef (a
subsidiary of Aryt) and the Subsidiary, that was previously in
effect, was replaced by a manufacturing arrangement under which
Reshef will manufacture 2,200 Voice Diary IMP units for the
Subsidiary in batches of 550 units each and the Subsidiary will
pay for each batch upon receipt. The price per unit is
approximately $45. In the first stage, the Subsidiary ordered the
manufacture of a batch of 550 units out of the total quantity in
the manufacturing arrangement. The cost of the first batch
amounts to approximately $ 25,000. Each supply of an additional
batch of 550 units will be conditional upon payment by the
Subsidiary for the previous batch.
F19
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SHAREHOLDERS' DEFICIENCY
A. General
The total number of shares of the Company is as follows:
Authorized Issued and Outstanding
---------- ------------------------
Class A Common Stock 10,000,000 634,863
============ ==========
Class B Common Stock 10,000 2,400
============ ==========
Each share has a par value of $0.01. Each share of Class B Common
Stock is convertible at any time at the option of its holder or
holders and for no additional consideration into such number of fully
paid and non-assessable shares of Class A Common Stock as shall equal
the quotient obtained by dividing the number of shares of Class A
Common Stock outstanding at the close of business on the day
immediately preceding the date the conversion notice is received by
the Company, by 7,600.
The shares of Class A and Class B Common Stock confer to holders the
right to receive notice to participate and vote in general meetings of
the Company and the right to receive dividends, if declared.
The holders of Class A and Class B Common Stock shall vote and
participate ratably in dividends as a single class. Each share of
Class A Common Stock entitles its holder to one vote and each share of
Class B Common Stock entitles its holder to such number of votes as
shall equal the number of whole shares of Class A Common Stock into
which such share of Class B Common Stock is convertible.
Each share of Class A Common Stock participates in dividends as one
share of a single class and each share of Class B Common Stock
participates in dividends as the whole number shares of Class A Common
Stock into which such share of Class B Common Stock is convertible.
The Company has not adopted a stock option plan. In previous years the
Subsidiary granted stock options.
F20
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SHAREHOLDERS' DEFICIENCY (CONT.)
A. General (CONT.)
A summary of the status of the Subsidiary's stock options as of
June 30, 2002, 2001 and 2000 and December 31, 2001, 2000 and
1999, and of changes during the periods then ended, is presented
below:
JUNE 30, DECEMBER 31,
------------------ -----------------------------------------------
EXERCISE EXERCISE
2 0 0 2 2 0 0 1 2 0 0 1 2 0 0 0 PRICE 1 9 9 9 PRICE
-------- -------- -------- --------- ------ ------- ---------
UNAUDITED
---------
Outstanding at beginning
of year 42,414 67,595 67,595 65,127 $0 1,200 $0
Granted during year
-- -- -- 236,458 $0 63,927 $0
Exercised during year
-- -- (25,181) (233,990) $0 -- $0
-------- -------- -------- --------- ------ ------- ---------
Outstanding at end of year
42,414 67,595 42,414 67,595 $0 65,127 $0
======== ======== ======= ========= ====== ======= =========
Weighted average fair
value of options granted
during the year
$ 0.25 $3
======== =======
The Company is considering issuing shares of the Company in
exchange for subsidiary's stock options.
B. Issuance of share capital and options
1. In June 2002 the Company acquired approximately 99.43% of
the outstanding shares of the Subsidiary. Under generally
accepted accounting principles the transaction was accounted
for as reorganization under common control. The shares of
Common Stock were exchanged to Shares of Class A Common
Stock and shares of Preferred Stock were exchanged to Shares
of Class B Common Stock.
2. During the period of its inception through 1998 the
Subsidiary issued 120,640 shares of Common Stock to 29
investors at a price per share ranging from $3 to $38.
3. On October 17, 1999 the Subsidiary issued 7,630 shares of
Common Stock to three investors for consideration of
$21,936.
4. In 1999, the Subsidiary issued 53,990 options to the CEO and
9,937 options to two other employees. The options are
convertible to shares of Common Stock with no exercise price
and in consideration for waiving their salaries for 1999.
The value of the options, totaling $ 199,864 was estimated
by the Subsidiary at a price of $3 per option based on the
last share placement price. That amount was charged to
operations.
F21
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SHAREHOLDERS' DEFICIENCY (CONT.)
5. In 2000, the Subsidiary issued 180,000 options to the CEO and 31,633
options to two additional employees. The options are convertible to shares
of Common Stock for no exercise price and in consideration for waiving
their salaries for 2000. The value of the options, totaling $50,391 was
estimated by the Subsidiary at a price of $0.25 per options based on the
last share placement price. That amount was charged to operations.
6. On November 1, 2000 the Subsidiary issued 213,718 shares of Common Stock to
two investors for consideration of $53,629.
7. On December 1, 2000 the Subsidiary issued 300,000 shares of Common Stock to
a related party pursuant to a financing agreement in consideration for a
credit line of $150,000. The value of the shares of Common Stock, totaling
$74,039, was estimated by the Subsidiary using an average price of $0.25
per share and was charged to operations.
8. On December 1, 2000 the Subsidiary issued 2,400 shares of Preferred Stock
to the CEO in consideration of 233,990 options.
9. During 2000 the Subsidiary issued 24,825 options to suppliers in
consideration for services rendered to the Subsidiary. The options are
convertible to shares of Common Stock with no exercise price. The value of
the options, totaling $30,145, was estimated by the Subsidiary based on
fair value of the services rendered. That amount was charged to operations.
10. In February 2002 Aryt Industries Ltd (Subsidiary's former Parent Company)
("Aryt") granted to the Subsidiary a credit line of $425,000 to be
available throughout 2002. in consideration the Subsidiary issued to Aryt
98,249 shares. Deferred compensation cost in the amount of $196,498 was
calculated based on the price and number of shares issued to Aryt in
consideration for the credit line. On June 30, 2002 the credit line was
terminated and, accordingly, 50% of the abovementioned amount ($98,249) was
charged to operations.
11. On February 13, 2002 the Subsidiary issued 65,177 shares Common Stock to a
related party for consideration of $65,177.
12. On June 30, 2002 Aryt, the Subsidiary's principal shareholder, decided to
waive all its rights pertaining its shares of the Subsidiary and to sell
its shareholdings to the Company for total consideration of $1.
On June 30, 2002 Aryt, the Subsidiary's principal shareholder, waived debt
in the amount of $649,289 previously included in short-term loans from
Related Party. The amount has been included in additional paid in capital
(see Note 15).
F22
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COST OF REVENUES
Cumulative from
October 1, 1993
(date of
commencement
Six months ended of operations)
June 30 Year ended December 31 to June 30
---------------------- ------------------------------------ -----------
2 0 0 2 2 0 0 1 2 0 0 1 2 0 0 0 1 9 9 9 2 0 0 2
----------- ---------- ---------- ---------- ---------- ----------
Unaudited
----------
Materials $2,496 -- $63,985 $2,936 $77,140 $372,047
Salaries and related expenses 16,024 -- 13,347 9,041 -- 58,575
Sub-contractors -- -- -- -- -- 50,783
Non-cash compensation expenses -- -- -- 5,391 11,034 20,025
Other 12,133 -- 3,704 1,555 6,554 51,056
---------- ---------- ----------- ----------- ----------- ----------
30,653 -- 81,036 18,923 94,728 552,486
Decrease in inventory of
work in progress and
finished goods -- -- -- 40,139 20,991 --
---------- ---------- ----------- ----------- ----------- ----------
$30,653 -- $81,036 $59,062 $115,719 $552,486
========== ========== =========== =========== =========== ==========
NOTE 11 - RESEARCH AND DEVELOPMENT EXPENSES
Cumulative from
October 1, 1993
(date of
commencement
Six months ended of operations)
June 30 Year ended December 31 To June 30
------------------ ------------------------------------ -----------
2 0 0 2 2 0 0 1 2 0 0 1 2 0 0 0 1 9 9 9 2 0 0 2
--------- ------- --------- ----------- ------------ -----------
Unaudited
---------
Salaries and related
Expenses $ 83,612 $ -- -- $ 6,623 $ 9,874 $ 846,880
Sub-contractors 5,856 46,151 137,127 3,219 50,198 387,556
Materials 9,356 4,268 15,000 469 -- 86,752
Non-cash compensation
expenses -- -- -- 30,145 26,859 57,004
Other 8,896 1,109 21,989 -- 16,530 366,747
--------- ------- --------- ----------- ----------- ------------
107,720 51,528 174,116 40,456 103,461 1,744,939
Less participation from
Government funds -- -- -- -- -- (704,350)
Grants received -- -- -- 39,244 -- 39,244
--------- ------- --------- ----------- ----------- ------------
$107,720 $51,528 $174,116 $79,700 $ 103,461 $1,079,833
========= ======= ========= =========== =========== ============
F23
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Cumulative from
October 1, 1993
(date of
commencement
Six months ended of operations)
June 30 Year ended December 31 To June 30
------------------ ------------------------------------ -------
2 0 0 2 2 0 0 1 2 0 0 1 2 0 0 0 1 9 9 9 2 0 0 2
--------- --------- --------- ----------- ------------ -------
Unaudited
---------
Salaries and related expenses $66,753 $11,625 $33,280 -- -- $362,180
Advertising and marketing costs 31,263 -- 22,122 2,573 22,446 166,343
Depreciation 3,325 1,626 2,951 13,503 29,562 103,664
Non-cash compensation expenses -- -- -- 45,000 161,971 206,971
Professional Services 33,309 6,798 14,178 58,692 5,008 150,642
Office Expenses 9,369 3,846 9,457 4,809 13,200 137,898
Management Fees -- -- -- -- -- 48,282
Car Maintenance 6,986 7,204 3,779 1,827 11,998 54,891
Others 5,392 481 1,211 9,427 6,142 75,680
-------- -------- -------- --------- --------- ---------
156,397 31,580 86,978 135,831 250,327 1,306,551
Less: Expenses Attributed To
Research And Development Expenses -- -- -- -- (16,530) (335,861)
-------- -------- -------- --------- --------- ---------
$156,397 $31,580 $86,978 $135,831 $233,797 $970,690
======== ======== ======== ========= ========= =========
NOTE 13 - FINANCIAL EXPENSES
Cumulative from
October 1, 1993
(date of
commencement
Six months ended of operations)
June 30 Year ended December 31 To June 30
------------------ ------------------------------------ ----------
2 0 0 2 2 0 0 1 2 0 0 1 2 0 0 0 1 9 9 9 2 0 0 2
--------- --------- --------- ----------- ------------ ----------
Unaudited
---------
Financial Expenses To Banks 10,100 5,573 15,084 46,458 50,365 176,650
Interest To Related Party* 33,465 -- 9,049 472 -- 42,986
Amoritization of debt issuance 98,249 -- -- 70,412 -- 168,561
--------- --------- --------- ----------- ------------ ----------
$141,814 $5,573 $24,133 $117,542 $50,365 $388,197
========= ======== ========= =========== ============ ==========
* Including financial expenses of $ 18,500 connected with obtaining a credit line.
F24
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - INCOME TAXES
A. The Subsidiary is assessed under the provisions of the
Israeli Income Tax Law (Inflationary Adjustments) 1985,
pursuant to which results for tax purposes are measured in
new Israeli shekels in real terms in accordance with changes
in the Israeli consumer price index.
B. Deferred taxes
Under Statement No. 109 of the FASB, deferred tax assets are to
be recognized for anticipated tax benefits associated with net
operating loss carryforwards and deductible temporary
differences. A valuation allowance is recorded if it is more
likely than not some or all of the deferred tax assets will not
be realized.
June 30 As of December 31
--------- ---------------------
2 0 0 2 2 0 0 1 2 0 0 0
--------- --------- ---------
Loss carryforwards $ 613,536 $ 528,243 $ 455,898
Other temporary differences 3,108 753 --
--------- --------- ---------
616,644 528,996 455,898
Less: valuation allowance 616,644 528,996 455,898
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
The Company has provided for a valuation allowance in respect of
all deferred tax benefits resulting from tax loss carryforwards
and other temporary differences, due to the uncertainty regarding
the realizability of such benefits.
In accordance with Israeli tax laws, losses may be carried
forward indefinitely. The Subsidiary's carryforward tax losses
are denominated in New Israel Shekels and are linked to the
Israeli consumer price index. As of June 30, 2002 such losses
amounted to $1,704,268.
C. Tax assessments
Neither the Company nor the Subsidiary has been assessed for tax
purposes since incorporation.
F25
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RELATED PARTY TRANSACTIONS
June 30 As of December 31
--------- -----------------------
2 0 0 2 2 0 0 1 2 0 0 0
--------- --------- -----------
Balances of related parties
Loans from a related party -- $357,672 $55,472
========= ========== ===========
Payables and other current
liabilities - related parties -- $4,929 --
========= ========== ===========
<BTB>
Six months ended
June, 30 Year ended December 31
--------------------- ----------------------------------
2 0 0 2 2 0 0 1 2 0 0 1 2 0 0 0 1 9 9 9
-------- ---------- -------- ---------- ----------
Unaudited
----------
Related parties
Expenses -
Purchase of materials $6,158 -- $50,299 -- --
======== ========= ========= ========== =========
Sub-contractors $9,027 -- $ 8,445 -- --
======== ========= ========= ========== =========
Travel expenses $3,837 $244 $ 1,605 -- --
======== ========= ========= ========== =========
Salaries and related expenses $32,532 $11,807 $33,280 -- --
======== ========= ========= ========== =========
1. On June 30, 2002 the Company signed an agreement with Aryt Industries
Ltd. (Subsidiary's former Parent Company) ("Aryt"). Aryt agreed to
sell to the Company its entire investment in the Subsidiary (93.8% of
the outstanding shares of the Subsidiary) for a total amount of $1.
(See Note 9B (12)).
2. In addition, on June 30, 2002 the Subsidiary signed another agreement
with Aryt. The Subsidiary undertook to pay to Aryt royalties from the
sales of Subsidiary's products up to an aggregate amount of $751,000
(see Note 8A), in exchange for the cancellation by Aryt of all of its
rights, title and interest in and to any obligation of Subsidiary or
any other entity on its behalf including a short term debt in the
amount of $649,289.The short-term debt was cancelled and recorded to
"additional paid-in capital".
3. In February 2002 Aryt granted to the Subsidiary a credit line of
$425,000 to be available throughout 2002. On June 30, 2002 the credit
line was terminated
(see Note 9 (10)).
F26
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENT
Since July 1, 2002 the Company has obtained an aggregate of $35,000 in bridge
loan financing from a new group of investors.
F27
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
FINANCIAL STATEMENTS
The following financial statements are filed as part of this registration
statement on Form 10: the consolidated financial statements of Voice Diary Inc.
(a development stage company) and its subsidiary as of June 30, 2002, December
31, 2001 and 2000 and the related consolidated statements of operations, changes
in shareholder's deficiency and cash flow for the six month period ended June
30, 2002 and each of the three years in the period ended December 31, 2001 and
the cumulative period from October 1, 1993 (date of commencement of operations)
to June 30, 2002.
<BTB>
EXHIBITS
Number Description
3.1 Certificate of Incorporation of the Company.*
3.2 By-laws of the Company.*
10.1 Employment Agreement dated July 3, 2002 between Arie Hinkis and VDI.*
10.2 Employment Agreement dated March 14, 2001 between VDL and Arie Hinkis*
10.3 Share Purchase Agreement between VDI and Aryt, dated June 30, 2002.*
10.4 Share Purchase Agreement between VDI and Seed Money Holding Limited
Partnership, dated July 2, 2002.*
10.5 Share Purchase Agreement between VDI and Arie Hinkis, dated July 2,
2002 (Class B Common Stock).*
10.6 Loan Agreement between VDL and Bank for the Development of Industry in
Israel Ltd., dated September 8, 2001.*
10.7 Royalty Agreement between Aryt and VDL, dated as of June 30, 2002.*
10.8 Share Purchase Agreement between VDI and Robogroup T.E.K. Ltd., dated
September 4, 2002.*
10.9 Share Purchase Agreement between VDI and Arie Hinkis, dated July 2,
2002 (Class A Common Stock).*
21. Subsidiaries of the Registrant:
Name Jurisdiction of Formation Percentage Ownership
Voice Diary Ltd. Israel 99.4%
- --------------------------------------------------------------------------------
* Previously filed.
37
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Act of 1934,
the registrant has duly caused this Amendment No. 1 of this registration
statement to be signed on its behalf by the undersigned, hereunto authorized.
Dated at New York, New York this 16th day of December 2002.
VOICE DIARY INC.
By: /s/Arie Hinkis
------------------------------
President and Director
38
EXHIBIT INDEX
Number Description
3.1 Certificate of Incorporation of the Company.*
3.2 By-laws of the Company.*
10.10 Employment Agreement dated July 3, 2002 between Arie Hinkis
and VDI.*
10.11 Employment Agreement dated March 14, 2001 between VDL
and Arie Hinkis.*
10.12 Share Purchase Agreement between VDI and Aryt, dated June 30, 2002.*
10.13 Share Purchase Agreement between VDI and Seed Money Holding Limited
Partnership, dated July 2, 2002.*
10.14 Share Purchase Agreement between VDI and Arie Hinkis, dated July 2,
2002 (Class B Common Stock).*
10.15 Loan Agreement between VDL and Bank for the Development of Industry in
Israel Ltd., dated September 8, 2001.*
10.16 Royalty Agreement between Aryt and VDL, dated as of June 30, 2002.*
10.17 Share Purchase Agreement between VDI and Robogroup T.E.K. Ltd., dated
September 4, 2002.*
10.18 Share Purchase Agreement between VDI and Arie Hinkis, dated July 2,
2002 (Class A Common Stock).*
21. Subsidiaries of the Registrant:
Name Jurisdiction of Formation Percentage Ownership
Voice Diary Ltd. Israel 99.4%
- --------------------------------------------------------------------------------
* Previously filed
39