SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
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)
<BTB>
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Financial Information 13
Item 3. Properties 21
Item 4. Security Ownership of Certain Beneficial Owners and Management 21
Item 5. Directors and Executive Officers 23
Item 6. Executive Compensation 23
Item 7. Certain Relationships and Related Transactions 24
Item 8. Legal Proceedings 25
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters 25
Item 10. Recent Sales of Unregistered Securities 27
Item 11. Description of Registrant's Securities to be Registered 27
Item 12. Indemnification of Directors and Officers 29
Item 13. Financial Statements and Supplementary Data 32
Item 14. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
Item 15. Financial Statements and Exhibits 33
CAUTIONARY NOTICE REGARDING
FORWARD LOOKING STATEMENTS
Voice Diary Inc. (the "Company," VDI or the "Registrant") cautions readers
that certain important factors may affect the Company's 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 or on behalf of the Company. 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 the Company's financial condition or results of operations for
its limited history; (ii) the Company's business and growth strategies; and
(iii) the Company's 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, the Company's limited operating history,
potential fluctuations in quarterly operating results and expenses, the failure
of products resulting from engineering faults, the Company's 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 the Company 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. The Company is also subject to other risks detailed herein or set
forth from time to time in the Company's filings with the Securities and
Exchange Commission (the "Commission").
2
PART I
ITEM 1. BUSINESS.
The Company is voluntarily filing this Registration Statement on Form 10 in
order to make information concerning itself more readily available to the
public. Management believes 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 the Company. In
addition, management believes that this might make the Company more attractive
to an operating business as a potential business combination candidate. As a
result of filing this Registration Statement, the Company will become obligated
to file with the Commission certain interim and periodic reports, including an
annual report containing audited financial statements. The Company intends to
continue to voluntarily file these periodic reports under the Exchange Act even
if its obligation to file such reports is suspended under applicable provisions
of the Exchange Act.
General
VDI was incorporated in the state of Delaware on February 26, 2002. In
June and July 2002 VDI 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 ("Purchase and Exchange Agreement"). 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 the Company herein include
VDL.)
The Company 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.
Products
The Company has developed and is 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 an
elaborate data structure and can be easily retrieved and played. The IMP can
communicate with a personal computer ("PC") for back-up and software update.
3
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 ergomonic 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 Company is currently developing a voice-activated PDA which will also
incorporate a cell phone. This product, to be called the "TOTAL", will feature a
removable, large flash disk. It will enable the user to make long recordings
(lectures, court sessions, meetings, phone conversations, etc.) and to edit the
recordings with features such as cut and paste. Using the flash disk, the user
will be able to import information and entertainment products and features, such
as MP3 music and talking books.
The Company anticipates that an operating prototype will be available
beginning in the first quarter of 2003 and the product will be introduced in the
third quarter of 2003.
The Company is also looking at providing a basic e-mail capability to the
blind and visually impaired (and to future targeted niches), taking advantage of
the success of text-based paging e-mail products (e.g., RIM Blackberry). The
Company believes that this can be done by adding a two-way messaging/paging
functionality to the TOTAL, mainly as a voice e-mail service. The service will
be based on existing text-to-speech technologies and developing speech-to-text
technologies or, on existing human speech-to-text services.
Preliminary talks have already been initiated by the Company with a U.S.
provider of such paging services to the deaf and hard of hearing.
The Company is also planning an adaptation of the TOTAL which would serve
the needs of elderly people who often have problems reading the displays on
existing mobile devices, or activating their complex functions controlled by
tiny buttons.
The product, to be called the "GOLDEN", will have only a minimal set of
large buttons and an optional illuminated display. It will have some special
features such as the ability to set it from a remote telephone, thus enabling
settings by a distant relative, and an emergency button. GOLDEN will be sold at
similar price and distribution arrangements as the TOTAL.
The Company anticipates that the GOLDEN will be available in mid-2004.
The Company anticipates that the TOTAL and GOLDEN will be sold mainly by
cellular service providers with or without support from distributors of products
to the blind and visually impaired.
4
Services
The incorporation of a large, removable flash memory will enable TOTAL to
be used as an information/entertainment station. This will enable VDI to develop
a service to provide content to its subscribers. Distribution of content will be
made through several means: mail (sending flash disc with the content);
libraries, particularly those that serve the visually impaired; e-mails to PCs
from where the content will be downloaded either in communication or using a
flash disk drive; or directly to the TOTAL using its communication abilities.
VDI also intends to operate a voice portal accessible through the Internet.
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 accessed by the visually impaired.
VDI intends to provide content for its portal under a subscription
arrangement that will require users to pay an annual fee plus fees for certain
third party content. VDI plans to obtain royalties from content distributed to
its subscribers, as well as from e-business generated by them, advertisements in
its channels and also from the communication fees paid to the operator. VDI
plans to start offering content distribution services in 2003.
Software for OEM Platforms
VDI plans to adapt its basic know-how of voice-operating systems to PCs and
brand name PDAs. For example, the Company plans to develop software comparable
to Microsoft Outlook (and adapted to it), that could provide to the blind and
visually impaired (and others) a voice shell and a synchronizing capability for
their IMP or TOTAL as part of the PC text environment. Similarly, the Company
envisages a voice shell for the Palm Pilot. The Company plans to commercialize
software for the OEM platform starting in 2004.
Technology
VDI products make use of developments in voice processing technology that
have matured in recent years. The rapid advances in microelectronics have
facilitated the development of a voice user interface in pocketsize platforms
instead of the commonly used text/graphic interface. Moreover, it is possible,
when necessary, to coordinate both environments.
Voice processing technology consists of a series of so-called "engines": voice
recognition, voice compression, text-to-speech and speech-to-text. VDI believes
that it has gained knowledge in the development task of the second tier
software: the user interface and database.
In addition, VDI has gained knowledge in the design of a small form
portable product, including such issues as power supply, audio quality,
5
packaging, ergonomic keypad design adapted to the blind, implementing
applications with voice processing engine.
Business Strategy
The Company develops and markets 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 VOICE DIARY product line provides the
full range of personal information management, including a talking diary,
phonebook, daily pads and many more advanced features.
VDI is in the process of incorporating wireless capabilities (cell-phone
and two-way messaging/e-mailing voice paging) to its 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 it operates and will
operate.
The Company intends 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 VDI's 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.
VDI's technology consists of its ability to provide complete hardware and
software systems that answer needs specifically identified by the people in the
addressed niche. VDI does not get involved in the development of generic
technology (such as voice processing engines).
VDI may complement growth in its proprietary line by acquisition of
companies with complementary products and services, a market presence and stable
cash flow.
VDI already operates globally and it will seek to intensify this activity
by becoming directly involved to gain market leadership in many countries of the
industrial world.
VDI manufactures its products mainly through subcontractors. VDI markets
its products and services through a one level marketing structure. VDI conducts
its research and development activity by a team of trained, experienced and
devoted software and hardware engineers, operating at its 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, the Company spent an
aggregate of $464,997 and $1,079,833, respectively, on research and development.
Industry Analysis
VDI operates between two successfully growing industries: the mobile
computing industry and the industry of assistive technology that provides
6
technology-based products and services to disabled people. Some of the
better-known technology products that are sold to the visually impaired are:
- - Screen-reader software for PCs.
- - Braille and audio portable computers.
- - Electronic and optic magnifiers.
Mobile computing and assistive technology are both growth industries.
The mobile computing industry, with the introduction of the cellular phone
and the PDA, and the enabling of these products to information and entertainment
content, appeals to many and effects everyday life of the general population.
The assistive technology industry, spurred in the United States by the Americans
with Disabilities Act legislation (the "ADA"), 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 societal
need to bring the disabled into the mainstream and integrate them into
productive life.
In the mobile computing industry, already dominated by major corporations,
the Company has discerned two trends: First, the technology that spurred the
growth of the industry in recent years now is becoming generally available
through modules and components. For example, a name like Gucci can be a brand
name in the cellular telephone market. Second, content is becoming the key
application, second only to verbal communication. Blackberry, active in two-way
messaging (e-mailing), can be cited as an indication of this trend.
Wireless technologies as a whole saw growth in 2001 and the deployment of
wireless services are expected to surge in 2002. This expansion is due mainly to
a host of 2G and 2.5G applications and services, and real returns, even on a
one-year payback basis are seen in the industry.
VDI attempts to follow and leverage these trends, including voice-based
e-mailing, focusing in a market that VDI believes is too small to deserve the
attention of the major providers. As one of many examples to the opportunities
that exist in the content services for the visually impaired, the Company can
cite a large project initiated by the U.S. Library of Congress to provide the
visually impaired with digitized audio versions of a large number of books.
Another is the successful talking books and magazines service provided by
Audible.com.
7
Competition
VDI believes that it has 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 VDI believes that this company currently
has an approximately 90% market share.
Based upon input from distributors and users, however, VDI believes that the
market will come to favor VDI's products during the next three years.
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.
VDI believes that the disabled market in general and the blind and visually
impaired market in particular, are markets where barriers seem to block large
companies like Palm or Nokia from successfully competing with a company such as
VDI. However, there can be no assurance that other companies, with greater
resources than VDI, may not enter the market.
Marketing
The U.S. market for products for the disabled is growing continually. There are
several reasons for this:
- - The ADA has created a greater awareness of the needs of people with
disabilities.
- - More sophisticated technology enables new products to people with
disabilities - from battery powered bicycles to speech-recognition
software.
- - The aging baby-boomers and the increase in life span.
There are 52 million disabled people who represent a spending power of almost
$800 billion in 1997, and a projected $1 trillion in 2001, according to a 1997
report entitled "Enabling Disabled Workers."
"People with disabilities frequently have more resources at their disposal
than marketers give them credit for," states the report. "Moreover, their
wealth and spending power are only likely to increase in the years
ahead--as wealthier, spend-happy baby boomers enter the 'age of
disabilities'and as improved access increases the employment opportunities
of people with disabilities of working age."
- ------------------------
1 'Enabling Disabled Workers,' July 1997, Security Industry Association
8
According to "Cultural Diversity at Work Online," in 1986 66% of people with
disabilities wanted a job while 34% did not. In 1994, these percentages changed
to 79% and 18%, respectively. For these reasons more stores, services, products,
and publications for people with disabilities and their caretakers appear all of
the time. Businesses are beginning to recognize the significance of this vast
market.
The purchase of products for the disabled is 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. For example,
the United States Internal Revenue Service is now planning a program that will
lead to the hiring of thousands of blind people as auditors.
The U.S. government also 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.
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 Company believes that the potential market for the VOICE DIARY, IMP and the
planned TOTAL is estimated at 25 million blind and visually impaired people in
the developed world (not taking into account a very concrete possibility of
sales to people in Third World countries).
VDI is planning to perform further market research in the second half of 2002 to
learn in detail the market potential and most desirable operating specifications
for its new products.
The Company believes that the market for its products is continually growing,
mainly due to advances in medical treatment that prolong life expectancy. In the
9
United States, the baby boomer generation is now entering the age group targeted
by the Company. More than once a minute, another American turns fifty.
Economists agree that the number of age-related disabilities will increase
significantly over the next two decades. Thus, the market potential for the
Company's devices is expected to grow.
Distribution Channels
The blind and visually impaired market is characterized by the close
relationship between users, including distributors who are often themselves
blind. Every blind person is registered somewhere and is relatively easy to
reach.
Direct sales activity is done through local distributors, assisted by VDI's
personnel. VDI has active distributors, operating with it for many years. There
is a standing list of distributors seeking to sell its products. While the
Company does not grant territorial exclusivity to any distributors, it attempts
to limit the number of distributors operating in a territory.
In the United States the Company uses a single distributor, New York-based
Independent Living Aids ("ILA"), one of the larger U.S. catalog distributors for
the blind and visually impaired. ILA provides VDI office space.
Some of the distributors are specialized catalog sellers, providing the blind
and visually impaired with the special products they need, otherwise not
available through regular retail outlets.
Marketing activity to raise customer awareness, education, promotion,
advertisement and public relations is conducted by the Company 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.
10
- 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.
The Company 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. The Company believes that it would be advantageous for both
sides to add the Company's family of products to the product line of such large
corporations.
The Company 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 VDI, and there are no conditions which could lead to
financially harmful outcomes (such as maintaining high stocks in stores).
The TOTAL and GOLDEN devices will be sold 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.
VDI intends 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, additional distribution channels, specialized in the elderly
market, will be used. As the Company generally does not work through exclusive
distributors, it believes that it is very feasible to have several types of
distributors in one area.
11
VDI is 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.
Intellectual Property
The Company has rights to a patent in Israel with respect to a Voice Organizer
for the Blind. The Company currently does not own or license any other patents.
The Company may seek patent protection on its technology where appropriate.
The Company has a registered trademark in Israel for its logo and design.
Environmental Compliance
The Company does not anticipate that it will become subject to environmental
laws and regulations since it does not intend to conduct manufacturing
operations.
Backlog and Seasonality
The Company generally does not have any backlog of unfilled orders. The Company
does not believe that its business will be seasonal.
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ITEM 2. FINANCIAL INFORMATION.
The selected financial data presented below has been derived from the Company's
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 the Company's
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)
========= ======== ========= ========= ========= =========
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
VDI was incorporated in the state of Delaware on February 26, 2002. In
June and July 2002 VDI 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 ("Purchase and Exchange Agreement"). 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 the Company herein include
VDL.)
The Company 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.
Critical Accounting Policies
Stock-based compensation
The Company accounts for employee stock-based compensation in accordance
with APB No. 25, "Accounting for Stock Issued to Employees" and the FASB
interpretations thereon. Pursuant to those accounting pronouncements, the
Company 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. The Company accounts for
stock-based compensation to non-employees at fair value of the award 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.
14
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.
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 its inception until 1999, VDI was financed by an aggregate of
approximately $780,000 in equity investments made by a group of investors.
During this period VDL 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 the Company was in a financial
crisis that resulted in the dismissal of all its employees. 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 Diary IMP ("IMP").
15
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 replaced by
a manufacturing understanding under which Aryt 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 extended 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 the Purchase and
Exchange Agreement, 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
of 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
The Company's 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.
The Company's 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.
16
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.
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 the Company 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.
The Company's 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
The Company's 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
17
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 the Company 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.
The Company's 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
The Company's revenues decreased by approximately $138,000 (approximately
96%) in FY 2000 compared to the fiscal year ended December 31, 1999 ("FY 1999")
due to a 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 of
activity of the Company 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 the Company's activity. In both years most expenses are
non-cash expenses (relating to the issuance of warrants to employees and
subcontractors).
In FY 2000 the Company 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).
The Company's net loss in FY 2000 decreased by approximately $15,300
(approximately 4%) from FY 1999 due to the decrease in operating expenses.
Liquidity
The Company has limited financial resources to continue its operations.
Ultimately, the Company's ability to continue as a going concern will depend
upon its ability to achieve and maintain profitability in the sale of its
18
products. The Company's independent certified public accountants, stated in its
report on the financial statements of
the Company as of June 30, 2002, December 31, 2001 and December 31, 2000 and for
certain periods then ended, that the Company's recurring losses from operations,
negative working capital and shareholders' deficiency raise substantial doubt
about its ability to continue as a going concern.
The Company had a deficit in working capital of $261,000 as of June 30,
2002. 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.
The Company's need to finance the manufacturing of IMP units is met mostly
by the arrangement the Company made with Aryt in June 2002. The Company expects
to receive about 50% of its sales revenues from its distributors in advance
which will enable the Company to pay its product suppliers upon delivery of
manufactured units.
Since the Company's disengagement from Aryt has severed its main source of
financing in recent years, the Company has taken several steps to reduce
expenses. It has reduced the number of its employees from 10 to 4 and it has
contracted 2 of its employees to another company.
Since July 1, 2002 the Company has obtained an aggregate of $35,000 in
bridge loan financing from a new group of investors. The Company is negotiating
with such investors regarding a more permanent equity and convertible debt
investment by such group in the Company of approximately $200,000 (the proceeds
of which would be used in part to repay the bridge loans). Management of the
Company believes that these resources will enable the Company to finish the
development of its new model in the Voice Diary line. The Company is also
negotiating a merger with a small Israeli company with positive cash flow. The
merger candidate, as well as the company for which the Company does contract
work, are controlled by the prospective investors. No assurance can be given
that either transaction will be consummated.
Capital Resources
As of the date of this memorandum the Company has no material commitments
for capital expenditures.
In August 2001 the Company 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
19
2002. 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.
In August 2001 the Company received a loan from United Mizrahi Bank Ltd.
The balance of the loan as of August 31, 2002 is about $14,000. The loan is
payable in 10 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 $7,000.
In February 2001 the Company 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 the Company was in default of payment. Under this settlement
the Company still has 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.
The Company's monthly operating budget after the foregoing expense reductions
provides for cash expenditures of $30,000 per month (including approximately
$5,000 in debt service payments. The Company projects that for the year 2002 it
will generate approximately $70,000 from sales of the IMP and $50,000 from sales
of engineering 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 Year 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
The Company is 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. The Company's policy is not to use
financial instruments for trading purposes or other speculative purposes. The
Company does not use any derivative contracts or other financial instruments to
manage risk.
The Company is exposed to foreign exchange risk to the extent of adverse
fluctuations in the U.S. dollar. Based on historical U.S. currency movement, the
Company does not believe that reasonably possible near-term changes in the U.S.
dollar of 10% will result in a material effect on future earnings, financial
position or cash flows of the Company.
The Company is exposed to financial risks resulting from changes in the
exchange rate between the U.S. dollar and the Israeli new shekel, changes in the
20
prime interest rate in Israel and changes in the London Interbank Offered Rate
("LIBOR"). About 85% of the Company's revenues are received in U.S. dollars.
About 75% of the Company's debt is linked to the U.S. dollar exchange rate and
bears interest based on LIBOR. Most of the Company's expenses (other than
salaries) are linked to the U.S. dollar exchange rate. The effect of currency
exchange rate fluctuations on the financial results of the Company is included
in financial expenses (income) net.
The following table provides information about the Company's 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 1,719 7,926
skekels)
Interest rate 6.85 6.85
------------ ------------ ------------ ------------
21,930 53,848 33,845 19,742
============ ============ ============ ============
*IP-Israel Prime Interest Rate. On June 30, 2002 the IP was 10.6%.
ITEM 3. PROPERTIES.
The Company leases approximately 400 square feet of office space in the Shaar
Yoqneam Industrial Park, Yoqneam, Israel for the payment of approximately $350
per month by the Company in rent. The original term of the lease has expired and
the Company intends to negotiate a new lease for the premises.
Under oral arrangements with a contractor and distributor, respectively, the
Company is 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.
The following table sets forth as of September 10, 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)
21
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)
- -------------------- ----------------- -----------
Seed Money Holding
Limited Partnership 421,607 66.4%
Arie Hinkis 262,404(3) 31.4%
Robogroup T.E.K. Ltd. 126,154 19.9%
Directors and Executive Officers
As a group (1 person) 262,404(3) 31.4%
__________________________________________
(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 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.
22
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The following table sets forth certain information concerning the Company's
sole director and executive officer as of September 10, 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
<BTB>
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 (1)
Chief Executive Officer 1999 0 0 (1)
23
(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
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 the Company. The
employment agreement does not have a stated term.
Directors' Compensation
The Company currently has only one director who is also an employee and is
not paid separately for his services as a director. The Company does 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 the Company has entered into several transactions
with its 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 the Company under which the Company 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 the Company 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.
24
ITEM 8. LEGAL PROCEEDINGS.
As of September 10, 2002 there were no legal actions pending against
the Company or any of its officers or directors in their fiduciary capacities,
nor, to the Company's knowledge, was any litigation threatened.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
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. The Company intends 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. The Company's 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 third quarter of 2003 and to be replaced by the new Bulletin
Board Exchange (the "BBX") which is presently scheduled to be launched in the
first 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.
25
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 the Company's 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
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 the Company's Common Stock and may affect the
ability of stockholders to sell their shares.
As of September 10, 2002, there were four holders of record of the Class A
Stock and one holder of record of the Class B Stock. As of such date, the
Company had issued and outstanding 634,863 shares of Class A Stock and 2,400
shares of Class B Stock.
Dividend Policy
The Company has not declared or paid any cash dividends on its Common Stock
since its formation, and does not presently anticipate paying any cash dividends
on its Common Stock in the foreseeable future. The Company currently intends 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 the Company's earnings, capital requirements and financial position,
applicable requirements of the Delaware General Corporation Law, general
economic conditions and other factors considered relevant by the Company's board
of directors.
There are no contractual restrictions on the Company's ability to declare
and pay dividends.
26
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
During the three fiscal years preceding the date of this Registration
Statement, the Company 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.
Number of Shares 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.
The Company's 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.
27
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
the Company 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 Class B Stock, voting as a separate class, unilaterally
shall be entitled to elect one director of the Company as well as to amend the
Certificate of Incorporation of the Company 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 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 the Common Stock.
Dividend Rights
Each share of Common Stock is entitled to share pro rata in dividends and
distributions with respect to the Common Stock when, as and if declared by the
board of directors and from funds legally available therefor. No holder of any
shares of Common Stock has any preemptive right to subscribe for any of the
Company's 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 creditors of the Company 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
28
of assets pursuant to such voluntary or involuntary liquidation, dissolution, or
winding-up of the Company. 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
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'
29
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 the Certificate of Incorporation of the Registrant
provides in part that:
"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
30
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 the Certificate of Incorporation of the Registration
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."
The Company's By-Laws also provide indemnification provisions for the
benefit of its officers similar to those contained in the Company's Certificate
of Incorporation.
The Company has 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 payment by the Company of expenses incurred or paid by a
director, officer or control person in the successful defense of any action,
suit or proceeding.
31
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.
32
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, net 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 Company 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 Company 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 Company 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
The Company's Subsidiary is committed according to subcontracting
agreement to purchase 550 Voice Diary IMP units on a total cost
of approximetly $25,000.
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 shares of Class B Common Stock have the right to appoint one
director.
F20
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SHAREHOLDERS' DEFICIENCY (CONT.)
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.
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.
F21
VOICE DIARY INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SHAREHOLDERS' DEFICIENCY (CONT.)
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
Other 55,056 18,329 28,625 74,755 19,818 131,532
-------- -------- -------- --------- --------- ---------
$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 $43,565 $5,573 $24,133 $47,230 $50,365 $219,636
Amoritization of debt issuance 98,249 -- -- 70,412 -- 168,561
--------- --------- --------- ----------- ------------ ----------
$141,814 $5,573 $24,133 $117,542 $50,365 $388,197
========= ======== ========= =========== ============ ==========
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.
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).
33
21. Subsidiaries of the Registrant:
Name Jurisdiction of Formation Percentage Ownership
------ --------------------------- ----------------------
Voice Diary Ltd. Israel 99.4%
34
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Act of 1934,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, hereunto authorized.
Dated at New York, New York this 7th day of October 2002.
VOICE DIARY INC.
By: /s/Arie Hinkis
----------------------------
President and Director
35
EXHIBIT INDEX
<BTB>
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%
36