iVoice Technology, Inc.
10,050,000 Shares of Class A Common Stock
This prospectus relates to the distribution by dividend to all of the
stockholders of iVoice, Inc. of up to 10,050,000 shares of iVoice Technology,
Inc. Class A Common Stock (the "Distribution"). iVoice Technology is not selling
any shares of Class A Common Stock in this offering and therefore will not
receive any proceeds from this offering. All costs associated with this
registration will be borne by iVoice Technology.
iVoice Technology is currently a wholly-owned subsidiary of iVoice, Inc.
and after the Distribution iVoice Technology will be an independent public
company.
Holders of iVoice common stock, other than affiliates of iVoice, Inc.,
will receive one share of iVoice Technology Class A Common Stock for every 988
shares of iVoice common stock that they hold. Holders of less than 988 shares of
iVoice common stock will receive one share of iVoice Technology Class A Common
Stock. Following the Distribution, 100% of the outstanding iVoice Technology
Class A Common Stock will be held by non-affiliates of iVoice Technology or
iVoice, Inc. and 100% of the outstanding iVoice Technology Class B Common Stock
(including securities convertible into such shares) will be beneficially owned
by affiliates of iVoice Technology or iVoice, Inc. No such affiliates will
receive shares of iVoice Technology Class A Common Stock in the Distribution.
You may be required to pay income tax on all or a portion of the value of
the Share of iVoice Technology Class A Common Stock received by you in
connection with this Distribution.
Currently, no public market exists for iVoice Technology Class A Common
Stock.
These Securities are speculative and involve a high degree of risk.
Please refer to "Risk Factors" beginning on page 12.
No underwriter or person has been engaged to facilitate the Distribution
in this offering.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is August 4, 2005.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY...........................................................2
SUMMARY OF THE DISTRIBUTION..................................................5
SUMMARY CONDENSED FINANCIAL INFORMATION.....................................10
POTENTIAL DILUTION DUE TO CONVERSION AT BELOW MARKET PRICE..................11
RISK FACTORS................................................................12
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS...................28
USE OF PROCEEDS.............................................................28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................28
OUR BUSINESS................................................................40
IVOICE TECHNOLOGY'S MANAGEMENT..............................................46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................50
PRINCIPAL STOCKHOLDERS......................................................52
DESCRIPTION OF SECURITIES...................................................53
THE DISTRIBUTION............................................................56
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION.........................61
CHANGES IN ACCOUNTANTS......................................................62
REASONS FOR FURNISHING THIS DOCUMENT........................................63
RELATIONSHIP BETWEEN IVOICE AND IVOICE TECHNOLOGY FOLLOWING
THE DISTRIBUTION............................................................63
WHERE YOU CAN FIND MORE INFORMATION.........................................63
INDEX TO FINANCIAL STATEMENTS..............................................F-1
i
PROSPECTUS SUMMARY
Overview
iVoice Technology, Inc., which we refer to in this prospectus as "iVoice
Technology," "we", "us" or "the Company," was incorporated in New Jersey on
November 10, 2004 as a wholly-owned subsidiary of iVoice, Inc. ("iVoice"). While
iVoice has been engaged in the speech recognition software and computerized
telephony business since 1997, iVoice management seeks to leverage the value of
underutilized developed technology and believes that the transition to an
independent company will provide iVoice Technology with greater access to
capital. This should provide needed financial resources to potentially penetrate
the market and distribute the product. As such, iVoice Technology's business
will be formed from the contribution by iVoice of certain assets and related
liabilities on or about the effective date of the registration statement of
which this prospectus is a part. In connection with a reorganization of iVoice,
immediately prior to the Distribution, iVoice will transfer to iVoice Technology
its Interactive Voice Response (IVR) software business and related liabilities,
including all intellectual property of iVoice relating to the IVR software
business. Following the Distribution, iVoice Technology will own and operate
iVoice's IVR. Concurrently with the Distribution, iVoice intends to contribute
the majority of its remaining business lines into two new companies and intends
to distribute the stock of those two companies to its stockholders. iVoice will
retain cash assets of approximately $6.7 million, no part of which will be
transferred to iVoice Technology. Following the Distribution and the two other
distributions, iVoice's operating assets will consist of its iVoiceMail software
and its portfolio of patents and patent rights, and its future business
development operations will consist of licensing its intellectual property
rights. iVoice will also continue to seek additional operating income
opportunities through potential acquisitions or investments. iVoice Technology
will be a development stage company following the Distribution. Following the
Distribution, iVoice Technology may seek to expand its operations through
additional sales and marketing activity and the acquisition of additional
businesses. Any potential acquired additional businesses may be outside the
current field of operations of iVoice Technology. iVoice Technology may not be
able to identify, successfully integrate or profitably manage any such
businesses or operations. Currently, iVoice Technology has no plans, proposals
or arrangements, either orally or in writing, regarding any proposed
acquisitions and is not considering any potential acquisitions.
iVoice Technology intends to continue to develop, market and license the
IVR line of computerized telephony software. The IVR software is designed to
enable a caller to obtain requested information in voice form from a local or
non-local database and allow information in PC databases to be accessed from a
standard touch-tone telephone using a telephone keypad or voice command.
In September 2004, iVoice announced its intention to distribute iVoice
Technology Class A Common Stock to its stockholders and to contribute to iVoice
Technology its IVR business upon the effectiveness of required Securities
Exchange Commission filings and final approval by the Board of Directors of the
terms and conditions of the Distribution.
The board of directors and management of iVoice believe that the
Distribution is in the best interests of iVoice and its stockholders. iVoice
believes that the Distribution will enhance
2
value for iVoice stockholders and that the spin off of the IVR business into
iVoice Technology has provided greater access to capital by allowing the
financial community to focus solely on iVoice Technology and its IVR software
business as a stand alone company. In determining the terms of the spin off of
the IVR business and the Distribution, the board considered the ability of
iVoice to satisfy its working capital needs as a whole as against the ability of
the IVR business to satisfy its capital needs as a stand alone company. iVoice's
present plan, which is subject to change, is to become a technology licensing
company, and, in order to effectuate that business plan, iVoice would need to
significantly expand its research and development and hire different types of
personnel. In addition, the iVoice board believed that, as a result of each
company's business plan, the IVR business as a stand-alone company would more
easily be able to obtain financing from third parties than iVoice would. After
considering these issues and the relative working capital needs of iVoice and
iVoice Technology, the iVoice board elected not to transfer any part of the
current cash balance of iVoice to iVoice Technology.
Prior to and after the Distribution, members of the Board of Directors and
management of iVoice and iVoice Technology have had and will have a variety of
conflicts of interest, as Mr. Jerome Mahoney, the Chairman of the Board of
iVoice Technology, will also continue to serve as the Chairman of the Board and
Chief Executive Officer of iVoice. In addition, following the Distribution, Mr.
Mahoney will own iVoice shares and have the right to convert $190,000 (plus
accrued and unpaid interest) of indebtedness into 190,000 shares (plus shares
attributable to conversion of accrued and unpaid interest) of iVoice Technology
Class B Common Stock which is convertible into the number of shares of Class A
Common Stock determined by dividing the number of shares of Class B Common Stock
being converted by a 20% discount of the lowest price at which iVoice had ever
issued its Class A Common Stock. There is no limitation on the number of shares
of Class A Common Stock we may be required to issue to Mr. Mahoney upon the
conversion of this indebtedness. See "Potential Dilution Due to Conversion at
Below Market Price." Each share of Class B Common Stock has voting rights equal
to 100 shares of Class A Common Stock. For example, if Mr. Mahoney converts
$190,000 of his indebtedness into 190,000 shares of Class B Common Stock, he
will have voting rights equal to 19,000,000 shares of Class A Common Stock and
will have control over the management and direction of iVoice Technology,
including the election of directors, appointment of management and approval of
actions requiring the approval of stockholders. In addition, Mr. Mahoney may be
deemed to receive personal benefit as a result of the creation of iVoice
Technology and the Distribution. This relationship could create, or appear to
create, potential conflicts of interest when iVoice Technology's directors and
management are faced with decisions that could have different implications for
iVoice Technology and iVoice.
On August 12 and November 19, 2004, iVoice Technology issued an aggregate
of $560,000 in secured convertible debentures, with interest payable at 5% per
annum, to Cornell Capital Partners L.P. The debentures were convertible at the
option of the holder only after our Class A Common Stock had commenced trading
on the Over-the-Counter Bulletin Board.
On February 28, 2005, iVoice Technology's obligations under the secured
promissory notes were terminated and replaced with secured promissory notes of
the same principal amount, which note accrues interest at rate of 12% per annum,
but is not convertible into any equity security of iVoice Technology. On
February 28, 2005, iVoice Technology borrowed an additional $140,000 pursuant to
the promissory note payable to Cornell Capital Partners. In
3
connection with the issuances of the secured convertible debentures, iVoice
Technology paid a fee to Cornell Capital Partners equal to 10% of the aggregate
principal amount of the debentures. When the secured convertible debentures were
terminated, iVoice Technology received a credit for fees that would otherwise
have been payable upon the issuance of the $560,000 in replacement notes. iVoice
Technology paid Cornell Capital a fee of $14,000 in connection with its $140,000
borrowing. iVoice Technology's obligations under the secured promissory note
issued to Cornell Capital Partners are secured by a first priority security
interest in substantially all of its assets. iVoice has also guaranteed the
payment of all amounts payable by iVoice Technology pursuant to the secured
promissory note. This guaranty terminates upon the effectiveness of the
registration statement of which this prospectus is a part.
Why iVoice Sent This Document To You
iVoice, Inc. sent you this document because you were an owner of iVoice
common stock on the record date. This entitles you to receive a distribution of
one share of Class A Common Stock of iVoice Technology, Inc., which is currently
a wholly-owned subsidiary of iVoice, for every 988 iVoice shares you owned on
that date. No action is required on your part to participate in the Distribution
and you do not have to pay cash or other consideration to receive your iVoice
Technology shares.
This document describes iVoice Technology's business, the relationship
between iVoice and iVoice Technology, and how this transaction benefits iVoice
and its stockholders, and provides other information to assist you in evaluating
the benefits and risks of holding or disposing of the shares of iVoice
Technology stock that you will receive in the Distribution. You should be aware
of certain risks relating to the Distribution and iVoice Technology's
businesses, which are described in this document beginning on page 12.
About Us
iVoice Technology was incorporated in New Jersey on November 10, 2004 as a
wholly-owned subsidiary of iVoice, Inc. iVoice Technology received by assignment
all of the interests in and rights and title to, and assumed all of the
obligations of, all of the agreements, contracts, understandings and other
instruments of iVoice Technology, Inc., a Nevada corporation and affiliate of
iVoice Technology. These agreements, contracts, understandings and other
instruments consisted of financing documentation, employment agreements and an
administrative services agreement with iVoice. Since this assignment, iVoice
Technology Nevada has no operating business, assets or known liabilities, and is
currently in the process of being dissolved. When we refer to or describe any
agreement, contract or other written instrument of iVoice Technology in this
prospectus, we are referring to an agreement, contract or other written
instrument that had been entered into by iVoice Technology Nevada and assigned
to iVoice Technology.
Our principal office is located at 750 Highway 34, Matawan, New Jersey
07747. Our telephone number is (732) 441-7700. We will be setting up a company
website, which will be located at www.ivoicetechnologies.com.
4
SUMMARY OF THE DISTRIBUTION
Distributing Company iVoice, Inc., a New Jersey corporation. As used in
this prospectus, the term iVoice includes iVoice,
Inc. and its wholly-owned and majority-owned
subsidiaries, other than the Company, as of the
relevant date, unless the context otherwise
requires.
Distributed Company iVoice Technology, Inc., a New Jersey corporation.
As used in this prospectus, the terms iVoice
Technology, the Company, we, our, us and similar
terms mean iVoice Technology, Inc., as of the
relevant date, unless the context otherwise
requires.
iVoice Technology Shares iVoice will distribute to iVoice stockholders an
to be Distributed aggregate of approximately 10,050,000 shares of
Class A Common Stock, no par value per share, of
iVoice Technology. Mr. Mahoney has agreed to forego
receiving any shares of iVoice Technology Class A
Common Stock that he is or would be entitled to
receive in the Distribution by virtue of his
ownership of either iVoice Class A Common Stock or
iVoice Class B Common Stock. Based on approximately
9,994,728,373 iVoice shares outstanding on the
Record Date, as defined below, and approximately
9,884,728,373 iVoice shares outstanding on the
Record Date that will actually participate in the
Distribution, one share of iVoice Technology Class A
Common Stock will be distributed for approximately
every 988 shares of iVoice common stock outstanding
on the Record Date. iVoice Technology currently has
10,050,000 shares of Class A Common Stock
outstanding. A 100,500-for-one stock split was
accomplished by means of a stock dividend
effectuated immediately prior to the effective date
of the registration statement of which this
prospectus is a part. The shares of iVoice
Technology Class A Common Stock to be distributed
will constitute 100% of the iVoice Technology Class
A Common Stock outstanding after the Distribution.
Immediately following the Distribution, iVoice and
its subsidiaries will not own any shares of iVoice
Technology Class A Common Stock and iVoice
Technology will be an independent public company.
Record Date If you own iVoice shares at the close of business
on July 29, 2005 (the "Record Date"), then you
will receive iVoice Technology Class A Common Stock
in the Distribution. If you own fewer than 988
iVoice shares on the Record Date, then you will
receive one share of iVoice Technology Class A
Common Stock.
5
Distribution Date We currently anticipate that the Distribution will
occur shortly after the effective date of the
registration statement. If you are a record holder
of iVoice stock, instead of physical stock
certificates you will receive from iVoice
Technology's transfer agent shortly after the
effective date of the registration statement a
statement of your book entry account for the shares
of iVoice Technology Class A Common Stock
distributed to you. If you are not a record holder
of iVoice stock because such shares are held on
your behalf by your stockbroker or other nominee,
your iVoice Technology Class A Common Stock should
be credited to your account with your stockbroker
or other nominee after the effective date of the
registration statement. Following the Distribution,
you may request physical stock certificates if you
wish, and instructions for making that request will
be furnished with your account statement.
Distribution On the Distribution Date, the distribution agent
identified below will begin distributing
certificates representing our Class A Common Stock
to iVoice stockholders that have requested physical
certificates. You will not be required to make any
payment or take any other action to receive your
shares of our Class A Common Stock. The distributed
shares of our Class A Common Stock will be freely
transferable unless you are issued shares in
respect of restricted shares of iVoice common
stock.
Distribution Ratio iVoice will distribute to iVoice stockholders an
aggregate of approximately 10,050,000 shares of
Class A Common Stock of iVoice Technology, based on
approximately 9,994,728,373 iVoice shares
outstanding on the record date. Mr. Mahoney has
agreed to forego receiving any shares of iVoice
Technology Class A Common Stock that he is or would
be entitled to receive in the Distribution by
virtue of his ownership of either iVoice Class A
Common Stock or iVoice Class B Common Stock. The
actual number of iVoice shares outstanding on the
record date that will participate in the
Distribution is 9,884,728,373. Therefore, for
every 988 shares of iVoice common stock that you
own of record on July 29, 2005, you will receive
one share of iVoice Technology Class A Common
Stock. The Distribution ratio is subject to change
depending upon the number of outstanding shares of
iVoice common stock on the Record Date. If you own
fewer than 988 shares of iVoice common stock, you
will receive one share of iVoice Technology Class A
Common Stock in the Distribution. iVoice
shareholders are not receiving shares of iVoice
Technology Class A Common Stock on a one-for-one
basis because iVoice Technology's management has
determined that a more modest capital structure and
fewer outstanding shares of common stock would be
more beneficial for stockholders.
6
Distribution Agent Fidelity Transfer Company. Their address is 1800
South West Temple, Suite 301, Salt Lake City, Utah
84115. Their telephone number is (801) 484-7222.
Transfer Agent and Fidelity Transfer Company. Their address is 1800
Registrar for the iVoice South West Temple, Suite 301, Salt Lake City, Utah
Technology Shares 84115. Their telephone number is (801) 484-7222.
Fractional Shares of Our iVoice will not distribute any fractional shares of
Common Stock iVoice Technology Class A Common Stock. In lieu of
distributing a fraction of a share of our Class A
Common Stock to any iVoice stockholder, fractional
shares will be rounded up to the next higher whole
number of shares.
Trading Market We anticipate that our Class A Common Stock will be
traded on the Over-the-Counter Bulletin Board under
the proposed symbol "IVTC." We expect that a market
maker will apply for quotation on the
Over-the-Counter Bulletin Board on our behalf prior
to the Distribution. No public trading market for
our Class A Common Stock currently exists. However,
a trading market for the entitlement to receive
shares of our Class A Common Stock in the
distribution, referred to as a when-issued market,
may develop on or after the record date for the
distribution.
Dividend Policy iVoice has not paid cash dividends in the past, and
we anticipate that following the Distribution
neither iVoice Technology nor iVoice will pay cash
dividends. However, no formal action has been taken
with respect to future dividends, and the
declaration and payment of dividends by iVoice
Technology and iVoice will be at the sole
discretion of their respective boards of directors.
Risk Factors The distribution and ownership of our Class A
Common Stock involve various risks. You should read
carefully the factors discussed under "Risk
Factors" beginning on page 12. Several of the most
significant risks of the Distribution include:
o The Distribution may cause the trading price
of iVoice Common Stock to decline.
o Substantial sales of shares of iVoice
Technology Class A Common Stock may have an
adverse impact on the trading price of our
Class A Common Stock.
o There has not been a prior trading market for
7
iVoice Technology Class A Common Stock and a
trading market for our Class A Common Stock
may not develop.
o The Distribution of iVoice Technology Class A
Common Stock may result in tax liability to
you.
o iVoice has in the past, and iVoice Technology
may in the future, sell or issue unregistered
convertible securities which are convertible
into common shares of iVoice Technology,
without limitations on the number of common
shares the securities are convertible into,
which could dilute the value of your holdings
and could have other negative impacts on your
investment.
Federal Income Tax iVoice and iVoice Technology do not intend for the
Consequences Distribution to be tax-free for U.S. federal income
tax purposes. You will be required to pay income
tax on the value of your shares of iVoice
Technology Class A Common Stock received to the
extent of the current or accumulated earnings and
profits of iVoice. You are advised to consult your
own tax advisor as to the specific tax consequences
of the Distribution.
Our Relationship with Prior to the Distribution, iVoice and iVoice
iVoice After the Technology have entered or will enter into
Distribution agreements to transfer to iVoice Technology
selected assets and liabilities of iVoice related
to iVoice Technology's business and to make
arrangements for the Distribution. iVoice and
iVoice Technology have entered into an
administrative services agreement for the provision
of certain services by iVoice to iVoice Technology
following the Distribution. The administrative
services agreement will continue on a month to
month basis until iVoice Technology has found
replacement services for those services being
provided by iVoice or can provide these services
for itself. Following termination of the
administrative services agreement, we expect that
iVoice Technology will operate on a completely
stand-alone basis from iVoice and there will be no
business or operating relationship between iVoice
and iVoice Technology. See "Certain Relationships
and Related Transactions." In addition, after the
Distribution, we anticipate that each of iVoice
Technology's two directors will also be a director
of iVoice. After the Distribution, any arrangements
with iVoice that may occur will not be deemed to be
on an "arms-length" basis because of the
relationships between the boards of directors and
executive officers of iVoice Technology and iVoice,
but we will seek to establish terms and conditions
at least as favorable as those that could be
obtained from an independent third party.
8
Board of Directors of After the Distribution, iVoice Technology is
iVoice Technology expected to have an initial board of two directors.
The initial directors will serve one-year terms.
Jerome R. Mahoney and Frank V. Esser have been
identified to serve on the initial board. Jerome R.
Mahoney expects to remain on iVoice's board
following the Distribution Date.
Management of iVoice Mr. Mahoney will serve as Chairman of the Board of
Technology iVoice Technology and will continue to serve as
Chairman of the Board and Chief Executive Officer of
iVoice, and Arie Seidler will serve as President and
Chief Executive Officer of iVoice Technology. Mr.
Mahoney and Mr. Seidler will not provide services to
iVoice Technology on a full-time basis.
Conflicts of Interest After the Distribution, Mr. Mahoney, the Chairman
of the Board of iVoice Technology, will continue to
serve as the Chairman of the Board and Chief
Executive Officer of iVoice. Further, Mr. Mahoney
will own both iVoice shares and have the right to
convert $190,000 of indebtedness (plus the amount
of accrued and unpaid interest on such
indebtedness) into 190,000 shares of iVoice
Technology Class B Common Stock which is
convertible into the number of shares of Class A
Common Stock determined by dividing the number of
shares of Class B Common Stock being converted by a
20% discount of the lowest price at which iVoice
had ever issued its Class A Common Stock. There is
no limitation on the number of shares of Class A
Common Stock we may be required to issue to Mr.
Mahoney upon the conversion of this indebtedness.
See "Potential Dilution Due to Conversion at Below
Market Price." Each share of Class B Common Stock
has voting rights equal to 100 shares of Class A
Common Stock. For example, if Mr. Mahoney converts
$190,000 of indebtedness into 190,000 shares of
Class B Common Stock, he will have voting rights
equal to 19,000,000 shares of Class A Common Stock
and will have control over the management and
direction of iVoice Technology, including the
election of directors, appointment of management
and approval of actions requiring the approval of
stockholders. In addition, Mr. Mahoney may be
deemed to receive personal benefit as a result of
the creation of iVoice Technology and the
Distribution. This relationship could create, or
appear to create, potential conflicts of interest
when iVoice Technology's directors and management
are faced with decisions that have different
implications for iVoice Technology and iVoice, such
as potential business acquisitions
9
to be made by iVoice Technology or disputes arising
out of any agreements between the two companies.
iVoice Technology does not have any formal procedure
in place for resolving such conflicts of interest
which may arise in the future.
Certain Anti-takeover Some of the provisions of iVoice Technology's
Effects certificate of incorporation and bylaws may have
the effect of making the acquisition of control of
iVoice Technology in a transaction not approved by
iVoice Technology's board of directors more
difficult.
Stockholder Inquiries Any persons having inquiries relating to the
Distribution should contact the Shareholder
Services department of the distribution agent at
(801) 484-7222 or iVoice Technology, in writing at
iVoice Technology, Inc., 750 Highway 34, Matawan,
NJ 07747 Attention: Investor Relations, or by email
at information@ivoice.com, or by telephone at (732)
441-7700.
SUMMARY CONDENSED FINANCIAL INFORMATION
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplates continuation of the company as a going concern. iVoice
Technology has traditionally operated as a non-reporting component of iVoice and
accordingly these financial statements have been derived from the consolidated
financial statements and accounting records of iVoice, and reflect significant
assumptions and allocations. iVoice allocated operating costs to iVoice
Technology. These allocations are reflected in the selling, general and
administrative, cost of revenue and/or research and development line items in
our statements of operations. The general corporate expense allocation is
primarily for cash management, selling expense, legal, accounting, tax,
insurance, public relations, advertising, and human resources. Other general
categories of operating expense, as well as other income and expense, have been
allocated to iVoice Technology by iVoice based upon a ratio of revenue of iVoice
Technology over total iVoice revenue for the applicable periods. Management
believes that although the financial information was prepared on a pro forma
basis, the cost of these services charged are a reasonable representation of the
costs that would have been incurred if iVoice Technology had performed these
functions as a stand-alone company. iVoice Technology relies on iVoice for
administrative and other services. These financial statements do not necessarily
reflect the financial position, results of operations, and cash flows of iVoice
Technology had it been a stand-alone company.
For the Three For the Three For the Year For the Year
Months Ended Months Ended Ended Ended
March 31, March 31, December 31, December 31,
2005 2004 2004 2003
----------- ------------- ------------ -----------
Statement of Operation Data:
- -------------------------------------------------------------------------------------------------------------------
Sales $ 53,861 $ 66,234 $ 239,114 $ 303,756
- -------------------------------------------------------------------------------------------------------------------
Cost of sales 738 26,434 72,870 123,091
- -------------------------------------------------------------------------------------------------------------------
Gross profit 53,123 39,800 166,244 180,665
- -------------------------------------------------------------------------------------------------------------------
10
For the Three For the Three For the Year For the Year
Months Ended Months Ended Ended Ended
March 31, March 31, December 31, December 31,
2005 2004 2004 2003
----------- ------------- ------------ -----------
- -------------------------------------------------------------------------------------------------------------------
Selling, general, and
administrative expenses 107,860 313,316 863,456 965,341
- -------------------------------------------------------------------------------------------------------------------
Loss from operations (54,737) (273,516) (697,212) (784,676)
- -------------------------------------------------------------------------------------------------------------------
Net Loss $ (75,574) $(1,408,311) $(1,478,127) $(1,131,420)
- -------------------------------------------------------------------------------------------------------------------
March 31, March 31, December 31,
2005 2004 2003
----------- ------------- -----------
Balance Sheet Data:
- ----------------------------------------------------------------------------------------------------------------------------------
Current Assets $ 494,045 $ 378,332 $ 52,077
- ----------------------------------------------------------------------------------------------------------------------------------
Intangibles -- -- 45,400
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities 815,011 623,747 23,662
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (deficiency) (316,252) (240,678) 73,815
- ----------------------------------------------------------------------------------------------------------------------------------
POTENTIAL DILUTION DUE TO CONVERSION AT BELOW MARKET PRICE
The net tangible book value of iVoice Technology as of December 31, 2004
was ($240,678) or ($.02395) per share of Class A Common Stock. Net tangible
book value per share is determined by dividing the tangible book value of iVoice
Technology (total tangible assets less total liabilities) by the number of
outstanding shares of our common stock. Since no proceeds from this offering
will be paid to iVoice Technology, our net tangible book value will be
unaffected by this offering. Our net tangible book value, however, will be
impacted if and when common stock is issued under the proposed equity line of
credit. The amount of dilution will depend on the offering price and number of
shares to be issued under the equity line of credit. The following example shows
the dilution to new investors at an offering price of $0.01 per share.
If we assume that iVoice Technology will issue 1,052,631,579 shares of
Class A Common Stock under its proposed equity line of credit at an assumed
offering price of $0.01 per share (i.e., the maximum number of shares needed in
order to raise a total of $10.0 million under the equity line of credit,
excluding the commitment fee), less a retention fee of $600,000, offering
expenses of $113,500, and repayment of the promissory note, our net tangible
book value as of December 31, 2004 would have been $8,485,822 or $0.00780 per
share. Such an offering would represent an immediate increase in net tangible
book value to existing stockholders of $.03175 per share and an immediate
dilution to new stockholders of $0.00220 per share, or 22%. The following
table illustrates the per share dilution:
Assumed public offering price per share $ 0.01000
Net tangible book value per share before this offering ($.02395)
Increase attributable to new investors $.03175
----------
Net tangible book value per share after this offering $ 0.00780
-----------
Dilution per share to new stockholders $ 0.00220
===========
The conversion price of our Class A Common Stock is based on the
then-existing market price. In order to provide you an example of the dilution
per share you may experience, we have
11
prepared the following table showing the dilution per share at various assumed
market prices (assuming that Mr. Mahoney converts $190,000 of indebtedness):
Assumed Market No. of Shares to Dilution per Share
Price be issued (1) to New Investors
-------------- ---------------- ------------------
$0.0100 19,000,000 $0.00220
$0.0075 25,333,333 $0.00163
$0.0050 38,000,000 $0.00108
$0.0025 76,000,000 $0.00054
RISK FACTORS
You should carefully consider each of the following risk factors and all
of the other information in this information statement. The following risks
relate principally to the Distribution and iVoice Technology's business.
If any of the following risks and uncertainties develops into actual
events, the business, financial condition or results of operations of iVoice
Technology could be materially adversely affected. If that happens, the trading
prices of iVoice Technology shares could decline significantly.
The risk factors below contain forward-looking statements regarding the
Distribution and iVoice Technology. Actual results could differ materially from
those set forth in the forward-looking statements. See "Cautionary Statement
Regarding Forward-Looking Statements" below.
Risks Related to Our Business
iVoice Technology will face many of the difficulties that companies in the early
stage may face.
As a result of the Company's limited operating history, the currently
difficult economic conditions of the telecommunications marketplace and the
emerging nature of the interactive voice response industry, it may be difficult
for you to assess our growth and earnings potential. The Company believes that
due primarily to the relatively brief time IVR has been available to the general
public, there has not yet been developed, implemented and demonstrated a
commercially viable business model from which to successfully operate any form
of business that relies on the products and services that we intend to market,
sell, and distribute. Therefore, we have faced many of the difficulties that
companies in the early stages of their development in new and evolving markets
often face, as they are described herein. We may continue to face these
difficulties in the future, some of which may be beyond our control. If we are
unable to successfully address these problems, our future growth and earnings
will be negatively affected.
12
iVoice Technology has no operating history as an independent public company and
may be unable to operate profitably as a stand-alone company.
Although iVoice has operated as a reporting public company since 2000 and
has sold computerized telephony software since 1997, iVoice Technology does not
have an operating history as an independent public company. Historically, since
the businesses that comprise each of iVoice Technology and iVoice have been
under one ultimate parent, they have been able to rely, to some degree, on the
earnings, assets, and cash flow of each other for capital requirements. After
the Distribution, iVoice Technology will be able to rely only on the IVR
software business for such requirements. iVoice has operated the IVR software
business since the fourth quarter of 1999. The IVR software business has
operated at a loss in the past for iVoice, and as an independent company such
losses may continue or increase. Additionally, iVoice Technology's business has
relied on iVoice for financial, administrative and managerial expertise in
conducting its operations. Following the Distribution, iVoice Technology will
maintain its own credit and banking relationships and perform its own financial
and investor relations functions. iVoice Technology may not be able to
successfully put in place the financial, administrative and managerial structure
necessary to operate as an independent public company, and the development of
such structure will require a significant amount of management's time and other
resources.
iVoice's operations demonstrate a history of net losses and cash flow shortfalls
and iVoice Technology's likely will as well.
iVoice, of which iVoice Technology was a part, has incurred recurring
operating losses. iVoice used cash in operations of approximately $1,213,000 and
$1,142,000 during the years ended December 31, 2004 and 2003, respectively, and
has a history of net losses. iVoice had a cash balance of approximately
$8,000,000 and $4,500,000 at December 31, 2004 and 2003, respectively, and
current assets exceeded current liabilities by approximately $5,100,000 and
$3,200,000 at December 31, 2004 and 2003, respectively. iVoice had stockholders'
equity of approximately $5,400,000 and $3,400,000 at December 31, 2004 and 2003,
respectively. The IVR software business had net losses of approximately
$1,478,000 and $1,131,000 for the years ended December 31, 2004 and 2003,
respectively, and cash used in operations of approximately $1,372,000 and
$927,000 during the years ended December 31, 2004 and 2003, respectively. iVoice
has been and may, in the future, be dependent upon outside and related party
financing to develop and market their software products, perform their business
development activities, and provide for ongoing working capital requirements.
During the year ended December 31, 2004 and the three months ending March 31,
2005, substantially all of this financing has been provided by iVoice, Inc and
Cornell Capital Partners. There can be no assurance that iVoice Technology will
have operations separately that fare any better than those of iVoice.
Our historical information has limited relevance to our results of operations as
a separate company.
The historical financial information we have included in this prospectus
does not reflect what our results of operations, financial position and cash
flows would have been had we been a separate, stand-alone entity during the
periods presented or what our results of operations, financial position and cash
flows will be in the future. This is because iVoice did not account for
13
us as, and we were not operated as, a single stand-alone business for the
periods presented. For more information about the preparation of our financial
statements from the financial statements of iVoice, see "Summary Consolidated
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
iVoice Technology has received a going concern opinion from its independent
auditors that describes the uncertainty regarding its ability to continue as a
going concern.
iVoice Technology has received a report from its independent auditors for
the fiscal years ended December 31, 2004 and December 31, 2003 containing an
explanatory paragraph that describes the uncertainty regarding the Company's
ability to continue as a going concern due to its historical negative cash flow
and because, as of the date of the auditors' opinion, the Company did not have
access to sufficient committed capital to meet its projected operating needs for
at least the next 12 months.
Our consolidated financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. We have not made any
adjustments to our consolidated financial statements as a result of the going
concern modification to the report of our independent registered public
accounting firm. If we become unable to continue as a going concern, we could
have to liquidate our assets, which means that we are likely to receive
significantly less for those assets than the values at which such assets are
carried on our consolidated financial statements. Any shortfall in the proceeds
from the liquidation of our assets would directly reduce the amounts, if any,
that holders of our common stock could receive in liquidation.
There can be no assurance that management's plans will be successful, and
other unforeseeable actions may become necessary. Any inability to raise capital
may require us to reduce the level of our operations. Such actions would have a
material adverse effect on us, our business and operations and result in charges
that would be material to our business and results of operations.
iVoice Technology's future revenue and operating results are unpredictable and
may fluctuate, which could cause iVoice Technology's stock price to decline.
Our short operating history and the rapidly changing nature of the market
in which we compete make it difficult to accurately forecast our revenues and
operating results. Our operating results are unpredictable and we expect them to
fluctuate in the future due to a number of factors. These factors may include,
among others:
o the timing of sales of our products and services, particularly in
light of our minimal sales history;
o the introduction of competitive products by existing or new
competitors;
o reduced demand for any given product;
o difficulty in keeping current with changing technologies;
14
o unexpected delays in introducing new products, new product features
and services;
o increased or uneven expenses, whether related to sales and
marketing, product development or administration;
o deferral of recognition of our revenue in accordance with applicable
accounting principles due to the time required to complete projects;
o the mix of product license and services revenue;
o seasonality in the end-of-period buying patterns of foreign and
domestic software markets;
o the market's transition between operating systems; and
o costs related to possible acquisitions of technology or businesses.
Due to these factors, forecasts may not be achieved, either because
expected revenues do not occur or because they occur at lower prices or on terms
that are less favorable to us. In addition, these factors increase the chances
that our results could diverge from the expectations of investors and analysts.
If so, the market price of our stock would likely decline.
iVoice Technology has in the past and may in the future sell additional
unregistered convertible securities, possibly without limitations on the number
of shares of common stock the securities are convertible into, which could
dilute the value of the holdings of current stockholders and have other
detrimental effects on your holdings.
We have relied on the private placement of convertible debentures and
secured promissory notes to obtain working capital and may continue to do so in
the future. As of the date of the registration statement of which this
prospectus is a part, however, we have convertible obligations. The $190,000
promissory note owing to Mr. Mahoney provides that, at Mr. Mahoney's option,
principal and interest due on the note can be converted into shares of the
Company's Class B Common Stock which is convertible into the number of shares of
Class A Common Stock determined by dividing the number of shares of Class B
Common Stock being converted by a 20% discount of the lowest price at which
iVoice Technology had ever issued its Class A Common Stock. There is no limit
upon the number of shares that we may be required to issue upon conversion of
any of these obligations.
In order to obtain working capital in the future, we intend to issue
additional equity securities and convertible obligations.
In the event that the price of our Class A Common Stock decreases, and our
convertible obligations (or any other convertible obligations we may issue) are
converted into shares of our Class A Common Stock:
o the percentage of shares outstanding that will be held by these
holders upon conversion will increase accordingly,
15
o increased share issuance, in addition to a stock overhang of an
indeterminable amount, may depress the price of our Class A Common Stock,
o the sale of a substantial amount of convertible debentures to
relatively few holders could effectuate a possible change in control of the
Company, and
o in the event of our voluntary or involuntary liquidation while the
secured convertible debentures are outstanding, the holders of those securities
will be entitled to a preference in distribution of our property.
In addition, if the market price declines significantly, we could be
required to issue a number of shares of Class A Common Stock sufficient to
result in our current stockholders not having an effective vote in the election
of directors and other corporate matters. In the event of a change in control of
the Company, it is possible that the new majority stockholders may take actions
that may not be consistent with the objectives or desires of our current
stockholders.
We are required to convert our existing convertible obligations based upon
a formula that varies with the market price of our common stock. As a result, if
the market price of our Class A Common Stock increases after the issuance of our
convertible obligations, it is possible, that, upon conversion of our
convertible obligations, we will issue shares of Class A Common Stock at a price
that is far less than the then-current market price of our Class A Common Stock.
If the market price of our Class A Common Stock decreases after our
issuance of any convertible obligations, upon conversion, we will have to issue
an increased number of shares to the holders of our convertible obligations. Any
sale of convertible obligations may result in a very large conversion at one
time. If we do not have a sufficient number of shares to cover the conversion,
we may have a risk of a civil lawsuit.
For more information, please see "Potential Dilution Due to Conversion at
Below Market Price."
If iVoice Technology loses the services of any key personnel, including our
chief executive officer or our directors, our business may suffer.
We are dependent on our key officers and directors, including Jerome R.
Mahoney and Arie Seidler, our Chairman of the Board and our President and Chief
Executive Officer, respectively. The loss of any of our key personnel could
materially harm our business because of the cost and time necessary to retain
and train a replacement. Such a loss would also divert management attention away
from operational issues. To minimize the effects of such loss, iVoice Technology
has entered into employment contracts with Jerome Mahoney and Arie Seidler.
However, Mr. Seidler's employment agreement has a term of only one year.
Our potential future business acquisitions may be unpredictable and may cause
our business to suffer.
iVoice Technology may seek to expand its operations through the
acquisition of additional businesses. These potential acquired additional
businesses may be outside the current field of operations of iVoice Technology.
iVoice Technology may not be able to identify,
16
successfully integrate or profitably manage any such businesses or operations.
The proposed expansion may involve a number of special risks, including possible
adverse effects on iVoice Technology's operating results, diversion of
management attention, inability to retain key personnel, risks associated with
unanticipated events and the financial statement effect of potential impairment
of acquired intangible assets, any of which could have a materially adverse
effect on iVoice Technology's business, financial condition and results of
operations. In addition, if competition for acquisition candidates or assumed
operations were to increase, the cost of acquiring businesses or assuming
customers' operations could increase materially. The inability of iVoice
Technology to implement and manage its expansion strategy successfully may have
a material adverse effect on the business and future prospects of iVoice
Technology. Furthermore, through the acquisition of additional businesses,
iVoice Technology may effect a business acquisition with a target business which
may be financially unstable, under-managed, or in its early stages of
development or growth. While iVoice Technology may, under certain circumstances,
seek to effect business acquisitions with more than one target business, as a
result of its limited resources, iVoice Technology, in all likelihood, will have
the ability to effect only a single business acquisition at one time. Currently,
iVoice Technology has no plans, proposals or arrangements, either orally or in
writing, regarding any proposed acquisitions and is not considering any
potential acquisitions.
Members of iVoice Technology's Board of Directors and management may have
conflicts of interest after the Distribution; iVoice Technology does not have
any formal procedure for resolving conflicts in the future.
After the Distribution, Mr. Mahoney, a member of the board of directors,
will own iVoice shares and have the right to convert $190,000 of indebtedness
into 190,000 shares of iVoice Technology Class B Common Stock which are
convertible into the number of shares of Class A Common Stock determined by
dividing the number of shares of Class B Common Stock being converted by a 20%
discount of the lowest price at which iVoice had ever issued its Class A Common
Stock. In addition, Mr. Mahoney has the right to convert the amount of all
accrued and unpaid interest on such indebtedness into 1 share of iVoice
Technology Class B Common Stock for each dollar of accrued and unpaid interest.
As of March 31, 2005, accrued and unpaid interest on this indebtedness was
$26,334.97. There is no limitation on the number of shares of Class A Common
Stock we may be required to issue to Mr. Mahoney upon the conversion of this
indebtedness. In addition, following the Distribution, we anticipate that Mr.
Mahoney, the Chairman of the Board of iVoice Technology will also continue to
serve as the Chairman of the Board and Chief Executive Officer of iVoice. These
relationships could create, or appear to create, potential conflicts of interest
when iVoice Technology's directors and management are faced with decisions that
could have different implications for iVoice Technology and iVoice. For example,
Mr. Mahoney may experience conflicts of interest with respect to the allocation
of his time, services and functions among iVoice, iVoice Technology and any
other projects. Other examples could include potential business acquisitions
that would be suitable for either iVoice Technology or iVoice, activities
undertaken by iVoice in the future that could be in direct competition with
iVoice Technology, or the resolution of disputes arising out of the agreements
governing the relationship between iVoice and iVoice Technology following the
Distribution. Also, the appearance of conflicts, even if such conflicts do not
materialize, might adversely affect the public's perception of iVoice Technology
following the Distribution. Furthermore,
17
iVoice Technology does not have any formal procedure for resolving such
conflicts of interest should they arise following the Distribution.
iVoice Technology's industry is characterized by rapid technological change and
failure to adapt our product development to these changes may cause our products
to become obsolete.
We participate in a highly dynamic industry characterized by rapid change
and uncertainty relating to new and emerging technologies and markets. Future
technology or market changes may cause some of our products to become obsolete
more quickly than expected.
iVoice Technology stockholders may experience significant dilution if future
equity offerings are used to fund operations or acquire businesses.
On March 9, 2005, we obtained a non-binding letter of commitment from
Cornell Capital Partners to provide a $10 million standby equity line of credit.
If working capital or future acquisitions are financed through the issuance of
equity securities, such as through the possible sale of Class A Common Stock on
the terms of the non-binding commitment from Cornell Capital Partners, L.P. (see
"Certain Relationships and Related Transactions" beginning on page 50), iVoice
Technology stockholders would experience significant dilution. In addition, the
conversion of outstanding debt obligations into equity securities would have a
dilutive effect on iVoice Technology shareholders. Further, securities issued in
connection with future financing activities or potential acquisitions may have
rights and preferences senior to the rights and preferences of the iVoice
Technology Class A Common Stock.
Except for the potential sale of Class A Common Stock to Cornell Capital
Partners on the terms of the non-binding commitment, iVoice Technology currently
has no expectations or plans to conduct future equity offerings. Management
believes that if the transactions contemplated by the non-binding commitment are
consummated, the Company will have sufficient capital resources to conduct its
business as currently planned over the 12-month period following the
Distribution.
However, Cornell Capital Partners is under no obligation to execute any
definitive agreements with iVoice Technology. Furthermore, if a definitive
agreement is executed, Cornell Capital Partners is under no obligation to
purchase shares of Class A Common Stock unless certain conditions are satisfied
by iVoice Technology, including completing of the Distribution, listing our
Class A Common Stock on the Over-the-Counter Bulletin Board and having the
registration statement relating to such Class A Common Stock declared effective.
If Cornell Capital Partners does not execute the definitive agreements or iVoice
Technology cannot satisfy the requirements for Cornell Capital Partners to
purchase the Class A Common Stock under the terms of the definitive documents,
we will not have sufficient capital resources to conduct our business on a
long-term basis, which would have a material adverse effect on us and our
financial condition. Management believes that its going-forward expenses over
the next 12 months will be approximately $431,000 and, assuming that iVoice
Technologies has no revenues, iVoice Technologies expects to have aggregate
liabilities of approximately $432,000, which includes salaries for iVoice
Technology's officers and employees for the year ending December 31, 2005.
Management has no current plan to hire additional employees, perform
18
additional research and development or purchase additional equipment or services
beyond the requirements of the administrative services agreement with iVoice.
Management believes that the deficiency between the Company's expenses and net
revenues will be more than covered by the cash available from the proceeds of
the secured promissory note. If there are additional deficiencies that are in
excess of the proceeds of the secured promissory note, and iVoice Technology is
unable to obtain funds from the equity line of credit, management believes that
iVoice Technology can limit its operations, defer payments to management and
maintain its business at nominal levels until it can identify alternative
sources of capital.
The trend toward consolidation in iVoice Technology's industry may impede its
ability to compete effectively.
As consolidation in the software industry continues, fewer companies
dominate particular markets, changing the nature of the market and potentially
providing consumers with fewer choices. Also, many of these companies offer a
broader range of products than us, ranging from desktop to enterprise solutions.
We may not be able to compete effectively against these competitors.
Furthermore, we may use strategic acquisitions, as necessary, to acquire
technology, people and products for our overall product strategy. The trend
toward consolidation in our industry may result in increased competition in
acquiring these technologies, people or products, resulting in increased
acquisition costs or the inability to acquire the desired technologies, people
or products. Any of these changes may have a significant adverse effect on our
future revenues and operating results.
iVoice Technology faces intense price-based competition for licensing of its
products which could reduce profit margins.
Price competition is often intense in the software market, especially for
computerized telephony software products. Many of our competitors have
significantly reduced the price of their products. Price competition may
continue to increase and become even more significant in the future, resulting
in reduced profit margins. Neither iVoice nor iVoice Technology has experienced
any pressure from price competition on the pricing of its IVR software products
in the past, but iVoice Technology believes that this pressure could occur in
the future.
iVoice Technology may be unsuccessful in adapting to changes in the dynamic
technological environment of telecommunications in a timely manner.
Critical issues concerning the commercial use of telecommunications,
including security, reliability, cost, ease of use, accessibility, quality of
service or potential tax or other government regulation, remain unresolved and
may affect the use of telecommunications as a medium to distribute or support
our software products and the functionality of some of our products. If we are
unsuccessful in timely assimilating changes in the telecommunications
environment into our business operations and product development efforts, our
future net revenues and operating results could be adversely effected.
19
iVoice Technology may be unsuccessful in continuing existing distribution
channels or in developing new distribution channels.
Due to our limited operating history, we currently offer products directly
to end-users and through dealer and reseller channels established by iVoice. We
intend to assume iVoice's relationships and contractual arrangements with these
dealers and resellers. However, there can be no assurance that these dealers and
resellers will wish to continue their existing arrangements, or create new
arrangements, with us. If we cannot continue to use iVoice's existing dealer and
reseller channels, we will need to develop a new network of dealers and
resellers. However, we may not be able to effectively develop our own network of
resellers and dealers to distribute our software products. If we cannot assume
iVoice's existing distribution channels and we cannot develop our own new
distribution channels, this would have a material adverse effect on us and our
financial condition. The adoption of new channels may adversely impact existing
channels and/or product pricing, which may reduce our future revenues and
profitability.
Restrictive product return policies may limit iVoice Technology's sales and
penetration into the marketplace.
iVoice Technology only permits returns from authorized dealers and
resellers of unused inventory, subject to the consent of the Company and a
twenty-five percent restocking fee. End users who purchase products directly
from iVoice Technology may not return such products to iVoice Technology under
any circumstances. Such policies may deter resellers and end users from
purchasing our products in a competitive and quickly evolving marketplace, and
have a material adverse effect on our ability to remain competitive with similar
products.
iVoice Technology may depend on distribution by resellers and distributors for a
significant portion of revenues.
We may distribute some of our products through resellers and distributors.
We intend to assume iVoice's existing relationships and contractual
relationships with its resellers and distributors. To effectively do so, we must
establish and maintain good working relationships with these resellers and
distributors. If we are unsuccessful in establishing and maintaining
relationships with iVoice's existing resellers and distributors or with new
resellers and distributors, or if these resellers and distributors are
unsuccessful in reselling our products, our future net revenues and operating
results may be adversely affected. iVoice Technology does not have any material
relationship with any single distributor or reseller.
The limited scope of results of iVoice Technology's research and development may
limit the ability of iVoice Technology to expand or maintain its sales and
products in a competitive marketplace.
iVoice Technology currently has no plans to engage in research and
development of new products or improvements on existing technologies. Failure to
engage in such research and to develop new technologies or products or upgrades,
enhancements, applications or uses for existing technologies may place iVoice
Technology at a competitive disadvantage in the marketplace for its products. As
no current research and development program currently exists within iVoice
Technology, any future research and development programs could cause us to
20
incur substantial fixed costs which may result in such programs being
prohibitively expensive to initiate without substantial additional financing
being obtained on favorable terms. Also, the lack of any current research and
development program may result in an extended launch period for a research and
development program at a point in our business when time is of the essence.
These delays could have a material adverse effect on the amount and timing of
future revenues.
Such limited research and development may also adversely affect the
ability of iVoice Technology to test any new technologies which may be
established in the future in order to determine if they are successful. If they
are not technologically successful, our resulting products may not achieve
market acceptance and our products may not compete effectively with products of
our competitors currently in the market or introduced in the future.
If iVoice Technology must restructure its operations, valuable resources will be
diverted from other business objectives.
We intend to continually evaluate our product and corporate strategy. We
have in the past undertaken, and will in the future undertake, organizational
changes and/or product and marketing strategy modifications. These
organizational changes increase the risk that objectives will not be met due to
the allocation of valuable limited resources to implement changes. Further, due
to the uncertain nature of any of these undertakings, these efforts may not be
successful and we may not realize any benefit from these efforts.
Potential software defects and product liability could result in delays in
market acceptance, unexpected costs and diminished operating results.
Software products frequently contain errors or defects, especially when
first introduced or when new versions or enhancements are released. Defects and
errors could be found in current versions of our products, future upgrades to
current products or newly developed and released products. Software defects
could result in delays in market acceptance or unexpected reprogramming costs,
which could materially adversely affect our operating results. Most of our
license agreements with customers contain provisions designed to limit our
exposure to potential product liability claims. It is possible, however, that
these provisions limiting our liability may not be valid as a result of federal,
state, local or foreign laws or ordinances or unfavorable judicial decisions. A
successful product liability claim may have a material adverse effect on our
business, operating results and financial condition.
iVoice Technology relies on third party technologies which may not support
iVoice Technology products.
Our software products are designed to run on the Microsoft(R) Windows(R)
operating system and with industry standard hardware. Although we believe that
the operating systems and necessary hardware are and will be widely utilized by
businesses in the corporate market, businesses may not actually adopt such
technologies as anticipated or may in the future migrate to other computing
technologies that we do not support. Moreover, if our products and technology
are not compatible with new developments from industry leaders such as
Microsoft, our business, results of operations and financial condition could be
materially and adversely affected.
21
iVoice Technology faces aggressive competition in many areas of the business,
and the business will be harmed if iVoice Technology fails to compete
effectively.
We encounter aggressive competition from numerous competitors in many
areas of our business. Many of our current and potential competitors have longer
operating histories, greater name recognition and substantially greater
financial, technical and marketing resources than we have. We may not be able to
compete effectively with these competitors. Our competition may engage in
research and development to develop new products and periodically enhance
existing products in a timely manner, while we have no established plan or
intention to engage in any manner of research or development. We anticipate that
we may have to adjust the prices of many of our products to stay competitive. In
addition, new competitors may emerge, and entire product lines may be threatened
by new technologies or market trends that reduce the value of these product
lines. The market in which we compete is influenced by the strategic direction
of major computer hardware manufacturers and operating system software
providers.
We may not be able to access sufficient funds when needed.
We are dependent on external financing to fund our operations. Our
financing needs are expected to be provided, through the possible sale of Class
A Common Stock on the terms of the non-binding letter of intent to provide an
equity line of credit from Cornell Capital Partners.
However, Cornell Capital Partners is under no obligation to execute any
definitive agreements with iVoice Technology. Furthermore, if definitive
agreements are executed Cornell Capital Partners is under no obligation to
purchase any shares of Class A Common Stock, Cornell Capital Partners will be
obligated to purchase shares of Class A Common Stock only upon the satisfaction
of certain conditions being met by iVoice Technology, including completing of
the Distribution, listing our Class A Common Stock on the Over-the-Counter
Bulletin Board and having the registration statement relating to such Class A
Common Stock declared effective. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." If Cornell Capital Partners does not execute the definitive
agreements or iVoice Technology cannot satisfy the requirements for Cornell
Capital Partners to purchase the Class A Common Stock under the terms of the
definitive documents, we will not have sufficient capital resources to operate
our business, and we have no current plans to obtain other financing. If we
obtain the equity line of credit, we cannot assure you that we will be able to
access such financing in sufficient amounts or at all when needed. Our inability
to obtain sufficient financing would have an immediate material adverse effect
on us, our financial condition and our business.
Our obligations under the secured promissory note are secured by substantially
all of our assets.
Our obligations under the secured promissory note issued to Cornell
Capital Partners are secured by substantially all of our assets. As a result, if
we default under the terms of the secured promissory note, Cornell Capital
Partners could foreclose its security interest and liquidate all of our assets.
This would cause operations to cease.
22
Jerome Mahoney, the Chairman of the Board of iVoice Technology, may have control
over the management and direction of iVoice Technology.
Mr. Mahoney will have the right to convert $190,000 of indebtedness,
together with any accrued but unpaid interest on the indebtedness, into 190,000
shares (plus shares receivable upon conversion of accrued and unpaid interest on
the promissory note) of iVoice Technology Class B Common Stock, which Class B
Stock is convertible into the number of shares of Class A Common Stock
determined by dividing the number of shares of Class B Common Stock being
converted by a 20% discount of the lowest price at which iVoice had ever issued
its Class A Common Stock. Interest accrues on the outstanding principal balance
of the note at a rate of 2% per annum. There is no limitation on the number of
shares of Class A Common Stock we may be required to issue to Mr. Mahoney upon
the conversion of this indebtedness. Each share of Class B Common Stock has
voting rights equal to 100 shares of Class A Common Stock. If Mr. Mahoney
converts his indebtedness into 190,000 shares of Class B Common Stock, he will
have voting rights equal to 19,000,000 shares of Class A Common Stock and will
have control over the management and direction of iVoice Technology, including
the election of directors, appointment of management and approval of actions
requiring the approval of stockholders.
iVoice Technology's management team is new and its working relationships are
untested.
We have only recently assembled our management team as part of the
Distribution and changes in our operating structure. Some members of our
management team have worked with each other in the past, although at this time
we cannot assess the effectiveness of their working relationships after the
Distribution. As a result, we may be unable to effectively develop and sell our
software products and iVoice Technology, as a business, may fail.
iVoice Technology relies on intellectual property and proprietary rights which
may not remain unique to iVoice Technology.
We regard our software as proprietary and underlying technology as
proprietary. We seek to protect our proprietary rights through a combination of
confidentiality agreements and copyright, patent, trademark and trade secret
laws.
We do not have any patents or statutory copyrights on any of our
proprietary technology that we believe to be material to our future success. Our
future patents, if any, may be successfully challenged and may not provide us
with any competitive advantages. We may not develop proprietary products or
technologies that are patentable and other parties may have prior claims.
In selling our products, we rely primarily on shrink-wrap licenses that
are not signed by licensees. Therefore, such licenses may be unenforceable under
the laws of some jurisdictions. In addition, existing copyright laws afford
limited practical protection. Furthermore, the laws of some foreign countries do
not offer the same level of protection of our proprietary rights as do the laws
of the United States.
Patent, trademark and trade secret protection is important to us because
developing and marketing new technologies and products is time-consuming and
expensive. We do not own any
23
U.S. or foreign patents or registered intellectual property. We may not obtain
issued patents or other protection from any future patent applications owned by
or licensed to us.
Our competitive position is also dependent upon unpatented trade secrets.
Trade secrets are difficult to protect. Our competitors may independently
develop proprietary information and techniques that are substantially equivalent
to ours or otherwise gain access to our trade secrets, such as through
unauthorized or inadvertent disclosure of our trade secrets.
There can be no assurance that our means of protecting our proprietary
rights will be adequate or that our competitors will not independently develop
similar technology substantially equivalent or superseding proprietary
technology. Furthermore, there can be no assurance that any confidentiality
agreements between us and our employees will provide meaningful protection of
our proprietary information, in the event of any unauthorized use or disclosure
thereof. As a consequence, any legal action that we may bring to protect
proprietary information could be expensive and may distract management from
day-to-day operations.
iVoice Technology may become involved in future litigation, which may result in
substantial expense and may divert our attention from the implementation of our
business strategy.
We believe that the success of our business depends, in part, on obtaining
intellectual property protection for our products, defending our intellectual
property once obtained and preserving our trade secrets. Litigation may be
necessary to enforce our intellectual property rights, to protect our trade
secrets and to determine the validity and scope of our proprietary rights. Any
litigation could result in substantial expense and diversion of our attention
from our business, and may not adequately protect our intellectual property
rights.
In addition, we may be sued by third parties which claim that our products
infringe the intellectual property rights of others. This risk is exacerbated by
the fact that the validity and breadth of claims covered in technology patents
involve complex legal and factual questions for which important legal principles
are unresolved. Any litigation or claims against us, whether valid or not, could
result in substantial costs, place a significant strain on our financial
resources, divert management resources and harm our reputation. Such claims
could result in awards of substantial damages, which could have a material
adverse impact on our results of operations. In addition, intellectual property
litigation or claims could force us to:
o cease licensing, incorporating or using any of our products that
incorporate the challenged intellectual property, which would
adversely effect our revenue;
o obtain a license from the holder of the infringed intellectual
property right, which license may not be available on reasonable
terms, if at all; and
o redesign our products, which would be costly and time-consuming.
24
iVoice Technology may incur increased expenses after the administrative services
agreement with iVoice is terminated.
In connection with its spin-off, iVoice Technology has entered into an
administrative services agreement with iVoice. Under this agreement, iVoice is
providing iVoice Technology with services in such areas as inventory purchasing,
material and inventory control, employee benefits administration, payroll,
financial accounting and reporting, and other areas where iVoice Technology
needs assistance and support. The agreement will continue following the
completion of the Distribution on a month-to-month basis. Upon termination of
the agreement, iVoice Technology will be required to obtain such services from a
third party or increase its headcount to provide such services. This could be
more expensive than the fees which iVoice Technology has been required to pay
under the administrative services agreement.
Risks Relating to the Distribution
The Distribution may cause the trading price of iVoice common stock to decline.
Following the Distribution, iVoice expects that its common stock will
continue to be listed and traded on the Over-the-Counter Bulletin Board under
the symbol "IVOC." Following the Distribution and the intended distributions of
the two other new subsidiaries of iVoice to the iVoice stockholders, iVoice's
operating assets will consist of its portfolio of patents and patent rights, and
its future business development operations will consist of licensing its
intellectual property rights. A trading market may not continue for the shares
of iVoice common stock or ever develop for the iVoice Technology Class A Common
Stock. As a result of the Distribution, the trading price of iVoice common stock
immediately following the Distribution may be substantially lower than the
trading price of iVoice common stock immediately prior to the Distribution.
The combined trading prices of iVoice common stock and the iVoice
Technology Class A Common Stock after the Distribution may be less than the
trading price of iVoice common stock immediately prior to the Distribution.
Further, the combined trading prices of iVoice common stock, the iVoice
Technology Class A Common Stock and the common stock of each of the two other
new companies being distributed to iVoice stockholders after the Distribution
and the two other distributions may be less than the trading price of iVoice
common stock immediately prior to these distributions.
Substantial sales of shares of iVoice Technology Class A Common Stock may have
an adverse impact on the trading price of the iVoice Technology Class A Common
Stock.
After the Distribution, some iVoice Technology stockholders may decide
that they do not want shares in a company consisting of the IVR software
operations, and may sell their iVoice Technology common stock following the
Distribution.
Based on the number of shares of iVoice common stock anticipated to be
outstanding on the record date and the number of shares of iVoice common stock
anticipated to be outstanding on the Record Date and that will actually
participate in the Distribution, iVoice will distribute to iVoice stockholders a
total of up to 10,050,000 shares of iVoice Technology Class A Common Stock.
Under the United States federal securities laws, substantially all of these
shares may be
25
resold immediately in the public market, except for (1) shares of iVoice
Technology Class A Common Stock held by affiliates of iVoice Technology or (2)
shares which are issued in respect of restricted shares of iVoice common stock.
iVoice Technology cannot predict whether stockholders will resell large numbers
of shares of iVoice Technology Class A Common Stock in the public market
following the Distribution or how quickly they may resell these shares of iVoice
Technology Class A Common Stock. If iVoice Technology stockholders sell large
numbers of shares of iVoice Technology Class A Common Stock over a short period
of time, or if investors anticipate large sales of shares of iVoice Technology
Class A Common Stock over a short period of time, this could adversely affect
the trading price of the iVoice Technology Class A Common Stock.
There has not been any prior trading market for the iVoice Technology Class A
Common Stock and a trading market for the iVoice Technology Class A Common Stock
may not develop.
There is no current trading market for the iVoice Technology Class A
Common Stock, although a when-issued trading market may develop prior to
completion of the Distribution. We anticipate that the iVoice Technology Class A
Common Stock will be listed on the Over-the-Counter Bulletin Board under the
proposed symbol "IVTC."
Shares of iVoice Technology Class A Common Stock may not be actively
traded or the prices at which the iVoice Technology Class A Common Stock will
trade may be low. Some of the iVoice stockholders who receive iVoice Technology
Class A Common Stock may decide that they do not want shares in a company
consisting of an IVR software business, and may sell their shares of iVoice
Technology Class A Common Stock following the Distribution. This may delay the
development of an orderly trading market in iVoice Technology Class A Common
Stock for a period of time following the Distribution. Until the shares of
iVoice Technology Class A Common Stock are fully distributed and an orderly
market develops, the prices at which the iVoice Technology Class A Common Stock
trade may fluctuate significantly and may be lower than the price that would be
expected for a fully distributed issue. Prices for iVoice Technology Class A
Common Stock will be determined in the marketplace and may be influenced by many
factors, including the depth and liquidity of the market for the shares, iVoice
Technology's results of operations, what investors think of iVoice Technology
and the IVR software industry, changes in economic conditions in the IVR
software industry, and general economic and market conditions. Market
fluctuations could have a material adverse impact on the trading price of the
iVoice Technology Class A Common Stock.
Our common stock is deemed to be "penny Stock" which may make it more difficult
for investors to sell their shares due to suitability requirements.
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3A51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks
are stock:
o with a price of less than $5.00 per share;
o that are not traded on a "recognized" national exchange;
26
o whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00
per share); or
o in issuers with net tangible assets of less than $2.0 million (if
the issuer has been in continuous operation for at least three
years) or $5.0 million (if in continuous operation for less than
three years), or with average revenues of less than $6.0 million for
the last three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether in investment in a penny stock
is a suitable investor for a prospective investor. These requirements may reduce
the potential market for our common stock by reducing the number of potential
investors. This may make it more difficult for investors in our common stock to
sell shares to third parties or to otherwise dispose of them. This could cause
our stock price to decline.
If we are able to sell shares of our Class A Common Stock to Cornell Capital
Partners, stockholders would experience significant dilution from such sale of
shares.
Under the terms of the non-binding letter of intent received by iVoice
Technology, if we executed definitive agreements and satisfy the conditions
therein, iVoice Technology may issue and sell to Cornell Capital Partners shares
of Class A Common Stock for a total purchase price of up to $10.0 million. As
stated above under " -- We may not be able to access sufficient funds when
needed," the commitment provides that our ability to obtain funds under any
definitive agreement will be subject to the satisfaction of certain conditions
that we may not be able to satisfy. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." If we consummate the transactions contemplated by the
commitment and are able to sell such shares of Class A Common Stock to Cornell
Capital Partners, such sale of shares will have a dilutive impact on our
stockholders. As a result, our net income per share could decrease in future
periods, and the market price of our Class A Common Stock could decline. In
addition, if our stock price declines, the price at which we sell such shares to
Cornell Capital Partners could decrease, and we would need to issue a greater
number of shares of Class A Common Stock. If our stock price is lower, then
iVoice Technology stockholders would experience greater dilution.
The Distribution of iVoice Technology Class A Common Stock may result in tax
liability to you.
You will be required to pay income tax on the value of your shares of
iVoice Technology Class A Common Stock received to the extent of the current or
accumulated earnings and profits of iVoice. Any excess will be treated as a
tax-free return of capital and thereafter as capital gain. You are advised to
consult your own tax advisor as to the specific tax consequences of the
Distribution.
27
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Information included in this prospectus may contain forward-looking
statements. This information may involve known and unknown risks, uncertainties
and other factors which may cause our actual results, performance or
achievements to be materially different from the future results, performance or
achievements expressed or implied by any forward-looking statements.
Forward-looking statements, which involve assumptions and describe our future
plans, strategies and expectations, are generally identifiable by use of the
words "may," "will," "should," "expect," "anticipate," "estimate," "believe,"
"intend" or "project" or the negative of these words or other variations on
these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans, and (e) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and "Our Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
USE OF PROCEEDS
iVoice Technology will receive no proceeds from the distribution of
securities in this Distribution.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our audited
financial statements and related notes included elsewhere in this prospectus.
Our fiscal year currently ends on December 31, and each of our fiscal quarters
ends on the final day of a calendar quarter (each March 31, June 30 and
September 30). The following discussion contains forward-looking statements.
Please see "Cautionary Statement Regarding Forward-Looking Statements" for a
discussion of uncertainties, risks and assumptions associated with these
statements.
Overview
iVoice Technology has traditionally operated as a non-reporting component
of iVoice and accordingly the financial statements discussed below have been
derived from the consolidated financial statements and accounting records of
iVoice, and reflect significant assumptions and allocations. These financial
statements do not necessarily reflect the financial position, results of
operations and cash flows of iVoice Technology had it been a stand-alone entity.
iVoice Technology seeks to leverage the value of underutilized developed
technology and believes that the transition to an independent company will
provide iVoice Technology with
28
greater access to capital. This should provide needed financial resources to
potentially penetrate the market and distribute the product. As such, iVoice
Technology's business will be formed from the contribution by iVoice of certain
assets and related liabilities on or about the effective date of the
registration statement of which this prospectus is a part. In connection with a
reorganization of iVoice, immediately prior to the Distribution, iVoice will
transfer to iVoice Technology its IVR software business and related liabilities,
including all intellectual property of iVoice relating to the IVR software
business . The board and management of iVoice has elected not to transfer any
part of its working cash balance of iVoice to iVoice Technology. Based upon the
current intention of iVoice Technology not to conduct any research and
development or hire additional employees and instead focus on the sale of the
existing IVR technology, the board has determined that, on balance, iVoice
Technology has the ability to satisfy its working capital needs as a whole. The
board and management of iVoice also determined that iVoice Technology has the
ability to obtain financing to satisfy any addition working capital needs as a
stand-alone company.
The emerging nature of the interactive voice response industry and
unforeseen expenses from the separation from iVoice, make it difficult to assess
the future growth of iVoice Technology.
The IVR software business has operated at a loss in the past for iVoice,
and as an independent company such losses may continue or increase.
Additionally, iVoice Technology's business has relied on iVoice for financial,
administrative and managerial expertise in conducting its operations. Following
the Distribution, iVoice Technology will develop and maintain its own credit and
banking relationships and perform its own financial and investor relations
functions. iVoice Technology may not be able to successfully put in place the
financial, administrative and managerial structure necessary to operate as an
independent public company, and the development of such structure will require a
significant amount of management's time and other resources.
iVoice Technology has received a going concern opinion from its auditors.
Its continuation as a going concern is dependent upon obtaining the financing
necessary to operate its business. Our financing needs are expected to be
provided, in large part, from the sale of Class A Common Stock to Cornell
Capital Partners pursuant to the terms of definitive documents executed pursuant
to the non-binding letter of intent iVoice Technology has received from Cornell
Capital. Such Class A Common Stock would then be sold to Cornell Capital
Partners at the discretion of the Company to fund working capital needs.
However, Cornell Capital Partners is under no obligation to execute any
definitive agreements with iVoice Technology. Furthermore, Cornell Capital
Partners is under no obligation to purchase any shares of Class A Common Stock
until the execution of the definitive agreements, following which Cornell
Capital Partners will be obligated to purchase shares of Class A Common Stock
only upon the satisfaction of certain conditions being met by iVoice Technology,
including completing of the Distribution, listing our Class A Common Stock on
the Over-the-Counter Bulletin Board and having the registration statement
relating to the Standby Equity Distribution Agreement declared effective. See "-
Liquidity and Capital Resources." If Cornell Capital Partners does not execute
the definitive agreements or iVoice Technology cannot satisfy the requirements
for Cornell Capital Partners to purchase the Class A Common Stock under the
terms of any definitive documents, we will not be able to obtain sufficient
capital resources to operate our business, and
29
we have no current plans to obtain other financing. We cannot assure you that we
will be able to access any financing in sufficient amounts or at all when
needed. Our inability to obtain sufficient financing would have an immediate
material adverse effect on us, our financial condition and our business.
Separation from iVoice
iVoice Technology was incorporated under the laws of the State of New
Jersey on November 10, 2004, as a wholly-owned subsidiary of iVoice. iVoice
Technology will have no material assets or activities until the contribution of
the IVR software business described in this prospectus. After the Distribution,
iVoice Technology will be an independent public company, with iVoice having no
continuing ownership interest in iVoice Technology.
On November 11, 2004, iVoice Technology received by assignment all of the
interests in and rights and title to, and assumed all of the obligations of, all
of the agreements, contracts, understandings and other instruments of iVoice
Technology, Inc., a Nevada corporation and affiliate of iVoice Technology. These
agreements, contracts, understandings and other instruments consisted of the
documentation relating to the issuance of the secured convertible debentures and
the equity line of credit, the employment agreements with Messrs. Mahoney and
Seidler and the administrative services agreement. Since this assignment, iVoice
Technology Nevada has no operating business, assets or known liabilities, and is
currently in the process of being dissolved. When we refer to or describe any
agreement, contract or other written instrument of iVoice Technology in this
prospectus, we are referring to an agreement, contract or other written
instrument that had been entered into by iVoice Technology Nevada and assigned
to iVoice Technology.
iVoice Technology's financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, and reflect
the historical financial position, results of operations, and cash flows of the
business to be transferred to iVoice Technology from iVoice as part of the
Distribution. The financial information included in this prospectus, however, is
not necessarily indicative of what iVoice Technology's results of operations or
financial position would have been had it operated as an independent company
during the periods presented, nor is it necessarily indicative of its future
performance as an independent company.
iVoice Technology will operate the IVR software business. This business
has historically operated as a non-reportable segment of iVoice. Even if iVoice
Technology was to operate the IVR business on a stand alone basis, management is
uncertain that sufficient cash to sustain its operations will be generated in
the next twelve months, or beyond, by the sales activity of IVR. iVoice
Technology intends to use a portion of the proceeds from any financing
arrangements, on sales and marketing efforts for IVR. It is unclear whether such
efforts will result in a reasonably successful operating business due to
iVoice's previous lack of sales and marketing efforts on IVR, iVoice
Technology's lack of operating history, the current economic environment and,
more specifically, the uncertainty of the telecommunications market.
Upon effectiveness of the registration statement of which this prospectus
is a part, iVoice Technology will be allocated the iVoice corporate assets,
liabilities and expenses related to the
30
IVR software business, including the IVR software and all intellectual property
of iVoice relating to the IVR software business and the assignment of iVoice's
existing agreements and arrangements with dealers and resellers. This allocation
of assets, liabilities and expenses will be based on an estimate of the
proportion of such amounts allocable to iVoice Technology, utilizing such
factors as total revenues, employee headcount and other relevant factors. iVoice
Technology believes that these allocations have been made on a reasonable basis.
iVoice Technology believes that all costs allocated to iVoice Technology are a
reasonable representation of the costs that iVoice Technology would have
incurred if iVoice Technology had performed these functions as a stand-alone
company.
In conjunction with the separation of the IVR software business from
iVoice, iVoice Technology entered into an administrative services agreement with
iVoice for the provision of certain services by iVoice to iVoice Technology
following the Distribution. This agreement will continue on a month to month
basis until iVoice Technology has found replacement services for those services
being provided by iVoice or can provide these services for itself. See
"Relationship Between iVoice and iVoice Technology Following the Distribution"
for a description of the administrative services agreement. Following
termination of the administrative services agreement, we expect that iVoice
Technology will operate on a completely stand-alone basis from iVoice and there
will be no business or operating relationship between iVoice and iVoice
Technology. iVoice Technology has no current intention to terminate the
administrative services agreement, seek replacement services or provide services
for itself in the near future.
iVoice announced in September 2004 its intention to distribute our shares
to its stockholders upon effectiveness of required Securities and Exchange
Commission filings, including the registration statement of which this
prospectus is a part.
Results of Operations for the Year Ended December 31, 2004 as Compared with the
Year Ended December 31, 2003
All revenues reported by iVoice Technology are derived from the sale or
license of our interactive voice response software products, which enable a
caller to obtain requested information in voice form from a local or non-local
database. Total revenues for the year ended December 31, 2004 and December 31,
2003 were $239,114 and $303,756 respectively. The $64,642 decrease in revenue
between the year ended December 31, 2004 and the year ended December 31, 2003
was the result of fewer units being sold in 2004 as compared to 2003, reflecting
a weaker demand for the product offset by increases in other revenue. The IVR
business has only operated as a division of iVoice and has never operated on a
stand-alone basis. The low sales volume of the IVR business is attributable to
the minimal resources made available by iVoice for the sales and marketing of
the interactive voice response software products. Management feels that the
sales of the interactive voice response software products may increase if
greater financial and operational resources were made available for the sales
and marketing of the products. If iVoice Technology can obtain funds under the
proposed equity line of credit, iVoice Technology will be able to devote more
resources to operating the business. See -- "Liquidity and Capital Resources."
31
Gross margin for the year ended December 31, 2004 and December 31, 2003
was $166,244 (69.5%) and $180,665 (59.5%), respectively. The increase in gross
margin is a result of a change in the products and services mix being sold. At
times, contracts require iVoice Technology to provide more service in a sale
than might otherwise be typical, resulting in a change in gross margin. In the
year ending December 31, 2004, iVoice Technology provided more consulting and
maintenance services, which have higher gross margins than the sale of software
products.
Total operating expenses decreased to $863,456 for the year ended December
31, 2004 from $965,341 for the year ended December 31, 2003, a decrease of
$101,885 or 10.6%. This decrease in the current year is primarily attributable
to reductions in research and development and amortization expenses offset by
increases in accrued professional and consulting fees in connection with
financing the operation of the business and the anticipated registration of
shares of iVoice Technology. The reductions in research and development expense
reflect a decrease in the number of employees performing research and
development functions.
As of December 31, 2004, iVoice Technology had five employees, four of
whom are full-time and one of whom is part-time.
The loss from operations for the year ended December 31, 2004 was
$(697,212) compared to $(784,676) for the year ended December 31, 2003, a
decrease of $87,464. As discussed above, this decrease was primarily
attributable to reductions in research and development and amortization expenses
offset by increases in accrued professional and consulting fees incurred in
connection with financing the operation of the business and the anticipated
registration of shares of iVoice Technology.
Total other expenses for the year ended December 31, 2004 were $780,915 as
compared to $346,744 for the year ended December 31, 2003, an increase of
$434,171. During the year ended December 31, 2004, iVoice Technology recorded
$31,487 of interest expense and $850,555 of financing costs. Of the financing
costs, $794,555 was attributed to allocations from the parent for stock issued
and fees paid to Cornell Capital for initial and additional financing
arrangements during 2004 and $56,000 was paid to Cornell Capital for fees
related to the issuance of $560,000 of secured convertible debentures). Interest
expense included accrued interest on the secured debentures of $7,044 in 2004. A
significant portion of iVoice, Inc.'s interest expense was allocated to iVoice
Technology in 2004 and 2003 as a result of the funding for the loss from
operations. These amounts are $24,443 and $516,719, respectively. Other income
primarily consists of $57,237 related to the write-off of certain accounts
payable and $52,337 in interest income. In future periods, iVoice Technology
will incur additional interest expense and additional fees related to the
borrowings from the promissory notes issued in replacement of the convertible
debentures and, if the equity line of credit is consummated, the anticipated
sale of shares to fund working capital needs. There is no assurance that iVoice
Technology will enter into the equity line of credit or, if it does obtain such
line of credit, be able to raise funds by selling its common stock.
32
Results of Operations for the three months ending March 31, 2005 as Compared
with the three months ending March 31, 2004.
All revenues reported by iVoice Technology are derived from the sale or
license of our interactive voice response software products, which enable a
caller to obtain requested information in voice form from a local or non-local
database. Total revenues for the three month ended March 31, 2005 and March 31,
2004 were $53,861 and $66,234, respectively. The $12,373 decrease in revenue
between the three month ended March 31, 2005 and the three month ended March 31,
2004 was the result of fewer turn-key systems being sold in 2005 as compared to
2004. The IVR business has only operated as a division of iVoice and has never
operated on a stand-alone basis. The low sales volume of the IVR business is
attributable to the minimal resources made available by iVoice for the sales and
marketing of the interactive voice response software products. Management feels
that the sales of the interactive voice response software products may increase
if greater financial and operational resources were made available for the sales
and marketing of the products. If iVoice Technology can obtain funds under the
proposed equity line of credit, iVoice Technology will be able to devote more
resources to operating the business. See "Liquidity and Capital Resources."
Gross margin for the three month ended March 31, 2005 and March 31, 2004
was $53,123 (98.6%) and $39,800 (60.1%), respectively. Revenues in the three
month ended March 31, 2005 contained very little hardware and such, had very
little direct costs. Software and maintenance revenue has a very low direct cost
content. The increase in gross margin is a result of a change in the hardware
and software mix being sold as compared to prior year.
Total operating expenses decreased to $107,860 for the three month ended
March 31, 2005 from $313,316 for the three month ended March 31, 2004, a
decrease of $205,456 or 65.6%. This decrease in the current three month is
primarily attributable to reductions in the allocated costs from iVoice, Inc. In
the three months ended March 31, 2004, iVoice accrued professional and
consulting fees in connection with financing the operation of the business and
the anticipated registration of shares of iVoice Technology. The reductions in
allocated selling and research and development expenses reflect a decrease in
the number of employees performing these functions.
As of March 31, 2005, iVoice Technology had two full-time employees.
The loss from continuing operations before other income (expense) for the
three month ended March 31, 2005 was $54,737 compared to a loss of $273,516 for
the three month ended March 31, 2004, a decrease in the loss of $218,779. As
discussed above, this decrease was primarily attributable to reductions in
allocated research and development and accrued professional and consulting fees
incurred in connection with financing the operation of the business and the
anticipated registration of shares of iVoice Technology.
Total other income (expense) for the three month ended March 31, 2005 were
$20,837 as compared to $774,795 for the three month ended March 31, 2004, a
decrease of $753,958. During the three month ended March 31, 2005, iVoice
Technology recorded $7,633 of interest expense and $14,000 financing costs on
the issuance of $140,000 of secured convertible debentures. In the three months
ending March 31, 2004, iVoice, Inc allocated $788,831 for
33
financing costs, $5,587 for interest expenses and $19,623 for other income to
iVoice Technology. The allocated finance costs were for stock issued and fees
paid to Cornell Capital for initial and additional financing arrangements. The
allocated other income was primarily from interest earned on the cash accounts.
The allocated interest expense was for accrued interest on related party debts.
Net loss for the three months ending March 31, 2005 was $75,574 as
compared to a loss of $1,048,311 for the three months ending March 31, 2004. The
decrease in net loss of $972,737 was the result of the factors discussed above.
Liquidity and Capital Resources
To date, iVoice Technology has incurred substantial losses, and will
require financing for working capital to meet its operating obligations. We
anticipate that we will require financing on an ongoing basis for the
foreseeable future.
If we execute definitive documentation and satisfy necessary conditions
under the equity line of credit described in our non-binding letter of
commitment with Cornell Capital Partners, we intend to sell shares of Class A
Common Stock as soon as possible following the completion of the Distribution in
order to generate capital necessary to sustain our operations. In the event
that, in the judgment of the Board of Directors, sufficient capital has not been
raised from the proceeds of such sales for iVoice Technology to both sustain its
business operations and to make payment to each of Mr. Mahoney and Mr. Seidler,
Mr. Mahoney has agreed to accept shares of iVoice Technology Class B Common
Stock (on a dollar-per-share basis) in satisfaction of iVoice Technology's
obligations under his employment agreement.
In August 2004, the Company entered into an agreement with Sloan
Securities Corporation to as an agent for the private placement of secured
convertible debentures to Cornell Capital Partners, L.P. Under the placement
agent agreement, the Company agreed to issue to Sloan on or about the date of
effectiveness of the registration statement covering the Distribution, a number
of shares of Class A Common Stock to equal to $10,000 divided by the closing bid
price of the Class A Common Stock on the date of effectiveness of the
registration statement covering the Distribution. On August 12 and November 19,
2004, iVoice Technology issued an aggregate of $560,000 in secured convertible
debentures, with interest payable at 5% per annum, to Cornell Capital Partners.
On February 28, 2005, iVoice Technology's obligations under the secured
convertible debentures were terminated and replaced with a secured promissory
note of the same principal amount, which note accrues interest at rate of 12%
per annum, but is not convertible into any equity security of iVoice Technology.
On February 28, 2005, iVoice Technology borrowed an additional $140,000 pursuant
to the promissory note payable to Cornell Capital Partners. In connection with
the issuances of the secured convertible debentures, iVoice Technology paid a
fee to Cornell Capital Partners equal to 10% of the aggregate principal amount
of the debentures. When the secured convertible debentures were terminated,
iVoice Technology received a credit for fees that would otherwise have been
payable upon the issuance of the $560,000 in replacement notes. iVoice
Technology paid Cornell Capital a fee of $14,000 in connection with its $140,000
borrowing. iVoice Technology's obligations under the secured promissory note
issued to Cornell Capital Partners are secured by a first
34
priority security interest in substantially all of its assets. iVoice has also
guaranteed the payment of all amounts payable by iVoice Technology pursuant to
the secured promissory note.
Effective August 12, 2004, iVoice Technology entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners to obtain an equity line of
credit. On February 28, 2005, iVoice Technology entered into a Termination
Agreement with Cornell Capital Partners, pursuant to which the equity line
transaction was terminated. On March 9, 2005, iVoice Technology received a
non-binding letter of intent from Cornell Capital whereby Cornell Capital
offered, subject to satisfaction of certain conditions, to purchase shares of
iVoice Technology's common stock upon the terms set forth in the non-binding
letter of intent and the definitive documentation to be executed after
satisfaction of those closing conditions. Pursuant to the terms of the
non-binding letter of intent, if the definitive documentation is executed,
iVoice Technology may, from time to time, issue and sell to Cornell Capital
Partners Class A Common Stock for a total purchase price of up to $10.0 million.
The purchase price for the shares would be equal to 95% of the market price,
which is defined as the lowest closing bid price of the Class A Common Stock
during the five trading days following the date that iVoice Technology delivers
to Cornell Capital Partners a notice requiring it to advance funds to us. A cash
fee equal to six percent (6%) of the cash proceeds of the draw down would also
be payable at the time of funding. In addition, Cornell Capital Partners would
receive, as additional compensation, the number of shares of Class A Common
Stock equal to one and one half percent (1.5%) of the number of shares of Class
A Common Stock outstanding on the date that a registration statement in respect
of the shares to be distributed pursuant to the equity line of credit becomes
effective.
However, Cornell Capital Partners is under no obligation to execute any
definitive agreements with iVoice Technology. Furthermore, Cornell Capital
Partners is under no obligation to purchase any shares of Class A Common Stock
until the execution of the definitive agreements, following which Cornell
Capital Partners will be obligated to purchase shares of Class A Common Stock
only upon the satisfaction of certain conditions being met by iVoice Technology,
including completing of the Distribution, listing our Class A Common Stock on
the Over-the-Counter Bulletin Board and having the registration statement
relating to the Standby Equity Distribution Agreement declared effective. If
Cornell Capital Partners does not execute definitive agreements or iVoice
Technology cannot satisfy the requirements for Cornell Capital Partners to
purchase the Class A Common Stock under the terms of the definitive documents,
we will not be able to obtain sufficient capital resources to operate our
business, and we have no current plans to obtain other financing. We cannot
assure you that we will be able to access any financing in sufficient amounts or
at all when needed. Our inability to obtain sufficient financing would have an
immediate material adverse effect on us, our financial condition and our
business. Management believes that its going-forward expenses for the twelve
months following the distribution will be approximately $431,000, which includes
salaries for iVoice Technology's officers and employees, and assuming iVoice
Technologies has no revenues in such period, iVoice Technology expects to incur
liabilities, for the year ending December 31, 2005 of approximately $432,000.
Management has no current plan to hire additional employees, perform additional
research and development or purchase additional equipment or services beyond the
requirements of the administrative services agreement with iVoice. Management
believes that the deficiency between the Company's expenses and net revenues
will be more than covered by the cash available from the proceeds of the secured
promissory note. If there are additional deficiencies that are in excess of the
proceeds of the secured promissory note, and iVoice
35
Technology is unable to obtain funds from the sale of Class A Common Stock to
Cornell Capital Partners, management believes that iVoice Technology can limit
its operations, defer payments to management and maintain its business at
nominal levels until it can identify alternative sources of capital.
Except for these two financing agreements, the Company has no other
significant sources of working capital or cash commitments. However, no
assurance can be given that iVoice Technology will enter into the equity line of
credit or raise sufficient funds from such financing arrangements, or that
iVoice Technology will ever produce sufficient revenues to sustain its
operations, or that a market will develop for its common stock for which a
significant amount of iVoice Technology's financing is dependent upon.
Upon the date of this prospectus, iVoice Technology will assume an
aggregate of $190,000 in liabilities from iVoice and iVoice will assign to
iVoice Technology assets having an aggregate book value of $10,000. See
"Selected Historical and Pro Forma Financial Information" contained in the
financial statements of iVoice Technology at the back of this prospectus. iVoice
Technology believes that the fair value of these assets may be greater than the
book value, although it has not undertaken an appraisal. The assumed obligations
are described below.
iVoice Technology has agreed to assume from iVoice upon the date of this
prospectus an outstanding promissory note in the amount of $190,000 payable to
Jerry Mahoney. This amount is related to funds that had been loaned to iVoice in
July 2000 that were used to develop the IVR software business. The amount of
$190,000 includes approximately $24,000 for interest on the original loan from
Jerry Mahoney to iVoice. iVoice Technology, for value received, will promise to
pay to Mr. Mahoney the principal sum of $190,000 that will bear interest at the
prime rate plus 2% per annum on the unpaid balance until paid or until default.
Interest payments will be due annually. All accrued interest becomes due on the
date of any payment of the promissory note. At the time of default (if any) the
interest rate shall increase to 20% until the principal balance has been paid.
Under the terms of the promissory note, at the option of the note holder,
principal and interest can be converted into either (i) one share of Class B
Common Stock of iVoice Technology, par value $0.01, for each dollar owed, (ii)
the number of shares of Class A Common Stock of iVoice Technology calculated by
dividing (x) the sum of the principal and interest that the note holder has
requested to have prepaid by (y) eighty percent (80%) of the lowest issue price
of Class A Common Stock since the first advance of funds under this note, or
(iii) payment of the principal of this note, before any repayment of interest.
iVoice Technology has yet to record this liability on its financial statements,
as the promissory note will not be assumed by iVoice Technology until the
effectiveness of the registration statement.
Mr. Mahoney has agreed to forego receiving any shares of iVoice Technology
Class A Common Stock or iVoice Technology Class B Common Stock he is or would be
entitled to receive in the Distribution by virtue of his ownership of either
iVoice Class A Common Stock or iVoice Class B Common Stock.
iVoice Technology has entered into employment contracts with its
Non-Executive Chairman of the Board of Directors and its President and Chief
Executive Officer. As consideration, iVoice Technology agreed to pay Mr. Mahoney
the sum of $85,000 the first year
36
with an annual increase based on the Consumer Price Index every year thereafter.
Mr. Mahoney will also be entitled to incentive compensation based upon
acquisitions completed by iVoice Technology. The employment agreement with Mr.
Mahoney provides for a severance payment to him of three hundred percent (300%),
less $100, of his gross income for services rendered to iVoice Technology in
each of the five prior calendar years (or shorter period during which Mr.
Mahoney shall have been employed by iVoice Technology) should his employment be
terminated following a change in control, as defined in the employment
agreement.
iVoice Technology entered into an employment agreement as of August 1,
2004 with Mr. Seidler. Mr. Seidler will serve as iVoice Technology's President
and Chief Executive Officer for a term of one year. As consideration, iVoice
Technology agreed to pay Mr. Seidler a base salary of $40,000 during the term.
iVoice Technology also agreed to pay Mr. Seidler incentive compensation based on
the amount of total revenues collected by the Company. Mr. Seidler will also be
entitled to additional incentive compensation based upon acquisitions completed
by iVoice Technology.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP). The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate these estimates, including
those related to bad debts, inventory obsolescence, intangible assets, payroll
tax obligations, and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of certain assets and liabilities. Actual results may differ
from these estimates under different assumptions or conditions.
We have identified below the accounting policies, revenue recognition and
software costs, related to what we believe are most critical to our business
operations and are discussed throughout Management's Discussion and Analysis of
Financial Condition and Results of Operations where such policies affect our
reported and expected financial results.
Revenue Recognition
With respect to the sale of software license fees, the Company recognizes
revenue in accordance with Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2), as amended, and generally recognizes revenue when all of
the following criteria are met: (1) persuasive evidence of an arrangement exists
generally evidenced by a signed, written purchase order from the customer, (2)
delivery of the software product on Compact Disk (CD) or other means to the
customer has occurred, (3) the perpetual license fee is fixed or determinable
and (4) collectibility, which is assessed on a customer-by-customer basis, is
probable.
With respect to customer support services, upon the completion of one year
from the date of sale, the Company offers customers an optional annual software
maintenance and support
37
agreement for subsequent one-year periods. Sales of purchased maintenance and
support agreements are recorded as deferred revenues and recognized over the
respective terms of the agreements.
The Company derives its revenues from the licensing of its software
product and optional customer support (maintenance) services. Presently, 100% of
the revenues reported by the Company are derived from the licensing of the
Company's IVR software. No revenues have been derived from the sale of optional
customer support services. The Company's standard license agreement provides for
a one-time fee for use of the Company's product in perpetuity for each computer
or CPU in which the software will reside. The Company's software application is
fully functional upon delivery and implementation and does not require any
significant modification or alteration. The Company also offers customers an
optional annual software maintenance and support agreement for the subsequent
one-year periods. Such maintenance and support services are free for the first
year the product is licensed. The software maintenance and support agreement
provides free software updates, if any, and technical support the customer may
need in deploying or changing the configuration of the software. Generally, the
Company does not license its software in multiple element arrangements whereby
the customer purchases a combination of software and maintenance. In a typical
arrangement, software maintenance services are sold separately from the software
product; are not considered essential to the functionality of the software and
are purchased at the customer's option upon the completion of the first year
licensed.
The Company does not offer any special payment terms or significant
discount pricing. Normal and customary payment terms require payment for the
software license fees when the product is shipped. Payment for software
maintenance is due prior to the commencement of the maintenance period. It is
also the Company's policy not to provide direct customers (as opposed to
resellers and dealers) the right to refund any portion of its license fees. The
Company accepts Visa and MasterCard as well as company checks.
Customers may license the Company's products through our telesales
organization and through promotions or reseller agreements with independent
third parties. iVoice Technology only permits returns from authorized dealers
and resellers of unused inventory, subject to the consent of the Company and a
twenty-five percent restocking fee. End users who purchaser products directly
from iVoice Technology may not return such products to iVoice Technology under
any circumstances. Accordingly, the Company records a provision for product
returns and allowances against product revenue in the same period the revenue is
recorded. The estimates are based on historical sales returns and other known
data as well as market and economic conditions.
Our current products are not sold through retail distribution channels.
Current reseller agreements provide for a limited contractual right of return
and do not provide for future price concessions, minimum inventory commitments
nor is payment contingent upon the reseller's future sales or our products.
Revenues generated from products licensed through marketing channels where the
right of return exists, explicitly or implicitly, is reduced by reserves for
estimated product returns. Such reserves are estimates based on returns history
and current economic and market trends.
38
Software Costs
Software license costs are recorded at cost, which approximates fair
market value as of the date of purchase. These costs represent the purchase of
various exploitation rights to certain software, pre-developed codes and systems
developed by a non-related third party. These costs are capitalized pursuant to
Statement of Financial Accounting Standards ("SFAS") 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed". The
Company has adopted SFAS No. 121. The carrying value of software license costs
are regularly reviewed by the Company and a loss would be recognized if the
value of the estimated undiscounted cash flow benefit related to the asset falls
below the unamortized cost. The Company develops software for licensing to its
customers and capitalizes software development costs when technological
feasibility has been established. Software development costs not qualifying for
capitalization are expensed and classified as research and development expenses
in the statements of operations. Research and development expenses and the
capitalization rate will fluctuate from period to period depending upon the
number and status of software development projects that are in process and the
related number of people assigned to those projects.
Purchased software and capitalized software development costs are
amortized using the greater of the revenue method or the straight-line method
with useful lives ranging from three to five years. Amortization expense is
classified in costs of revenue on the statements of operations. Our products
operate on or with other third party software and operating systems. When
determining the useful life of a product we consider factors such as the current
state of the technology, operating systems on which our products run,
competitive products and the potential use of our products by the end user.
Technological advances in software operating systems and other software
technologies on which our products rely may shorten the expected life cycle of
our products. We make an assessment of the useful lives of our products at each
balance sheet date. If that assessment determines that a shortened product life
has occurred, we amortize the remaining unamortized balances over the new
estimated useful life of the product and provide disclosure regarding a change
in estimate in the notes to the financial statements pursuant to Accounting
Principles Board Opinion No. 20 "Accounting Changes."
The Company evaluates the estimated net realizable value of each software
product at each balance sheet date. The estimate is based on historical and
forecasted net revenue for each product. Net revenue is the product revenue
reduced by the estimated costs of revenue and, if in development, the estimated
cost to complete the development of the product. When the net book value exceeds
the estimate of net realizable value, the Company records a write-down to net
realizable value on each product affected. Management's ability to achieve its
revenue forecast is subject to judgment, competitive pressures, market and
economic conditions and management's ability to successfully license its
products to its customers. A change in one or more of these factors may
influence management's estimates. Accordingly, currently estimated net
realizable values are subject to being reduced resulting in corresponding
charges for impairment in the future.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which requires
variable interest entities to be consolidated by the primary beneficiary of the
entity if certain criteria are met. FIN 46 is effective for all new variable
interest entities created after January 31, 2003. For variable interest entities
created or
39
acquired before February 1, 2003, the provisions of FIN 46 become effective for
the Company on September 1, 2003. The Company does not expect that the adoption
of FIN 46 will have a material impact on its financial position, results of
operations or cash flows.
In April, 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." Except
as noted below, the Company is required to adopt this statement by the first
quarter of the fiscal year, 2004. Certain provisions of this statement relating
to SFAS No. 133 implementation issues that have been effective for prior fiscal
quarters will continue to be applied in accordance with their respective
effective dates. The Company does not expect that the adoption of SFAS No. 149
will have a material impact on its financial position, results of operations or
cash flows.
In May, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for the Company on September 1, 2003. The Company does not
expect that the adoption of SFAS No. 150 will have a material impact on the
Company's financial position, results of operations or cash flows.
OUR BUSINESS
Background
iVoice Technology, Inc. (the "Company") was incorporated in New Jersey on
November 10, 2004 as a wholly-owned subsidiary of iVoice, Inc. It is engaged in
the design, manufacture, and marketing of specialized telecommunication
equipment. As of December 31, 2004, the Company employed four full-time
employees and one part-time employee. Following the Distribution, iVoice
Technology may seek to expand its operations through additional sales and
marketing activity and the acquisition of additional businesses. Any potential
acquired additional businesses may be outside the current field of operations of
iVoice Technology. iVoice Technology may not be able to identify, successfully
integrate or profitably manage any such businesses or operations. Currently,
iVoice Technology has no plans, proposals or arrangements, either orally or in
writing, regarding any proposed acquisitions and is not considering any
potential acquisitions.
The following description of our business is intended to provide an
understanding of our product and the direction of our initial marketing
strategy. As the Company is in its developmental stages, any focus described in
the following pages may change and different initiatives may be pursued, at the
discretion of Management.
Products
Our flagship product is IVR, an application generator that allows full
connectivity to many databases, including Microsoft Access, Microsoft Excel,
Microsoft Fox Pro, DBase, Btrieve, and Paradox, or to standard text files. IVR
can be used to read information from, and
40
write information to, databases, as well as query databases and return
information. The IVR software is sold as an application generator that gives the
end user the ability to develop their own customized IVR application or as a
customized turnkey system. IVR performs over 40 different customizable commands.
Examples of IVR range from simply selecting announcements from a list of options
stored in the computer (also known as audio text) to more complex interactive
exchanges such as querying a database for information.
Properties can be set up for each command, as if the commands were being
executed manually. IVR links a phone system to a database to provide customers
with 24-hour immediate access to account information, via telephone. With IVR,
polished IVR applications are quick and easy to install. No knowledge of
computer programming and minimal database knowledge is needed. IVR will execute
any created application when a caller dials in. Using DTMF (touch-tone
telephones) or speech activation allows callers to interact with the system.
Advanced database technology permits reading, writing, appending, searching and
seeking database information. A user can record product inventory, set up games,
keep a record of patients or customers, and perform other applications. The
advanced, innovative technology, backed by a simple, easy-to-use drag-and-drop
interface, makes writing applications simple.
The IVR software also incorporates an Internet access tool, which can be
either connected to the IVR system or run as a standalone. This IVR system also
has a graphical user interface and provides for Internet access to the system.
Once logged onto the Internet, a user can gain access to the IVR system by
clicking on a hypertext link for the user's browser. Upon entering the IVR
system, the response prompts are in text form rather than voice form. The user
can enter selections and get information by clicking on icons or choosing items
from menus. Some of the Internet applications available are order processing and
transactions, database integration, questions and queries, account status,
delivery information, funds transfer, and claims information.
We are in the process of rolling out Version 3.0 of the IVR software,
which incorporates certain upgrades designed to improve stability and
performance of the software. Only minor changes are being made to the user
interface, and there are no material new features that are readily apparent to
the end user. We currently have no plans to engage in future research and
development or to launch any additional versions of the IVR software or other
products.
Distribution
As a product line of iVoice, Inc., IVR has produced sales revenues for the
past three fiscal years. In the past, iVoice devoted limited resources to the
marketing of IVR. The Company's future revenues depend on its ability to develop
a customer base through the establishment of a reseller channel using various
marketing and sales promotions.
iVoice Technology will market its products directly, with a sales force,
and through more than 100 domestic and international re-sellers. iVoice
Technology intends to enter into arrangements with resellers to broaden
distribution channels and to increase its sales penetration to specific markets
and industries. Distributors will be selected based on their access to the
markets, industries and customers that are candidates for the products.
41
Competition
The Company competes generally with a number of other manufacturers of
supplemental telecommunications software, telecommunications integrators, as
well as application service providers (ASPs), which provide IVR software to
other businesses and organizations either through internet servers or
telecommunication servers. System design and engineering, application technical
features, built-in speech recognition capabilities and simplicity of user
implementation and administration are the principal characteristics of our IVR
that differentiates it from competing products. The markets in which we compete
are the IVR enterprise market, in which the customers are generally direct end
users and smaller clients with limited capacity requirements and revenue per
contract, and the IVR enhanced services market, which consists primarily of
service providers and other large organizations who require a greater level of
capacity and features.
The IVR enterprise market is fragmented and highly competitive. The
Company's major competitors in this market are Avaya Inc., IBM Corporation,
Nortel Networks Limited, Aspect Communications Corporation and Security First
Corp. (formerly Edify Corporation). The principal competitive factors in this
market include breadth and depth of solution, product features, product
scalability and reliability, client services, the ability to implement
solutions, and the creation of a referenceable customer base. The Company
believes that its product line of solutions, combined with its professional and
technical services and its extensive customer base, allow it to compete
favorably in this market. However, this market is evolving rapidly, and the
Company anticipates intensified competition not only from traditional IVR
vendors but also from emerging vendors with non-traditional technologies and
solutions.
Competition in the IVR enhanced network services market ranges from large
telecommunication suppliers offering turnkey, multi-application solutions to
"niche" companies that specialize in a particular enhanced service such as
prepaid or voicemail. The Company's primary competitors in this market are
suppliers such as Comverse Technology, Inc., Unisys Corporation and Lucent
Technologies Inc. that provide a suite of enhanced services. Smaller niche
players that compete with the Company in various geographies and/or products
include GlenAyre Electronics Inc. The Company anticipates that competition will
continue from existing and new competitors, some of which have greater
financial, technological and marketing resources and greater market share than
the Company.
No assurance can be given that our competitors will not develop new
technologies or enhancements to their existing products or introduce new
products that will offer superior price or performance features. We expect our
competitors to offer new and existing products at prices necessary to gain or
retain market share. Certain of our competitors have substantial financial
resources, which may enable them to withstand sustained price competition or a
market downturn better than us. There can be no assurance that we will be able
to compete successfully in the pricing of our products, or otherwise, in the
future.
As is customary in the telecommunications industry, the Company produces
its products from readily available components purchased from a variety of
manufacturers. Printed circuit boards and housings are contracted for
manufacture according to Company specifications from among many available
suppliers. The business of the Company is not seasonal. The Company
42
maintains no special arrangements relating to working capital items, and as far
as it is aware this is standard in the industry. The Company is not subject to
environmental protection regulations during the foreseeable future. The Company
has spent nothing on research and development in the last three fiscal years.
None of the Company's present business is subject to renegotiation of profits or
termination of contracts or subcontracts at the election of the government.
Product Development
We are in the process of rolling out Version 3.0 of the IVR software,
which incorporates certain upgrades designed to improve stability and
performance of the software. Only minor changes are being made to the user
interface, and there are no material new features that are readily apparent to
the end user. We currently have no plans to engage in future research and
development or to launch any additional versions of the IVR software or other
products.
iVoice Technology considers its current products to be competitive with
products offered by others in its industry segment. It does not foresee spending
any significant capital on new product development in the foreseeable future.
Business Development
Business development objectives at iVoice Technology will be to focus on
two primary functions as listed below:
1. Negotiate and secure strategic alliances related to our IVR
products; and
2. Negotiate, secure and manage Original Equipment Manufacturer (OEM)
and reseller accounts.
Strategic Alliances
iVoice Technology's business development efforts will seek to engage and
secure strategic alliances with related telecommunications businesses and
professional organizations in order to develop co-marketing programs that will
expand market share for our products and develop brand recognition. By entering
into strategic alliances with companies that offer telecommunications devices or
services to businesses or professional organizations whereby appointment setting
and scheduling are of vital importance, we will seek to obtain access to an
installed customer base as well as new sales opportunities of our products.
Manage OEM and Reseller Accounts
While we have traditionally sold our product primarily on a direct basis,
with our existing officers and employees fulfilling orders received by telephone
and the internet, we will seek to obtain new OEM and reseller relationships that
will serve as an extension of our sales team which has yet to be hired. We
currently have no strategic alliances with any OEMs or resellers other than the
existing relationship between iVoice's resellers and iVoice that are being
transferred to us by iVoice for our benefit, nor do we have any current material
negotiations with any OEM or other reseller. Ideally, an OEM agreement, which
provides distribution of our software product along with the manufacturers own
telecommunication equipment, could
43
produce the most widespread distribution and acceptance of our product at
minimal distribution costs. Many of the OEMs have extensive and established
reseller channels that could provide an avenue of distribution for our software.
To effectively manage these accounts, we will need to provide these resellers
with product literature, pricing, and sales leads as well as technical training
and support.
Sales and Marketing
The IVR enterprise market is characterized by a business environment that
has goals to improve customer communication and personalization as well as
reduce the costs of customer contact, a historically time-and-money intensive
operation. Furthermore, consumers are increasingly taking charge of this
important interaction between enterprise and consumer; deciding where, when and
how they want this communication. To address this new business paradigm,
enterprises are increasingly applying innovative wireless, speech and web
technologies to leverage existing customer service infrastructures in the
creation of interactive, self-directed service applications. These new
applications are designed to put the customer in control of the delivery of the
information while allowing the enterprise control of the data. This serves to
address the enterprise's objectives of improving the customer experience and
reducing operating costs.
The Company's strengths are reflected in the IVR enterprise market as part
of a suite of offerings that can be delivered as components or as part of a
total, turnkey solution. These IVR solutions use the latest in technology to
allow enterprises to automate increasingly complex interactions, enabling
businesses to provide quick and timely communications with customers and
business partners. Such technology enables enterprises to communicate with their
customers through voice, web, e-mail, facsimile and other forms of communication
on a variety of devices, including telephones, PCs, mobile phones and personal
digital assistants ("PDAs").
iVoice Technology will market its products directly and through more than
100 domestic and international re-sellers. The Company intends to enter into
arrangements with resellers to broaden distribution channels and to increase its
sales penetration to specific markets and industries. Distributors will be
selected based on their access to the markets, industries and customers that are
candidates for the products.
The Company is actively seeking strategic relationships with companies to
build its developing partner program. The partner program will be built by
establishing relationships in basic areas consisting of software and technology
solution partners and system integration partners. These relationships will
enhance the Company's technological strength, improve its market position,
facilitate shorter time-to-market, enhance its ability to deliver end-to-end
solutions, and broaden its market coverage.
Developing market possibilities will be crucial to our success. However,
we cannot provide any assurance that we will be able to effectively market and
sell our products for these uses or that they will be accepted by our perceived
market.
44
Intellectual Property Rights
We regard some features of our IVR software and documentation to be
proprietary intellectual property. We have been and will be dependent in part on
our ability to protect our proprietary technology. We will seek to use
copyright, trademarks, trade secret laws, confidentiality agreements and other
measures if necessary to establish and protect our rights in our proprietary
technology. We have not filed any provisional patent applications with respect
to some of our application and intellectual property rights. We are currently
reviewing our technologies and processes with our patent attorneys to determine
if it is possible to obtain any patents or statutory copyrights on any of our
proprietary technology which we believe to be material to our future success. If
we were to file for any patent or copyright protection, we cannot be certain
that others will not develop substantially equivalent or superseding proprietary
technology before any patent or copyright protection is awarded to us. Any
provisional patent application requires that we file one or more non-provisional
patent applications within 12 months from the date of filing to specify the
claims asserted for patent protection. Furthermore, there can be no assurance
that any confidentiality agreements between our employees and us will provide
meaningful protection of our proprietary information in the event of any
unauthorized use or disclosure of such proprietary information.
There can be no assurance that we will not become the subject of claims of
infringement with respect to intellectual property rights associated with our
products. In addition, we may initiate claims or litigation against third
parties for infringement of our proprietary rights or to establish the validity
of our proprietary rights. Any such claims could be time consuming and could
result in costly litigation or lead us to enter into royalty or licensing
agreements rather than disputing the merits of such claims.
Employees
As of December 31, 2004, we had four full-time employees and one part-time
employee. We have entered into employment agreements with our President and
Chief Executive Officer (Mr. Seidler) and our Chairman of the Board (Mr.
Mahoney). Mr. Mahoney and Mr. Seidler will not provide services to iVoice
Technology on a full-time basis. Many services that would be provided by
employees are currently being provided to iVoice Technology by iVoice under the
administrative services agreement. We do not currently have any plans to hire
additional personnel, and we expect our current officers and employees to
continue to fulfill orders received by telephone and the internet for iVoice
Technology products. However, if iVoice Technology can obtain funds under the
equity line of credit, iVoice Technology will be able to devote more resources
to expanding its personnel. See " Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Within the industry, competition for key technical and management
personnel is intense, and there can be no assurance that we can retain our
future key technical and managerial employees or that, should we seek to add or
replace key personnel, we can assimilate or retain other highly qualified
technical and managerial personnel in the future.
45
Government Regulation
We are subject to licensing and regulation by a number of authorities in
the state and municipality in which we conduct operations. These may include
health, safety, and fire regulations. Our operations are also subject to federal
and state minimum wage laws governing such matters as working conditions and
overtime.
We are not subject to any necessary government approval or license
requirement in order to market, distribute or sell our principal or related
products other than ordinary federal, state, and local laws that govern the
conduct of business in general.
Legal Proceedings
iVoice Technology is not party to any material legal proceedings, nor to
the knowledge of iVoice Technology, is any such proceeding threatened against
it.
Properties
We do not own any real property. We currently co-occupy the same space as
iVoice and are subleasing from iVoice some of the office space located at 750
Highway 34, Matawan, New Jersey. The rent payment for the sublease is currently
included in the administrative services agreement. Following the Distribution,
we intend to continue subleasing such space pursuant to the administrative
services agreement and anticipate no relocation of our offices in the
foreseeable future.
IVOICE TECHNOLOGY'S MANAGEMENT
iVoice Technology initially intends to have a board of directors that will
consist of two directors. Listed below is certain information concerning
individuals who are expected to serve as directors and executive officers of
iVoice Technology following the Distribution. Each of Mr. Mahoney and Mr. Esser
is currently a director of iVoice and we anticipate that Mr. Mahoney and Mr.
Esser will remain a director of both iVoice and iVoice Technology following the
Distribution.
Position with Director
Name Age iVoice Technology, Inc. since
- ----------------- --- ------------------------------------ --------
Jerome R. Mahoney 43 Non-Executive Chairman of the Board 2004
Arie Seidler 63 President and Chief Executive Officer N/A
Frank V. Esser 66 Director 2005
Jerome R. Mahoney. Mr. Mahoney is iVoice Technology's Chairman of the
Board. He has been a director of iVoice since May 21, 1999. Mr. Mahoney is also
the Chairman of the Board of Trey Resources, Inc. and has been a director of
Trey Resources since January 1, 2002. He is also the Chairman of the Board of
Deep Field Technologies, Inc. and SpeechSwitch, Inc. and has been a director of
Deep Field Technologies and SpeechSwitch since August 2004. Mr.
46
Mahoney started at Executone Information Systems, a telephone systems
manufacturer, and was Director of National Accounts from 1988 to 1989. In 1989,
Mr. Mahoney founded Voice Express, Inc., a New York company that sold voicemail
systems and telephone system service contracts and installed these systems. Mr.
Mahoney sold Voice Express Systems in 1993. From 1993 to 1997, Mr. Mahoney was
President of IVS Corp., and on December 17, 1997, he established International
Voice Technologies, with which iVoice merged on May 21, 1999. Mr. Mahoney
received a B.A. in finance and marketing from Fairleigh Dickinson University,
Rutherford, N.J. in 1983.
Arie Seidler. Mr. Seidler has been iVoice Technology's President and Chief
Executive Officer and a director since August 1, 2004. In 1994, Mr. Seidler
founded Vertical Solutions, Inc., a management consulting and business advisory
services firm, and was Chief Executive Officer of Vertical Solutions from 1994
to 2004. In 1979, Mr. Seidler founded The Wheatley Group and served as Chief
Executive Officer of The Wheatley Group until 1990. From 1974 to 1979, Mr.
Seidler was a management consultant with KPMG Peat Marwick.
Frank V. Esser. Mr. Esser has served as a director of the Company since
June 2005. He has been a director of iVoice since February 2004. Mr. Esser
functioned as Transfer Agent and Head Bookkeeper in the Treasury Department of
Texaco Inc from 1959 to 1968. As a certified public accountant with Ernst &
Young from 1968 to 1981, he participated in the audits of major publicly traded
companies such as J.P. Stevens & Co., Dynamics Corporation of America, and
Phillips - Van Heusen Corporation, along with law firms, banks, manufacturing
companies and other organizations, and also participated in the public offerings
of equity and debt and the preparation of SEC filings. In 1981, Mr. Esser
accepted the position of Corporate Controller with Grow Group, Inc., a Fortune
500 manufacturer of paints, solvents, and household products and became its
Chief Financial Officer in 1987. During 1997 and 1998, Mr. Esser was Chief
Financial Officer of a privately-held plastics injection molding company. In
1998, Mr. Esser accepted the position of Senior Associate at Beacon Consulting
Associates, adding the title of Vice President in 1999, and has been working at
Beacon Consulting Associates in such capacities ever since. Mr. Esser holds a
BBA degree from Baruch College of the City University of New York and is a
Certified Public Accountant in New York State.
In consideration of Mr. Esser's service as a director of the Company, he
will receive a fee of $12,000 for each year of service as a director.
Compensation of Executive Officers
The following table sets forth compensation information for services
rendered by certain of our executive officers in all capacities during the last
three completed fiscal years. The following information includes the dollar
value of base salaries, bonus awards, the number of stock options granted, and
certain other compensation, if any, whether paid or deferred.
Summary Compensation Table
Securities
Other Annual Restricted Underlying All Other
Name and Position(s) Year Salary ($) Bonus Compensation Stock Options Compensation
- -------------------- ---- ---------- ----- ------------ ---------- ---------- ------------
Jerome R. Mahoney(1) 2004 $21,250 $0 $0 $0 $0 $0
Non-executive Chairman 2003 $0 $0 $0 $0 $0 $0
of the Board 2002 $0 $0 $0 $0 $0 $0
Arie Seidler(2) 2004 $35,417 $0 $0 $0 $0 $0
President and Chief 2003 $0 $0 $0 $0 $0 $0
Executive Officer 2004 $0 $0 $0 $0 $0 $0
47
____________________
(1) Mr. Mahoney has been serving as our Non-executive Chairman of the Board
since August 1, 2004. Mr. Mahoney's salary is unpaid.
(2) Mr. Seidler has been serving as our President and Chief Executive Officer
since August 1, 2004.
Aggregate Option/SAR Exercises in Last Fiscal Year and
FY-End Options/SAR Value
- --------------- ---------------- ----------------- ---------------------------------- ----------------------------
Number of Securities Underlying Value of Unexercised
Shares Acquired Value Unexercised Options/SAR In-the-Money Options/
on Exercise Realized at FY-End (#) SARs at FY-End ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- --------------- ---------------- ----------------- ---------------------------------- ----------------------------
- --------------- ---------------- ----------------- ---------------------------------- ----------------------------
None 0 0 0 0 / 0
- --------------- ---------------- ----------------- ---------------------------------- ----------------------------
Employment Agreements
Jerome Mahoney
iVoice Technology entered into a five-year employment agreement with Mr.
Mahoney as of August 1, 2004. Mr. Mahoney will serve as iVoice Technology's
Non-Executive Chairman of the Board for a term of five years. As consideration,
iVoice Technology agreed to pay Mr. Mahoney the sum of $85,000 the first year
with an annual increase based on the Consumer Price Index every year thereafter.
iVoice Technology also agreed to pay Mr. Mahoney a bonus for each merger or
acquisition completed by the Company equal to six percent (6%) of the gross
consideration paid or received by iVoice Technology in a merger or acquisition
completed by the Company during the term of the agreement. This bonus would be
payable in the form of cash, debt or shares of Class B Common Stock at the
option of Mr. Mahoney.
In the event Mr. Mahoney's employment agreement is terminated by iVoice
Technology for cause or due to Mr. Mahoney's disability or retirement, iVoice
Technology will pay him his full base salary for five years from the date of
termination at the highest salary level under the agreement. Under his
agreement, "cause" means (1) the willful and continued failure of Mr. Mahoney to
substantially perform his duties to the Company after written demand for such
performance is delivered to Mr. Mahoney by the Company's board of directors, (2)
the willful engaging by Mr. Mahoney in conduct that is demonstrably and
materially injurious to the Company, monetarily or otherwise, (3) the conviction
of Mr. Mahoney of a felony, which is limited solely to a crime that relates to
the business operations of the Company or that results in his being unable to
substantially carry out his duties as set forth in the agreement, or (4) the
commission of any act by Mr. Mahoney against the Company that may be construed
as embezzlement, larceny, and/or grand larceny. However, Mr. Mahoney will not be
deemed to have been terminated for cause unless the board of directors
determines, by a vote of at least 75% of the members of the board of directors
that Mr. Mahoney was guilty of conduct described in items (1), (2) or (4) above.
As the board of directors consists solely of Mr. Mahoney and Mr. Esser, and Mr.
Mahoney, pursuant to his employment agreement, would be required to recuse
48
himself from any discussions or vote regarding any potential termination, Mr.
Esser would be required to determine, in accordance with his fiduciary duties as
a board member, if Mr. Mahoney should be terminated for cause.
In the event Mr. Mahoney's employment agreement is terminated due to Mr.
Mahoney's death, iVoice Technology will pay to his estate his full base salary
for eight years from the date of termination at the highest salary level under
the agreement. In the event Mr. Mahoney's employment agreement is terminated by
iVoice Technology within three years following a change in control, as defined
in the employment agreement, or by Mr. Mahoney for good reason within three
years following a change in control, Mr. Mahoney will be entitled to receive a
severance payment equal to three hundred percent (300%), less $100, of his gross
income for services rendered to iVoice Technology in each of the five prior
calendar years (or shorter period during which Mr. Mahoney shall have been
employed by iVoice Technology). Under his employment agreement, "good reason"
means, among other things, (1) any limitation on Mr. Mahoney's powers as
Chairman of the Board, (2) a reduction in compensation, (3) a relocation of the
Company outside New Jersey or (4) the failure of the Company to make any
required payments under the agreement. The employment agreement restricts Mr.
Mahoney from competing with iVoice Technology during the term of the agreement
and for one year after he is no longer employed by the Company; provided that
Mr. Mahoney is receiving severance or other compensation from the Company
pursuant to the employment agreement for at least one year.
Arie Seidler
iVoice Technology entered into an employment agreement with Mr. Seidler as
of August 1, 2004. Mr. Seidler will serve as iVoice Technology's President and
Chief Executive Officer for a term of one year. As consideration, iVoice
Technology agreed to pay Mr. Seidler a base salary of $40,000 during the term.
In addition, iVoice Technology agreed to pay Mr. Seidler incentive compensation
based on the amount of total revenues collected by iVoice Technology. If iVoice
Technology records and collects total revenues in an amount greater than
$300,000 but less than $2,000,000, Mr. Seidler will receive a bonus equal to
7.5% of the total revenues of the Company. If iVoice Technology records and
collects total revenues in an amount greater than $2,000,000, in addition to the
7.5% bonus, Mr. Seidler will also receive a bonus equal to 3.5% of the total
revenues of the Company in excess of $2,000,000. However, if the Company's
pre-tax profit margin for the year is less than 35%, Mr. Seidler's aggregate
bonus will be reduced by 35%. iVoice Technology also agreed to pay Mr. Seidler a
bonus for each merger or acquisition brought to the Company exclusively by Mr.
Seidler and completed by the Company equal to six percent (6%) of the gross
consideration paid or received by iVoice Technology, net of any debt or other
liabilities assumed by the Company, in a merger or acquisition completed by the
Company during the term of the agreement. This merger or acquisition bonus would
be payable in the form of cash, debt or shares of Class A Common Stock at the
option of iVoice Technology.
In the event Mr. Seidler's employment agreement is terminated due to his
death or disability or by iVoice Technology with or without cause, Mr. Seidler
will receive the portion of his salary earned up until the date of his
termination. Under his agreement, "cause" means (1) any material breach of the
agreement by Mr. Seidler, (2) Mr. Seidler's failure to perform his duties under
the employment agreement to the reasonable satisfaction of the board of
directors,
49
(3) any material act, or material failure to act, by Mr. Seidler in bad faith
and to the material detriment of the Company, (4) commission of a material act
involving moral turpitude, dishonesty, unethical business conduct, or any other
conduct which significantly impairs the reputation of the Company, its
subsidiaries or affiliates or (5) the conviction of Mr. Seidler of a felony. The
employment agreement restricts Mr. Seidler from competing with iVoice Technology
during the term of the agreement and for eighteen months after he is no longer
employed by the Company.
Equity Compensation Plans
There are no existing equity compensation plans and iVoice Technology has
no current plans, proposals or arrangements to establish, or provide any awards
under, any such equity compensation plans.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 12 and November 19, 2004, iVoice Technology issued an aggregate
of $560,000 in secured convertible debentures, with interest payable at 5% per
annum, to Cornell Capital Partners L.P. The debentures were intended to be
convertible at the option of the holder only after our Class A Common Stock has
commenced trading on the Over-the-Counter Bulletin Board. On February 25, 2005,
iVoice Technology's obligations under the secured convertible debentures were
terminated and replaced with a secured promissory note of the same principal
amount, which note accrues interest at rate of 12% per annum, but is not
convertible into any equity security of iVoice Technology. On February 28, 2005,
iVoice Technology borrowed an additional $140,000 pursuant to the promissory
note payable to Cornell Capital Partners. In connection with the issuances of
the secured convertible debentures, iVoice Technology paid a fee to Cornell
Capital Partners equal to 10% of the aggregate principal amount of the
debentures. When the secured convertible debentures were terminated, iVoice
Technology received a credit for fees that would otherwise have been payable
upon the issuance of the $560,000 in replacement notes. iVoice Technology paid
Cornell Capital a fee of $14,000 in connection with its $140,000 borrowing.
iVoice Technology's obligations under the secured promissory note issued to
Cornell Capital Partners are secured by a first priority security interest in
substantially all of its assets. iVoice has also guaranteed the payment of all
amounts payable by iVoice Technology pursuant to the secured promissory note.
Effective August 12, 2004, iVoice Technology entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners to obtain an equity line of
credit. On February 28, 2005, iVoice Technology entered into a Termination
Agreement with Cornell Capital Partners, pursuant to which the equity line
transaction was terminated. On March 9, 2005, iVoice Technology received a
non-binding letter of intent from Cornell Capital whereby Cornell Capital
offered, subject to satisfaction of certain conditions, to purchase shares of
iVoice Technology's common stock upon the terms set forth in the non-binding
letter of intent and the definitive documentation to be executed after
satisfaction of closing conditions. Pursuant to the terms of the non-binding
letter of intent, if the definitive documentation is executed, iVoice Technology
may then issue and sell to Cornell Capital Partners Class A Common Stock for a
total purchase price of up to $10.0 million. The purchase price for the shares
would be equal to 95% of the market price, which is defined as the lowest
closing bid price of the Class A Common Stock
50
during the five trading days following the date that iVoice Technology delivers
to Cornell Capital Partners a notice requiring it to advance funds to us. A cash
fee equal to six percent (6%) of the cash proceeds of the draw down would also
be payable at the time of funding. In addition, Cornell Capital Partners would
receive, as additional compensation, the number of shares of Class A Common
Stock equal to one and one half percent (1.5%) of the number of shares of Class
A Common Stock outstanding on the date that the registration statement in
respect of the shares to be distributed pursuant to the equity line of credit
becomes effective.
However, Cornell Capital Partners is under no obligation to execute any
definitive agreements with iVoice Technology. Furthermore, Cornell Capital
Partners is under no obligation to purchase any shares of Class A Common Stock
until the execution of the definitive agreements, following which Cornell
Capital Partners will be obligated to purchase shares of Class A Common Stock
only upon the satisfaction of certain conditions being met by iVoice Technology,
including completing of the Distribution, listing our Class A Common Stock on
the Over-the-Counter Bulletin Board and having the registration statement
relating to the Standby Equity Distribution Agreement declared effective. If
Cornell Capital Partners does not execute the definitive agreements or iVoice
Technology cannot satisfy the requirements for Cornell Capital Partners to
purchase the Class A Common Stock under the terms of the definitive documents,
we will not be able to obtain sufficient capital resources to operate our
business, and we have no current plans to obtain other financing. We cannot
assure you that we will be able to access any financing in sufficient amounts or
at all when needed. Our inability to obtain sufficient financing would have an
immediate material adverse effect on us, our financial condition and our
business.
Upon the effective date of the registration statement of which this
prospectus is a part, iVoice Technology will assume an aggregate of $190,000 in
liabilities from iVoice and iVoice will assign to iVoice Technology assets
having an aggregate book value of $10,000. See "Selected Historical and Pro
Forma Financial Information" contained in the financial statements of iVoice
Technology at the back of this prospectus. iVoice Technology believes that the
fair value of these assets may be greater than the book value, although it has
not undertaken an appraisal. The assumed obligations are described below.
In connection with the assumption of assets and liabilities by iVoice
Technology from iVoice, iVoice Technology will assume from iVoice immediately
prior to the date of this prospectus $190,000 of outstanding indebtedness from
iVoice to Jerry Mahoney. The debt will be subject to a promissory note having
substantially the same terms as the note from iVoice to Mr. Mahoney. iVoice
Technology, upon the date of this prospectus, will issue a promissory note in
the amount of $190,000 payable to Mr. Mahoney that will bear interest at the
prime rate plus 2% per annum on the unpaid balance until paid or until default.
Interest payments are due and payable annually. Under the terms of the
promissory note, at the option of the note holder, principal and interest can be
converted into either (i) one share of Class B Common Stock of iVoice
Technology, par value $0.01, for each dollar owed, (ii) the number of shares of
Class A Common Stock of iVoice Technology calculated by dividing (x) the sum of
the principal and interest that the note holder has requested to have prepaid by
(y) eighty percent (80%) of the lowest issue price of Class A Common Stock since
the first advance of funds under this note, or (iii) payment of the principal of
this note, before any repayment of interest. There is no limitation on the
number of shares of Class A Common Stock we may be required to issue to Mr.
51
Mahoney upon the conversion of this indebtedness. See "Potential Dilution Due to
Conversion at Below Market Price."
Mr. Mahoney has agreed to forego receiving any shares of iVoice
Technology's Class A Common Stock or Class B Common Stock he is or would be
entitled to receive in the Distribution by virtue of his ownership of either
iVoice Class A Common Stock or iVoice Class B Common Stock.
iVoice Technology entered into two separate employment agreements with Mr.
Mahoney, its Chairman of the Board, and Mr. Seidler, its President and Chief
Executive Officer, respectively, as of August 1, 2004. Mr. Mahoney's agreement
provides for annual compensation of $85,000 per annum with an annual increase
based on the Consumer Price Index every year thereafter. Mr. Seidler's agreement
provides for compensation of $40,000 plus additional incentive compensation.
Each of Mr. Mahoney and Mr. Seidler will also be entitled to additional
incentive compensation based upon acquisitions completed by iVoice Technology.
iVoice Technology believes that the compensation provided to each of Mr. Mahoney
and Mr. Seidler are commensurate with compensation levels paid by other
companies to management having equivalent experiences and capabilities.
In August 2004, iVoice Technology entered into a temporary administrative
services agreement with iVoice. Pursuant to that agreement, iVoice is providing
iVoice Technology with physical premises, inventory purchasing services,
material and inventory control services, source code management and other
personnel and data processing services for a period ending upon completion of
the Distribution. For these services iVoice Technology is paying iVoice $7,000
per month during the term of the agreement. The administrative services
agreement will continue on a month to month basis until iVoice Technology has
found replacement services for those services being provided by iVoice or can
provide these services for itself. Following termination of the administrative
services agreement, we expect that iVoice Technology will operate on a
completely stand-alone basis from iVoice and there will be no business or
operating relationship between iVoice and iVoice Technology.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this prospectus,
information with respect to the beneficial ownership of our common stock by (i)
persons known by us to beneficially own more than five percent of the
outstanding shares, (ii) the director, (iii) each executive officer and (iv) all
directors and executive officers as a group.
Common Stock Common Stock
Beneficially Beneficially
Owned Before Percentage Owned After Percentage
Name Title of Class Distribution Ownership Distribution Ownership
- ---- -------------- ------------ --------- ------------ ---------
Jerome R. Mahoney Class A Common Stock 0(1) 0%(1) 0(1) 0%(1)
- ---------------------------- ------------------------- --------------- --------------- ----------------- -------------
Class B Common Stock 190,000(2) 100%(2) 190,000(2) 100%(2)
- ---------------------------- ------------------------- --------------- --------------- ----------------- -------------
Class C Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- ----------------- -------------
Arie Seidler Class A Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- ----------------- -------------
Class B Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- ----------------- -------------
52
- ---------------------------- ------------------------- --------------- --------------- ----------------- -------------
Class C Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- ----------------- -------------
iVoice, Inc. Class A Common Stock 10,050,000 100% 0 0%
- ---------------------------- ------------------------- --------------- --------------- ----------------- -------------
Class B Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- ----------------- -------------
Class C Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- ----------------- -------------
All directors and Class A Common Stock 0(1) 0%(1) 0(1) 0%(1)
executive officers as a
group (2 persons)
- ---------------------------- ------------------------- --------------- --------------- ----------------- -------------
Class B Common Stock 190,000(2) 100%(2) 190,000(2) 0%(2)
- ---------------------------- ------------------------- --------------- --------------- ----------------- -------------
Class C Common Stock 0 0% 0 0%
- ---------------------------- ------------------------- --------------- --------------- ----------------- -------------
(1) Does not give effect to the right of Mr. Mahoney pursuant to the promissory
note executed by Mr. Mahoney and iVoice Technology in the amount of $190,000 to
convert $190,000 of indebtedness plus accrued and unpaid interest into more than
190,000 shares of Class B Common Stock which is convertible into the number of
shares of Class A Common Stock determined by dividing the number of shares of
Class B Common Stock being converted by a 20% discount of the lowest price at
which iVoice had ever issued its Class A Common Stock. There is no limitation on
the number of shares of Class A Common Stock we may be required to issue to Mr.
Mahoney upon the conversion of this indebtedness.
(2) Mr. Mahoney may at his option convert the $190,000 promissory note held by
him into Class B Common Stock of iVoice Technology at a rate of one dollar per
share. The Class B Common Stock is convertible at any time into Class A Common
Stock at a rate equal to 80% of the lowest price that iVoice Technology issues
shares of Class A Common Stock subsequent to the date of the note. Thus by
virtue of Mr. Mahoney's right to convert $190,000 of indebtedness plus accrued
and unpaid interest into more than 190,000 shares of Class B Common Stock, Mr.
Mahoney is deemed to beneficially own such shares for the purpose of computing
the percentage of ownership by him, but such shares are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person.
DESCRIPTION OF SECURITIES
Pursuant to iVoice Technology's certificate of incorporation, as amended,
we are authorized to issue 10,000,000,000 shares of Class A Common Stock, no par
value per share, 50,000,000 shares of Class B Common Stock, par value $0.01 per
share, 20,000,000 shares of Class C Common Stock, par value $0.01 per share, and
1,000,000 shares of Preferred Stock, par value of $1.00 per share. Below is a
description of iVoice Technology's outstanding securities, including Class A
Common Stock, Class B Common Stock, Class C Common Stock, and Preferred Stock.
Class A Common Stock
Each holder of our Class A Common Stock is entitled to one vote for each
share held of record. Holders of our Class A Common Stock have no preemptive,
subscription, conversion, or redemption rights. Upon liquidation, dissolution or
winding-up, the holders of Class A Common Stock are entitled to receive our net
assets pro rata. Each holder of Class A Common Stock is entitled to receive
ratably any dividends declared by our board of directors out of funds legally
available for the payment of dividends. We have not paid any dividends on our
Common Stock and do not contemplate doing so in the foreseeable future. We
anticipate that any earnings
53
generated from operations will be used to finance our growth. As of March 31,
2005, there was one record holder of Class A Common Stock and iVoice Technology
had 100 shares of Class A Common Stock outstanding. iVoice Technology currently
has 10,050,000 shares of Class A Common Stock outstanding. A 100,500-for-one
stock split was accomplished by means of a stock dividend effectuated
immediately prior to the effective date of the registration statement of which
this prospectus is a part.
Class B Common Stock
Each holder of Class B Common Stock has voting rights equal to 100 shares
of Class A Common Stock. Holders of Class B Common Stock are entitled to receive
dividends in the same proportion as the Class B Common Stock conversion rights
have to Class A Common Stock. There are 50,000,000 shares authorized and 0
shares issued and outstanding as of March 31, 2005. A holder of Class B Common
Stock has the right to convert each share of Class B Common Stock into the
number of shares of Class A Common Stock determined by dividing the number of
shares of Class B Common Stock being converted by a 20% discount of the lowest
price that iVoice Technology had ever issued its Class A Common Stock. Upon our
liquidation, dissolution, or winding-up, holders of Class B Common Stock will be
entitled to receive distributions.
Class C Common Stock
Each holder of our Class C Common Stock is entitled to 1,000 votes for
each one share held of record. Holders of our Class C Common Stock have no
preemptive, subscription, conversion, or redemption rights. Shares of Class C
Common Stock are not convertible into Class A Common Stock. There are 20,000,000
shares authorized and 0 shares issued and outstanding as of March 31, 2005. Upon
liquidation, dissolution or winding-up, the holders of Class C Common Stock are
not entitled to receive our net assets pro rata. We have not paid any dividends
on our common stock and do not contemplate doing so in the foreseeable future.
We anticipate that any earnings generated from operations will be used to
finance our growth.
Preferred Stock
iVoice Technology is authorized to issue 1,000,000 shares of Preferred
Stock, par value $1.00 per share. As of March 31, 2005, iVoice Technology has
not issued any shares of Preferred Stock. iVoice Technology has no current plans
to issue any shares of preferred stock.
Our board of directors is authorized (by resolution and by filing an
amendment to our certificate of incorporation and subject to limitations
prescribed by the New Jersey Business Corporation Act) to issue, from to time,
shares of Preferred Stock in one or more series, to establish from time to time
the number of shares to be included in each series, and to fix the designation,
powers, preferences and other rights of the shares of each such series and to
fix the qualifications, limitations and restrictions thereon, including, but
without limiting the generality of the foregoing, the following:
o the number of shares constituting that series and the distinctive
designation of that series;
54
o the dividend rate on the shares of that series, whether dividends
are cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on
shares of that series;
o whether that series has voting rights, in addition to voting rights
provided by law, and, if so, the terms of those voting rights;
o whether that series has conversion privileges, and, if so, the terms
and conditions of conversion, including provisions for adjusting the
conversion rate in such events as our board of directors determines;
o whether or not the shares of that series are redeemable, and, if so,
the terms and conditions of redemption, including the dates upon or
after which they are redeemable, and the amount per share payable in
case of redemption, which amount may vary under different conditions
and at different redemption dates;
o whether that series has a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount
of that sinking fund;
o the rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of iVoice
Technology, and the relative rights of priority, if any, of payment
of shares of that series; and
o any other relative powers, preferences and rights of that series,
and qualifications, limitations or restrictions on that series.
If we liquidate, dissolve or wind up our affairs, whether voluntarily or
involuntarily, the holders of Preferred Stock of each series will be entitled to
receive only that amount or those amounts as are fixed by the Company's
certificate of incorporation or the certificate of designations or by resolution
of the board of directors providing for the issuance of that series.
Transfer Agent
iVoice and iVoice Technology's transfer agent is Fidelity Transfer
Company. The address is 1800 South West Temple, Suite 301, Salt Lake City, Utah
84115. The telephone number is (801) 484-7222.
Limitation of Liability: Indemnification
Our by-laws include an indemnification provision under which we have
agreed to indemnify directors of iVoice Technology to the fullest extent
possible from and against any and all claims of any type arising from or related
to future acts or omissions as a director of iVoice Technology.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
iVoice Technology pursuant to the foregoing, or otherwise, iVoice Technology has
been advised that in the opinion of the SEC such
55
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
THE DISTRIBUTION
Introduction
In September 2004, iVoice's board of directors declared a distribution
payable to the holders of record of outstanding iVoice common stock at the close
of business on November 1, 2004. A new record date of July 29, 2005 (the "Record
Date") has been set. iVoice currently anticipates that it will distribute to
iVoice stockholders, other than Mr. Mahoney, an aggregate of up to 10,050,000
shares of iVoice Technology Class A Common Stock. Accordingly, the Distribution
will consist of one share of iVoice Technology Class A Common Stock for
approximately every 988 shares of iVoice common stock outstanding on the Record
Date. Holders of less than 988 shares of iVoice common stock will receive one
share of iVoice Technology Class A Common Stock. We currently anticipate that
the Distribution will be effected near the effective date of the registration
statement.
iVoice Technology is currently a wholly-owned subsidiary of iVoice. As a
result of the Distribution, 100% of the outstanding iVoice Technology Class A
Common Stock will be distributed to iVoice stockholders. Immediately following
the Distribution, iVoice and its subsidiaries will not own any shares of iVoice
Technology Class A Common Stock and iVoice Technology will be an independent
public company. The iVoice Technology Class A Common Stock will be distributed
by book entry. Instead of stock certificates, each iVoice stockholder that is a
record holder of iVoice shares will receive a statement of such stockholder's
book entry account for the iVoice Technology Class A Common Stock distributed to
such stockholder. Account statements reflecting ownership of the iVoice
Technology Class A Common Stock will be mailed shortly after the Distribution
Date. iVoice Technology Class A Common Stock should be credited to accounts with
stockbrokers, banks or nominees of iVoice stockholders that are not record
holders after the effective date of the Distribution.
iVoice Technology was incorporated on November 10, 2004. On November 11,
2004, iVoice Technology received by assignment all of the interests in and
rights and title to, and assumed all of the obligations of, all of the
agreements, contracts, understandings and other instruments of iVoice
Technology, Inc., a Nevada corporation and affiliate of iVoice Technology. These
agreements, contracts, understandings and other instruments consisted of the
documentation relating to the issuance of the secured convertible debentures and
the equity line of credit, the employment agreements with Messrs. Mahoney and
Seidler and the administrative services agreement. Since this assignment, iVoice
Technology Nevada has no operating business, assets or known liabilities, and is
currently in the process of being dissolved. When we refer to or describe any
agreement, contract or other written instrument of iVoice Technology in this
prospectus, we are referring to an agreement, contract or other written
instrument that had been entered into by iVoice Technology Nevada and assigned
to iVoice Technology. iVoice Technology's principal executive offices are
located at 750 Highway 34, Matawan, New Jersey 07747, and its telephone number
is (732) 441-7700. iVoice Technology will own and operate the IVR software
business of iVoice.
56
Concurrently with the Distribution, iVoice intends to contribute the
majority of its remaining business lines into two new companies and distribute
the stock of those two companies to its stockholders. Following the Distribution
and the two other distributions, iVoice's operating assets will consist of its
iVoiceMail software and its portfolio of patents and patent rights, and its
future business development operations will consist of licensing its
intellectual property rights.
Reasons for the Distribution
The board of directors and management of iVoice believe that the
Distribution is in the best interests of iVoice, iVoice Technology and iVoice
stockholders. iVoice believes that the Distribution will enhance value for
iVoice stockholders and give iVoice Technology the financial and operational
flexibility to take advantage of potential growth opportunities in the IVR
software business.
iVoice's board of directors and management believe that the Distribution
will enhance the ability of each of iVoice Technology and iVoice to focus on
strategic initiatives and new business opportunities, improve cost structures
and operating efficiencies and design equity-based compensation programs
targeted to its own performance. In addition, iVoice's board of directors
expects that the transition to an independent company will provide iVoice
Technology with greater access to capital by allowing the financial community to
focus solely on iVoice Technology and allow the investment community to measure
iVoice Technology's performance relative to its peers.
The IVR software business also has some important traits that make this
business distinct from iVoice's other operations with respect to markets,
products, capital needs and plans for growth. The Distribution will give iVoice
Technology direct access to the capital markets as a stand alone company.
The board of directors and management of iVoice believe that the
Distribution is in the best interests of iVoice and its stockholders. iVoice
believes that the Distribution will enhance value for iVoice stockholders and
that the spin off of the IVR business into iVoice Technology has provided
greater access to capital by allowing the financial community to focus solely on
iVoice Technology and its IVR software business as a stand alone company. In
determining whether of not to spin off the IVR business and make the
Distribution, the board considered the ability of iVoice to satisfy its working
capital needs as a whole as against the ability of the IVR business to satisfy
its capital needs as a stand alone company. As financing was available to the
IVR business as a stand alone company, it was determined that the IVR business
would be transferred to iVoice Technology. After considering the availability of
such financing and the relative working capital needs of iVoice and iVoice
Technology, the board elected not to transfer any part of the current cash
balance of iVoice to iVoice Technology.
As part of iVoice, the IVR software business competed with iVoice's other
core business groups for capital to finance expansion and growth opportunities.
As a separate entity, iVoice Technology will be free of iVoice's capital
structure restrictions and should be in a better position to fund the
implementation of its business strategy. The Distribution will also enable
iVoice Technology to provide its management and employees incentive compensation
in the
57
form of equity ownership in iVoice Technology, enhancing iVoice Technology's
ability to retain and motivate key employees, and, if iVoice Technology seeks to
hire additional or replacement personnel, attract such personnel. However, there
are no present plans, proposals or arrangements to establish, or provide any
awards under, any such incentive compensation plan.
Manner of Effecting the Distribution
The Distribution will be made on the basis of one share of iVoice
Technology Class A Common Stock for approximately every 988 shares of iVoice
common stock outstanding on the Record Date. Holders of less than 988 shares of
iVoice common stock will receive one share of iVoice Technology Class A Common
Stock. Based on approximately 9,994,728,373 iVoice shares outstanding on the
Record Date and approximately 9,884,728,373 iVoice shares outstanding on the
Record Date that will actually participate in the Distribution, we currently
anticipate that an aggregate of up to 10,050,000 shares of iVoice Technology
Class A Common Stock will be distributed to iVoice stockholders. At the time of
the Distribution, the shares of iVoice Technology Class A Common Stock to be
distributed will constitute 100% of the outstanding iVoice Technology Class A
Common Stock. Immediately following the Distribution, iVoice will not own any
iVoice Technology Class A Common Stock and iVoice Technology will be an
independent public company.
The shares of iVoice Technology Class A Common Stock being distributed in
the Distribution will be fully paid and non-assessable and the holders thereof
will not be entitled to preemptive rights. See "Description of Securities"
beginning on page 53.
iVoice will use a book entry system to distribute the shares of iVoice
Technology Class A Common Stock in the Distribution. Following the Distribution,
each record holder of iVoice stock on the Record Date will receive from the
Distribution Agent a statement of the shares of iVoice Technology Class A Common
Stock credited to the stockholder's account. If you are not a record holder of
iVoice stock because your shares are held on your behalf by your stockbroker or
other nominee, your shares of iVoice Technology Class A Common Stock should be
credited to your account with your stockbroker or nominee after the effective
date of the registration statement. After the Distribution, stockholders may
request stock certificates from iVoice Technology's transfer agent instead of
participating in the book entry system.
No fractional shares of iVoice Technology Class A Common Stock will be
issued. If you own a fractional share of iVoice common stock as of the Record
Date or own a number of iVoice shares that is not a multiple of 988, you will
receive the next higher whole number of shares of iVoice Technology Class A
Common Stock in the Distribution. If you own less than 988 shares you will
receive one share of iVoice Technology Class A Common Stock.
No iVoice stockholder will be required to pay any cash or other
consideration for the shares of iVoice Technology Class A Common Stock received
in the Distribution, or to surrender or exchange iVoice shares in order to
receive shares of iVoice Technology Class A Common Stock. The Distribution will
not affect the number of, or the rights attaching to, outstanding iVoice shares.
No vote of iVoice stockholders is required or sought in connection with the
Distribution, and iVoice stockholders will have no appraisal rights in
connection with the Distribution.
58
In order to receive shares of iVoice Technology Class A Common Stock in
the Distribution, iVoice stockholders must be stockholders at the close of
business on the Record Date.
Results of the Distribution
After the Distribution, iVoice Technology will be a separate public
company operating the IVR software business. Based on approximately
9,994,728,373 iVoice shares outstanding on the Record Date and approximately
9,884,728,373 iVoice shares outstanding on the Record Date that will actually
participate in the Distribution, immediately after the Distribution, iVoice
Technology expects to have approximately 20,000 holders of record of iVoice
Technology Class A Common Stock, and up to 10,050,000 shares of iVoice
Technology Class A Common Stock outstanding. The Distribution will not affect
the number of outstanding iVoice shares or any rights of iVoice stockholders.
Listing and Trading of the iVoice Technology Class A Common Stock
Neither iVoice Technology nor iVoice makes recommendations on the
purchase, retention or sale of shares of iVoice common stock or shares of iVoice
Technology Class A Common Stock. You should consult with your own financial
advisors, such as your stockbroker, bank or tax advisor.
If you do decide to purchase or sell any iVoice or iVoice Technology
shares, you should make sure your stockbroker, bank or other nominee understands
whether you want to purchase or sell iVoice common stock or iVoice Technology
Class A Common Stock, or both. The following information may be helpful in
discussions with your stockbroker, bank or other nominee.
There is not currently a public market for the iVoice Technology Class A
Common Stock, although a when-issued market may develop prior to completion of
the Distribution. When-issued trading refers to a transaction made conditionally
because the security has been authorized but is not yet issued or available.
Even though when-issued trading may develop, none of these trades would settle
prior to the effective date of the Distribution, and if the Distribution does
not occur, all when-issued trading will be null and void. On the first trading
day following the date of the Distribution, when-issued trading in respect of
shares of iVoice Technology Class A Common Stock will end and regular-way
trading will begin. Regular-way trading refers to trading after a security has
been issued and typically involves a transaction that settles on the third full
business day following the date of a transaction. We anticipate that the iVoice
Technology Class A Common Stock will trade on the Over-the-Counter Bulletin
Board under the proposed symbol "IVTC."
The shares of iVoice Technology Class A Common Stock distributed to iVoice
stockholders will be freely transferable, except for (1) shares of iVoice
Technology Class A Common Stock received by persons who may be deemed to be
affiliates of iVoice Technology under the Securities Act of 1933, as amended
(the "Securities Act"), and (2) shares of iVoice Technology Class A Common Stock
received by persons who hold restricted shares of iVoice common stock. Persons
who may be deemed to be affiliates of iVoice Technology after the
59
Distribution generally include individuals or entities that control, are
controlled by, or are under common control with iVoice Technology and may
include certain directors, officers and significant stockholders of iVoice
Technology. Persons who are affiliates of iVoice Technology will be permitted to
sell their shares of iVoice Technology Class A Common Stock only pursuant to an
effective registration statement under the Securities Act or an exemption from
the registration requirements of the Securities Act, such as the exemptions
afforded by Section 4(1) of the Securities Act and the provisions of Rule 144
thereunder.
There can be no assurance as to whether the iVoice Technology Class A
Common Stock will be actively traded or as to the prices at which the iVoice
Technology Class A Common Stock will trade. Some of the iVoice stockholders who
receive shares of iVoice Technology Class A Common Stock may decide that they do
not want shares in a company consisting of the IVR business, and may sell their
shares of iVoice Technology Class A Common Stock following the Distribution.
This may delay the development of an orderly trading market in iVoice Technology
Class A Common Stock for a period of time following the Distribution. Until the
shares of iVoice Technology Class A Common Stock are fully distributed and an
orderly market develops, the prices at which the iVoice Technology Class A
Common Stock trades may fluctuate significantly and may be lower than the price
that would be expected for a fully distributed issue. Prices for iVoice
Technology Class A Common Stock will be determined in the marketplace and may be
influenced by many factors, including the depth and liquidity of the market for
the shares, iVoice Technology's results of operations, what investors think of
iVoice Technology and the IVR industry, the amount of dividends that iVoice
Technology pays, changes in economic conditions in the IVR industry and general
economic and market conditions.
Following the Distribution, iVoice expects that its common stock will
continue to be listed and traded on the Over-the-Counter Bulletin Board under
the symbol "IVOC." Following the Distribution and the distribution of the two
other new subsidiaries of iVoice, iVoice will have no remaining businesses other
than the licensing of its intellectual property rights. A trading market may not
continue for the shares of iVoice common stock or ever develop for the iVoice
Technology Class A Common Stock. As a result of the Distribution, the trading
price of iVoice common stock immediately following the Distribution may be
substantially lower than the trading price of iVoice common stock immediately
prior to the Distribution. The combined trading prices of iVoice common stock
and the iVoice Technology Class A Common Stock after the Distribution may be
less than the trading price of iVoice common stock immediately prior to the
Distribution. Further, the combined trading prices of iVoice common stock, the
iVoice Technology Class A Common Stock and the common stock of each of the two
other new companies being distributed to iVoice stockholders after the
Distribution and the two other distributions may be less than the trading price
of iVoice common stock immediately prior to these distributions.
Even though iVoice is currently a publicly held company, there can be no
assurance as to whether an active trading market for iVoice common stock will be
maintained after the Distribution and the two other distributions or as to the
prices at which the iVoice common stock will trade. iVoice stockholders may sell
their iVoice common stock following the Distribution. These and other factors
may delay or hinder the return to an orderly trading market in the iVoice common
stock following the Distribution. Whether an active trading market for iVoice
common
60
stock will be maintained after the Distribution and the prices for iVoice common
stock will be determined in the marketplace and may be influenced by many
factors, including the depth and liquidity of the market for the shares,
iVoice's results of operations, what investors think of iVoice and its
industries, changes in economic conditions in its industries and general
economic and market conditions.
In addition, the stock market often experiences significant price
fluctuations that are unrelated to the operating performance of the specific
companies whose stock is traded. Market fluctuations could have a material
adverse impact on the trading price of the iVoice Technology Class A Common
Stock and/or iVoice common stock.
As described elsewhere in this prospectus, iVoice Technology had issued to
Cornell Capital Partners $560,000 aggregate principal amount of secured
convertible debentures. On February 28, 2005, iVoice Technology's obligations
under the secured convertible debentures were terminated and replaced with a
secured promissory note of the same principal amount, which note accrues
interest at rate of 12% per annum, but is not convertible into any equity
security of iVoice Technology.
Mr. Mahoney will have the right to convert $190,000 of indebtedness plus
accrued and unpaid interest into 190,000 (plus on a dollar per share basis,
amounts of accrued and unpaid interest) shares of iVoice Technology Class B
Common Stock which is convertible into the number of shares of Class A Common
Stock determined by dividing the number of shares of Class B Common Stock being
converted by a 20% discount of the lowest price at which iVoice had ever issued
its Class A Common Stock. There is no limitation on the number of shares of
Class A Common Stock we may be required to issue to Mr. Mahoney upon the
conversion of these obligations. See "Potential Dilution Due to Conversion at
Below Market Price." However, assuming a market price for iVoice Technology
Class A Common Stock of $0.01, we would be required to issue 23,750,000 shares
of Class A Common Stock to Mr. Mahoney, plus shares attributable to accrued and
unpaid interest upon conversion of his promissory note. As of March 31, 2005,
there was $26,334.97 of accrued and unpaid interest on the promissory note.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The following discussion summarizes the material U.S. federal income tax
consequences resulting from the Distribution. This discussion is based upon the
U.S. federal income tax laws and regulations now in effect and as currently
interpreted by courts or the Internal Revenue Service and does not take into
account possible changes in such tax laws or such interpretations, any of which
may be applied retroactively.
The following summary is for general information only and may not be
applicable to stockholders who received their shares of iVoice stock pursuant to
an employee benefit plan or who are foreign persons or who are otherwise subject
to special treatment under U.S. federal income tax laws. Each stockholder's
individual circumstances may affect the tax consequences of the Distribution to
such stockholder. In addition, no information is provided with respect to tax
consequences under any applicable foreign, state or local laws. Consequently,
each iVoice stockholder is advised to consult his own tax advisor as to the
specific tax consequences of the Distribution to him and the effect of possible
changes in tax laws.
61
General
Each iVoice stockholder who receives shares of iVoice Technology Class A
Common Stock in the Distribution will generally be treated as receiving a
taxable dividend equal to the fair market value on the Distribution date of the
shares received to the extent of the current or accumulated earnings and profits
of iVoice as of the end of the year in which the Distribution occurs. Any such
earnings and profits will be proportionately allocated among the shares
received. iVoice does not have any accumulated earnings and profits.
Following the end of the year in which the Distribution occurs, iVoice
will provide, or otherwise make available, to its stockholders information
setting forth the portion of the Distribution, if any, that is treated as a
dividend.
Dividends received by non-corporate taxpayers generally are taxed at the
same preferential rates that apply to long-term capital gains. Any portion of
the Distribution that exceeds such earnings and profits will be treated as a
tax-free return of capital to the extent of the stockholder's adjusted tax basis
in the iVoice shares and thereafter as gain from the sale or exchange of iVoice
shares. Stockholders which are corporations may be subject to additional special
provisions dealing with taxable distributions, such as the dividends received
deduction and the extraordinary dividend rules.
The basis of shares received in the Distribution will be equal to their
fair market value on the distribution date, and a stockholder's holding period
with respect to the shares received will begin on the day following the date of
the Distribution.
You should consult your own tax advisor as to the particular consequences
of the Distribution to you, including the application of state, local and
foreign tax laws.
CHANGES IN ACCOUNTANTS
On February 23, 2005, iVoice Technology terminated the services of its
independent account, Mendlowitz Weitsen, LLP. For the two most recent fiscal
years and through the subsequent interim period ending upon such termination,
(i) the independent account's report did not contain an adverse opinion or
disclaimer of opinion, nor was it modified as to uncertainty, audit scope, or
accounting principles and (ii) there were no disagreements with the former
accountant, whether or not resolved, on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the former accountant's satisfaction, would have
caused it to make reference to the subject matter of the disagreement(s) in
connection with its report. The decision to change accountants was recommended
by iVoice Technology's Audit Committee.
On February 23, 2005, iVoice Technology engaged the independent accounting
firm of Bagell, Josephs & Company, L.L.C. as principal accountant to audit
iVoice Technology's financial statements for the fiscal years ended December 31,
2004 and 2003.
62
REASONS FOR FURNISHING THIS DOCUMENT
This document is being furnished solely to provide information to iVoice
stockholders who will receive iVoice Technology Class A Common Stock in the
Distribution. It is not, and is not to be construed as, an inducement or
encouragement to buy or sell any securities of iVoice or iVoice Technology.
Neither iVoice nor iVoice Technology will update the information contained in
this document except in the normal course of their respective public disclosure
practices. However, this document will be amended if there is any material
change in the terms of the Distribution.
RELATIONSHIP BETWEEN IVOICE AND IVOICE TECHNOLOGY FOLLOWING
THE DISTRIBUTION
To provide for an orderly transition to the status of two independent
companies, iVoice and iVoice Technology have entered into an administrative
services agreement. Under this agreement, iVoice is providing iVoice Technology
services in such areas as inventory purchasing, material and inventory control,
sharing of office space, source code management, employee benefits
administration, payroll, electronic data processing services, financial
accounting and reporting, claims administration and reporting, and other areas
where iVoice Technology needs transitional assistance and support. Under the
administrative services agreement, iVoice is providing iVoice Technology
substantially the same level of service and use substantially the same degree of
care as iVoice's personnel provided and used in providing such services prior to
the execution of the agreement. For these services, iVoice Technology pays
iVoice a fee of $7,000 per month. iVoice Technology believes that the terms and
conditions of the administrative services agreement are as favorable to iVoice
Technology as those available from unrelated parties for a comparable
arrangement.
The administrative services agreement will continue on a month to month
basis until iVoice Technology has found replacement services for those services
being provided by iVoice or can provide these services for itself. Following
termination of the administrative services agreement, we expect that iVoice
Technology will operate on a completely stand-alone basis from iVoice and there
will be no business or operating relationship between iVoice and iVoice
Technology. Upon termination of the agreement, iVoice Technology would be
required to obtain such services from a third party or increase its headcount to
provide such services. This could be more expensive than the fees which iVoice
Technology has been required to pay under the administrative services agreement.
WHERE YOU CAN FIND MORE INFORMATION
iVoice Technology has filed with the Securities and Exchange Commission
the registration statement under the Securities Act with respect to the iVoice
Technology Class A Common Stock. This document does not contain all of the
information set forth in the registration statement and the exhibits and
schedules thereto, to which reference is hereby made. Statements made in this
document as to the contents of any contract, agreement or other document
referred to herein are not necessarily complete. The registration statement and
the exhibits thereto filed by iVoice Technology with the Commission may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W.,
63
Washington, D.C. 20549. Copies of such information can be obtained by mail from
the Public Reference Branch of the Securities and Exchange Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a website that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's website is http://www.sec.gov. Upon
the effectiveness of the registration statement, iVoice Technology will be
required to comply with the reporting requirements of the Securities Exchange
Act of 1934 and to file with the Commission reports, proxy statements and other
information as required by the Exchange Act. Additionally, iVoice Technology
will be required to provide annual reports containing audited financial
statements to its stockholders in connection with its annual meetings of
stockholders. These reports, proxy statements and other information will be
available to be inspected and copied at the public reference facilities of the
Commission or obtained by mail or over the Internet from the Commission, as
described above.
64
iVOICE TECHNOLOGY, INC.
INDEX TO FINANCIAL STATEMENTS
Contents Page
- -------- ----
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM F-2
AUDITED FINANCIAL STATEMENTS
Balance Sheets - December 31, 2004 and 2003 F-3
Statements of Operations - for the years ended
December 31, 2004 and 2003 F-4
Statements of Owner's Equity (Deficiency) - for the
years ended December 31, 2004 and 2003 F-5
Statements of Cash Flow - for the years ended
December 31, 2004 and 2003 F-6
NOTES TO AUDITED FINANCIAL STATEMENTS F-7
UNAUDITED FINANCIAL STATEMENTS
Balance Sheet - March 31, 2005 F-18
Statements of Operations - for the three months ended
March 31, 2005 and 2004 F-19
Statements of Cash Flows - for the three months ended
March 31, 2005 and 2004 F-20
NOTES TO UNAUDITED FINANCIAL STATEMENTS F-21
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION F-31
Condensed Unaudited Pro Forma Balance Sheet at
December 31, 2004 F-32
Condensed Unaudited Pro Forma Balance Sheet at
March 31, 2005 F-33
Unaudited Pro Forma Statement of Operations for
the year ended December 31, 2004 F-34
Unaudited Pro Forma Statement of Operations for
the year ended December 31, 2003 F-35
Unaudited Pro Forma Statement of Operations for
the three months ended March 31, 2005 F-36
NOTES TO CONDENSED UNAUDITED PRO FORMA
FINANCIAL INFORMATION F-37
F-1
Bagell, Josephs & Company, LLC
200 Haddonfield Berlin Road, Gibbsboro, NJ 08026
Tel: 856.346.2628 Fax: 856.346.2882
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF iVOICE TECHNOLOGY, INC.
Matawan, New Jersey
We have audited the accompanying balance sheets of the interactive voice
response software business of iVoice, Inc. (iVoice Technology, Inc., a wholly
owned subsidiary of iVoice, Inc.) as of December 31, 2004 and 2003 and the
related statements of operations, owner's equity and cash flows for the years
ended December 31, 2004 and 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the interactive voice
response software business of iVoice, Inc. (iVoice Technology, Inc.) as of
December 31, 2004 and 2003, and the results of its operations and its cash
flows for the years ended December 31, 2004 and 2003, in conformity with
accounting principles generally accepted in the United States of America.
These financial statements have been derived from the consolidated financial
statements and accounting records of iVoice, Inc., and reflect significant
assumptions and allocations. Moreover, as indicated in Note 1, the Company
relies on iVoice, Inc. for administrative, management, research and other
services. Accordingly, these financial statements do not necessarily reflect
the financial position, results of operations, and cash flows of the Company
had it been a stand-alone Company.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3, the Company
had net losses and negative cash flows from operations for the years ended
December 31, 2004 and 2003, and as of those dates had negative working
capital, which raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
discussed in Note 3. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
BAGELL, JOSEPHS & COMPANY, L.L.C.
Gibbsboro, New Jersey
March 21, 2005
F-2
iVOICE TECHNOLOGY, INC.
BALANCE SHEETS
December 31,
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 346,599 $ 0
Accounts receivable 31,733 37,483
Inventory, net 0 11,888
Cost in excess of billing 0 2,706
----------- -----------
Total current assets 378,332 52,077
PROPERTY AND EQUIPMENT, net
Property and equipment, net 4,737 0
OTHER ASSETS
Software license costs, net 0 45,400
----------- -----------
TOTAL ASSETS $ 383,069 $ 97,477
=========== ===========
LIABILITIES AND OWNER'S EQUITY (DEFICIENCY)
- -------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 30,606 $ 0
5% Convertible debentures 560,000 0
Deferred maintenance contracts 33,141 23,662
----------- -----------
Total current liabilities 623,747 23,662
OWNER'S EQUITY (DEFICIENCY)
Common Stock
Class A, no par value; Authorized
10,000,000,000 shares; 10,050,000 shares issued
and outstanding as of 12/31/04 and 0 shares
issued and outstanding as of 12/31/03 0 0
Class B, par value $.01; Authorized 50,000,000
shares; no shares issued and outstanding 0 0
Class C, par value $.01; Authorized 20,000,000
shares; no shares issued and outstanding 0 0
Preferred Stock; Par value $1.00; Authorized
1,000,000 shares; no shares issued and outstanding 0 0
Net investment, iVoice, Inc. 7,297,231 6,133,597
Accumulated deficit (7,537,909) (6,059,782)
----------- -----------
Total owner's equity (deficiency) (240,678) 73,815
----------- -----------
TOTAL LIABILITIES AND OWNER'S EQUITY
(DEFICIENCY) $ 383,069 $ 97,477
=========== ===========
The Notes to Financial Statements are an integral part of these statements.
F-3
iVOICE TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
For The Years December 31, 2004 and 2003
2004 2003
----------- -----------
SALES, net $ 239,114 $ 303,756
COST OF SALES 72,870 123,091
----------- -----------
GROSS PROFIT 166,244 180,665
----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
Selling expenses 45,512 68,692
General & administrative expense 721,733 665,473
Research & development 50,788 128,696
Depreciation & amortization 45,423 102,480
----------- -----------
Total Selling, General & 863,456 965,341
Administrative expense
----------- -----------
LOSS FROM CONTINUING OPERATIONS (697,212) (784,676)
----------- -----------
OTHER INCOME (EXPENSE)
Other income 113,194 100,557
Write off of financing costs (850,555) 0
Gain on sale of securities held for
sale 0 69,418
Interest expense (31,487) (516,719)
Other expense (12,067) 0
----------- -----------
Total other expense (780,915) (346,744)
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (1,478,127) (1,131,420)
----------- -----------
PROVISION FOR INCOME TAXES 0 0
----------- -----------
NET LOSS FROM CONTINUING OPERATIONS $(1,478,127) $(1,131,420)
=========== ===========
NET LOSS PER COMMON SHARE:
Basic $( .15) $( .11)
=========== ===========
Diluted $( .15) $( .11)
=========== ===========
The Notes to Financial Statements are an integral part of these statements.
F-4
iVOICE TECHNOLOGY, INC.
STATEMENTS OF OWNER'S EQUITY (DEFICIENCY)
For the Years Ended December 31, 2004 and 2003
Total
Common Common Net Owner's
Stock Stock Investment Accumulated Equity
Shares Amount iVoice, Inc Deficit (Deficiency)
---------- ------------ ----------- ----------- ------------
Balance at January 1, 2003 0 0 5,108,396 (4,928,362) 180,034
Net transactions with iVoice, Inc. 1,025,201 -- 1,025,201
Net loss for the twelve months ended
December 31, 2003 (1,131,420) (1,131,420)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2003 0 0 6,133,597 (6,059,782) 73,815
Issuance of common stock 100 0 0
Retroactive Treatment of 100,500:1
stock split 10,049,900 0 0
Net transactions with iVoice, Inc. 1,163,634 1,163,634
Net loss for the twelve months ended
December 31, 2004 (1,478,127) (1,478,127)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2004 (As
Retroactively Restated) 10,050,000 $ 0 $ 7,297,231 $(7,537,909) $ (240,678)
=========== =========== =========== =========== ===========
The Notes to Financial Statements are an integral part of these statements.
F-5
iVOICE TECHNOLOGY, INC.
STATEMENTS OF CASH FLOW
For The Years December 31, 2004 and 2003
2004 2003
---- ----
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(1,478,127) $(1,033,500)
Depreciation and amortization 45,423 102,480
Changes in operating assets and liabilities
Decrease in accounts receivable 5,750 --
Decrease in inventory 11,888 --
Decrease in cost in excess of billing 2,706 --
Increase in accounts payable and accrued
expenses 30,606 --
Increase in deferred maintenance contracts 9,479 3,739
----------- -----------
Net cash (used in) operating activities (1,372,275) (927,281)
----------- -----------
CASH FLOWS FOR INVESTING ACTIVITIES
Purchase of property and equipment (4,760) --
----------- -----------
Net cash used in)investing activities (4,760) 0
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Allocation of costs by iVoice 1,163,634 927,281
Sale of convertible debentures 560,000
----------- -----------
Net cash provided by financing activities 1,723,634 927,281
----------- -----------
NET INCREASE IN CASH 346,599 0
CASH - beginning 0 0
CASH - end $ 346,599 $ 0
=========== ===========
CASH PAID DURING THE YEAR FOR:
Interest expense $ 25 $ 516,719
=========== ===========
Income taxes $ 0 $ 0
=========== ===========
The Notes to Financial Statements are an integral part of these statements.
F-6
iVOICE TECHNOLOGY, INC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 1 - BACKGROUND
iVoice Technology, Inc. ("iVoice Technology" or the "Company") was
incorporated under the laws of New Jersey on November 10, 2004 as a wholly
owned subsidiary of iVoice, Inc. ("iVoice"). The Company received by
assignment all of the interests in and rights and title to, and assumed all
of the obligations of, all of the agreements, contracts, understandings and
other instruments of iVoice Technology, Inc., a Nevada corporation and
affiliate of the Company. When we refer to or describe any agreement,
contract or other written instrument of the Company in these notes, we are
referring to an agreement, contract or other written instrument that had been
entered into by iVoice Technology Nevada and assigned to the Company.
On September 1, 2004, the Board of Directors of iVoice, Inc. resolved to
pursue the separation of iVoice software business into three publicly owned
companies. iVoice will continue to focus on its own computerized telephony
technology and related business development operations. iVoice Technology
will continue to develop, market and license the Interactive Voice Response
line of computerized telephony software.
In September, 2004, iVoice Inc. announced that it intends to distribute to
its shareholders all of the iVoice Technologies Class A Common Stock.
The spin-off transaction will be accomplished by the distribution of certain
intellectual property, representing the software codes of Interactive Voice
Response ("IVR"), and certain accrued liabilities and related party debt to
iVoice Technology (the "Distribution"), the shares of common stock of which
will be distributed to iVoice shareholders in the form of a taxable dividend.
In conjunction with the spin-off, iVoice Technology has entered into a
temporary administrative services agreement with iVoice. The administrative
services agreement will continue on a month to month basis until iVoice
Technology has found replacement services for those services being provided
by iVoice or can provide these services for itself.
iVoice Technology also intends to assume $190,000 in accrued liabilities and
related party debt presently outstanding and incurred by iVoice. The debt
being assumed will be convertible into Class B Common Stock of iVoice
Technology at the option of the holder as later described in these notes.
NOTE 2 - BUSINESS OPERATIONS
The Company will continue to develop, market and license the Interactive
Voice Response line, which was developed by iVoice. The Company's Interactive
Voice Response line is designed to read information from and write
information to, databases, as well as to query databases and return
information.
IVR is an application generator that allows full connectivity to many
databases, including Microsoft Access, Microsoft Excel, Microsoft Fox Pro,
and Paradox, or to standard text files. The IVR software is sold as an
application generator that gives the end user the ability to develop their
own customized IVR applications or as a customized turnkey system. IVR
performs over 40 different customizable commands. Examples of IVR range from
simply selecting
F-7
iVOICE TECHNOLOGY, INC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
announcements from a list of options stored in the computer (also known as
audio text) to more complex interactive exchanges such as querying a database
for information.
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America,
which contemplates continuation of the Company as a going concern. The
Company has traditionally operated as a non-reporting component of iVoice,
Inc. and accordingly these financial statements have been derived from the
consolidated financial statements and accounting records of iVoice, Inc., and
reflect significant assumptions and allocations. The Company relies on
iVoice, Inc. for administrative, management, research and other services.
These financial statements do not necessarily reflect the financial position,
results of operations, and cash flows of the Company had it been a
stand-alone Company.
As of December 31, 2004, the Company had a net loss, a negative cash flow
from operations as well as negative working capital. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Therefore, recoverability of a major portion of the recorded asset amounts
shown in the accompanying balance sheets is dependent upon continued
operations of the Company, which in turn, is dependent upon the Company's
ability to raise capital and/or generate positive cash flow from operations.
In order to provide necessary working capital, in August 2004, the Company
entered into a subscription agreement, pursuant to which the Company issued
$280,000 of secured convertible debentures in August 2004, and an additional
$280,000 of secured convertible debentures, in November 2004, around the time
of filing of the registration statement for the Class A Common Stock. The
debentures are convertible at the option of the holder only after the
Company's Class A Common Stock has commenced trading on the Over-the-Counter
Bulletin Board. Interest on the secured convertible debentures is payable at
5% per annum and the notes are convertible into the Company's Class A Common
Stock at a price equal to the lesser of (a) an amount equal to one hundred
twenty percent (120%) of the initial bid price of the Class A Common Stock on
the date of effectiveness of the registration statement, or (b) an amount
equal to eighty percent (80%) of the lowest closing bid price of the Class A
Common Stock for the five (5) trading days immediately preceding the
conversion date. Additionally, the Company had also entered into a Standby
Equity Distribution Agreement, subsequently terminated, where the Company
could, at its discretion, periodically sell to an investor shares of Class A
Common Stock to raise capital to fund working capital needs. These two
financing transactions required the Company to register its common stock
under Section 12 (g) of the U.S. Securities Exchange Act of 1934 and
subsequently register for resale a number of shares to facilitate these
financing transactions.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the
Company cannot continue in existence.
F-8
iVOICE TECHNOLOGY, INC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The accompanying financial statements have been derived from the
consolidated financial statements and accounting records of iVoice using the
historical results of operations and historical basis of assets and
liabilities of the Company's Interactive Voice Response business. Management
believes the assumptions underlying the financial statements are reasonable.
However, the financial statements included herein may not necessarily reflect
the Company's results of operations, financial position, and cash flows in
the future or what its results of operations, financial position and cash
flows would have had the Company been a stand-alone company during the
periods presented.
b) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
c) Software License Costs
Software license costs are recorded at cost, which approximates fair
market value as of the date of purchase. These costs represent the purchase
of various exploitation rights to certain software, pre-development codes and
systems developed by a non-related third party. These costs are capitalized
pursuant to Statement of Financial Accounting Standards ("SFAS") 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed". The Company has adopted SFAS No. 121. The carrying value
of software license costs are regularly reviewed by the Company and a loss
would be recognized if the value of the estimated un-discounted cash flow
benefit related to the asset falls below the unamortized cost. Historically
the Interactive Voice Response software technology has produced limited sales
revenue. However, management believes that the limited sales generated result
from a lack of application of Company sales and marketing resources to the
software. It is Management's plan to devote such resources to its software
technology to recognize the technology's potential value and therefore, no
impairment loss has been recorded.
d) Revenue Recognition
The Company derives its revenues from the licensing of its software
product and optional customer support (maintenance) service. The Company's
standard license agreement provides for a one-time fee for use of the
Company's product in perpetuity for each computer or CPU in which the
software will reside. The Company's software application is fully functional
upon delivery and implementation and does not require any significant
modification or alteration. The Company also offers customers an optional
annual software maintenance and support agreement for the subsequent one-year
periods. Such maintenance and support services are free for the first year
the product is licensed and is considered the warranty period. The software
maintenance and support agreement provides free software updates, if any, and
technical support the customer
F-9
iVOICE TECHNOLOGY, INC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
may need in deploying or changing the configuration of the software.
Generally, the Company does not license its software in multiple element
arrangements whereby the customer purchases a combination of software and
maintenance. In a typical arrangement, software maintenance services are sold
separately from the software product; are not considered essential to the
functionality of the software and are purchased at the customer's option upon
the completion of the first year licensed.
The Company does not offer any special payment terms or significant
discount pricing. Normal and customary payment terms require payment for the
software license fees when the product is shipped. Payment for software
maintenance is due prior to the commencement of the maintenance period. It is
also the Company's policy to not provide customers the right to refund any
portion of its license fees. The Company accepts Visa and MasterCard as well
as company checks.
With respect to the sale of software license fees, the Company
recognizes revenue in accordance with Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2), as amended, and generally recognizes revenue
when all of the following criteria are met: (1) persuasive evidence of an
arrangement exists generally evidenced by a signed, written purchase order
from the customer, (2) delivery of the software product on Compact Disk (CD)
or other means to the customer has occurred, (3) the perpetual license fee is
fixed or determinable and (4) collectibility, which is assessed on a
customer-by-customer basis, is probable.
With respect to customer support services, upon the completion of one
year from the date of sale, considered to be the warrantee period, the
Company offers customers an optional annual software maintenance and support
agreement for subsequent one-year periods. Sales of purchased maintenance and
support agreements are recorded as deferred revenue and recognized over the
respective terms of the agreements.
Three customers generated approximately 69% of the revenue for the
Company through one-time contracts that will be unlikely to impact revenues
in future periods.
e) Product Warranties
The Company estimates its warranty costs based on historical warranty
claims experience in estimating potential warranty claims. Due to the limited
sales of the Company's products, management has determined that warranty
costs are immaterial and has not included an accrual for potential warranty
claims. Presently, costs related to warranty coverage are expensed as
incurred. Warranty claims are reviewed quarterly to verify that warranty
liabilities properly reflect any remaining obligation based on the
anticipated expenditures over the balance of the obligation period.
f) Research and development costs
Research and development costs will be charged to expense as incurred.
F-10
iVOICE TECHNOLOGY, INC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
g) Inventory
Inventory, consisting primarily of system components such as computer
components, voice cards, and monitors, is valued at the lower of cost or
market. Cost is determined on a first-in, first-out basis.
h) Income Taxes
The Company accounts for income taxes under the Financial Accounting
Standards Board ("FASB") of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" ("Statement 109"). Under Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
The Company, not being a separate reporting entity, will not receive
any benefit from the approximately $7,000,000 net operating loss allocated to
the IVR software business contained in these financial statements.
i) Organization Costs
Organization costs consist primarily of professional and filing fees
relating to the formation of the Company. These costs have been expensed.
j) Earnings Per Share
SFAS No. 128, "Earnings Per Share" requires presentation of basic
earnings per share ("basic EPS") and diluted earnings per share ("diluted
EPS").
The computation of basic pro forma EPS is computed by dividing income
available to common shareholders by the expected number of shares to be
issued in connection with the Company's proposed spin-off from iVoice, Inc.
Diluted earnings per share gives effect to all dilutive potential Common
shares outstanding during the period. The computation of diluted EPS does not
assume conversion, exercise or contingent exercise of securities that would
have an anti-dilutive effect on earnings resulting from the Company's net
loss position. Since the earnings per share information is being shown on a
pro forma basis, only the most recent year has been presented. The shares
used in the computation are as follows:
As of As of
December 31, 2004 December 31, 2003
----------------- -----------------
Pro Forma Basis and diluted purposes 10,050,000 10,050,000
F-11
iVOICE TECHNOLOGY, INC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
k) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its components in
the financial statements. The items of other comprehensive income that are
typically required to be displayed are foreign currency items, minimum
pension liability adjustments, and unrealized gains and losses on certain
investments in debt and equity securities, As of December 31, 2004 and 2003,
the Company has no items that represent comprehensive income, and thus, has
not included a statement of comprehensive income.
l) Recent Accounting Pronouncements
In December 2003, the FASB issued Interpretation No. 46-R,
"Consolidation of Variable Interest Entities" ("FIN 46-R"). FIN 46-R, which
modifies certain provisions and effective dates of FIN No. 46, sets forth
criteria to be used in determining whether an investment in a variable
interest entity should be consolidated, and is based on the general premise
that companies that control another entity through interests other than
voting interests should consolidate the controlled entity. The provisions of
FIN 46 became effective for the Company during the third quarter of Fiscal
2004. The adoption of this new standard did not have any impact on the
Company's financial position, results of operations or cash flows.
In December 2003, the FASB issued a revision to SFAS No. 132
"Employers' Disclosures about Pensions and Other Post retirement Benefits."
This revised statement requires additional annual disclosures regarding types
of pension plan assets, investment strategy, future plan contributions,
expected benefit payments and other items. The statement also requires
quarterly disclosure of the components of net periodic benefit cost and plan
contributions. This currently has no effect on the Company.
m) Reclassification
Certain amounts in the 2003 financial statements were reclassified to
conform to the 2004 presentation. The reclassification in 2003 results in no
changes to the net loss for that period.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of software source codes originally purchased
by iVoice for $454,000 in May 1999. The asset is reflected at its original
cost net of accumulated amortization of $454,000, from the date acquired by
iVoice. The asset was amortized over a 5-year period.
In accordance with FAS 142 goodwill and indefinite-lived intangible
assets are reviewed for impairment at least annually, and whenever events or
changes in circumstances indicate the carrying amounts of the assets may be
impaired. We have elected to perform our impairment review during the fourth
quarter of each year, in conjunction with our annual planning cycle. At
December 31, 2004, we found no impairment of goodwill or other
indefinite-lived intangible assets.
F-12
iVOICE TECHNOLOGY, INC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
NOTE 6 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2004 and December 31, 2003 iVoice
allocated operating costs of $1,163,634 and $965,341, respectively to iVoice
Technology. These allocations are reflected in the selling, general and
administrative, cost of revenue and research and development line items in
our statements of operations. The general corporate expense allocation is
primarily for cash management, selling expense, legal, accounting, tax,
insurance, public relations, advertising, and human resources. The
amortization of the Interactive Voice Response software has been reflected as
cost of sales. Other general categories of operating expense, as well as
other income and expense, have been allocated to iVoice Technology by iVoice
based upon a ratio of revenue of the Interactive Voice Response software over
total iVoice revenue for the applicable periods. Management believes the
costs of these services charged are a reasonable representation of the costs
that would have been incurred if iVoice Technology had performed these
functions as a stand-alone company.
In conjunction with the spin-off, iVoice Technology has entered into a
temporary administrative services agreement with iVoice. The administrative
services agreement will continue on a month to month basis until iVoice
Technology has found replacement services for those services being provided
by iVoice or can provide these services for itself.
NOTE 7 - INCOME TAXES
The reconciliation of the effective income tax rate to the Federal
Statutory rate is as follows:
Federal Income Tax Rate (34.0)%
Deferred Tax charge (Credit) 0.0 %
Effect on Valuation Allowance 38.1 %
State Income Tax, Net of Federal Benefits ( 4.1)%
Effective Income Tax Rate 0.0 %
Prior to the spin-off, the Company was included as part of iVoice's
consolidated federal income tax return. However, the income tax expense
presented in these financial statements has been computed on a separate
return basis.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
As discussed in Note 3, the Company has entered into a subscription
agreement with certain purchasers for the sale of $700,000 in convertible
debentures. The debentures will be convertible into Class A Common Stock at
the discretion of the holders only after the Company's Class A Common Stock
has commenced trading on the Over-the-Counter Bulletin Board. Additionally,
the Company had entered into a Standby Equity Distribution Agreement whereby
the Company, at their discretion, may periodically sell to an investor shares
of Class A Common Stock to raise capital to fund its working capital needs.
These transactions will require the Company to register its common stock under
Section 12(g) of the Securities Exchange Act of 1934 and subsequently register
for resale a number of shares to facilitate these financial transactions. On
February 28, 2005, the Standby Equity Distribution Agreement was terminated.
The Company has obtained a non-binding commitment for a Standby Equity
Distribution Agreement whereby the Company, at its discretion, may
periodically sell to an investor shares of Class A Common Stock to raise
capital to fund its working capital needs. This transaction will require the
Company to register its Class A Common Stock for resale to facilitate this
financial transaction.
F-13
iVOICE TECHNOLOGY, INC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
On February 28, 2005, convertible debentures equal in principal to
$560,000 were terminated and replaced with a secured promissory note of the
same value. In addition, on February 28, 2005, iVoice Technology borrowed an
additional $140,000 under the promissory note. On February 28, 2005, the
Standby Equity Distribution Agreement was terminated.
The Company will also assume an outstanding promissory note in the
amount of $190,000 payable to Jerry Mahoney, President and Chief Executive
Officer of iVoice and Non-Executive Chairman of the Board of iVoice
Technology. This amount is related to funds loaned to iVoice and is unrelated
to the operations of iVoice Technology. The note will bear interest at the
rate of Prime plus 2.0% per annum on the unpaid balance until paid. Under the
terms of the Promissory Note, at the option of the Note holder, principal and
interest can be converted into either (i) one share of Class B Common Stock
of iVoice Technology, Inc., par value $.01, for each dollar owed, (ii) the
number of shares of Class A Common Stock of iVoice Technology, Inc.
calculated by dividing (x) the sum of the principal and interest that the
Note holder has requested to have prepaid by (y) eighty percent (80%) of the
lowest issue price of Class A Common Stock since the first advance of funds
under this Note, or (iii) payment of the principal of this Note, before any
repayment of interest.
Effective August 1, 2004, the Company entered into a one year
employment contract with Arie Seidler, its President and Chief Executive
Officer. The Company will pay Mr. Seidler a base salary of $40,000 during
the term. Mr. Seidler can earn bonuses based on the Company achieving
certain levels of sales and profitability and will also be entitled to
certain bonuses based on mergers and acquisitions completed by the Company.
The Company entered into a five-year employment agreement with Jerome
Mahoney, its non-executive Chairman of the Board of Directors, effective
August 1, 2004. The Company will compensate Mr. Mahoney with a base salary
of $85,000 for the first year with annual increases based on the Consumer
Price Index. Mr. Mahoney will also be entitled to certain bonuses based on
mergers and acquisitions completed by the Company.
In conjunction with the spin-off, iVoice Technology has entered into an
administrative services agreement with iVoice. The administrative services
agreement will continue on a month-to- month basis until iVoice Technology
has found replacement services for those services being provided by iVoice or
can provide these services for itself.
NOTE 9 - CAPITAL STOCK
Pursuant to iVoice Technology's certificate of incorporation, as
amended, the Company is authorized to issue 10,000,000,000 shares of Class A
Common Stock, no par value per share, 50,000,000 shares of Class B Common
Stock, par value $0.01 per share, 20,000,000 shares of Class C Common Stock,
par value $0.01 per share, and 1,000,000 shares of Preferred Stock, par value
of $1.00 per share. Below is a description of iVoice Technology's
outstanding securities, including Class A Common Stock, Class B Common Stock,
Class C Common Stock, and Preferred Stock.
a) Class A Common Stock
As of December 31, 2004, there are 10,000,000,000 shares of Class A Common
Stock authorized, no par value, and 100 shares were issued and outstanding.
Subsequent to December 31, 2004, upon the registration statement becoming
effective, the Company's proposed 100,500-for-one stock split retroactively
increased the shares to 10,050,000. (See note 10).
Each holder of Class A Common Stock is entitled to receive ratably
dividends, if any, as may be declared by the Board of Directors out of funds
legally available for payment of dividends. The Company has never paid any
dividends on its common stock and does not
F-14
iVOICE TECHNOLOGY, INC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
contemplate doing so in the foreseeable future. The Company anticipates that
any earnings generated from operations will be used to finance its growth
objectives.
b) Class B Common Stock
As of December 31, 2004, there are 50,000,000 shares of Class B Common
Stock authorized, par value $.01 per share. Each holder of Class B Common
Stock has voting rights equal to 100 shares of Class A Common Stock. A holder
of Class B Common Stock has the right to convert each share of Class B Common
Stock into the number of shares of Class A Common Stock determined by
dividing the number of Class B Common Stock being converted by a 20% discount
of the lowest price that iVoice Technology, Inc. had ever issued its Class A
Common Stock. Upon our liquidation, dissolution, or winding-up, holders of
Class B Common Stock will be entitled to receive distributions. As of
December 31, 2004, no shares were issued or outstanding.
c) Class C Common Stock
As of December 31, 2004, there are 20,000,000 shares of Class C Common
Stock authorized, par value $.01 per share. Each holder of Class C Common
Stock is entitled to 1,000 votes for each share held of record. Shares of
Class C Common Stock are not convertible into Class A Common Stock. Upon
liquidation, dissolution or wind-up, the holders of Class C Common Stock are
not entitled to receive our net assets pro rata. As of December 31, 2004, no
shares were issued or outstanding.
d) Preferred Stock
iVoice Technology is authorized to issue 1,000,000 shares of Preferred
Stock, par value $1.00 per share. As of December 31, 2004, iVoice Technology
has not issued any shares of Preferred Stock.
NOTE 10 - SUBSEQUENT EVENTS
In August 2004, the Company entered into an agreement with Sloan
Securities Corporation to act as an agent for the private placement of secured
convertible debentures to Cornell Capital Partners, L.P. Under the placement
agent agreement, the Company agreed to issue to Sloan on or about the date of
effectiveness of the registration statement for the Class A Common Stock a
number of shares of Class A Common Stock equal to $10,000 divided by the
closing bid price of the Class A Common Stock on the date of effectiveness of
such registration statement. The Company issued the following secured
convertible debentures to Cornell Capital Partners on the dates and amounts as
follows: August 2004 for $280,000 and November 2004 for $280,000. These
debentures were convertible at the option of the holder only after the
Company's Class A Common Stock has commenced trading on the Over-the-Counter
Bulletin Board. Each of the debentures were convertible into shares of Class A
Common Stock at a price equal to the lesser of (a) an amount equal to one
hundred twenty percent (120%) of the initial bid price of the Class A Common
Stock on the date of effectiveness of the registration statement of which this
prospectus is a part or (b) an amount equal to eighty percent (80%) of the
lowest closing bid price of the Class A Common Stock for the five trading days
immediately preceding the conversion date. The secured convertible debentures
had a term of two years with all accrued
F-15
iVOICE TECHNOLOGY, INC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
interest due at the expiration of the term. At our option, these debentures
may be redeemed at a 20% premium prior to August 12, 2006. The secured
convertible debentures were secured by a first priority security interest in
substantially all of the assets of iVoice Technology. On February 28, 2005,
the Company renegotiated the terms and conditions of its Convertible
Debentures with the holders of such debentures. The parties thereto agreed to
terminate the $560,000 Convertible Debentures replacing them with a Promissory
Note. The Promissory Note was in the amount of $700,000, $560,000 of which
replaced the Convertible Debentures in 2004, and $140,000 of which was
advanced on February 28, 2005. A commitment fee of 10% of the face amount of
the Convertible Debentures was paid at the time of each advance on the
Convertible Debentures. Such commitment fees were credited against commitment
fees due and owing against the Note. The balance of the commitment fee against
the Note was paid on February 28, 2005, at the time that such $140,000 was
advanced to the Company.
The Promissory Note bears interest at the rate of 12% per annum.
Principal on the Note will be amortized in equal weekly installments of
$10,000 commencing on July 4, 2005. Payments of interest shall commence on
September 1, 2005 and shall continue on the first day of each calendar month
thereafter until the principal is paid in full. Payment in full of the
principal and interest on the Note is due on or before July 4, 2006. In the
event all principal and interest has not been paid by the one year
anniversary of the initial payment on July 4, 2005, in accordance with the
amortization schedule described above, the Company will make a lump sum
payment of all outstanding interest and principal on July 4, 2006.
On February 28, 2005, the iVoice, Inc. agreed to provide Cornell
Capital Partners a full and unconditional guaranty of the payment and
performance obligations of iVoice Technology under the promissory note,
which cannot be discharged, except as specifically provided in the
promissory note and the related documents. Under the guaranty, if iVoice
Technology defaults in payment or performance of any of its obligations under
the promissory note, iVoice, Inc. is required to pay or perform such
obligations upon two days' written notice or demand by the holders of the
promissory notes and to take an advance or advances, as may be necessary,
from the Standby Equity Distribution Agreement by and between iVoice and
Cornell Capital Partners, LP. Notwithstanding anything to the contrary, this
Guaranty shall be discharged and terminated on the date that iVoice
Technology's registration statement in connection with the Distribution is
declared effective by the U.S Securities and Exchange Commission.
Effective August 12, 2004, iVoice Technology entered into a Standby
Equity Distribution Agreement with Cornell Capital Partners to obtain an
equity line of credit. Under this agreement, iVoice Technology may issue and
sell to Cornell Capital Partners Class A Common Stock for a total purchase
price of up to $10.0 million. Effective February 28, 2005, iVoice
Technology, Inc. terminated its Standby Equity Distribution Agreement, dated
August 2004, entered into by and between the Company and Cornell Capital
Partners, LLP. On March 9, 2005, the Company executed a non-binding letter
agreement with Cornell Capital Partners LLP whereby the parties agreed
subject to the satisfaction of certain conditions to enter into a Standby
Equity Distribution Agreement following the date that the Company's
registration statement on Form SB-2, as filed with the Securities and
Exchange Commission on November 2004, is deemed effective by that agency.
Subject to various conditions, the non-binding letter of commitment provides
that, upon execution of definitive documents and the satisfaction of any
conditions that may be set forth in such documents iVoice Technology will be
entitled to commence drawing funds under this
F-16
iVOICE TECHNOLOGY, INC
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
agreement when the resale of the Class A Common Stock issuable under the
equity line of credit is registered with the Securities and Exchange
Commission, and the equity line of credit will remain outstanding for two
years thereafter. The non-binding letter of commitment provides that purchase
price for the shares will be equal to 95% of the market price, which is
defined as the lowest closing bid price of the Class A Common Stock during the
five trading days following the date that iVoice Technology delivers to
Cornell Capital Partners a notice requiring it to advance funds to the
Company. A cash fee equal to six percent (6%) of the cash proceeds of the draw
down is also payable at the time of funding. In addition, non-binding letter
of commitment provides that Cornell Capital Partners will receive, as
additional compensation, the number of shares of Class A Common Stock equal to
one and one half percent (1.5%) of the number of shares of Class A Common
Stock outstanding on the date that the registration statement in respect of
the shares to be distributed pursuant to the equity line of credit becomes
effective. To date, iVoice Technology has not drawn down on the equity line of
credit.
According to the registration statement for the distribution of the iVoice
Technology Class A Common Stock, a 100,500-for-one stock split was accomplished
by means of a stock dividend effectuated immediately prior to the effective date
of the registration statement. The Company has retroactively restated the shares
outstanding at December 31, 2004 for this stock split.
F-17
iVOICE TECHNOLOGY, INC.
BALANCE SHEET
(Unaudited)
March 31
2005
-----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 434,236
Accounts receivable 59,809
-----------
Total current assets 494,045
PROPERTY AND EQUIPMENT, net
Property and equipment, net 4,714
-----------
TOTAL ASSETS $ 498,759
===========
LIABILITIES AND OWNER'S EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 69,962
Notes payable 700,000
Deferred maintenance contracts 45,049
-----------
Total current liabilities 815,011
OWNER'S EQUITY (DEFICIENCY)
Preferred stock, par value $1;
Authorized 1,000,000 shares; no shares
issued and outstanding 0
Common Stock
Class A, no par value; Authorized 10,000,000,000
shares; 10,050,0000 issued and outstanding 0
Class B, par value $.01; Authorized 50,000,000
shares; no shares issued and outstanding 0
Class C, par value $.01; Authorized 20,000,000 shares;
no shares issued and outstanding 0
Net investment, iVoice, Inc. 7,297,231
Accumulated deficit (7,613,483)
-----------
Total owner's equity (deficiency) (316,252)
-----------
TOTAL LIABILITIES AND OWNER'S EQUITY $ 498,759
===========
The Notes to the Unaudited Financial Statements are an integral part
of these statements.
F-18
iVOICE TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
For The Three Months Ended March 31, 2005 and 2004
(Unaudited)
2005 2004
----------- -----------
SALES, net $ 53,861 $ 66,234
COST OF SALES 738 26,434
----------- -----------
GROSS PROFIT 53,123 39,800
----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
Selling expenses 1,864 22,338
General & administrative expense 105,973 246,692
Research & development 0 21,586
Depreciation & amortization 23 22,700
----------- -----------
Total Selling, General & 107,860 313,316
Administrative expenses
----------- -----------
LOSS FROM CONTINUING OPERATIONS (54,737) (273,516)
----------- -----------
OTHER INCOME (EXPENSE)
Other income 796 19,623
Write off of financing costs (14,000) (788,831)
Interest expense (7,633) (5,587)
----------- -----------
Total other income (expense) (20,837) (774,795)
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (75,574) (1,048,311)
----------- -----------
PROVISION FOR INCOME TAXES 0 0
----------- -----------
NET LOSS FROM CONTINUING OPERATIONS $ (75,574) $(1,048,311)
=========== ===========
PRO FORMA NET LOSS PER COMMON SHARE:
Basic $ ( .01) $( .10)
=========== ===========
Diluted $ ( .01) $( .10)
=========== ===========
Average weighted common shares 10,050,000 10,050,000
=========== ===========
The Notes to the Unaudited Financial Statements are an integral part of these
statements.
F-19
iVOICE TECHNOLOGY, INC.
STATEMENTS OF CASH FLOW
For The Three Months Ended March 31, 2005 and 2004
(Unaudited)
2005 2004
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (75,574) $(1,048,311)
Depreciation and amortization 23 22,700
Bad Debt Expense
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (28,076) 31,249
Decrease in inventory -- 2,354
Decrease in cost in excess of billing -- 1,555
Increase in accounts payable and accrued
expenses 39,356 --
Increase (decrease) in deferred maintenance
contracts 11,908 (13,622)
----------- -----------
Net cash (used in) operating activities (52,363) (1,004,075)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Allocation of costs by iVoice -- 1,004,075
Sale of convertible debentures 140,000 --
----------- -----------
Net cash provided by financing activities 140,000 1,004,075
----------- -----------
NET INCREASE IN CASH 87,637 0
CASH - Beginning of period 346,599 0
----------- -----------
CASH - End of period $ 434,236 $ 0
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest expense $ 0 $ 0
=========== ===========
Income taxes $ 0 $ 0
=========== ===========
The Notes to the Unaudited Financial Statements are an integral part of these
statements.
F-20
iVOICE TECHNOLOGY, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 1 - BACKGROUND
The unaudited interim financial statements included herein have been
prepared by iVoice Technology, Inc., without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted as
allowed by such rules and regulations, and the Company believes that the
disclosures are adequate to make the information presented not misleading. It
is suggested that these financial statements be read in conjunction with the
December 31, 2004 audited financial statements and the accompanying notes
thereto. While management believes the procedures followed in preparing these
financial statements are reasonable, the accuracy of the amounts are in some
respects dependent upon the facts that will exist, and procedures that will
be accomplished by the Company later that year.
The management of the Company believes that the accompanying unaudited
financial statements contain all adjustments (including normal recurring
adjustments) necessary to present fairly the operations and cash flows for
the periods presented.
iVoice Technology, Inc. ("iVoice Technology" or the "Company") was
incorporated under the laws of New Jersey on November 10, 2004 as a wholly
owned subsidiary of iVoice, Inc. ("iVoice"). The Company received by
assignment all of the interests in and rights and title to, and assumed all
of the obligations of, all of the agreements, contracts, understandings and
other instruments of iVoice Technology, Inc., a Nevada corporation and
affiliate of the Company. When we refer to or describe any agreement,
contract or other written instrument of the Company in these notes, we are
referring to an agreement, contract or other written instrument that had been
entered into by iVoice Technology Nevada and assigned to the Company.
On September 1, 2004, the Board of Directors of iVoice, Inc. resolved
to pursue the separation of iVoice software business into three publicly
owned companies. iVoice will continue to focus on its own computerized
telephony technology and related business development operations. iVoice
Technology will continue to develop, market and license the Interactive Voice
Response line of computerized telephony software.
The spin-off transaction will be accomplished by the distribution of
certain intellectual property, representing the software codes of Interactive
Voice Response ("IVR"), and certain accrued liabilities and related party
debt to iVoice Technology (the "Distribution"), the shares of common stock of
which will be distributed to iVoice shareholders in the form of a taxable
dividend.
In conjunction with the spin-off, iVoice Technology has entered into a
temporary administrative services agreement with iVoice. The administrative
services agreement will continue on a month to month basis until iVoice
Technology has found replacement services for those services being provided
by iVoice or can provide these services for itself.
F-21
iVOICE TECHNOLOGY, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
iVoice Technology also intends to assume $190,000 in accrued
liabilities and related party debt presently outstanding and incurred by
iVoice. The debt being assumed will be convertible into Class B Common Stock
of iVoice Technology at the option of the holder as later described in these
notes.
NOTE 2 - BUSINESS OPERATIONS
The Company will continue to develop, market and license the
Interactive Voice Response line, which was developed by iVoice. The Company's
Interactive Voice Response line is designed to read information from and
write information to, databases, as well as to query databases and return
information.
IVR is an application generator that allows full connectivity to many
databases, including Microsoft Access, Microsoft Excel, Microsoft Fox Pro,
and Paradox, or to standard text files. The IVR software is sold as an
application generator that gives the end user the ability to develop their
own customized IVR applications or as a customized turnkey system. IVR
performs over 40 different customizable commands. Examples of IVR range from
simply selecting announcements from a list of options stored in the computer
(also known as audio text) to more complex interactive exchanges such as
querying a database for information.
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America, which contemplates continuation of the Company as a going concern.
The Company has traditionally operated as a non-reporting component of
iVoice, Inc. and accordingly these financial statements have been derived
from the consolidated financial statements and accounting records of iVoice,
Inc., and reflect significant assumptions and allocations. The Company relies
on iVoice, Inc. for administrative, management, research and other services.
These financial statements do not necessarily reflect the financial position,
results of operations, and cash flows of the Company had it been a
stand-alone Company.
As of March 31, 2005, the Company had a net loss, a negative cash flow
from operations as well as negative working capital. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Therefore, recoverability of a major portion of the recorded asset amounts
shown in the accompanying balance sheets is dependent upon continued
operations of the Company, which in turn, is dependent upon the Company's
ability to raise capital and/or generate positive cash flow from operations.
In order to provide necessary working capital, in August 2004, the
Company entered into a subscription agreement, pursuant to which the Company
issued $280,000 of secured convertible debentures in August 2004, and an
additional $280,000 of secured convertible debentures, in November 2004,
around the time of filing of the registration statement for the Class A
Common Stock and an additional $140,000 of secured convertible debentures in
February 2005. On February 28, 2005, convertible debentures equal
F-22
iVOICE TECHNOLOGY, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
in principal to $560,000 were terminated and replaced with a secured
promissory note in the amount of $700,000 ($560,000 representing replacement
notes and $140,000 representing new financing).
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the
Company cannot continue in existence.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The accompanying financial statements have been derived from the
consolidated financial statements and accounting records of iVoice using the
historical results of operations and historical basis of assets and
liabilities of the Company's Interactive Voice Response business. Management
believes the assumptions underlying the financial statements are reasonable.
However, the financial statements included herein may not necessarily reflect
the Company's results of operations, financial position, and cash flows in
the future or what its results of operations, financial position and cash
flows would have had the Company been a stand-alone company during the
periods presented.
b) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
c) Software License Costs
Software license costs are recorded at cost, which approximates fair
market value as of the date of purchase. These costs represent the purchase
of various exploitation rights to certain software, pre-development codes and
systems developed by a non-related third party. These costs are capitalized
pursuant to Statement of Financial Accounting Standards ("SFAS") 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed". The Company has adopted SFAS No. 121. The carrying value
of software license costs are regularly reviewed by the Company and a loss
would be recognized if the value of the estimated un-discounted cash flow
benefit related to the asset falls below the unamortized cost. Historically
the Interactive Voice Response software technology has produced limited sales
revenue. However, management believes that the limited sales generated result
from a lack of application of Company sales and marketing resources to the
software, It is Management's plan to devote such resources to its software
technology to recognize the technology's potential value and therefore, no
impairment loss has been recorded.
F-23
iVOICE TECHNOLOGY, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
d) Revenue Recognition
The Company derives its revenues from the licensing of its software
product and optional customer support (maintenance) service. The Company's
standard license agreement provides for a one-time fee for use of the
Company's product in perpetuity for each computer or CPU in which the
software will reside. The Company's software application is fully functional
upon delivery and implementation and does not require any significant
modification or alteration. The Company also offers customers an optional
annual software maintenance and support agreement for the subsequent one-year
periods. Such maintenance and support services are free for the first year
the product is licensed and is considered the warranty period. The software
maintenance and support agreement provides free software updates, if any, and
technical support the customer may need in deploying or changing the
configuration of the software. Generally, the Company does not license its
software in multiple element arrangements whereby the customer purchases a
combination of software and maintenance. In a typical arrangement, software
maintenance services are sold separately from the software product; are not
considered essential to the functionality of the software and are purchased
at the customer's option upon the completion of the first year licensed.
The Company does not offer any special payment terms or significant
discount pricing. Normal and customary payment terms require payment for the
software license fees when the product is shipped. Payment for software
maintenance is due prior to the commencement of the maintenance period. It is
also the Company's policy to not provide customers the right to refund any
portion of its license fees. The Company accepts Visa and MasterCard as well
as company checks.
With respect to the sale of software license fees, the Company
recognizes revenue in accordance with Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2), as amended, and generally recognizes revenue
when all of the following criteria are met: (1) persuasive evidence of an
arrangement exists generally evidenced by a signed, written purchase order
from the customer, (2) delivery of the software product on Compact Disk (CD)
or other means to the customer has occurred, (3) the perpetual license fee is
fixed or determinable and (4) collectibility, which is assessed on a
customer-by-customer basis, is probable.
With respect to customer support services, upon the completion of one
year from the date of sale, considered to be the warrantee period, the
Company offers customers an optional annual software maintenance and support
agreement for subsequent one-year periods. Sales of purchased maintenance and
support agreements are recorded as deferred revenue and recognized over the
respective terms of the agreements.
e) Product Warranties
The Company estimates its warranty costs based on historical warranty
claims experience in estimating potential warranty claims. Due to the limited
sales of the Company's products, management has determined that warranty
costs are immaterial and has not included an accrual for potential warranty
claims. Presently, costs related to
F-24
iVOICE TECHNOLOGY, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
warranty coverage are expensed as incurred. Warranty claims are reviewed
quarterly to verify that warranty liabilities properly reflect any remaining
obligation based on the anticipated expenditures over the balance of the
obligation period.
f) Research and development costs
Research and development costs will be charged to operations as
incurred.
g) Inventory
Inventory, consisting primarily of system components such as computer
components, voice cards, and monitors, is valued at the lower of cost or
market. Cost is determined on a first-in, first-out basis.
h) Income Taxes
The Company accounts for income taxes under the Financial Accounting
Standards Board ("FASB") of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" ("Statement 109"). Under Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
Upon completion of the spin-off the Company will have access to
approximately $7,600,000 net operating loss allocated to the IVR software
business contained in these financial statements.
i) Organization Costs
Organization costs consist primarily of professional and filing fees
relating to the formation of the Company. These costs have been expensed.
j) Earnings Per Share
SFAS No. 128, "Earnings Per Share" requires presentation of basic
earnings per share ("basic EPS") and diluted earnings per share ("diluted
EPS").
The computation of basic pro forma EPS is computed by dividing income
available to common shareholders by the expected number of shares to be
issued in connection with the Company's proposed spin-off from iVoice, Inc.
Diluted earnings per share gives effect to all dilutive potential Common
shares outstanding during the period. The computation of diluted EPS does not
assume conversion, exercise or contingent exercise of securities that would
have an anti-dilutive effect on earnings resulting from the Company's net
loss position. Since the earnings per share information is being shown
F-25
iVOICE TECHNOLOGY, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
on a pro forma basis, only the most recent year has been presented. The shares
used in the computation are as follows:
As of March 31, As of March 31,
2005 2004
-------------- ---------------
Pro Forma Basis and diluted purposes 10,050,000 10,050,000
k) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its components in
the financial statements. The items of other comprehensive income that are
typically required to be displayed are foreign currency items, minimum
pension liability adjustments, and unrealized gains and losses on certain
investments in debt and equity securities, As of March 31, 2005 and 2004, the
Company has no items that represent comprehensive income, and thus, has not
included a statement of comprehensive income.
l) Recent Accounting Pronouncements
In December 2003, the FASB issued Interpretation No. 46-R,
"Consolidation of Variable Interest Entities" ("FIN 46-R"). FIN 46-R, which
modifies certain provisions and effective dates of FIN No. 46, sets forth
criteria to be used in determining whether an investment in a variable
interest entity should be consolidated, and is based on the general premise
that companies that control another entity through interests other than
voting interests should consolidate the controlled entity. The provisions of
FIN 46 became effective for the Company during the third quarter of fiscal
2004. The adoption of this new standard did not have any impact on the
Company's financial position, results of operations or cash flows.
In December 2003, the FASB issued a revision to SFAS No. 132
"Employers' Disclosures about Pensions and Other Post retirement Benefits."
This revised statement requires additional annual disclosures regarding types
of pension plan assets, investment strategy, future plan contributions,
expected benefit payments and other items. The statement also requires
quarterly disclosure of the components of net periodic benefit cost and plan
contributions. This currently has no effect on the Company.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards,
stock appreciation rights, and employee share purchase plans. The provisions
of SFAS 123R are effective for small business issuers as of the first interim
period that begins after December 15, 2005. Accordingly, the Company will
implement the revised standard in the fourth quarter of fiscal year 2005.
Currently, the Company accounts for its share-based payment transactions
under the
F-26
iVOICE TECHNOLOGY, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
provisions of APB 25, which does not necessarily require the recognition of
compensation cost in the financial statements (note 3(d)). Management is
assessing the implications of this revised standard, which may materially
impact the Company's results of operations in the fourth quarter of fiscal
year 2005 and thereafter.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of software source codes originally purchased
by iVoice for $454,000 in May 1999. The asset is reflected at its original
cost net of accumulated amortization of $454,000, from the date acquired by
iVoice. The asset was amortized over a 5-year period.
In accordance with FAS 142 goodwill and indefinite-lived intangible
assets are reviewed for impairment at least annually, and whenever events or
changes in circumstances indicate the carrying amounts of the assets may be
impaired. We have elected to perform our impairment review during the fourth
quarter of each year, in conjunction with our annual planning cycle. At March
31, 2005, we found no impairment of goodwill or other indefinite-lived
intangible assets.
NOTE 6 - RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2004 iVoice allocated operating
costs of $1,004,075 to iVoice Technology. These allocations are reflected in
the selling, general and administrative, cost of revenue, research and
development, and other income (expense) line items in our statements of
operations. The general corporate expense allocation is primarily for cash
management, selling expense, legal, accounting, tax, insurance, public
relations, advertising, and human resources. The amortization of the
Interactive Voice Response software has been reflected as cost of sales.
Other general categories of operating expense, as well as other income and
expense, have been allocated to iVoice Technology by iVoice based upon a
ratio of revenue of the Interactive Voice Response software over total iVoice
revenue for the applicable periods. Management believes the costs of these
services charged are a reasonable representation of the costs that would have
been incurred if iVoice Technology had performed these functions as a
stand-alone company.
In conjunction with the spin-off, iVoice Technology has entered into a
temporary administrative services agreement with iVoice. The administrative
services agreement will continue on a month to month basis until iVoice
Technology has found replacement services for those services being provided
by iVoice or can provide these services for itself.
F-27
iVOICE TECHNOLOGY, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
NOTE 7 - INCOME TAXES
The reconciliation of the effective income tax rate to the Federal
Statutory rate is as follows:
Federal Income Tax Rate (34.0)%
Deferred Tax charge (Credit) 0.0 %
Effect on Valuation Allowance 38.1 %
State Income Tax, Net of Federal Benefits ( 4.1)%
Effective Income Tax Rate 0.0 %
Prior to the spin-off, the Company was included as part of iVoice's
consolidated federal income tax return. The Company has provided for a 100%
allowance of its deferred tax assets.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
As discussed in Note 3, the Company has entered into a subscription
agreement with certain purchasers for the sale of $700,000 in convertible
debentures. The debentures will be convertible into Class A Common Stock at
the discretion of the holders only after the Company's Class A Common Stock
has commenced trading on the Over-the-Counter Bulletin Board. Additionally,
the Company had entered into a Standby Equity Distribution Agreement whereby
the Company, at their discretion, may periodically sell to an investor shares
of Class A Common Stock to raise capital to fund its working capital needs.
These transactions will require the Company to register its common stock under
Section 12(g) of the Securities Exchange Act of 1934 and subsequently register
for resale a number of shares to facilitate these financial transactions. On
February 28, 2005, the Standby Equity Distribution Agreement was terminated.
The Company has obtained a non-binding commitment for a Standby Equity
Distribution Agreement whereby the Company, at its discretion, may
periodically sell to an investor shares of Class A Common Stock to raise
capital to fund its working capital needs. This transaction will require the
Company to register its Class A Common Stock for resale to facilitate this
financial transaction.
On February 28, 2005, convertible debentures equal in principal to
$560,000 were terminated and replaced with a secured promissory note in the
amount of $700,000 ($560,000 representing replacement notes and $140,000
representing new financing).
The Company will also assume an outstanding promissory note in the
amount of $190,000 payable to Jerry Mahoney, President and Chief Executive
Officer of iVoice and Non-Executive Chairman of the Board of iVoice
Technology. This amount is related to funds loaned to iVoice and is unrelated
to the operations of iVoice Technology. The note will bear interest at the
rate of Prime plus 2.0% per annum on the unpaid balance until paid. Under the
terms of the Promissory Note, at the option of the Note holder, principal and
interest can be converted into either (i) one share of Class B Common Stock
of iVoice Technology, Inc., par value $.01, for each dollar owed, (ii) the
number of shares of Class A Common Stock of iVoice Technology, Inc.
calculated by dividing (x) the sum of the principal and interest that the
Note holder has requested to have prepaid by (y) eighty percent (80%) of the
lowest issue price of Class A Common Stock since the first advance of funds
under this Note, or (iii) payment of the principal of this Note, before any
repayment of interest.
F-28
iVOICE TECHNOLOGY, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
Effective August 1, 2004, the Company entered into a one year
employment contract with Arie Seidler, its President and Chief Executive
Officer. The Company will pay Mr. Seidler a base salary of $40,000 during
the term. Mr. Seidler can earn bonuses based on the Company achieving
certain levels of sales and profitability and will also be entitled to
certain bonuses based on mergers and acquisitions completed by the Company.
The Company entered into a five-year employment agreement with Jerome
Mahoney, its non-executive Chairman of the Board of Directors, effective
August 1, 2004. The Company will compensate Mr. Mahoney with a base salary
of $85,000 for the first year with annual increases based on the Consumer
Price Index. Mr. Mahoney will also be entitled to certain bonuses based on
mergers and acquisitions completed by the Company.
In conjunction with the various spin-offs, iVoice Technology has
entered into temporary administrative services agreement with iVoice. The
administrative services agreements will continue on a month-to- month basis
until these companies have found replacement services for those services
being provided by iVoice or can provide these services for itself.
NOTE 9 - CAPITAL STOCK
Pursuant to iVoice Technology's certificate of incorporation, as
amended, the Company is authorized to issue 10,000,000,000 shares of Class A
Common Stock, no par value per share, 50,000,000 shares of Class B Common
Stock, par value $0.01 per share, 20,000,000 shares of Class C Common Stock,
par value $0.01 per share, and 1,000,000 shares of Preferred Stock, par value
of $1.00 per share. Below is a description of iVoice Technology's
outstanding securities, including Class A Common Stock, Class B Common Stock,
Class C Common Stock, and Preferred Stock.
a) Class A Common Stock
As of March 31, 2005, there are 10,000,000,000 shares of Class A Common
Stock authorized, no par value, and 100 shares were issued and outstanding.
Subsequent to March 31, 2005, upon the registration statement becoming
effective, the Company's proposed 100,500-for-one stock split retroactively
increased the shares to 10,050,000.
Each holder of Class A Common Stock is entitled to receive ratably
dividends, if any, as may be declared by the Board of Directors out of funds
legally available for payment of dividends. The Company has never paid any
dividends on its common stock and does not contemplate doing so in the
foreseeable future. The Company anticipates that any earnings generated from
operations will be used to finance its growth objectives.
b) Class B Common Stock
As of March 31, 2005, there are 50,000,000 shares of Class B Common
Stock authorized, par value $.01 per share. Each holder of Class B Common
Stock has voting rights equal to 100 shares of Class A Common Stock. A holder
of Class B Common Stock has the right to convert each share of Class B Common
Stock into the number of shares of Class A Common Stock determined by
dividing the number of Class B
F-29
iVOICE TECHNOLOGY, INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
Common Stock being converted by a 20% discount of the lowest price that iVoice
Technology, Inc. had ever issued its Class A Common Stock. Upon our
liquidation, dissolution, or winding-up, holders of Class B Common Stock will
be entitled to receive distributions. As of March 31, 2005, no shares were
issued or outstanding.
c) Class C Common Stock
As of March 31, 2005, there are 20,000,000 shares of Class C Common
Stock authorized, par value $.01 per share. Each holder of Class C Common
Stock is entitled to 1,000 votes for each share held of record. Shares of
Class C Common Stock are not convertible into Class A Common Stock. Upon
liquidation, dissolution or wind-up, the holders of Class C Common Stock are
not entitled to receive our net assets pro rata. As of March 31, 2005, no
shares were issued or outstanding.
d) Preferred Stock
iVoice Technology is authorized to issue 1,000,000 shares of Preferred
Stock, par value $1.00 per share. As of March 31, 2005, iVoice Technology
has not issued any shares of Preferred Stock.
F-30
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed statements of operations for the
three months ended March 31, 2005 the years ended December 31, 2004 and 2003
and the unaudited pro forma condensed balance sheets at March 31, 2005 and
December 31, 2004 present the results of operations and financial position of
iVoice Technology, Inc., assuming that the transactions contemplated by the
spin-off had been completed as of the beginning of 2003 with respect to the
pro forma consolidated income statements for the three months ended March 31,
2005, and the years ended December 31, 2004 and 2003 for the year ended
December 31, 2004 with respect to the pro forma consolidated balance sheet.
The pro forma adjustments give effect of a spin-off transaction whereby
shareholders of the Company's former parent, iVoice Inc., will receive a
pro-rata distribution of the Company's shares in the form of a taxable
dividend. Under the spin-off transaction, the Company will receive certain
intellectual property and liabilities of the Company's former parent, iVoice,
Inc. In the opinion of management, they include all material adjustments
necessary to reflect, on a pro forma basis, the impact of transactions
contemplated by the spin-off on the historical financial information of
iVoice Technology, Inc.
The pro forma financial information is presented for informational purposes
and does not purport to represent what our financial position and our results
of operations actually would have been had the separation and related
transactions occurred on the dates indicated. Actual results might have
differed from pro forma results if iVoice Technology had operated
independently. The pro forma financial information should not be relied upon
as being indicative of results iVoice Technology would have had or of future
results after the spin-off. The historical selected financial information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the combined financial
statements and notes thereto included elsewhere in this prospectus.
F-31
CONDENSED UNAUDITED PRO FORMA BALANCE SHEET
(UNAUDITED)
AS OF DECEMBER 31, 2004
As Pro Forma
Reported Adjustments Pro Forma
-------- ----------- ---------
Current Assets
Cash $ 346,599 $ -- $ 346,599
Accounts Receivable 31,733 -- 31,733
--------- --------- ---------
Total Current Assets 378,332 -- 378,332
--------- --------- ---------
Property and Equipment, net 4,737 -- 4,737
--------- --------- ---------
Total Assets $ 383,069 $ -- $ 383,069
========= ========= =========
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable and accrued liabilities: 30,606 -- 30,606
Due to related party -- 190,000 190,000
Convertible debentures 560,000 -- 560,000
Deferred maint contracts 33,141 -- 33,141
--------- --------- ---------
Total current liabilities 623,747 190,000 813,747
Stockholder's deficit (240,678) (190,000) (430,678)
--------- --------- ---------
Total Liabilities and Stockholder's Deficit $ 383,069 $ -- $ 383,069
========= ========= =========
See accompanying Notes to Condensed Unaudited Pro Forma Financial Information.
F-32
CONDENSED UNAUDITED PRO FORMA BALANCE SHEETS
(UNAUDITED)
AS OF MARCH 31, 2005
As Pro Forma
Reported Adjustments Pro Forma
-------- ----------- ---------
Current Assets
Cash $ 434,236 $ -- $ 434,236
Accounts Receivable 59,809 -- 59,809
----------- ----------- -----------
Total Current Assets 494,045 -- 494,045
----------- ----------- -----------
Property and Equipment, net 4,714 -- 4,714
----------- ----------- -----------
Total Assets $ 498,759 $ -- $ 498,759
=========== =========== ===========
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable and accrued liabilities: 69,962 -- 69,962
Due to related party -- 190,000 190,000
Convertible debentures 700,000 -- 700,000
Deferred maint contracts 45,049 -- 45,049
----------- ----------- -----------
Total current liabilities 815,011 190,000 1,005,011
Stockholder's deficit (316,252) (190,000) (506,252)
----------- ----------- -----------
Total Liabilities and Stockholder's Deficit $ 498,759 $ -- $ 498,759
=========== =========== ===========
See accompanying Notes to Condensed Unaudited Pro Forma Financial Information.
F-33
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 2004
As Pro Forma
Reported Adjustments Pro Forma
-------- ----------- ---------
Sales, net $ 239,114 $ -- $ 239,114
Cost of Sales 72,870 -- 72,870
----------- ----------- -----------
Gross Profit 166,244 -- 166,244
Selling General and Administrative Expenses 863,456 49,000 912,456
----------- ----------- -----------
Loss from Operations (697,212) (49,000) (746,212)
Other Income (Expense) (780,915) (12,350) (793,265)
----------- ----------- -----------
Loss before Income Taxes (1,478,127) (61,350) (1,539,477)
Provision for Income Taxes -- -- --
----------- ----------- -----------
Net Loss $(1,478,127) $ (61,350) $(1,539,477)
=========== =========== ===========
Net Loss Per Common Share:
Basic $ (0.15)
===========
Diluted $ (0.15)
===========
See accompanying Notes to Condensed Unaudited Pro Forma Financial Information.
F-34
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED DECEMBER 31, 2003
As Pro Forma
Reported Adjustments Pro Forma
----------- ----------- -----------
Sales, net $ 303,756 $ -- $ 303,756
Cost of Sales 123,091 -- 123,091
----------- ----------- -----------
Gross Profit 180,665 -- 180,665
Selling General and Administrative Expenses 965,341 84,000 1,049,341
----------- ----------- -----------
Income (Loss) from Operations (784,676) (84,000) (868,676)
Other Income (Expense) (346,744) (12,350) (359,094)
----------- ----------- -----------
Loss before Income Taxes (1,131,420) (96,350) (1,227,770)
Provision for Income Taxes -- -- --
----------- ----------- -----------
Net Loss $(1,131,420) $ (96,350) $(1,227,770)
=========== =========== ===========
Net Loss Per Common Share:
Basic $ (0.12)
===========
Diluted $ (0.12)
===========
See accompanying Notes to Condensed Unaudited Pro Forma Financial Information.
F-35
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2005
As Pro Forma
Reported Adjustments Pro Forma
-------- ----------- ---------
Sales, net $ 53,861 $ -- $ 53,861
Cost of Sales 738 -- 738
--------- --------- ---------
Gross Profit 53,123 -- 53,123
Selling General and Administrative Expenses 107,860 -- 107,860
--------- --------- ---------
Income (Loss) from Operations (54,737) -- (54,737)
Other Income (Expense) (20,837) (3,088) (23,925)
--------- --------- ---------
Loss before Income Taxes (75,574) (3,088) (78,662)
Provision for Income Taxes -- -- --
--------- --------- ---------
Net Loss $ (75,574) $ (3,088) $ (78,662)
========= ========= =========
Net Loss Per Common Share:
Basic $ (0.01)
=========
Diluted $ (0.01)
=========
See accompanying Notes to Condensed Unaudited Pro Forma Financial Information.
F-36
NOTES TO CONDENSED UNAUDITED PRO FORMA FINANCIAL
INFORMATION
NOTE 1.
The historical financial statements of iVoice Technology, Inc. reflect
periods during which iVoice Technology did not operate as a separate,
independent public company. Certain estimates, assumptions and allocations
were made in preparing such financial statements. Therefore, the historical
financial statements do not necessarily reflect the results of operations or
financial position that would have occurred had iVoice Technology been a
separate, independent public company during the periods presented, nor are
they indicative of future performance.
Management believes that the estimates, assumptions and allocations made in
preparing the historical financial statements are reasonable.
NOTE 2.
The pro forma unaudited balance sheet was prepared assuming the distribution
occurred on December 31, 2004 and includes "Pro Forma Adjustments" for
transactions that occurred subsequent to December 31, 2003 as follows:
a) The Company is assuming an outstanding promissory note in the
amount of $190,000 payable to Jerry Mahoney, President and Chief
Executive Officer of iVoice. The note will bear interest at the
rate of prime plus 2.0% per annum on the unpaid balance until
paid or until default. Under the terms of the Promissory Note, at
the option of the Note holder, principal and interest can be
converted into either (i) one Class B common stock share of
iVoice Technology, Inc., par value $.01, for each dollar owed,
(ii) the number of Class A common stock shares of iVoice
Technology, Inc. calculated by dividing (x) the sum of the
principal and interest that the Note holder has requested to have
prepaid by (y) eighty percent (80%) of the lowest issue price of
Class A common stock since the first advance of funds under this
Note, or (iii) payment of the principal of this Note, before any
repayment of interest.
The pro forma unaudited balance sheet was prepared assuming the distribution
occurred on March 31, 2005 and includes "Pro Forma Adjustments" for
transactions that occurred subsequent to December 31, 2003 as follows:
a) The Company is assuming an outstanding promissory note in the
amount of $190,000 payable to Jerry Mahoney, President and Chief
Executive Officer of iVoice. The note will bear interest at the
rate of prime plus 2.0% per annum on the unpaid balance until
paid or until default. Under the terms of the Promissory Note,
at the option of the Note holder, principal and interest can be
converted into either (i) one Class B common stock share of
iVoice Technology, Inc., par value $.01, for each dollar owed,
(ii) the number of Class A common stock shares of iVoice
Technology, Inc. calculated by dividing (x) the sum of the
principal and interest that the Note holder has requested to have
prepaid by (y) eighty percent (80%) of the lowest issue price of
Class A common stock since the first advance
F-37
of funds under this Note, or (iii) payment of the principal of
this Note, before any repayment of interest.
NOTE 3.
The pro forma unaudited statement of operations for the year ended December
31, 2004 was prepared assuming the distribution occurred on January 1, 2003
and includes "Pro Forma Adjustments" for transactions that would have
occurred subsequent to January 1, 2003 as follows:
a) $49,000 in administrative services provided by iVoice, Inc.
pursuant to an administrative service agreement between iVoice
Technology and iVoice, Inc.
b) $12,350 in interest at 6.5% per annum on $190,000 in outstanding
amounts due to a related party being assumed by iVoice Technology.
The pro forma unaudited statement of operations for the year ended December
31, 2003 was prepared assuming the distribution occurred on January 1, 2003
and includes "Pro Forma Adjustments" for transactions that would have
occurred subsequent to January 1, 2003 as follows:
a) $84,000 in administrative services provided by iVoice, Inc.
pursuant to an administrative service agreement between iVoice
Technology and iVoice, Inc. The administrative services agreement
sets forth charges generally intended to allow the providing
company to fully recover the allocated direct costs of providing
the services, plus all out-of-pocket costs and expenses. In
conjunction with the spin-off, iVoice Technology has entered into
a temporary administrative service agreement with iVoice. The
administrative services agreement will continue on a month to
month basis until iVoice Technology has found replacement
services for those services being provided by iVoice or can
provide these services for itself.
b) $12,350 in interest at 6.5% per annum on $190,000 in outstanding
amounts due to a related party being assumed by iVoice
Technology.
The pro forma unaudited statement of operations for the three months ended
March 31, 2005 was prepared assuming the distribution occurred on January 1,
2003 and includes "Pro Forma Adjustments" for transactions that would have
occurred subsequent to January 1, 2003 as follows:
a) $3,088 in interest at 6.5% per annum on $190,000 in outstanding
amounts due to a related party being assumed by iVoice Technology.
NOTE 4.
The average number of shares of iVoice Technology common stock used in the
computation of basic and diluted net income per share was 10,050,000 for the
three months ended March 31, 2005 and for the years ended December 31, 2004
and 2003, based on a distribution ratio of one
F-38
share of iVoice Technology Class A common stock for every 988 shares of iVoice
common stock. Since the Company is in a net loss position, all common stock
equivalents are considered anti-dilutive and are therefore not included in the
calculation of earnings per share.
F-39
All dealers that effect transactions
in these securities, whether or not
participating in this offering may be
required to deliver a prospectus. This is
in addition to the dealers' obligation to iVoice Technology, Inc.
deliver a prospectus when acting as
underwriters and with respect to their
unsold allotments or subscription. The 10,050,000 Shares of
information contained in this prospectus Class A Common Stock
is current only as of its date.
____________________
____________________
TABLE OF CONTENTS
Page [LOGO]
----
Prospectus Summary............... 2
Summary of the Distribution...... 5
Summary Condensed Financial
Information.................... 10
Potential Dilution Due to
Conversion at Below Market
Price.......................... 11
Risk Factors..................... 12 Date: August 4, 2005
Cautionary Statement Regarding
Forward-Looking Statements..... 28
Use of Proceeds.................. 28
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... 28
Our Business..................... 40
iVoice Technology's Management... 46
Certain Relationships and
Related Transactions........... 50
Principal Stockholders........... 52
Description of Securities ....... 53
The Distribution................. 56
Federal Income Tax Consequences
of the Distribution............ 61
Changes in Accountants........... 62
Reasons for Furnishing this
Document....................... 63
Relationship between iVoice
and iVoice Technology following
the Distribution............... 63
Where You Can Find More
Information.................... 63
Index to Financial Statements.... F-1
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