-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PRhN6MuiW5tMOLPcJaGv0pJpV5ZsHozNbESlPk8bMbKuK1xorgmW4osuJcJVQc1b LExSzxcuru7160a28avp2g== 0000898432-03-000180.txt : 20030212 0000898432-03-000180.hdr.sgml : 20030212 20030211193044 ACCESSION NUMBER: 0000898432-03-000180 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 7 REFERENCES 429: 333-91810 FILED AS OF DATE: 20030212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IVOICE COM INC /DE CENTRAL INDEX KEY: 0001105064 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 521750786 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-103112 FILM NUMBER: 03551341 BUSINESS ADDRESS: STREET 1: 750 HIGHWAY 34 STREET 2: 210 SOUTH FOURTH AVE CITY: MATAWAN STATE: NJ ZIP: 07747 BUSINESS PHONE: 7324417700 MAIL ADDRESS: STREET 1: 750 HIGHWAY 34 STREET 2: 210 SOUTH FOURTH AVE CITY: MATAWAN STATE: NJ ZIP: 07747 FORMER COMPANY: FORMER CONFORMED NAME: THIRDCAI INC DATE OF NAME CHANGE: 20000202 SB-2 1 ivoice_formsb2.txt As filed with the Securities and Exchange Commission on February 11, 2003 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------ DELAWARE IVOICE, INC. 52-1750786 (State or Other (Name of (I.R.S. Employer Jurisdiction of Registrant in Identification No.) Incorporation Our Charter) or Organization) 750 HIGHWAY 34 7373 JEROME R. MAHONEY MATAWAN, NEW JERSEY 07747 (Primary Standard 750 HIGHWAY 34 (732) 441-7700 Industrial MATAWAN, NEW JERSEY 07747 (Address and telephone Classification (732) 441-7700 number of Principal Code Number) (Name, address and Executive Offices telephone number and Principal of agent for service) Place of Business) Copies to: Clayton E. Parker, Esq. Troy J. Rillo, Esq. Kirkpatrick & Lockhart LLP Kirkpatrick & Lockhart LLP 201 S. Biscayne Boulevard, Suite 2000 201 S. Biscayne Boulevard, Suite 2000 Miami, Florida 33131 Miami, Florida 33131 (305) 539-3300 (305) 539-3300 Telecopier No.: (305) 358-7095 Telecopier No.: (305) 358-7095 Approximate date of commencement of proposed sale to the public: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. |X| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE ====================================================================================================== PROPOSED PROPOSED MAXIMUM MAXIMUM OFFERING AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) PRICE (1) FEE - ------------------------------------------------------------------------------------------------------ Class A common stock, par value $0.001 per share 5,000,000,000 shares $0.001 $5,000,000 $460.00 - ------------------------------------------------------------------------------------------------------ TOTAL 5,000,000,000 shares $0.001 $5,000,000 $460.00 ======================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes of this table, we have used the average of the closing bid and asked prices as of February 10, 2003. ---------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. Subject to completion, dated February 11, 2003 IVOICE, INC. 5,000,000,000 SHARES OF CLASS A COMMON STOCK This prospectus relates to the sale of up to 5,000,000,000 shares of iVoice's Class A common stock by certain persons who are, or will become, stockholders of iVoice. Please refer to "Selling Stockholders" beginning on page 10. iVoice is not selling any shares of Class A common stock in this offering and therefore will not receive any proceeds from this offering. iVoice will, however, receive proceeds from the sale of Class A common stock under the Equity Line of Credit. All costs associated with this registration will be borne by us. iVoice has agreed to allow Cornell Capital Partners, L.P. to retain 5% of the proceeds raised by us under the Equity Line of Credit. The shares of Class A common stock are being offered for sale by the selling stockholders at prices established on the Over-the-Counter Bulletin Board during the term of this offering. These prices will fluctuate based on the demand for the shares of Class A common stock. On January 15, 2003, the last reported sale price of our Class A common stock was $0.0011 per share. The selling stockholder consists of Cornell Capital Partners, who intends to sell up to 5,000,000,000 shares of Class A common stock. Cornell Capital Partners, L.P. is an "underwriter" within the meaning of the Securities Act of 1933 in connection with the sale of Class A common stock under the Equity Line of Credit. Cornell Capital Partner, L.P. will pay a net purchase price of 86% of iVoice's market price as calculated in the Equity Line of Credit Agreement. iVoice has engaged Westrock Advisors, Inc., an unaffiliated registered broker-dealer, to advise it in connection with the Equity Line of Credit. Westrock Advisors, Inc. was paid a fee of 500,000 shares of iVoice's Class A common stock. Brokers or dealers effecting transactions in these shares should confirm that the shares are registered under applicable state law or that an exemption from registration is available. THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 4. With the exception of Cornell Capital Partners, L.P., which is an "underwriter" within the meaning of the Securities Act of 1933, no other underwriter or person has been engaged to facilitate the sale of shares of Class A common stock in this offering. This offering will terminate 24 months after the accompanying registration statement is declared effective by the Securities and Exchange Commission. None of the proceeds from the sale of stock by the selling stockholders will be placed in escrow, trust or any similar account. 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 ___________ ___, 2003. TABLE OF CONTENTS PROSPECTUS SUMMARY.............................................................1 THE OFFERING...................................................................2 SUMMARY CONSOLIDATED FINANCIAL INFORMATION.....................................3 RISK FACTORS...................................................................4 FORWARD-LOOKING STATEMENTS.....................................................9 USE OF PROCEEDS...............................................................12 DILUTION......................................................................13 EQUITY LINE OF CREDIT.........................................................14 PLAN OF DISTRIBUTION..........................................................16 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................18 DESCRIPTION OF BUSINESS.......................................................25 MANAGEMENT....................................................................31 DESCRIPTION OF PROPERTY.......................................................35 LEGAL PROCEEDINGS.............................................................35 PRINCIPAL STOCKHOLDERS........................................................36 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................37 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER STOCKHOLDER MATTERS........................................38 DESCRIPTION OF SECURITIES.....................................................43 EXPERTS.......................................................................46 LEGAL MATTERS.................................................................46 HOW TO GET MORE INFORMATION...................................................46 FINANCIAL STATEMENTS.........................................................F-1 - -------------------------------------------------------------------------------- Our audited financial statements for the fiscal year December 31, 2001, were contained in our Annual Report on Form 10-KSB. i PROSPECTUS SUMMARY OVERVIEW iVoice, Inc. designs, manufactures, and markets innovative computerized telephony communications systems and software incorporating speech recognition technology that streamlines the call handling process. Our speech recognition software products enables users to communicate more effectively and efficiently through the integration of speech recognition into their traditional office telephone systems with call handling applications such as automated attendant, voice mail, unified messaging, and interactive voice response, or "IVR." Our products are designed to be "people oriented," with features that can be readily used without special training or manuals. Our principal speech recognition applications, Speech-enabled Auto Attendant, iVoiceMail, Unified Messaging, and iVoice IVR, incorporate this philosophy. Except for iVoice IVR, which is generally sold directly to end users due to required customization, iVoice markets and promotes its speech enabled products through telephony reseller channels and telephone equipment manufacturer distributor networks. This allows iVoice to leverage those resellers' existing customer bases. We may, however, sell direct to end users in geographic locations where an existing dealer relationship does not exist. We recently announced commercial availability of digital connectivity for our Speech Enabled Auto Attendant, VoiceMail and Unified Messaging applications. The migration to a digital platform should enable us to distribute our speech recognition solutions to mid and larger sized entities that support and prefer digital connectivity, which we feel could greatly expand our potential customer base. The Private Branch Exchanges or "PBX" already supporting digital technology include Avaya(R) Difinity(R), Nortel(R) NorStar(R) and Meridian(R), NEC(R), and Siemens(R) HICOM(R), representing a significant portion of PBX market share. Compared to other integration methods, digital integration offers more features and greater reliability. ABOUT US Our principal office is located at 750 Highway 34, Matawan, New Jersey 07747. Our telephone number is (732) 441-7700. 1 THE OFFERING This offering relates to the sale of Class A common stock by certain persons who are, or will become, stockholders of iVoice. The selling stockholder consists of Cornell Capital Partners, who intends to sell up to 5,000,000,000 shares of Class A common stock. Pursuant to the Equity Line of Credit, we may, at our discretion, periodically issue and sell to Cornell Capital Partners, L.P. shares of Class A common stock for a total purchase price of $5.0 million. The amount of each advance is subject to an aggregate maximum advance amount of $225,000 in any thirty-day period, provided that each of the initial four advances may not exceed $150,000 and thereafter may not exceed $75,000. Cornell Capital Partners, L.P. will purchase the shares of Class A common stock for a 9% discount to the prevailing market price of our common stock. In addition, Cornell Capital Partners will retain 5% of each advance under the Equity Line of Credit. Cornell Capital Partners intends to sell any shares purchased under the Equity Line of Credit at the then prevailing market price. This prospectus relates to the shares of Class A common stock to be issued under the Equity Line of Credit. iVoice has engaged Westrock Advisors, Inc., an unaffiliated registered broker-dealer, to advise it in connection with the Equity Line of Credit. Westrock Advisors, Inc. was paid a fee of 500,000 shares of iVoice's Class A common stock. CLASS A COMMON STOCK OFFERED 5,000,000,000 shares by selling stockholders OFFERING PRICE Market price CLASS A COMMON STOCK OUTSTANDING 573,590,263 shares of Class A common BEFORE THE OFFERING(1) stock CLASS B COMMON STOCK OUTSTANDING 2,406,801 shares of Class B common BEFORE THE OFFERING stock (which are convertible into 4,813,602,000 shares of Class A common stock) USE OF PROCEEDS We will not receive any proceeds of the shares offered by the selling stockholders. Any proceeds we receive from the sale of the Class A common stock under the Equity Line of Credit will be used for sales and marketing, research and development and general working capital purposes. See "Use of Proceeds." RISK FACTORS The securities offered hereby involve a high degree of risk and immediate substantial dilution. See "Risk Factors" and "Dilution." - -------- (1) Excludes options and warrants to purchase 13,449,343 shares of Class A common stock, Class B common stock convertible into 4,813,602,000 shares of Class A common stock, debentures convertible into 366,212,814 shares of Class A common stock (at an assumed conversion price of $0.00065 per share) and up to 5,000,000,000 shares of Class A common stock to be issued under the Equity Line of Credit. 2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION FOR THE NINE FOR THE NINE FOR THE YEAR MONTHS ENDED MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, 2002 2001 2001 ------------- ------------- ------------- STATEMENT OF OPERATION DATA: Sales, net $ 458,353 $ 303,948 $ 425,948 Cost of sales 139,774 130,279 167,229 Gross profit 318,579 173,669 258,719 Selling, general and administrative expenses 1,621,298 2,256,278 3,035,992 Loss from operations (1,302,719) (2,082,609) (2,777,273) Net loss $(1,660,638) $(2,542,906) $(3,447,434) Loss per share - basic and diluted $ (0.01) $ (0.02) $ (0.03) SEPTEMBER 30, DECEMBER 31, 2002 2001 BALANCE SHEET DATA: Cash and cash equivalents $ 316,982 $ 85,543 Accounts receivable, net 55,087 37,284 Inventory 12,463 20,586 Prepaid expenses and other current assets 6,182 331,361 Total current assets 390,714 474,774 Property and equipment, net 79,409 106,585 Other receivable 67,650 67,650 Software license costs, net 190,400 272,000 Intangible assets, net 263,016 306,726 Deposits and other assets 11,724 13,900 Total assets $ 1,002,915 $ 1,241,635 Accounts payable and accrued expenses 275,469 1,454,055 Capital leases payable - current 23,390 35,018 Due to related parties 2,009,822 806,419 Convertible debentures 314,317 359,800 Billings in excess of estimated costs of uncompleted contracts 24,313 43,617 Total current liabilities 2,803,858 2,698,909 Long-term debt - 13,928 Total liabilities 2,803,858 2,712,837 Common stock 1,252,014 1,175,314 Additional paid-in capital 11,067,350 10,568,103 Subscriptions receivable - (783,750) Treasury stock (28,800) -- Accumulated deficit (14,091,507) (12,430,869) Total stockholders' deficiency (1,800,943 (1,471,202) Total liabilities and stockholders' deficiency $ 1,002,915 1,241,635
3 RISK FACTORS iVoice is subject to various risks that may materially harm its business, financial condition and results of operations. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FILING BEFORE DECIDING TO PURCHASE OUR CLASS A COMMON STOCK. IF ANY OF THESE RISKS OR UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR CLASS A COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. RISKS RELATED TO OUR BUSINESS WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE We have historically lost money. In the nine months ended September 30, 2002 and the year ended December 31, 2001, we had net losses of $(1,660,638) and $(3,447,434), respectively, and $(0.01) or $(0.03) per share, respectively. Future losses are likely to occur. Accordingly, we may experience significant liquidity and cash flow problems because our operations are not profitable. No assurances can be given that we will be successful in reaching or maintaining profitable operations. WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS We have relied on significant external financing to fund our operations. Such financing has historically come from a combination of borrowings and sale of securities from third parties and funds provided by certain officers and directors. We cannot assure you that financing whether from external sources or related parties will be available if needed or on favorable terms. Our inability to obtain adequate financing will result in the need to curtail business operations. Any of these events would be materially harmful to our business and may result in a lower stock price. We will need to raise additional capital to fund our anticipated operating expenses and future expansion. Among other things, external financing may be required to cover our operating costs. WE HAVE BEEN THE SUBJECT OF A GOING CONCERN OPINION FROM OUR INDEPENDENT AUDITORS, WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with the year ended December 31, 2001 financial statements, which states that iVoice had losses and negative cash flows from operations for the years ended December 31, 2001 and 2000 and as of those dates had negative working capital which raises substantial doubt about its ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. We expect to be able to continue operations for six months with the cash currently on hand. WE HAVE A WORKING CAPITAL DEFICIT, WHICH MEANS THAT OUR CURRENT ASSETS ON SEPTEMBER 30, 2002 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES ON THAT DATE We had a working capital deficit of $2,413,144 at September 30, 2002, which means that our current liabilities exceeded our current assets on September 30, 2002 by $2,413,144. Current assets are assets that are expected to be converted into cash within one year and, therefore, may be used to pay current liabilities as they become due. Our working capital deficit means that our current assets on September 30, 2002 were not sufficient to satisfy all of our current liabilities on that date. THE VOICE-RECOGNITION BUSINESS IS IN ITS INFANCY Our prospects are subject to the difficulties frequently encountered by companies in the early stage of development in new and evolving markets. These difficulties include the following: o substantial delays and expenses related to testing and developing of our new products; o marketing and distribution problems encountered in connection with our new and existing products and technologies; 4 o competition from larger and more established companies; o delays in reaching our marketing goals; o difficulty in recruiting qualified employees for management and other positions; o lack of sufficient customers, revenues and cash flow; and o limited financial resources. We may continue to face these and other difficulties in the future, some of which may be beyond our control. If we are unable to successfully address these problems, our business will suffer and our stock price could decline. THE PRICE OF OUR STOCK MAY BE AFFECTED BY A LIMITED TRADING VOLUME AND MAY FLUCTUATE SIGNIFICANTLY Prior to this offering, there has been a limited public market for our Class A common stock and there can be no assurance that an active trading market for our stock will develop. An absence of an active trading market could adversely affect our stockholders' ability to sell our Class A common stock in short time periods, or possibly at all. Our Class A common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations which could adversely affect the market price of our stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our Class A common stock to fluctuate substantially. OUR TECHNOLOGIES AND PRODUCTS COULD CONTAIN DEFECTS OR OTHERWISE NOT WORK AS EXPECTED. WE MAY INCUR SIGNIFICANT EXPENSES IN ATTEMPTING TO CORRECT THESE DEFECTS OR IN DEFENDING LAWSUITS OVER ANY SUCH DEFECTS Voice-recognition products are not currently accurate in every instance, and may never be. Furthermore, we could inadvertently release products and technologies that contain defects. In addition, third-party technology that we include in our products could contain defects. We may incur significant expenses to correct such defects. Clients who are not satisfied with our products or services could bring claims against us for substantial damages. Such claims could cause us to incur significant legal expenses and, if successful, could result in the plaintiffs being awarded significant damages. OUR SUCCESS IS HIGHLY DEPENDANT UPON OUR ABILITY TO COMPETE AGAINST COMPETITORS THAT HAVE SIGNIFICANTLY GREATER RESOURCES THAN WE DO The call-processing and voice-recognition industries are highly competitive, and we believe that this competition will intensify. The segment of the voice-recognition industry that supplies call-processing systems to businesses is also extremely competitive. Many of our competitors have longer operating histories, significantly greater financial, technical, product development, and marketing resources, greater name recognition or larger client bases than we do. For example, industry analysts recognize Nuance Communications, Inc. and SpeechWorks International, Inc. as the market leaders. Customers of Nuance include American Airlines, Bell Atlantic, Charles Schwab, Sears and UPS. Nuance offers products through industry partners, platform providers, and value-added resellers around the world. Corporate investors in Nuance include Cisco Systems, Intel, Motorola, SAIC, Siebel Systems, SRI International, Sun Microsystems, and Visa International. SpeechWorks customers include America Online, First Union National Bank, Microsoft, Thrifty Car Rental and United Airlines. OUR SUCCESS IS HIGHLY DEPENDANT UPON OUR ABILITY TO PROTECT OUR TRADEMARKS AND PROPRIETARY RIGHTS To succeed, we will need to protect our intellectual property rights. To date, we have filed ten patent applications for internally developed applications. No assurances can be given that these patent applications will be approved. To maintain the confidentiality of our trade secrets, we require our employees, consultants, and distributors to enter into confidentiality agreements, but these agreements afford us only limited protection and can be time-consuming and expensive to obtain and maintain. Monitoring for unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will be effective to prevent unauthorized use. We may have to litigate to enforce our trade secrets. Such lawsuits, regardless of their merits, would likely be time consuming and expensive and would divert managements' time and attention away from our business. 5 OUR SOLE DIRECTOR CONTROLS A SIGNIFICANT PERCENTAGE OF STOCK As of January 15, 2003, Jerome R. Mahoney, our President, Chief Executive Officer and sole director, owned approximately 89.4% of our outstanding shares of shares of our Class A common stock (assuming the conversion of outstanding shares of Class B common stock and debt into shares of Class A common stock). Mr. Mahoney is able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership, which is not subject to any voting restrictions, could limit the price that investors might be willing to pay for our Class A common stock. In addition, Mr. Mahoney is in a position to impede transactions that may be desirable for other stockholders. He could, for example, make it more difficult for anyone to take control of us. WE ARE IN BREACH OF OBLIGATIONS RELATING TO OUR 12% SENIOR CONVERTIBLE DEBENTURES Holders of our 12% senior convertible debentures have told us that we have breached a number of the terms of the debentures and the related registration rights agreement and security agreement. Breach of the terms of the debentures could result in the following: (i) a 20% increase in the principal amount of the debentures; (ii) an increase in the debentures' annual interest rate to 15% commencing seven days after the date of default through the date that the debentures are converted or repaid; and (iii) the debentures immediately becoming due in full. Additionally, we have not registered the shares issuable upon conversion of the debentures. This could result in our being required to pay liquidated damages of 2.5% per month of the principal amount of the debentures from November 7, 1999, the date on which we were required to register the shares. These increased interest amounts and liquidating damages have not been accrued and do not appear on our financial statements. We anticipate having to issue additional shares to settle the debenture holders claims arising from the default on the 12% senior convertible debentures. We have settled with one previous holder of debentures regarding the interest and penalties demanded by this former holder. As part of this settlement, we issued 450,000 shares of our Class A common stock to this former holder in full satisfaction of its claims. We are endeavoring to settle with the remaining debenture holders. If we are unable to do so, we may be forced to pay the debenture holders amounts substantially in excess of our original obligations under the debentures. OUR CLASS A 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 Class A 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. These requirements may reduce the potential market for our Class A common stock by reducing the number of potential investors. This may make it more difficult for investors in our Class A common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline. 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; 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 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 an investment in a penny stock is a suitable investment for a prospective investor. 6 WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL Our success largely depends on the efforts and abilities of key executives and consultants, including Jerome R. Mahoney, our Chief Executive Officer and President, and Kevin Whalen, our Chief Financial Officer. The loss of the services of either Mr. Mahoney or Mr. Whalen could materially harm our business because of the cost and time necessary to replace and train a replacement. Such a loss would also divert management attention away from operational issues. We presently maintain a $5,000,000 key-man term life insurance policy on Mr. Mahoney. RISKS RELATED TO THIS OFFERING FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS Sales of our common stock in the public market following this offering could lower the market price of our Class A common stock. Sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable or at all. Of the 573,590,263 shares of Class A common stock outstanding as of January 15, 2003, 543,713,999 shares are, or will be, freely tradable without restriction, unless held by our "affiliates." The remaining 29,876,264 shares of Class A common stock held by existing stockholders are "restricted securities" and may be resold in the public market only if registered or pursuant to an exemption from registration. Some of these shares may be resold under Rule 144. In addition, we have outstanding options and warrants to purchase up to 13,449,343 shares of our Class A common stock, Class B common stock convertible into 4,813,602,000 shares of Class A common stock and debentures convertible into 366,212,814 shares of Class A common stock. Upon issuance of the maximum number of shares being registered under the Equity Line of Credit, there will be an additional 5,000,000,000 shares of Class A common stock outstanding. All of these shares of Class A common stock may be resold in the public market upon effectiveness of the accompanying registration statement and the sale to the investor under the terms of the Equity Line of Credit agreement. EXISTING STOCKHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF SHARES UNDER THE EQUITY LINE OF CREDIT The sale of shares pursuant to the Equity Line of Credit will have a dilutive impact on our stockholders. As a result, our net income per share could decrease in future periods, and the market price of our common stock could decline. In addition, for a given advance, we will need to issue a greater number of shares of Class A common stock under the Equity Line of Credit as our stock price declines. If our stock price is lower, then our existing stockholders would experience greater dilution. THE INVESTOR UNDER THE EQUITY LINE OF CREDIT WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK The common stock to be issued under the Equity Line of Credit will be issued at a 9% discount to the lowest closing bid price for the 5 days immediately following the notice date of an advance. These discounted sales could cause the price of our common stock to decline. THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE PUBLIC MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE The selling stockholders intend to sell the shares of common stock being registered in this offering in the public market. That means that up to 5,000,000,000 shares of Class A common stock, the number of shares being registered in this offering, may be sold. Such sales may cause our stock price to decline. 7 THE SALE OF OUR STOCK UNDER OUR EQUITY LINE OF CREDIT COULD ENCOURAGE SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FURTHER DECLINE OF OUR STOCK PRICE The significant downward pressure on the price of our Class A common stock caused by the sale of material amounts of Class A common stock under the Equity Line of Credit could encourage short sales by third parties. Such an event could place further downward pressure on the price of our common stock. OUR CLASS A COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT PREDICT THE EXTENT TO WHICH A TRADING MARKET WILL DEVELOP Before this offering, our Class A common stock has traded on the Over-the-Counter Bulletin Board. Our Class A common stock is thinly traded compared to larger more widely known companies. Thinly traded Class A common stock can be more volatile than common stock trading in an active public market. We cannot predict the extent to which an active public market for the Class A common stock will develop or be sustained after this offering. THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER OR LOWER THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING The price in this offering will fluctuate based on the prevailing market price of the Class A common stock on the Over-the-Counter Bulletin Board. Accordingly, the price you pay in this offering may be higher or lower than the prices paid by other people participating in this offering. WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE OF CREDIT WHEN NEEDED We are dependent on external financing to fund our operations. Our financing needs are expected to be provided from the Equity Line of Credit, in large part. No assurances can be given that such financing will be available in sufficient amounts or at all when needed. THE ISSUANCE OF SHARES OF CLASS A COMMON STOCK UNDER THIS OFFERING COULD RESULT IN A CHANGE OF CONTROL We are registering 5,000,000,000 shares of Class A common stock in this offering. These shares represent 89.7% of our outstanding Class A common stock, and we anticipate all such shares will be sold in this offering. If all or a significant block of these shares are held by one or more stockholders working together, then such stockholder or stockholders would have enough shares to assume control of iVoice by electing its or their own directors. ON OCTOBER 15, 2002, STOCKHOLDERS APPROVED A CHANGE IN THIS CONVERSION PRICE OF OUR CLASS B COMMON STOCK HELD BY MR. MAHONEY, OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER. PURSUANT TO THIS CHANGE, THE NUMBER OF SHARES OF CLASS A COMMON STOCK TO BE RECEIVED BY MR. MAHONEY UPON CONVERSION OF CLASS B COMMON STOCK WILL BE GREATER AS THE PRICE OF OUR CLASS A COMMON STOCK DECLINES. THIS WILL RESULT IN GREATER DILUTION TO OUR EXISTING AND FUTURE SHAREHOLDERS (EXCLUDING MR. MAHONEY, WHO WILL NOT EXPERIENCE DILUTION WITH RESPECT TO HIS CLASS B COMMON STOCK DUE TO THE CHANGE IN CONVERSION PRICE). On October 15, 2002, our stockholders approved a Change in This Conversion Price of Our Class B Common Stock held by Mr. Mahoney, our President and Chief Executive Officer. As a result of this change, the Class B common stock in convertible into the number of shares of Class A common stock determined by dividing the number of Class B common stock being converted by 50% of the lowest price that iVoice had previously issued its Class A common stock. Previously, each share of Class B common stock was convertible in to 100 shares of class A common stock. Accordingly, the number of shares of Class A common stock to be received by Mr. Mahoney upon the conversion of the Class B common stock will be greater as the price of the Class A common stock declines. This will result in greater dilution to our existing and future stockholders because iVoice will be obligated to issue a greater number of shares of Class A common stock upon conversion of the Class B common stock than under the prior conversion price. Mr. Mahoney will not experience such dilution with respect to his Class B common stock because the conversion price will decline as the price of the Class A common stock declines. 8 FORWARD-LOOKING STATEMENTS Information included or incorporated by reference 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 or Plan of Operations" and "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. 9 SELLING STOCKHOLDERS The following table presents information regarding the selling stockholder. The selling stockholder has not held a position or office, or had any other material relationship, with iVoice, except as follows: o Cornell Capital Partners, L.P. is the investor under the Equity Line of Credit and has outstanding loans to iVoice in the aggregate amount of $179,671 as of January 15, 2003, which is evidenced by promissory notes. All investment decisions of Cornell Capital Partners are made by its general partner, Yorkville Advisors, LLC. Mark Angelo, the managing member of Yorkville Advisors, makes the investment decisions on behalf of Yorkville Advisors. A brief description of the Equity Line of Credit and the promissory notes is set forth below: Pursuant to the Equity Line of Credit, dated as of February 2003, iVoice may, at its discretion, periodically issue and sell to Cornell Capital Partners, L.P. shares of Class A common stock for a total purchase price of $5.0 million. The amount of each advance is subject to an aggregate maximum advance amount of $225,000 in any thirty-day period, provided that each of the initial four advances may not exceed $150,000 and thereafter may not exceed $75,000. Cornell Capital Partners, L.P. will purchase the shares of Class A common stock for a 9% discount to the prevailing market price of our common stock. In addition, Cornell Capital Partners will retain 5% of each advance under the Equity Line of Credit. Cornell Capital Partners intends to sell any shares purchased under the Equity Line of Credit at the then prevailing market price. This prospectus relates to the shares of Class A common stock to be issued under the Equity Line of Credit. In August and November 2002, iVoice borrowed a total of $470,000 from Cornell Capital partners, which amounts are evidenced by two promissory notes. One note was issued in August 2002 in the principal amount of $250,000. This note is due 120 days after issuance. This note bears interest at 8% per year if not paid by the maturity date. The second note was issued in November 2002 in the principal amount of $220,000. This note is due 150 days after issuance. This note bears interest at 12% per year if not paid by the maturity date. As of January 15, 2003, iVoice owed Cornell Capital Partners an aggregate of $179,671 under these two promissory notes. The proceeds under these notes represent advances under the Equity Line of Credit that will be repaid through the issuance of Class A common stock pursuant the terms of the Equity Line of Credit agreement. The table follows:
PERCENTAGE OF PERCENTAGE OUTSTANDING PERCENTAGE OF SHARES OF OUTSTANDING SHARES TO TO BE OUTSTANDING SHARES SHARES BE ACQUIRED SHARES SHARES BENEFICIALLY BENEFICIALLY ACQUIRED UNDER TO BE BENEFICIALLY OWNED OWNED UNDER THE THE LINE SOLD IN OWNED SELLING BEFORE BEFORE LINE OF OF THE AFTER STOCKHOLDER OFFERING OFFERING CREDIT CREDIT (1) OFFERING OFFERING - ---------------- -------------- ------------ ----------- ------------ ---------- ------------ Cornell Capital Partners, L.P. -- 0.0% 5,000,000,000 89.7% 5,000,000,000 0.0% ---- ------------- ----- ------------- ---- Total -- 0.0% 5,000,000,000 89.7% 5,000,000,000 0.0% ==== ============= ===== ============= ====
- ---------- * Less than 1%. (1) Applicable percentage of ownership is based on 573,590,263 shares of Class A common stock outstanding as of January 15, 2003, together with securities exercisable or convertible into shares of Class A common stock within 60 days of January 15, 2003 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Class A common stock subject to securities exercisable or convertible into shares of Class A common stock that are currently exercisable or exercisable within 60 days of January 15, 2003 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. 10 USE OF PROCEEDS This prospectus relates to shares of our Class A common stock that may be offered and sold from time to time by certain selling stockholders. There will be no proceeds to us from the sale of shares of Class A common stock in this offering. However, we will receive the proceeds from the sale of shares of Class A common stock to Cornell Capital Partners, L.P. under the Equity Line of Credit. The purchase price of the shares purchased under the Equity Line of Credit will be equal to 91% of the lowest closing bid price of our common stock on the Over-the-Counter Bulletin Board for the 5 days immediately following the notice date. Cornell Capital will also retain 5% of each advance. For illustrative purposes, iVoice has set forth below its intended use of proceeds for the range of net proceeds indicated below to be received under the Equity Line of Credit. The table assumes estimated offering expenses of $15,000, plus the 5% retainage. GROSS PROCEEDS $2,500,000 $5,000,000 NET PROCEEDS $2,360,000 $4,735,000 USE OF PROCEEDS: AMOUNT AMOUNT ------------------------------------------------------------------ Sales and marketing $800,000 $1,550,000 Research and development $580,000 $1,100,000 General Working Capital $980,000 $2,085,000 ------------- ------------- TOTAL $2,360,000 $4,735,000 ============= ============= 11 DILUTION The net tangible book value of iVoice as of September 30, 2002 was ($2,254,359) or ($0.0098) per share of Class A common stock. Net tangible book value per share is determined by dividing the tangible book value of iVoice (total tangible assets less total liabilities) by the number of outstanding shares of our common stock. Since this offering is being made solely by the selling stockholders and none of the proceeds will be paid to iVoice, our net tangible book value will be unaffected by this offering. Our net tangible book value, however, will be impacted by the common stock to be issued under the Equity Line of Credit. The amount of dilution will depend on the offering price and number of shares to be issued under the Equity Line of Credit. The following example shows the dilution to new investors at an offering price of $0.001 per share. If we assume that iVoice had issued 5,000,000,000 shares of Class A common stock under the Equity Line of Credit at an assumed offering price of $0.001 per share (I.E., the maximum number of shares being registered in this offering, less a retention fee of $250,000 and offering expenses of $15,000, our net tangible book value as of September 30, 2002 would have been $2,480,641 or $0.0005 per share. Such an offering would represent an immediate increase in net tangible book value to existing stockholders of $0.01 per share and an immediate dilution to new stockholders of $0.0005 per share. The following table illustrates the per share dilution: Assumed public offering price per share $0.0010 Net tangible book value per share before this offering ($0.0098) Increase attributable to new investors $0.0100 ---------- Net tangible book value per share after this offering $0.0005 ---------- Dilution per share to new stockholders $0.0005 ========== The offering price of our Class A common stock is based on the then-existing market price. In order to give prospective investors an idea of the dilution per share they may experience, we have prepared the following table showing the dilution per share at various assumed offering prices: DILUTION PER ASSUMED NO. OF SHARES TO SHARE TO NEW OFFERING PRICE BE ISSUED INVESTORS -------------- ---------------- ------------ $0.0010 5,000,000,000(1) $0.0005 $0.0008 5,000,000,000(1) $0.0005 $0.0005 5,000,000,000(1) $0.0005 $0.0003 5,000,000,000(1) $0.0005 _____________________ (1) This represents the maximum number of shares of Class A common stock that will be registered under the Equity Line of Credit. 12 EQUITY LINE OF CREDIT SUMMARY. In February 2003, we entered into an Equity Line of Credit with Cornell Capital Partners, L.P. Pursuant to the Equity Line of Credit, we may, at our discretion, periodically sell to Cornell Capital Partners shares of Class A common stock for a total purchase price of up to $5.0 million. For each share of Class A common stock purchased under the Equity Line of Credit, Cornell Capital Partners will pay 91% of the lowest closing bid price on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the 5 days immediately following the notice date. Cornell Capital Partners is a private limited partnership whose business operations are conducted through its general partner, Yorkville Advisors, LLC. Further, Cornell Capital Partners will retain 5% of each advance under the Equity Line of Credit. In addition, iVoice engaged Westrock Advisors, Inc., a registered broker-dealer, to advise it in connection with the Equity Line of Credit. For its services, Westrock Advisors received 500,000 shares of iVoice's Class A common stock. The issuance of these shares is conditioned upon iVoice registering these shares with the Securities and Exchange Commission. EQUITY LINE OF CREDIT EXPLAINED. Pursuant to the Equity Line of Credit, we may periodically sell shares of Class A common stock to Cornell Capital Partners, L.P. to raise capital to fund our working capital needs. The periodic sale of shares is known as an advance. We may request an advance every 7 trading days. A closing will be held 6 trading days after such written notice at which time we will deliver shares of Class A common stock and Cornell Capital Partners, L.P. will pay the advance amount. We may request advances under the Equity Line of Credit once the underlying shares are registered with the Securities and Exchange Commission. Thereafter, we may continue to request advances until Cornell Capital Partners has advanced $5.0 million or two years after the effective date of the accompanying registration statement, whichever occurs first. The amount of each advance is subject to an aggregate maximum advance amount of $250,000 in any thirty-day period, provided, that each of the initial four advances may not exceed $150,000 and thereafter may not exceed $75,000. The amount available under the Equity Line of Credit is not dependent on the price or volume of our Class A common stock. Cornell Capital Partners may not own more than 9.9% of our outstanding common stock at any time. Because Cornell Capital Partners can repeatedly acquired and sell shares, this limitation does not limit the potential dilutive effect or the total number of shares that Cornell Capital Partners may receive under the Equity Line of Credit. We cannot predict the actual number of shares of Class A common stock that will be issued pursuant to the Equity Line of Credit, in part, because the purchase price of the shares will fluctuate based on prevailing market conditions and we have not determined the total amount of advances we intend to draw. Nonetheless, we can estimate the number of shares of our Class A common stock that will be issued using certain assumptions. For example, iVoice would need to issue 4,226,542,688 shares of Class A common stock in order to raise the maximum amount under the Equity Line of Credit at a purchase price of $0.001183 (i.e., 91% of a recent stock price of $0.0013). iVoice is registering a total of 5,000,000,000 shares of Class A common stock for the sale under the Equity Line of Credit. The issuance of shares under the Equity Line of Credit may result in a change of control. That is, up to 5,000,000,000 shares of Class A common stock could be issued under the Equity Line of Credit (i.e., the maximum number of shares being registered in the accompanying registration statement for the Equity Line of Credit). If all or a significant block of these shares are held by one or more stockholders working together, then such stockholder or stockholders would have enough shares to assume control of iVoice by electing its or their own directors. This could happen, for example, if Cornell Capital Partners sold the shares purchased under the Equity Line of Credit to the same purchaser. 13 Proceeds used under the Equity Line of Credit will be used in the manner set forth in the "Use of Proceeds" section of this prospectus. We cannot predict the total amount of proceeds to be raised in this transaction because we have not determined the total amount of the advances we intend to draw. We expect to incur expenses of approximately $15,000 consisting primarily of professional fees incurred in connection with this registration. In addition, Cornell Capital Partners will retain 5% of each advance. In connection with the Equity Line of Credit, iVoice also paid Cornell Capital Partners a one-time Commitment fee of 5,500,000 shares of Class A common stock. In addition, iVoice issued 500,000 shares of common stock to Westrock Advisors, Inc., a registered broker-dealer, as a placement agent fee. 14 PLAN OF DISTRIBUTION The selling stockholders have advised us that the sale or distribution of iVoice's Class A common stock owned by the selling stockholders may be effected directly to purchasers by the selling stockholders or by pledgees, donees, transferees or other successors in interest, as principals or through one or more underwriters, brokers, dealers or agents from time to time in one or more transactions (which may involve crosses or block transactions) (i) on the over-the-counter market or in any other market on which the price of iVoice's shares of Class A common stock are quoted or (ii) in transactions otherwise than on the over-the-counter market or in any other market on which the price of iVoice's shares of Class A common stock are quoted. Any of such transactions may be effected at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at varying prices determined at the time of sale or at negotiated or fixed prices, in each case as determined by the selling stockholders or by agreement between the selling stockholders and underwriters, brokers, dealers or agents, or purchasers. If the selling stockholders effect such transactions by selling their shares of iVoice's Class A common stock to or through underwriters, brokers, dealers or agents, such underwriters, brokers, dealers or agents may receive compensation in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of Class A common stock for whom they may act as agent (which discounts, concessions or commissions as to particular underwriters, brokers, dealers or agents may be in excess of those customary in the types of transactions involved). The selling stockholders and any brokers, dealers or agents that participate in the distribution of the Class A common stock may be deemed to be underwriters, and any profit on the sale of Class A common stock by them and any discounts, concessions or commissions received by any such underwriters, brokers, dealers or agents may be deemed to be underwriting discounts and commissions under the Securities Act. Cornell Capital Partners, L.P. is an "underwriter" within the meaning of the Securities Act of 1933 in connection with the sale of Class A common stock under the Equity Line of Credit. Cornell Capital Partners, L.P. will pay iVoice 91% of the lowest closing bid price of iVoice's Class A common stock on the Over-the-Counter Bulletin Board or other principal trading market on which our Class A common stock is traded for the 5 days immediately following the advance date. In addition, Cornell Capital Partners will retain 5% of the proceeds received by iVoice under the Equity Line of Credit. The 9% discount is an underwriting discounts. In addition, iVoice engaged Westrock Advisors, Inc., a registered broker-dealer, to advise it in connection with the Equity Line of Credit. For its services, Westrock Advisors, Inc. received 500,000 shares of iVoice's common stock. Cornell Capital Partners, L.P. was formed in February 2000 as a Delaware limited partnership. Cornell Capital Partners is a domestic hedge fund in the business of investing in and financing public companies. Cornell Capital Partners does not intend to make a market in iVoice's stock or to otherwise engage in stabilizing or other transactions intended to help support the stock price. Prospective investors should take these factors into consideration before purchasing iVoice's common stock. Under the securities laws of certain states, the shares of Class A common stock may be sold in such states only through registered or licensed brokers or dealers. The selling stockholders are advised to ensure that any underwriters, brokers, dealers or agents effecting transactions on behalf of the selling stockholders are registered to sell securities in all fifty states. In addition, in certain states the shares of Class A common stock may not be sold unless the shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. We will pay all the expenses incident to the registration, offering and sale of the shares of common stock to the public hereunder other than commissions, fees and discounts of underwriters, brokers, dealers and agents. We have agreed to indemnify Cornell Capital Partners and its controlling persons against certain liabilities, including liabilities under the Securities Act. We estimate that the expenses of the offering to be borne by us will be approximately $15,000, as well as retention of 5% of the gross proceeds received under the Equity Line of Credit. In addition, iVoice engaged Westrock Advisors, Inc., a registered broker-dealer, to advise it in connection with the Equity Line of Credit. For its services, Westrock Advisors, Inc. received 500,000 shares of iVoice's Class A common stock. The estimated offering expenses consist of: a SEC registration fee of $506, printing expenses of $1,500, accounting fees of $1,000, legal fees of $10,000 and miscellaneous expenses of $1,994. We will not receive any proceeds from the sale of any of the shares of common stock by the selling stockholders. We will, however, receive proceeds from the sale of Class A common stock under the Equity Line of Credit. 15 The selling stockholders should be aware that the anti-manipulation provisions of Regulation M under the Exchange Act will apply to purchases and sales of shares of Class A common stock by the selling stockholders, and that there are restrictions on market-making activities by persons engaged in the distribution of the shares. Under Registration M, the selling stockholders or their agents may not bid for, purchase, or attempt to induce any person to bid for or purchase, shares of Class A common stock of iVoice while such selling stockholders are distributing shares covered by this prospectus. Accordingly, except as noted below, the selling stockholders are not permitted to cover short sales by purchasing shares while the distribution is taking place. Cornell Capital Partners can cover any short positions only with shares received from iVoice under the Equity Line of Credit. The selling stockholders are advised that if a particular offer of Class A common stock is to be made on terms constituting a material change from the information set forth above with respect to the Plan of Distribution, then, to the extent required, a post-effective amendment to the accompanying registration statement must be filed with the Securities and Exchange Commission. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF IVOICE AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS FILING. STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION AND ELSEWHERE IN THIS PROSPECTUS THAT ARE NOT STATEMENTS OF HISTORICAL OR CURRENT FACT CONSTITUTE "FORWARD-LOOKING STATEMENTS." OVERVIEW To date, iVoice has incurred substantial losses, does not produce enough cash from operations to cover its operating cash requirements and will require additional financing in the next twelve months. This financing may include the issuance of common stock or instruments that are convertible into common stock, which have a dilutive effect on current shareholders. We are unsure whether we will be able to secure sufficient financing to meet our current operating requirements. Other than the Equity Line of Credit, we have no commitments for capital. iVoice has met interoperability standards with several leading PC-based Private Branch Exchange (or PBX) manufacturers for its award winning product, iVoice Speech-enabled Auto Attendant. To date, rigorous testing and compatibility studies have developed into co-marketing arrangements with 3Com, for its NBX(R) platform, Artisoft for its TeleVantage(R) Communication server, and AltiGen's AltiServ(R) phone systems. These recent platform integrations add to several others previously completed including a Siemens Ready(TM) certification, NEC Fusion Strategic Alliance and Sprint North Supply. Through these co-marketing arrangements and strategic alliances, iVoice will attempt to capture significant market share in the business communication solution market by expanding distribution through these manufacturers' authorized reseller networks. iVoice is currently focused on developing its dealer and reseller channels. Management believes it can leverage already existing equipment manufacturers reseller channels by integrating its speech recognition software directly into their established revenue producing product lines. Each manufacturer has an estimated 150-600 authorized dealers and resellers throughout North America. The recent introduction of an entirely TAPI (Telephone Application Program Interface) based Speech-enabled Auto Attendant and Name Dialer, allows integration into different PBX systems without the need for additional hardware devices. These integration changes should provide for greater appeal to telephony re-sellers allowing for more economical customer installations with no change in software pricing iVoice charges for its software. Unless special arrangements are made, iVoice generally receives 50% of the contract as a down payment on any product purchased with the balance due upon completion of the installation. iVoice recognizes its revenue using the percentage of completion method for turnkey systems that require custom configuration by the customer. iVoice determines the expected costs on a particular installation by estimating the hardware costs and anticipated labor hours to configure and install a system. Revenues are then recognized in proportion to the amount of costs incurred as of the reporting date over the total estimated costs anticipated. For orders comprised only of software or hardware items, iVoice recognizes revenue upon shipment of those items to the customer. iVoice accepts company checks or Visa/MasterCard. RESEARCH AND DEVELOPMENT Our research and development efforts focus on enhancing our existing product line and the development of new products that integrate with our existing products. We continually seek to improve our core speech recognition technology through ease of use, broader application and increased accuracy. iVoice employs qualified technical personnel to strengthen its product line. For the nine months ending September 30, 2002, research and development expenditures consisted of $165,806 in salaries and wages to technical staff and $5,013 in technical hardware supplies, software tool-kits and technical publications. In 2001, research and development expenditures consisted of $380,692 in salaries and wages to iVoice's technical staff and $6,771 for technical hardware supplies, software tool-kits and technical publications. In the year 2000, iVoice spent $406,106 in technical salaries and wages and $17,361 for related supplies, tools and publications. iVoice anticipates that expending on research and development will continue on technical staffing. Our current research and development efforts have allowed us to recently release our Speech Enabled Auto Attendant, VoiceMail and Unified Messaging applications on digital platforms. Compared to other integration methods, the use of digital connectivity to an organizations telephone system offers more features and greater reliability. In order to remain competitive, iVoice must continue to fund research and development efforts and will use some of the funds raised in this offering to further develop iVoice's current technologies and develop new voice recognition applications and technologies. 17 PLANT AND EQUIPMENT iVoice does not anticipate incurring any significant expenses for the purchase of plant or equipment over the next 12 months. EMPLOYEES iVoice has 10 full time employees and 2 part-time employees. Management anticipates increasing the number of employees to approximately 15 over the next 12 months, primarily in sales. RECENT DEVELOPMENTS In October 2002, iVoice formed two wholly-owned subsidiaries in Delaware in order to facilitate future potential acquisition transactions. No definitive purchase or merger agreements have been entered into as of the date of this filing, we are reviewing and negotiating with several potential candidates for the possibility of a transaction. In October 2002, iVoice signed a Letter of Intent to purchase of substantially all of the assets of a leading food equipment maintenance contractor located in New Jersey. Subsequently, the parties terminated the Letter of Intent and released each other from any obligations arising under the Letter of Intent. In June 2002, we announced commercial availability of digital connectivity for our Speech Enabled Auto Attendant, VoiceMail and Unified Messaging applications. The migration to a digital platform should enable us to distribute our speech recognition solutions to mid and larger sized entities that support and prefer digital connectivity, which we feel could greatly expand our potential customer base. The Private Branch Exchanges or "PBX" already supporting digital technology include Avaya(R) Difinity(R), Nortel(R) NorStar(R) and Meridian(R), NEC(R), and Siemens(R) HICOM(R), representing a significant portion of PBX market share. Compared to other integration methods, digital integration offers more features and greater reliability. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER 30, 2001 Revenues are derived primarily from the sale of voice and computer technology communication systems for small-to-medium sized businesses and corporate departments. Total revenues for the three and nine months ended September 30, 2002 were $140,614 and $458,353, respectively, as compared to $87,043 and $303,948 for the three and nine months ended September 30, 2001, an increase of $53,571 or 61.5% and $154,405 or 50.8%, respectively. The increase in sales for the three and nine month period are largely attributable to weak economic conditions resulting in weak demand for iVoice's products in the prior year period. Management feels that the demand for iVoice's Speech Enabled Auto Attendant and Speech Enabled Interactive Voice Response (IVR) applications is stabilizing and perhaps firming, as overall economic conditions in the business environment appear to be improving. iVoice continues to market and promote its products to telephony reseller networks in order to leverage those resellers' existing customer bases. iVoice has met interoperability standards with the leading PC-based Private Branch Exchange (or PBX) manufacturers for its Speech-enabled Auto Attendant product. To date, rigorous testing and compatibility studies have developed into co-marketing arrangements with 3Com, for its NBX(R) platform, Artisoft for its TeleVantage(R) Communication server, and AltiGen's AltiServ(R) phone systems. Management believes it can leverage already existing equipment manufacturers' reseller channels by integrating its speech recognition software directly into their established revenue producing product lines. Each manufacturer has an estimated 150-600 authorized dealers and resellers throughout North America. The recent introduction of an entirely TAPI (Telephone Application Program Interface) based Speech-enabled Auto Attendant and Name Dialer, allows integration into different PBX systems without the need for additional hardware devices. These integration changes should provide for greater appeal to telephony re-sellers allowing for more economical customer installations with no change in software pricing iVoice charges for its software. Unless special arrangements are made, iVoice generally receives 50% of the contract as a down payment on any product purchased with the balance due upon completion of the installation. iVoice recognizes its revenue using the percentage of completion method for turnkey systems that require custom configuration by the customer. iVoice recognizes its revenue using the percentage of completion method. iVoice determines the expected costs on a particular installation by estimating the hardware costs and anticipated labor hours to configure and install a system. Revenues are then recognized in proportion to the amount of costs incurred as of the reporting date over the total estimated costs anticipated. For orders comprised only of software or 18 hardware items, iVoice recognizes revenue upon shipment of those items to the customer. iVoice accepts company checks or Visa/MasterCard. Gross margin for the three and nine months ended September 30, 2002 was $102,277 and $318,579 or 72.7% and 69.5%, respectively, as compared to $55,882 and $173,669 or 64.2% and 57.1% for the three and nine months ended September 30, 2001. The gross margin is dependent, in part, on product mix, which fluctuates from time to time; complexity of a communication system installation which determines necessary hardware requirements and may not have a proportionate relationship with the system selling price; and the ability of Company technology personnel to efficiently configure and install iVoice's communications products. The increase in gross profit is a result of increased revenues as well as an increase in the sale of software only which result in significantly higher profit margins than turnkey systems, which require costly hardware. Total operating expenses decreased, from $511,588 for the three months ended September 30, 2001 to $348,113 for the three months ended September 30, 2002 a decrease of $163,475 or 32.0%. Specific line items that reflect the reduction in total operating expenses for the three months ending September 30, 2002, include reduced consulting expenses of $96,333; reduced payroll and benefit costs of $41,672 and lower rent of $16,970. iVoice has over the past year and a half effectively reduced its working capital requirements to preserve its cash resources. As a result, total operating expenses for the nine months ending September 30, 2002 have been reduced to $1,621,298 from $2,256,278 for the nine months ending September 30, 2001, a reduction of $634,980 or 28.1%. As of September 30, 2002, iVoice had 10 full-time employees, and 2 part-time employees for a total of 12 individuals. iVoice is actively pursuing additions to its sales and technical staff, which will increase operating expenditures for payroll, and related benefit costs in future quarters. The loss from operations for the three and nine months ended September 30, 2002 was $245,836 and $1,302,719 compared to $455,706 and $2,082,609 for the three and nine months ended September 30, 2001, a decrease of $209,870 and $779,890 in the three and nine month comparative periods. Interest expense of $47,461 and $377,476 was incurred for the three and nine-month period ending September 30, 2002 as compared to $36,782 and $107,591 for the three and nine-month period ending September 30, 2001, respectively an increase of $10,679 and $269,885 for the three and nine-month comparative periods. The current year figures reflect $171,300 in financing costs comprised of commissions and legal fees and $63,750 in debt issue costs related to the financing agreement with Cornell Capital, LP. Debt issue costs represent the estimated cost of the beneficial conversion discount feature applicable to the $255,000 in 5% Convertible Debentures issued during the quarter and are charged to expense in accordance with Emerging Issues Task Force (EITF) Issue 98-5. These items were not incurred in the prior nine-month period ending September 30, 2001. Other expenses for the nine-month period ending September 30, 2001 include non-recurring charges of $352,706 recorded in the second quarter of 2001. This amount represents a $141,626 write-off of capitalized financing costs incurred in connection with the agreement with Swartz Private Equity and $154,830 in charges related to the termination of the Swartz agreement, along with $56,250 in settlement charges incurred with respect to a former debenture holder's claim for damages incurred in default of iVoice's 12% convertible debentures. These items were not incurred in the current nine-month period ending September 30, 2002. Net loss for the three and nine month period ending September 30, 2002 was $302,540 and $1,660,638 as compared to $492,488 and $2,542,906 for the three and nine months of 2001. The respective changes in net loss for the comparative periods were a result of the factors discussed above. YEAR ENDED DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000 Sales for the year ended December 31, 2001 were $425,948, a decrease of $297,098 or 41.1% over the prior years sales of $723,046. The decrease was largely attributable to weak economic conditions resulting in weak demand for iVoice's products, coupled with iVoice's lack of sufficient capital resources to effectively develop a successful sales campaign. For the three months ending December 31, 2001, iVoice recorded sales of $122,000 as compared to $45,984 for the three months ending December 31, 2000, an increase of $76,016 or 165.3%. iVoice's gross profit for the year ended December 31, 2001 was $258,719, a decrease of $161,432 or 38.4% compared to $420,151 for the year ending December 31, 2000. iVoice's gross margin percentage for the twelve months ended December 31, 2001 was 60.7% versus 58.1% for the prior year. This represents a 2.6% increase over the gross profit percentage recorded for the same prior year 19 period. The gross margin is dependent, in part, on product mix, which fluctuates from time to time; complexity of a communication system installation which determines necessary hardware requirements and may not have a proportionate relationship with the system selling price; and the ability of iVoice technology personnel to efficiently configure and install its communications products. The dollar amount of gross profit has decreased due to reduced revenues for the comparative periods however margin percentages are consistent with prior periods with variances due only to product mix. Operating expenses increased from $2,678,310 for the year ended December 31, 2000 to $3,035,992 for the year ended December 31, 2001, an increase of $357,684 or 13.3%. Material changes in specific line items of operating expenses include an increase in payroll costs of $559,543 which includes accruals for reimbursement to iVoice's principal shareholder, Jerome R. Mahoney, for a charitable donation of his personal holdings of iVoice Class A common stock for a total value of $350,000 and reimbursement for income tax incurred by Mr. Mahoney for sales of Class A common stock which were sold in order to provide working capital to iVoice totaling $95,100. Also contributing to the increase in operating expense was a charge of $56,250 for a reduction in the strike price on warrants previously issued by iVoice. This amount was not incurred in the previous period. Rent expense also increased by $30,835 due to the reflection of a full years rent for iVoice's headquarters in Matawan where the prior year included only eight months. Offsetting the increases in the specific operating expense items described above were a reduction in employee recruiting fees amounting to $153,143, bad debt expense of $50,387 and a reduction in advertising and promotional expense totaling $46,875. The net loss from operations for the year ending December 31, 2001 was $2,777,273 compared to $2,258,159 for the year ended December 31, 2000. This decrease of $519,116 was a result of the decrease in net revenues and gross profit from year to year combined with an increase in current year operating expenses as described above. Other expense, comprised only of interest expense, increased $36,941 to $670,161 in the year ended December 31, 2001 compared to $633,220 in 2000. Interest expense reflects interest and discount amortization on iVoice's outstanding convertible debentures which were outstanding for most of the year 2001 and 2000. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 2002 and the year ended December 31, 2001, iVoice generated sales of $458,353 and $425,948, incurred net losses of $1,660,638 and $3,447,434 and had cash flow deficiencies from operating activities of $483,047 and $872,481, respectively. As a result, as of September 30, 2002, iVoice had a cash balance of $316,982, a working capital deficit of $2,413,144 and an accumulated deficit of $14,091,507. The primary source of financing for iVoice has been through the issuance of common stock and debt. iVoice had cash balances on hand of $316,982 as of September 30, 2002. In addition, on September 30, 2002, iVoice had total liabilities of $2,803,858, consisting of accounts payable and accrued expenses of $275,469, obligations under capital leases of 23,390, notes payable of $156,547, billings in excess of estimated costs on uncompleted projects of $24,313, convertible debentures of $314,317 and amounts due to related parties of $2,009,822. Of the total liabilities, the $2,009,822 due to related parties consists of amounts owed to Mr. Mahoney and on October 14, 2002, $1,504,875 of that amount was satisfied by the issuance of shares of 1,504,875 shares of Class B stock. It is anticipated that the remaining balance owed to Mr. Mahoney will be satisfied by the issuance of shares of capital stock. Additionally, of the $314,317 of convertible debentures, $201,517 has been satisfied by the issuance of shares of capital stock and $70,000 in cash through December 31, 2002. It is anticipated that the remaining balance owed on the remaining outstanding balance of convertible debentures will be satisfied by the issuance of shares of capital stock. iVoice also expects to satisfy $156,547 of notes payable by the issuance of shares of capital stock. The remaining liabilities of $323,172, consisting primarily of trade accounts payable, are current liabilities that are required to be paid in cash within the first six months of 2003. iVoice's primary need for cash is to fund its ongoing operations until such time that the sale of products generates enough revenue to fund operations. There can be no assurance as to the receipt or timing of revenues from operations. iVoice anticipates that its operations will require at least $89,000 per month. These monthly expenses are anticipated to consist of the following: payroll and benefits of $50,000, debt payments of $17,800, rent of $8,000, sales and marketing expenses of $4,600, insurance of $1,500, and miscellaneous administrative expenses of $7,100. These monthly obligations are expected to be funded from the proceeds anticipated to be received from the Equity Line of Credit, from current operations or otherwise from the sale of equity or debt securities. In addition, the Company's need for cash includes satisfying total liabilities of another $323,172 as described above. All of these amounts are due in less than one year. iVoice believes that it has sufficient funds on-hand to fund its operations for six months. Thereafter, iVoice will need to raise additional capital from the sale of equity or debt securities. 20 During the nine months ended September 30, 2002, iVoice had a net increase in cash of $231,439. iVoice's sources and uses of funds in the current nine months were as follows: CASH USED BY OPERATING ACTIVITIES. iVoice had cash used by operating activities of $483,047 in the nine months ended September 30, 2002. Cash provided by operating activities consisted of non-cash expenses (consisting of depreciation and amortization of $448,467 and common stock issued for services of $55,735), an increase in accounts payable and accrued expenses of $196,760, discounts on stock options of $316,750 and debt issue costs of $216,977. These items were offset by a net loss of $1,660,638 and an increase in accounts receivable of $20,803. CASH USED IN FINANCING ACTIVITIES. iVoice had cash provided by financing activities of $718,687, consisting primarily of the issuance of common stock of $102,696, collections of stock subscriptions of $317,000 and the sale of convertible debentures of $255,000. These amounts were partially offset by the repayment of obligations of $209,009. Below is a description of iVoice's principal sources of funding since June 2002: In August and November 2002, iVoice borrowed a total of $470,000 from Cornell Capital partners, which amounts are evidenced by two promissory notes. One note was issued in August 2002 in the principal amount of $250,000. This note is due 120 days after issuance. This note bears interest at 8% per year if not paid by the maturity date. The second note was issued in November 2002 in the principal amount of $220,000. This note is due 150 days after issuance. This note bears interest at 12% per year if not paid by the maturity date. As of January 15, 2003, iVoice owed Cornell Capital Partners an aggregate of $179,671 under these two promissory notes. The proceeds under these notes represent advances under the Equity Line of Credit that will be repaid through the issuance of Class A common stock pursuant the terms of the Equity Line of Credit agreement. In February 2003, we entered into an Equity Line of Credit with Cornell Capital Partners, L.P. Pursuant to the Equity Line of Credit, we may, at our discretion, periodically sell to Cornell Capital Partners shares of Class A common stock for a total purchase price of up to $5.0 million. For each share of Class A common stock purchased under the Equity Line of Credit, Cornell Capital Partners will pay 91% of the lowest closing bid price on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the 5 days immediately following the notice date. Cornell Capital Partners is a private limited partnership whose business operations are conducted through its general partner, Yorkville Advisors, LLC. Further, Cornell Capital Partners will retain 5% of each advance under the Equity Line of Credit. In addition, iVoice engaged Westrock Advisors, Inc., a registered broker-dealer, to advise it in connection with the Equity Line of Credit. For its services, Westrock Advisors received 500,000 shares of iVoice's Class A common stock. The issuance of these shares is conditioned upon iVoice registering these shares with the Securities and Exchange Commission. In June 2002, iVoice raised $255,000 from the sale of convertible debentures. These debentures are convertible into shares of Class A common stock at a price equal to either (a) an amount equal to one hundred twenty percent (120%) of the closing bid price of the common stock as of the closing date or (b) an amount equal to eighty percent (80%) of the average closing bid price of the common stock for the four trading days immediately preceding the conversion date. These convertible debentures accrue interest at a rate of 5% per year and are convertible at the holder's option. These convertible debentures have a term of two years. All amounts outstanding under these convertible debentures have been redeemed. iVoice paid $70,000 in cash and issued 129,645,133 shares of Class A common stock upon conversion of $185,000 in principal and $4,725 in interest, due under the debentures. Other than the Equity Line of Credit, no other financing agreement is currently available to us. In light of this, it should be noted that there is no assurance that the Equity Line of Credit will enable us to raise the requisite capital needed to implement our long-term growth strategy or that alternative forms of financing will be available. Current economic and market conditions have made it very difficult to raise required capital for iVoice to implement its business plan. In relation to iVoice's outstanding 12% Convertible Debentures which are currently in default, iVoice has reached settlement terms with one previous holder of debentures regarding the interest and penalties demanded by this former holder whereby iVoice has issued 450,000 shares to this former holder in full settlement of the former debenture holder's claim. iVoice continues its discussions with the remaining debenture holders attempting to resolve the default issues in a mutually favorable manner. However, it is uncertain whether 21 iVoice will be able to reach an agreement under terms favorable to iVoice. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS iVoice has adopted only the disclosure provisions of SFAS No. 123. It applies Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and its related interpretations in accounting for its plan. It does not recognize compensation expense for its stock-based compensation plan other than for restricted stock and options/warrants issued to outside third parties. SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information" requires that a public company report financial and descriptive information about its reportable operating segments. It also requires that an enterprise report certain information about its products and services, the geographic areas in which they operate and their major customers. In determining the requirements of this pronouncement, Management currently believes that there is no materially reportable segment information with respect to iVoice's operations and does not provide any segment information regarding products and services, major customers, and the material countries in which iVoice holds assets and reports revenue. SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities" requires that certain derivative instruments be recognized in balance sheets at fair value and for changes in fair value to be recognized in operations. Additional guidance is also provided to determine when hedge accounting treatment is appropriate whereby hedging gains and losses are offset by losses and gains related directly to the hedged item. While the standard, as amended, must be adopted in the fiscal year beginning after June 15, 2000, its impact on iVoice's financial statements is not expected to be material as iVoice has not historically used derivative and hedge instruments. SFAS No. 142, "Goodwill and Other Intangible Assets" requires goodwill to be tested for impairment under certain circumstances, and written off when impaired, rather than being amortized as previous standards require. It is effective for fiscal years beginning after December 15, 2001. Early application is permitted for entities with fiscal years beginning after March 15, 2001 provided the first interim period financial statements have not been previously issued. iVoice is currently assessing the impact of this pronouncement on its operating results and financial condition. Statement of Position ("SOP") No. 98-1 specifies the appropriate accounting for costs incurred to develop or obtain computer software for internal use. The new pronouncement provides guidance on which costs should be capitalized, and over what period such costs should be amortized and what disclosures should be made regarding such costs. This pronouncement is effective for fiscal years beginning after December 15, 1998, but earlier application is acceptable. Previously capitalized costs will not be adjusted. iVoice believes that it is already in substantial compliance with the accounting requirements as set forth in this new pronouncement and therefore believes that adoption will not have a material effect on its financial condition or operating results. SOP No. 98-5 requires that companies write-off defined previously capitalized start-up costs including organization costs and expense future start-up costs as incurred. iVoice believes that it is already in substantial compliance with the accounting requirements as set forth in this new pronouncement and therefore believes that adoption will not have a material effect on its financial condition or operating results. CRITICAL ACCOUNTING POLICIES Below is a description of those accounting policies that iVoice views as most critical in the preparation of its financial statements. GOING CONCERN. The accompanying financial statements have been prepared assuming that iVoice will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. iVoice has incurred accumulated net losses totaling $14,091,507 as of September 30, 2002, and has had periodic cash flow difficulties, which raise substantial doubt of iVoice's ability to continue as a going concern. To date, iVoice has funded its operations through the issuances of convertible debt, proceeds from exercised warrants, sales of its Class A common stock, collections from the sale of company products and loans from its principal stockholder, the proceeds of which are derived from sales of this principal stockholder's personal holdings of iVoice's Class A common stock. 22 iVoice operates in an industry segment having inherent risks generally associated with small technology companies. Such risks include, but are not limited to, the ability to: a) generate sales of its product at levels sufficient to cover its costs and provide a return for investors, b) attract additional capital in order to finance growth, c) further develop and successfully market and distribute commercial products and d) successfully compete with other technology companies having financial, production and marketing resources significantly greater than those of iVoice. iVoice recently entered into financing agreement with Cornell Capital, LP that will require the issuance of additional equity as described in Note 4 of these financial statements. Management believes that appropriate funding will be generated by the financing agreement with Cornell enabling iVoice to continue operations through the current fiscal year. Management is also confident that future product sales will generate necessary cash flow, reducing iVoice's need for additional financing. It should be noted however, that no assurance can be given that these future sales will materialize or that additional necessary funding can be raised. REVENUE RECOGNITION. iVoice obtains its income primarily from the sale of its voice recognition and computer technology communication systems. Revenue for systems which require customization to meet a customer's specific needs or technical requirements, is recognized by the contract method of accounting, using percentage of completion. Progress toward completion is measured by costs incurred to date as a percentage of total estimated costs for each contract. Under the percentage of completion method, the liability "Billings in excess of costs and estimated earnings" represents billings in excess of revenues earned. The completed contract method is used for systems, which do not require customization or installation. iVoice recognizes revenue from support services at the time the service is performed or over the period of the contract for maintenance/support. SOFTWARE LICENSE COST. 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 patented by Parwan Electronics, Corp. ("Parwan"), 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", and are being amortized using the straight-line method over a period of five years. As described later in Note 1, iVoice has adopted SFAS No. 121. The carrying value of software license costs are regularly reviewed by iVoice 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. No impairment loss was recognized as of December 31, 2001. DEBT ISSUE COSTS. Debt issue costs represent the estimated cost of the conversion discount feature relating to the issuance of iVoice's convertible debentures. In previous years, these costs were amortized and charged to interest expense over the life of the debt. During the year ended December 31, 2001, iVoice charged to expense the fair value of the beneficial conversion features of the convertible debt as measured at the date of issuance in accordance with EITF Issue 98-5. The switch to this method of accounting did not have a material affect on iVoice's financial statements. LONG-LIVED ASSETS. SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. iVoice has adopted this statement and determined that an impairment loss should not be recognized for applicable assets of continuing operations. 23 DESCRIPTION OF BUSINESS Our current corporate configuration is the result of a number of separate transactions over the past several years. On February 26, 1996, Select Resources, Inc., a publicly held Delaware company, and three of its principal stockholders entered into a stock exchange agreement with Visual Telephone of New Jersey, Inc., a privately held New Jersey corporation, and its two stockholders pursuant to which Select Resources acquired all of the outstanding shares of Visual Telephone and spun-off Select Housing Associates, Inc., its wholly owned subsidiary. The aim of this agreement was to provide for a more profitable business direction for Select Resources. Pursuant to the agreement, Select Resources agreed to issue 5,611,000 shares of its capital stock to one of the two stockholders of Visual Telephone and to transfer one-half of the shares of Select Housing Associates to the other stockholder of Visual Telephone, namely Joel Beagelman, in return for all of the outstanding shares of Visual Telephone. In addition, Select Resources transferred the other half of the shares of Select Housing Associates to Gary W. Pomeroy and Brad W. Pomeroy, two of Select Resources' three principal stockholders, in return for the cancellation of 1,111,000 shares of common stock of Select Resources owned by them. At the time of the stock exchange agreement, Mr. Beagelman, Gary W. Pomeroy and Brad W. Pomeroy were directors of Select Resources. On February 26, 1996, the stock exchange agreement was approved by the consent of stockholders a majority of the outstanding shares of common stock of Select Resources. Visual Telephone then merged into Select Resources, which changed its name to that of the subsidiary. In July 1996, Visual Telephone acquired 100% of the outstanding common shares of Communications Research Inc., or "CRI," for $50,000 in cash, $150,000 in notes and 1,000,000 shares of Visual Telephone. CRI designs, develops, sells, and supports PC-based communication systems that transmit data, voice and full-motion video. On May 21, 1999, International Voice Technologies, Corp., a Delaware corporation, merged with and into Visual Telephone (which in the interim had changed its name to Visual Telephone International, Inc.), with Visual Telephone surviving. Simultaneous with the merger, Visual Telephone changed its name to iVoice.com, Inc., and it was planned that Visual Telephone would spin off CRI prior to the merger with International Voice Technologies. Our current business is essentially that of International Voice Technologies, and this merger was aimed at giving that business better access to the capital markets by merging it into a public company. In addition, we changed our OTC Bulletin Board trading symbol to "IVOC." In consideration for the merger with International Voice Technologies, Jerome R. Mahoney, the sole stockholder of International Voice Technologies, received 10,000,000 shares of our Class A common stock and 700,000 shares of our Class B common stock. In addition, the two controlling stockholders of Visual Telephone sold 300,000 shares of Class B common stock to Mr. Mahoney and concurrently canceled a total of 2,000,000 shares of their Class A common stock. The consulting firm of Toby Investments was awarded 2,000,000 shares of common stock for consulting services on the transaction. The agreement also provided that certain of the assets of Visual Telephone would be transferred to Visual Telephone's wholly owned subsidiary, CRI. The merger was accounted for in its financial statements as a public shell merger. In a public shell merger the stockholders of the operating company, in this case International Voice Technologies, become the majority owners of the shell company, in this case Visual Telephone, and the stockholders of Visual Telephone, the public shell company, become minority stockholders in International Voice Technologies, the operating company. As for the CRI spin-off, on September 18, 2000, CRI filed a registration statement to provide for the distribution of its shares to Visual Telephone's stockholders as of May 21, 1999. Visual Telephone's stockholders received one CRI share for every four shares owned in Visual Telephone. The principal stockholders, officers and directors of Visual Telephone were Carl Ceragno and Joel Beagelman. Mr. Ceragno remained with CRI as its President and Mr. Beagelman entered into a consulting agreement with us. On April 24, 2000, we entered into an agreement and plan of reorganization with all the stockholders and ThirdCAI, another shell company that was a reporting company under the Securities Exchange Act of 1934. In this transaction, which took place by means of a short-form merger, with ThirdCAI's name being changed to iVoice, we acquired all the issued and outstanding shares of ThirdCAI in exchange for $150,000, and a finder's fee paid to Corporate Architect, Inc., consisting of 50,000 shares of our Class A voting common stock. The purpose of this transaction was to enable our business to be conducted by a reporting company, as pursuant to the "eligibility rule" adopted by the National Association of Securities Dealers, Inc., or "NASD," as only reporting companies may continue to have stock quoted on the OTC Bulletin Board. 24 Our principal offices and facilities are located at 750 Highway 34, Matawan, NJ 07747 and our telephone number is (732) 441-7700. Our common stock is quoted on the OTC Bulletin Board under the trading symbol "IVOC." OUR BUSINESS We design, manufacture, and market innovative voice and computer telephony communications systems for businesses and corporate departments with as many as 20,000 telephones. Our speech recognition software products enable our customers to communicate more effectively by integrating their traditional office telephone systems with automated attendant, voice mail, unified messaging, and interactive voice response, or "IVR," functions. Our products are designed to be "people oriented," with features that can be readily used without special training or manuals. Our principal products, Speech-enabled Auto Attendant, iVoiceMail, Unified Messaging, and iVoice IVR, incorporate this philosophy. We also design, market, and support voice recognition products. Except for iVoice IVR, which is generally sold directly to end users due to required customization, iVoice markets and promotes its speech enabled products through telephony reseller channels and telephone equipment manufacturer distributor networks. This allows iVoice to leverage those resellers' existing customer bases. We may, however, sell direct to end users in geographic locations where an existing dealer relationship does not exist. On direct sales orders, iVoice is able to achieve greater profit margins through higher direct selling prices. PRODUCTS AND SERVICES Our products use standard open-architecture personal computer platforms and Microsoft Windows 2000, NT Server and NT Workstation operating systems, thereby facilitating the rapid adoption of new PC-based technologies while reducing overall product costs. We concentrate our development efforts on software rather than hardware because we believe that the most efficient way to create product value is to emphasize software solutions that meet customers' needs. We have traditionally used standard PC-related hardware components in our products, in part, to limit our need to manufacture components. However, we have recently developed our software for use with Telephony Application Program Interface or TAPI. The use of TAPI allows iVoice to integrate into different telephone private branch exchange systems or PBX's, eliminating the need for additional external hardware. iVoice's manufacturing operations consist only of the installation of its proprietary software and a voiceboard, if required, into a fully assembled PC system. iVoice obtains from suppliers components such as PCs, circuit boards, application cards, faxboards, and voiceboards. Our products include the iVoice Speech Enabled Auto Attendant allowing businesses to incorporate speech recognition into their telephone systems without duplicating their current voicemail applications. The Speech Enabled Auto Attendant uses a customized dictionary of names and extension numbers that enables callers to contact their party using their spoken voice. Also one our principal products is iVoice IVR (interactive voice response). Except for iVoice IVR that is generally sold direct due to requested customization, iVoice markets and promotes its products to telephony reseller and distributor networks. This allows iVoice to leverage those resellers' existing customer bases. Our flagship product is iVoice IVR, an application generator that allows full connectivity to the most popular databases, including Microsoft Access, Microsoft Excel, Microsoft Fox Pro, DBase, Btrieve, and Paradox, or to standard text files. iVoice IVR can be used to read information from, and write information to, databases, as well as query databases and return information. iVoice IVR performs over 40 different customizable commands. Properties can be set up for each command, as if the commands were being executed manually. iVoice IVR links a phone system to a database to provide customers with 24-hour immediate access to account information, via telephone. With iVoice IVR, polished IVR applications are quick and easy to install. No knowledge of computer programming and minimal database knowledge is needed. iVoice 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 iVoice IVR 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. 25 The following is a list of Speech-enabled applications which iVoice has developed and are available for sale: IVOICE IVR (INTERACTIVE VOICE RESPONSE). Enables a caller to obtain requested information in voice form from a local or non-local database. Examples of IVR range from simply selecting announcements from a list of options stored in the computer (also know as Audio Text) to more complex interactive exchanges such as querying a database for information. iVoice IVR allows information in PC databases to be accessed from a standard touch-tone telephone using a telephone keypad or voice commands. iVoice IVR is sold as a customized turnkey system or as an Application Generator giving the end user the ability to develop their own customized IVR application. SPEECH ENABLED AUTO ATTENDANT. Any business can improve and speed up service for its customers by enabling them to reach the desired contact person or department by simply saying the appropriate name. Our speech recognition system is accurate and reliable. Callers no longer need to punch in letters on a telephone keypad. UNIFIED MESSAGING. With Unified Messaging, e-mail, voice mail and faxes can be handled through a desktop PC or the telephone. All messages can be viewed and acted upon in order of importance via Microsoft Outlook or a Web Browser. E-mail can also be retrieved over the phone, using text-to-speech, and responded to with a voice message including directed to a fax machine. IVOICEMAIL. This allows a caller to store voice messages and reply via the computer. This method allows the caller to conduct a dialogue with another person without having to be on the same line at the same time. As with most voice mail systems, the caller can record, store and delete messages and direct messages to multiple subscribers. IVOICE NAME DIALER is an automatic phone dialing system. The system imports the necessary contact information for dialing (names and phone numbers) from a variety of sources including, but not limited to, Microsoft Outlook, ACT, and Gold Mine. The imported names are then transcribed, through software, into a set of phonemes to be used for voice recognition. When the end user picks up the handset, the call is automatically transferred through the PBX, to the Name Dialer software running on a server machine. The user simply says the name of the person (whose name came from the contact list) and the Name Dialer places the call. IVOICE SPEECH DIRECTORY allows employees to pick up their phone, say the name of a co-worker they wish to speak to, and the Speech Directory will transfer the call. Just by speaking the person's name, the Speech Directory can also return an internal pager number, cell numbers and email listings through a voice activated telephony directory. INTERACTIVE VOICE RESPONSE/WEB APPLICATIONS. Using the Internet to access the IVR system, you "DIAL" the system by clicking on a hypertext link from your browser. The system responds the same way, except in text form, and not the normal voice prompt. You may enter selections and get information by clicking on icons or choosing items from menus. We are currently working on upgrading and enhancing existing products, with the aim of adding to some products, a full toolkit that would enable natural language recognition allowing the systems to understand spoken sentences rather than just single words. MARKETING AND DISTRIBUTION iVoice is currently focused on developing its dealer and reseller channels. Management believes it can leverage already existing equipment manufacturers reseller channels by integrating its speech recognition software directly into their established revenue producing product lines. We estimate that each major telephony equipment manufacturer has an estimated 150-600 authorized dealers and resellers throughout North America. The recent introduction of an entirely TAPI (Telephone Application Program Interface) based Speech-enabled Auto Attendant and Name Dialer, allows integration into different PBX systems without the need for additional hardware devices. Although concentration on resellers is the predominate and preferred sales channel, 26 iVoice also sells directly to end-users via its direct sales force providing management with information on market trends and customer needs. The direct channel also provides an avenue more suitable for iVoice IVR applications that often require customized development, which is usually difficult to provide through the reseller network. Our marketing strategy emphasizes our user-friendly PC-based processing applications that offer integrated access to a broad range of communication avenues with other people and information sources. Our strategy is built around the following basic elements: EMPHASIZE SOFTWARE, NOT HARDWARE. We concentrate our developing software that meets our clients' needs, rather than on designing or modifying hardware. This allows us to create the most value from our products. USE OF STANDARD, MICROSOFT WINDOWS-BASED ARCHITECTURE, OPEN SYSTEMS AND HARDWARE. Our products use standard, open-architecture PC platforms and operating systems rather than proprietary computer hardware and operating systems. As a result, we can quickly adapt to new PC-based technologies, leveraging the substantial investments made by third parties in developing these new technologies for the PC environment. In addition, using available hardware components and software minimizes our manufacturing activity and thereby reduces the overall cost of our products. FOCUS ON BUSINESSES AND CORPORATE DEPARTMENTS HAVING AS MANY AS 20,000 TELEPHONES. Our products are designed for use by businesses and corporate departments having as many 20,000 telephones in a wide range of markets, including manufacturing, retail, service, healthcare, and government. Our products offer these organizations, features offered by large, proprietary call processing systems, but at a more affordable price. DEVELOP USER-FRIENDLY PRODUCTS. We aim to make our products as easy as possible to install, maintain, and use. We accomplish this by incorporating product features that can be used without special training or manuals. One example of this user-oriented philosophy is exhibited in our voicemail product. IVOICEMAIL has user prompts that encourage conversation between callers and subscriber and uses simplified screens and menus for ease of installation. MINIMIZE DISTRIBUTION OVERHEAD. We are able to achieve broad market coverage in the U.S. via a nationwide network of independent telephone system dealers, and original-equipment-manufacturers, or "OEMs." This structure both minimizes our selling overhead and maximizes our product exposure, and allows us to focus our resources on product development. NEW PRODUCTS In June 2002, we announced commercial availability of digital connectivity for our Speech Enabled Auto Attendant, VoiceMail and Unified Messaging applications. The migration to a digital platform should enable us to distribute our speech recognition solutions to mid and larger sized entities that support and prefer digital connectivity, which we feel could greatly expand our potential customer base. The Private Branch Exchanges or "PBX" already supporting digital technology include Avaya(R) Difinity(R), Nortel(R) NorStar(R) and Meridian(R), NEC(R), and Siemens(R) HICOM(R), representing a significant portion of PBX market share. Compared to other integration methods, digital integration offers more features and greater reliability. In December 2001, we introduced the IVOICE NAME DIALER that uses Telephony Application Program Interface or ("TAPI"). The use of TAPI, allows iVoice to integrate into different telephone private branch exchange systems ("PBX"), eliminating the need for additional component hardware. Each phone system hardware provider provides a specific software driver that interfaces directly with the iVoice Name Dialer. TAPI provides a high-level interface for dialing and disconnecting. The Name Dialer is an automatic phone dialing system. The system imports the necessary contact information for dialing (names and phone numbers) from a users' contact management software such as Microsoft Outlook, ACT, and Gold Mine. The imported names are then transcribed, through our software, into a set of phonemes to be used for voice recognition. When the user picks up the handset, the call is automatically transferred through the PBX, to the Name Dialer software running on a server machine. The user simply says the name of the person (whose name came from the contact list) and the Name 27 Dialer places the call. iVoice is currently distributing demonstration copies of the Name Dialer to resellers and distributors to determine customer interest and marketability. COMPETITION The voice-recognition industry is highly competitive, and we believe that this competition will intensify. The segment of the industry that supplies call-processing systems to businesses is also extremely competitive. Many of our competitors have longer operating histories, significantly greater financial, technical, product development, and marketing resources, greater name recognition or larger client bases than we do. For example, industry analysts recognize Nuance Communications, Inc. and SpeechWorks International, Inc. as the market leaders in voice recognition software. Customers of Nuance include American Airlines, Bell Atlantic, Charles Schwab, Sears and UPS. Nuance offers products through industry partners, platform providers, and value-added resellers around the world. Corporate investors in Nuance include Cisco Systems, Intel, Motorola, SAIC, Siebel Systems, SRI International, Sun Microsystems, and Visa International. SpeechWorks customers include America Online, First Union National Bank, Microsoft, Thrifty Car Rental and United Airlines. On a more directly competitive scale, other companies that produce computerized telephony systems that incorporate speech recognition into their products such as the IVOICE SPEECH-ENABLED AUTO ATTENDANT include companies like Locus Dialogue, Phonetic Systems and Sound Advantage. Management believes that the IVOICE SPEECH-ENABLED AUTO ATTENDANT has competitive advantages based upon product features, the accuracy of the speech recognition and product pricing. SUPPLIERS Our suppliers include Dialogic Corporation (an Intel company) that distributes through a network of resellers for voiceboards, and iTox, Inc., and Amer.com, Inc. for computer hardware components. Since our products are based and run on standard PC architecture and as result of iVoice's recent integration with TAPI, iVoice does not rely on any one specific supplier for its system components. We have not experienced any supply shortages with respect to the components used in systems or developed applications. CUSTOMERS Direct customers are comprised of businesses, organization and corporate departments that use telephones as a principal means of communications. Specifically, the end users of our products seek to automate the call process for incoming callers in order to improve customer service and increase productivity. The IVOICE SPEECH-ENABLED AUTO ATTENDANT and IVOICE IVR seek to fulfill these customer needs. Customers who seek to automate the call process for outbound calling are primary targets for the IVOICE NAME DIALER and IVOICE PATIENT REMINDER. Wholesale customers include value added resellers and distributors of telephony equipment throughout North America. For the years ended December 31, 2002 and 2001, no one customer represented more than 10% of our total revenues. iVoice does not rely on any one specific customer for any significant portion of its revenue base. We generally require customers to pay 50% down on any turnkey applications purchased, with the balance due when installation has been completed. Software only sales require cash-on-delivery or prepayment before shipping except for dealers and resellers, which subject to credit approval are given 30 day payment terms. iVoice accepts checks or Visa/MasterCard. Approximately 70% of our revenues are derived from customers located in the northeast U.S. The remaining 30% are from customers located elsewhere in the continental U.S. PATENTS AND TRADEMARKS iVoice currently has ten patent applications pending with the United States Patent and Trademark Office for speech enabled applications that it has developed internally. These applications include various versions of the "iVoice Speech Enabled Name Dialer", the "Voice Activated Voice Operated Copier", the 28 "Voice Activated Voice Operational Universal Remote Control", and the "Voice Activated, Voice Responsive Product Locator." In February 2002, iVoice filed a Trademark application for its `iVoice' logo and approval is pending. GOVERNMENT REGULATION iVoice is subject to licensing and regulation by a number of authorities in its state or municipality. These may include health, safety, and fire regulations. iVoice's operations are also subject to federal and state minimum wage laws governing such matters as working conditions and overtime. iVoice is not subject to any necessary government approval or license requirement in order to market, distribute or sell its principal or related products other than ordinary federal, state, and local laws which governs the conduct of business in general. iVoice is unaware of any pending or probable government regulations that would have any material impact on the conduct of business. RESEARCH AND DEVELOPMENT Our research and development efforts focus on enhancing our existing product line and the development of new products that integrate with our existing products. We continually seek to improve our core speech recognition technology through ease of use, broader application and increased accuracy. iVoice employs qualified technical personnel to strengthen its product line. For the nine months ending September 31, 2002, research and development expenditures consisted of $165,806 in salaries and wages to technical staff and $5,013 in technical hardware supplies, software tool-kits and technical publications. In 2001, research and development expenditures consisted of $380,692 in salaries and wages to iVoice's technical staff and $6,773 for technical hardware supplies, software tool-kits and technical publications. In the year 2000, iVoice spent $406,106 in technical salaries and wages and $17,361 for related supplies, tools and publications. Reductions in amounts expended were deemed necessary for the conservation of capital resources. LICENSES We have purchased a worldwide, non-exclusive, irrevocable, royalty-free, fully paid license from Entropic, Inc., a Microsoft company, to incorporate their speech engine into customized software applications for our customers. We also have non-exclusive license agreements with Lernout & Hauspie Speech Products and Fonix Corporation, each of which allows us to incorporate their text-to-speech software into our applications so clients can listen to e-mail messages from any telephone. EMPLOYEES As of January 15, 2003, we had 10 full time employees and 2 part-time employees. None of our employees are represented by a labor organization and we are not a party to any collective bargaining agreements. 29 MANAGEMENT iVoice's present director and executive officers are as follows: NAME AGE POSITION --------------------- ----- ------------------------------ Jerome R. Mahoney 41 President, Chief Executive Officer and Director Kevin Whalen 39 Chief Financial Officer The following is a brief description of the background of the sole director and executive officers of iVoice. JEROME R. MAHONEY (PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR) Mr. Mahoney has been our Chief Executive Officer and our sole director since May 21, 1999. Mr. Mahoney started at Executone Information Systems, a telephone systems manufacturer, and was Director of National Accounts from 1988 to 1989. In 1989, Mr. Mahoney founded Voice Express, Inc., a New York company that sold voicemail systems and telephone system service contracts and installed these systems. Mr. Mahoney sold Voice Express Systems in 1993. From 1993 to 1997, Mr. Mahoney was President of IVS Corp., and on December 17, 1997, he established International Voice Technologies, which we merged with on May 21, 1999. Mr. Mahoney received a B.A. in finance and marketing from Fairleigh Dickinson University, Rutherford, N.J. in 1983. KEVIN WHALEN (CHIEF FINANCIAL OFFICER) Mr. Whalen has been a Certified Public Accountant since 1988 and has over 10 years experience in public accounting and 6 years experience in industry. From 1996 to 2000, he served as the Corporate Controller for Willcox and Gibbs, Inc., a $160 million international sales and distribution company, where he was responsible for preparing consolidated analytical statements and SEC filings, managing iVoice's independent audits, and assisting in the registration of an $85 million public bond offering. From 1986 to 1996, Mr. Whalen was the Tax Supervisor for Curchin and Company, P.A., where he was responsible for compilation and review engagements, as well as developing tax-planning strategies for business and individual clientele. Mr. Whalen received a B.S. in Commerce from Rider College, Lawrenceville, N.J. in 1986 and is a member of the American Institute of Certified Public Accountants. 30 ITEM 10. EXECUTIVE COMPENSATION The following table shows all the cash compensation paid by iVoice, as well as certain other compensation paid or accrued, during the fiscal years ended December 31, 2002, 2001 and 2000 to iVoice's named executive officers. No restricted stock awards, long-term incentive plan payouts or other types of compensation, other than the compensation identified in the chart below, were paid to these executive officers during these fiscal years.
ANNUAL COMPENSATION LONG-TERM COMPENSATION ---------------------------------------- --------------------------------- AWARDS PAYOUTS --------------------- ------- OTHER RESTRICTED ANNUAL STOCK OPTIONS/ LTIP ALL OTHER NAME AND SALARY BONUS COMPENSATION AWARD(S) SAR'S PAYOUTS COMPENSATION PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($) - ------------------ ---- --- --- --- --- --- --- --- Jerome R. Mahoney 2002 $232,320 $0(8) $45,605(3) $0 0 0 $4,729(7) President and Chief 2001 $211,200 $75,000 $95,000(3) $0 0 0 $354,416(7) Executive Officer 2000 $192,000 $0 $34,000(4) $0 0 0 $4,416(7) Kevin Whalen(2) 2002 $100,000 $0(8) $0 $0 0 $0 Chief Financial 2001 $93,333 $34,000 $0 $115,000(5) 1,200,000(6) 0 $0 Officer 2000 $53,333 $0 $0 $20,950(5) 200,000(6) 0 $0 Joel G. Beagelman(1) 2002 N/A N/A N/A N/A N/A N/A N/A Former Chief Financial 2001 $0 $0 $0 $0 0 0 $0 Officer, Secretary and Treasurer 2000 $39,000 $0 $0 $0 0 0 $0
- ---------------------- (1) Effective May 16, 2000, Mr. Beagelman resigned as our Chief Financial Officer, Secretary, and Treasurer. (2) Effective May 16, 2000, Mr. Whalen was promoted to Chief Financial Officer and is not subject to any employment contract with iVoice, Inc. (3) Represents amounts accrued for reimbursement of income taxes of $45,605 in 2002 and $95,000 in 2001, paid by Mr. Mahoney on sales of personal holdings of iVoice Class A common shares, the proceeds of which have been loaned to iVoice. (4) Represents accrued and unpaid sales commissions due to Mr. Mahoney. (5) Represents 1,000,000 Class A common shares granted on March 20, 2001 and 50,000 Class A common shares granted on September 20, 2000 and 5,000 Class A common shares granted on June 30, 2000. All shares granted vest with Mr. Whalen three years from the date granted. Total restricted shares held by Mr. Whalen total 1,055,000 valued at $1,910 as of December 31, 2002. (6) Represents options to purchase 1,000,000 Class A common shares at $.06 granted on June 27, 2001; options to purchase 200,000 Class A common shares at $.10 granted on March 12, 2001; options to purchase 100,000 Class A common shares at $.50 granted on June 30, 2000; options to purchase 50,000 Class A common shares at $.60 granted on May 17, 2000; and options to purchase 50,000 Class A common shares at $.75 granted on May 2, 2000. All options vest 25% per year and expire 5 years from the date of issue. To date, none of these options have been exercised. (7) Represents $4,729 in life insurance premiums paid on behalf of Mr. Mahoney for the year ending December 31, 2002; $350,000 as reimbursement for the donation of personal holdings of iVoice Class A Common shares donated to charity and $4,416 in life insurance premiums paid on behalf of Mr. Mahoney for the year ending December 31, 2001 and $4,416 in life insurance premiums paid on behalf of Mr. Mahoney for the year ending December 31, 2000. (8) iVoice has not yet determined whether it will pay bonuses for the year ended December 31, 2002 and, if so, in what amounts. 31 OPTIONS IVoice did not grant any options to any of the named executive officers during the year ended December 31, 2002. The following table contains information regarding options exercised in the year ended December 31, 2002, and the number of shares of common stock underlying options held as of December 31, 2002, by iVoice's named executive officer. AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTIONS/SAR VALUES (1)
VALUE OF UNEXERCISED NUMBER OF SECURITIES IN-THE-MONEY UNDERLYING UNEXERCISED OPTIONS/SAR'S OPTIONS/SAR'S AT FY-END AT FY-END ---------------------------- -------------------------- SHARES ACQUIRED VALUE ON EXERCISE REALIZED (#) ($) ----------------- -------- ---------------------------- -------------------------- NAME (#) ($) EXERCISABLE UNEXCERSISABLE EXERCISABLE UNEXERCSISABLE - ----------------- ----------------- -------- ------------ -------------- ----------- -------------- Kevin Whalen, CFO 0 0 400,000 1,000,000 0 0
- ---------- (1) These grants represent options to purchase common stock. No SAR's have been granted. (2) The value of the unexercised in-the-money options were calculated by determining the difference between the fair market value of the common stock underlying the options and the exercise price of the options as of December 31, 2002. EMPLOYMENT AGREEMENT On May 1, 1999, iVoice entered into a five-year employment agreement with Mr. Mahoney. Mr. Mahoney will serve as iVoice's President and Chief Executive Officer for a term of five years. As consideration, iVoice agreed to pay Mr. Mahoney the sum of $180,000 the first year with a 10% increase every year thereafter. 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 in each of the five prior calendar years (or shorter period during which Mr. Mahoney shall have been employed by iVoice) should his employment be terminated following a Change in Control, as defined in the agreement. STOCK OPTION PLAN During the year ended December 31, 1999, iVoice adopted the Employee Stock Option Plan in order to attract and retain qualified personnel. Under the Plan, the Board of Directors, in its discretion may grant stock options (either incentive or non-qualified stock options) to officers and employees to purchase iVoice's common stock at no less than 85% of the market price on the date the option is granted. Options generally vest over four years and have a maximum term of five years. During 1999, 20,000,000 shares were reserved for future issuance under the plan. As of January 15, 2003, 16,559,000 options to purchase shares were granted. A total of 9,000,000 of these granted options were exercised. A total of 6,891,083 options to purchase Class A common shares were outstanding and held by employees, of which a total of 2,704,415 are vested. The weighted average exercise price of all outstanding options is $0.077 per share. The weighted average exercise price of all vested options is $0.576 per share. All options issued to employees vest at 25% per year and expire in 5 years. 32 DESCRIPTION OF PROPERTY iVoice does not own any real property for use in its operations or otherwise. iVoice leases its headquarters located at 750 Highway 34, Matawan, New Jersey. The lease is presently a month-to-month obligation of $8,000 per month. iVoice maintains a good relationship with its landlord and believes that its current facilities will be adequate for the foreseeable future. LEGAL PROCEEDINGS iVoice is aware of the following actual and threatened legal proceedings: On August 2, 2002 we reached a settlement agreement with Business Staffing, Inc. who filed a lawsuit against iVoice in the amount of $37,250 for non-payment of placement services provided in the year 2000. The settlement agreement requires iVoice to pay Business Staffing, Inc. $13,500 payable in 10 monthly installments. iVoice has filed suit against PanAm Wireless, Inc. the parent company of Celpage, Inc. for breach of contract amounting to $245,375, related to the installation of a 196-port Integrated Voice Response System at the customer's Guaynabo, Puerto Rico location. PanAm has refused to accept the remaining ports citing a shortfall in their projected subscriber base. Subsequent to the filing and in response to our claim, PanAm Wireless has entered a counterclaim in the amount of $5,418,438 for lost profits and additional costs incurred by PanAm Wireless alleging iVoice failed to supply the required equipment and that the system did not provide the specified services specified in their purchase order. The case has presently been dismissed in court and the parties are preparing to enter into mutual releases from any further obligations of performance under the original contract. 33 PRINCIPAL STOCKHOLDERS The following table sets forth, as of January 15, 2003, 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. [UPDATE] ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK BENEFICIALLY OWNED -------------------------------- NAME/ADDRESS TITLE OF CLASS NUMBER PERCENT(1) - ---------------------------------- ----------------------- ------------ ------------ Jerome R. Mahoney Class A common stock 4,848,494,530(2) 89.4% 750 Highway 34 Class B common stock 2,406,801(3)(4) 100.0% Matawan, New Jersey 07747 Kevin Whalen Class A common stock 1,055,000 * 750 Highway 34 Matawan, New Jersey 07747 Sole Director and All Officers as a Group Class A common stock 4,849,549,530 89.4% 750 Highway 34 Class B common stock 2,406,801 100.0% Matawan, New Jersey 07747 Cornell Capital Partners, LP Class A common stock 151,877,430(5) 20.9% 101 Hudson Street, Suite 3606 Jersey City, New Jersey 07302
- ---------- (1) Applicable percentage of ownership is based on 573,590,263 shares of Class A common stock outstanding as of January 15, 2003, together with securities exercisable or convertible into shares of Class A common stock within 60 days of January 15, 2003 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of Class A common stock subject to securities exercisable or convertible into shares of Class A common stock that are currently exercisable or exercisable within 60 days of January 15, 2003 are deemed to be beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (2) Includes 450,000 shares of our Class A common stock held by Mr. Mahoney's minor children; 1,858,875 shares of Class B common stock indebtedness that have the voting power of, and may be converted into 3,717,750,000 shares of Class A common stock; and the right to receive 547,926 shares of Class B common stock upon conversion of outstanding indebtedness that may be converted into 1,095,852,000 shares of Class A common stock. (3) The shares of Class B common stock held by Mr. Mahoney have the voting power of, and may be converted into 4,813,602,000 shares of Class A common stock. iVoice does not have a sufficient number of authorized shares of Class A common stock in order to honor the exercise or conversion of all outstanding options, warrants, debentures and Class B common stock. Accordingly, Mr. Mahoney, iVoice's President and Chief Executive Officer, has agreed not to convert 75% of his shares of Class B common stock until such time as the accompanying registration statement is no longer effective or until iVoice has increased the number of authorized shares of Class A common stock. (4) Pursuant to the Promissory Note and Security Agreement executed by Mr. Mahoney and iVoice, Inc. on March 20, 2001, Mr. Mahoney may at his option convert amounts owed to him for monies loaned to iVoice from the proceeds of stock sales, unpaid compensation, income taxes incurred from the sale of stock unreimbursed expenses and interest on the unpaid balance at an amount equal to (i) one Class B share for each dollar owed or (ii) the number of Class A common stock shares of iVoice, Inc. calculated by dividing (x) the sum of the principal and interest that Mr. Mahoney has decided to prepay by (y) fifty percent (50%) of the lowest issue price of Series A common stock since the first advance of funds under the notes due to Mr. Mahoney, whichever the he chooses. At January 15, 2003, the total note balance equaled $547,926 representing 547,926 Class B common shares and subsequently convertible into 1,095,852,000 Class A common shares. 34 (5) This consists of promissory notes that are convertible into 151,877,430 shares of Class A common stock. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On October 15, 2002, our stockholders approved a change in this conversion price of our Class B common stock held by Mr. Mahoney, our President and Chief Executive Officer. On January 13, 2003, we amended our certificate of incorporation with the State of Delaware and as a result of this change, the Class B common stock is convertible into the number of shares of Class A common stock determined by dividing the number of Class B common stock being converted by 50% of the lowest price that iVoice had previously issued its Class A common stock. Previously, each share of Class B common stock was convertible in to 100 shares of class A common stock. Accordingly, the number of shares of Class A common stock to be received by Mr. Mahoney upon the conversion of the Class B common stock will be greater as the price of the Class A common stock declines. This will result in greater dilution to our existing and future stockholders because iVoice will be obligated to issue a greater number of shares of Class A common stock conversion of the Class B common stock than order the prior conversion price. Mr. Mahoney will not experience such dilution with respect to his Class B common stock because the conversion price will decline as the price of the Class A common stock declines. During the period from June 2000 to date, Jerome R. Mahoney, President and Chief Executive Officer of iVoice has sold personal holdings of iVoice's Class A common shares and has loaned the proceeds of these sales to iVoice to fund its working capital requirements. iVoice has executed a promissory note and Security Agreement in favor of Mr. Mahoney. As of January 15, 2003, the outstanding loan balance including monies loaned from the proceeds of stock sales, unpaid compensation, income taxes incurred from the sale of stock and unreimbursed expenses, totaled $547,629. On August 13, 2002, the board of directors approved amendments to the Promissory Note payable to Jerome Mahoney, iVoice President and Chief Executive Officer, for monies loaned to iVoice from the proceeds of stock sales of personal holdings of iVoice Class A common stock, unpaid compensation, income taxes incurred from the sale of Company stock and unreimbursed expenses. The change allows for the conversion of amounts due under the Promissory Note into either (i) one Class B common stock share of iVoice, Inc., no par value, for each dollar owed, or (ii) the number of Class A common stock shares of iVoice, Inc. calculated by dividing (x) the sum of the principal and interest that the Note holder has decided to prepay by (y) fifty percent (50%) of the lowest issue price of Series A common stock since the first advance of funds under this Note, whichever the Note holder chooses, or (iii) payment of the principal of this Note, before any repayment of interest. As of September 30, 2002, the outstanding loan balance including interest, monies loaned from the proceeds of stock sales, unpaid compensation, income taxes incurred from the sale of stock and unreimbursed expenses, totaled $2,009,822. On October 14, 2002 Mr. Mahoney converted $1,504,875 of the amounts owed to him under the promissory note into 1,504,875 shares of Class B common stock. On January 15, 2003, Mr. Mahoney had the ability to convert the remaining amounts owed to him under the promissory note into 547,629 shares of Class B common stock that may subsequently converted into 1,095,852,000 shares of Class A common stock. In May 1999, iVoice entered into a five-year employment agreement with Mr. Mahoney. He will serve as President and Chief Executive Officer for a term of five years. As consideration, iVoice agreed to pay the Executive a sum of $180,000 the first year with a 10% increase every year thereafter. iVoice's assets are subject to a Security Agreement with Mr. Mahoney. 35 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER STOCKHOLDER MATTERS Our common stock is quoted on the OTC Bulletin Board under the symbol "IVOC." The following table shows the high and low closing prices for the periods indicated. HIGH LOW 2000 First Quarter $5.9375 $0.2900 Second Quarter $2.2812 $0.3438 Third Quarter $0.7031 $0.3281 Fourth Quarter $0.4900 $0.0950 2001 First Quarter $0.4000 $0.0950 Second Quarter $0.1700 $0.0500 Third Quarter $0.0820 $0.0430 Fourth Quarter $0.0900 $0.0400 2002 First Quarter $0.0590 $0.0270 Second Quarter $0.0380 $0.0120 Third Quarter $0.0170 $0.0013 Fourth Quarter $0.0031 $0.0009 HOLDERS OF COMMON EQUITY As of January 15, 2003, the number of record holders of our common shares was approximately 559. DIVIDEND INFORMATION To date, iVoice has never paid a dividend. We have no plans to pay any dividends in the near future. We intend to retain all earnings, if any, for the foreseeable future, for use in our business operations. SALES OF UNREGISTERED SECURITIES YEAR ENDED DECEMBER 31, 2002. iVoice issued the following unregistered securities pursuant to various exemptions from registration under the Securities Act of 1933: In August and November 2002, iVoice borrowed a total of $470,000 from Cornell Capital partners, which amounts are evidenced by two promissory notes. One note was issued in August 2002 in the principal amount of $250,000. This note is due 120 days after issuance. This note bears interest at 8% per year if not paid by the maturity date. The second note was issued in November 2002 in the principal amount of $220,000. This note is due 150 days after issuance. This note bears interest at 12% per year if not paid by the maturity date. As of January 15, 2003, iVoice owed Cornell Capital Partners an aggregate of $179,671 under these two promissory notes. The proceeds under these notes represent advances under the Equity Line of Credit that will be repaid through the issuance of Class A common stock pursuant the terms of the Equity Line of Credit agreement. iVoice issued 10,000 shares of its Class A common stock for partial payment of leasehold improvements valued at $540. iVoice issued 2,250,000 shares of Class A common stock for legal services valued at $45,000. iVoice issued 505,921 shares of Class A common stock for the conversion of $15,000 in debenture principal and 84,766 shares for $2,594 in accrued interest on its 8% Convertible Debentures. 36 iVoice issued 7,229,230 shares of Class A common stock for the conversion of $64,000 in debenture principal and 4,279,750 shares of Class A Common Stock for the conversion of $93,085 in accrued interest on its outstanding 12% Convertible Debentures. iVoice issued 6,200,000 shares of its Class A common stock for fees and services associated with the financing iVoice issued 19,464,744 shares of its Class A common stock for the conversion of $71,483 in debenture principal on its 5% Convertible Debentures. iVoice issued 36,675,000 shares for repayment of $93,453 in principal on a $250,000 note payable issued for an advance on the equity line financing with Cornell Capital Partners, LP. During the nine months ending September 30, 2002, we issued the following options and warrants: o On August 23, 2002, iVoice issued, to an employee, an option to purchase 5,000,000 shares of iVoice Class A common stock at a price of $.009 per share. The options vest at 25% per year and have a five-year expiration from date of issue. In June 2002, iVoice issued 5,500,000 shares of Class A common stock to Cornell Capital Partners, L.P., 500,000 shares of Class A common stock to Westrock Advisors and 200,000 shares of Class A common stock to Seth A Farbman, all in connection with the Equity Line of Credit. These shares were valued at $110,000, $10,000 and $4,000, respectively. In May 2002, iVoice issued 2,250,000 shares of Class A common stock to Lawrence A. Muenz for legal services rendered. These legal services were valued at $45,000. In April and May 2002, iVoice issued 2,741,331 shares of Class A common stock for the conversion of $29,823.64 of convertible debentures. In February 2003, we entered into an Equity Line of Credit with Cornell Capital Partners, L.P. Pursuant to the Equity Line of Credit, we may, at our discretion, periodically sell to Cornell Capital Partners shares of Class A common stock for a total purchase price of up to $5.0 million. For each share of Class A common stock purchased under the Equity Line of Credit, Cornell Capital Partners will pay 91% of the lowest closing bid price on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the 5 days immediately following the notice date. Cornell Capital Partners is a private limited partnership whose business operations are conducted through its general partner, Yorkville Advisors, LLC. Further, Cornell Capital Partners will retain 5% of each advance under the Equity Line of Credit. In addition, iVoice engaged Westrock Advisors, Inc., a registered broker-dealer, to advise it in connection with the Equity Line of Credit. For its services, Westrock Advisors received 500,000 shares of iVoice's Class A common stock. The issuance of these shares is conditioned upon iVoice registering these shares with the Securities and Exchange Commission. In June 2002, iVoice raised $255,000 from the sale of convertible debentures. These debentures are convertible into shares of Class A common stock at a price equal to either (a) an amount equal to one hundred twenty percent (120%) of the closing bid price of the common stock as of the closing date or (b) an amount equal to eighty percent (80%) of the average closing bid price of the common stock for the four trading days immediately preceding the conversion date. These convertible debentures accrue interest at a rate of 5% per year and are convertible at the holder's option. These convertible debentures have a term of two years. All amounts outstanding under these convertible debentures have been redeemed. iVoice issued 129,645,133 shares of Class A common stock upon conversion of $185,000 in principal and $4,725 in interest due under the debentures. YEAR ENDED DECEMBER 31, 2001. In the year ending December 31, 2001, iVoice issued the following unregistered securities pursuant to various exemptions from registration under the Securities Act of 1933: We issued 15,194,287 shares of Class A common stock for services valued at $918,905. 37 We issued 9,829,204 shares of Class A common stock for the conversion of $402,201 in debenture principal and 317,576 shares of Class A common stock for $13,885 in accrued interest. We issued 2,128,000 shares of Class A common stock valued at $211,080 to settle disputes arising from financing agreements. We issued 1,172,000 shares of Class A common stock to Swartz Private Equity, LLC under the terms of a financing agreement for net proceeds of $129,931. We issued $425,000 of 8% Convertible Debentures exercisable at an 80% conversion price. The 20% conversion discount totaling $106,250 was recorded as interest expense. We issued 2,183,834 shares of our Class A common stock at various times during the year as compensation to employees valued at $234,432. On January 30, 2001, we issued 328,951 shares of our Class A common stock as repayment of amounts owed to related parties valued at $75,659. On November 20, 2001, we issued 1,000,000 shares of our Class A common stock for the conversion of 10,000 shares of our Class B common stock. During 2001, we issued the following options and warrants: o Options to purchase 1,655,000 shares of Class A common stock to employees at an average price of $0.076 per share. Of these options, 255,000 were cancelled due to employee terminations in 2001. The remaining options vest at 25% per year and have a five-year expiration from date of issue. o Warrants to purchase 404,510 shares of Class A common stock with an average exercise price of $0.1220, to Swartz Private Equity, LLC as draw-down fees under a financing agreement. The warrants expire five years from the date of issue. o Warrants to purchase a total of 343,750 shares of Class A common stock with an exercise price of $0.1323 to Owen May and Michael Jacobs of the May Davis Group as a fee for the placement of 8% convertible debentures, pursuant to a subscription agreement. The warrants expire five years from the date of issue. o Warrants to purchase 18,000,000 shares of Class A common stock with an exercise price of $0.055 to the EMCO\Hanover Group, Inc. pursuant to a consulting agreement with them. We issued 18,000,000 shares of Class A common stock for the exercise of this warrant. o Warrants to purchase a total of 250,000 shares of Class A common stock at $0.047 per share to Beacon Capital LLC in consideration for the placement of $150,000 of 8% convertible debentures pursuant to an subscription agreement. The warrants are exercisable at any time prior to their five year expiration and carry a cash or cashless exercise at the option of the holders. YEAR ENDED DECEMBER 31, 2000. On February 10, 2000, iVoice settled a $4,500,000 lawsuit by issuing 2,000,000 shares of Class A common stock. These shares were valued at $300,000 on the date of issuance. On January 10 and February 2, 2000, we issued $100,000 and $50,000, respectively, of 12% Convertible Debentures exercisable at a 50% conversion price. The 50% conversion discount totaling $150,000 was recorded as a prepaid debt issue cost and was amortized over the life of the debt. Debt issue costs represent the estimated cost of the conversion discount feature relating to the issuance of iVoice's convertible debentures. In previous years, these costs were amortized and charged to interest expense over the life of the debt. During the year ended December 31, 2001, iVoice charged to expense the fair value of the beneficial conversion features of the convertible debt as measured at the date of issuance in accordance with EITF Issue 98-5. The switch to this method of accounting did not have a material affect on iVoice's financial statements. During the year ended December 31, 2000, iVoice issued 848,718 shares of Class A common stock for services valued at $518,155. 38 On April 24, 2000, iVoice issued 50,000 shares of Class A common stock to Corporate Architects, Inc. with a value of $46,875 as a referral fee for the purchase of ThirdCAI, Inc. During the year ended December 31, 2000, iVoice issued 80,000 shares of Class A common stock as compensation to employees valued at $69,938. During the year ended December 31, 2000, iVoice issued 9,000,000 shares of Class A common stock upon the exercise of options at $0.033 per share for a total of $297,000. During the year ended December 31, 2000, iVoice issued 33,600,000 shares of Class A common stock for the conversion of 336,000 shares of Class B common stock. During the year ended December 31, 2000, iVoice issued 1,007,287 shares of Class A common stock for the conversion of $163,000 in principal on its outstanding 12% convertible debentures. During the year ended December 31, 2000, iVoice issued 1,240,047 shares of Class A common stock for cash totaling $746,000. On August 17, 2000, in connection with a financing agreement with Swartz Private Equity, LLC, we issued a warrant to purchase 5,490,000 shares of Class A common stock at $0.484 per share. The warrant expires on August 16, 2005 and contains strike price reset provisions. TRANSACTIONS FROM MAY 21, 1999 (THE DATE OF THE MERGER). On May 21, 1999, International Voice Technologies, Corp., a Delaware corporation, merged with and into the predecessor of iVoice, Visual Telephone International, Inc., with Visual Telephone surviving. Simultaneous with the merger, Visual Telephone changed its name to iVoice.com, Inc. and later to iVoice, Inc. In connection with the merger, iVoice issued 36,932,364 shares of Class A common stock to the shareholders of International Voice Technologies. On the date of issuance, these shares were valued at $138,000. In consideration for the merger with International Voice Technologies, Jerome R. Mahoney, the sole stockholder of International Voice Technologies, received 10,000,000 shares of Class A common stock and 700,000 shares of Class B common stock. In addition, the two controlling stockholders of Visual Telephone sold 300,000 shares of Class B common stock to Mr. Mahoney and concurrently canceled a total of 2,000,000 shares of their Class A common stock. The consulting firm of Toby Investments received 2,000,000 shares of common stock for consulting services on the transaction. The agreement also provided that certain of the assets of Visual Telephone would be transferred to Visual Telephone's wholly owned subsidiary, CRI. The merger was accounted for in its financial statements as a public shell merger. In a public shell merger the stockholders of the operating company, in this case International Voice Technologies, become the majority owners of the shell company, in this case Visual Telephone, and the stockholders of Visual Telephone, the public shell company, become minority stockholders in International Voice Technologies, the operating company. On May 22, 1999, iVoice issued 400,000 shares of Class A common stock to Lawrence A. Muenz for legal services. These shares were valued at $32,000 on the date of issuance. On May 22, 1999, iVoice issued 10,000 shares of Class A common stock to Ron Vance for consulting services. These shares were valued at $800 on the date of issuance. On June 15, 1999, iVoice issued 3,200,000 shares of Class A common stock to Suraj Tschand for the purchase of software codes. These shares were valued at $544,000 on the date of issuance. On June 22, 1999, iVoice issued 418,799 shares of Class A common stock to DOTCOM Funding for cash. These shares were valued at $87,949 on the date of issuance. On July 12, 1999, iVoice issued 445,655 shares of Class A common stock to DOTCOM Funding for cash. These shares were valued at $93,589 on the date of issuance. On August 16, 1999, iVoice issued 116,845 shares of Class A common stock to DOTCOM Funding for cash. These shares were valued at $59,591 on the date of issuance. 39 On August 27, 1999, iVoice issued 50,000 shares of Class A common stock to John Mahoney for services. These shares were valued at $7,000 on the date of issuance. John Mahoney is the father of Jerry Mahoney, iVoice's President, Chief Executive Officer and sole director. On August 27, 1999, iVoice issued 50,000 shares of Class A common stock to Daniel Timpone for services. These shares were valued at $7,000 on the date of issuance. On August 31, 1999, iVoice issued 100,000 shares of Class A common stock to RFG, Inc. for services. These shares were valued at $14,000 on the date of issuance. In October 1999, iVoice issued 12% debentures that were convertible into shares of iVoice's Class A common stock at the option of the holder by dividing the outstanding principal and interest by the conversion price which shall equal 50% of the average bid price during the 20 trading days before the conversion date. As of June 30, 2002, $345,200 in principal of the 12% debentures and $99,644 in accrued interest had been converted into 10,017,819 shares of iVoice's Class A common stock. Total outstanding principal balance of the 12% convertible debentures at June 30, 2002 was $154,800, plus accrued interest of $13,460. Debt issue costs represent the estimated cost of the conversion discount feature relating to the issuance of iVoice's convertible debentures. In previous years, these costs were amortized and charged to interest expense over the life of the debt. During the year ended December 31, 2001, iVoice charged to expense the fair value of the beneficial conversion features of the convertible debt as measured at the date of issuance in accordance with EITF Issue 98-5. The switch to this method of accounting did not have a material affect on iVoice's financial statements. On November 1, 1999, iVoice issued 250,000 shares of Class A common stock to Leo Pudlo as employee compensation. These shares were valued at $87,500 on the date of issuance. On November 23, 1999, iVoice issued 20,000 shares of Class A common stock to Jason Christman for services. These shares were valued at $2,800 on the date of issuance. On November 23, 1999, iVoice issued 100,000 shares of Class A common stock to Merle Katz upon the exercise of options. These shares were valued at $14,000 on the date of issuance. We relied upon the exemption provided in Section 4(2) of the Securities Act and/or Rule 506 thereunder, which cover "transactions by an issuer not involving any public offering," to issue securities discussed above without registration under the Securities Act of 1933. iVoice made a determination in each case that the person to whom the securities were issued did not need the protections that registration would afford. The certificates representing the securities issued displayed a restrictive legend to prevent transfer except in compliance with applicable laws, and our transfer agent was instructed not to permit transfers unless directed to do so by iVoice, after approval by our legal counsel. iVoice believes that the investors to whom securities were issued had such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment. iVoice also believes that the investors had access to the same type of information as would be contained in a registration statement. 40 DESCRIPTION OF SECURITIES Pursuant to our certificate of incorporation, as amended, we are authorized to issue 10,000,000,000 shares of Class A common stock, par value $0.0001 per share, 50,000,000 shares of Class B common stock, no par value and 1,000,000 shares of preferred stock, par value of $1.00 per share. Below is a description of iVoice's outstanding securities, including Class A common stock, Class B common stock, options, warrants and debt. iVoice does not have a sufficient number of authorized shares of Class A common stock in order to honor the exercise or conversion of all outstanding options, warrants, debentures and Class B common stock. Accordingly, Mr. Mahoney, iVoice's President and Chief Executive Officer, has agreed not to convert 75% of his shares of Class B common stock until such time as the accompanying registration statement is no longer effective or until iVoice has increased the number of authorized shares of Class A common stock. CLASS A COMMON STOCK Each holder of our Class A common stock is entitled to one vote for each share held of record. Holders of our Class A common stock have no preemptive, subscription, conversion, or redemption rights. Upon liquidation, dissolution or winding-up, the holders of Class A common stock are entitled to receive our net assets pro rata. Each holder of Class A common stock is entitled to receive ratably any dividends declared by our board of directors out of funds legally available for the payment of dividends. We have not paid any dividends on our common stock and do not contemplate doing so in the foreseeable future. We anticipate that any earnings generated from operations will be used to finance our growth. As of January 15, 2003, iVoice had 573,590,263 shares of Class A common stock outstanding. 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 and voting rights have to Class A common stock. Jerome R. Mahoney is the sole owner of the Class B common stock, of which there are 50,000,000 shares authorized and 354,000 shares issued and outstanding as of January 15, 2003. 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 50% of the lowest price that iVoice had previously issued its Class A common stock. On January 15, 2003, these shares of Class B common stock were convertible into 4,813,602,000 shares of Class A common stock. Upon our liquidation, dissolution, or winding-up, holders of Class B common stock will not be entitled to receive any distributions. PREFERRED STOCK On August 24, 2001, we filed an amendment to our certificate of incorporation, authorizing us to issue 1,000,000 shares of preferred stock, par value $1.00 per share. As of January 15, 2003, we have not issued 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 General Corporation Law of the State of Delaware) to issue, from to time, shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, and to fix the designation, powers, preferences and other rights of the shares of each such series and to fix the qualifications, limitations and restrictions thereon, including, but without limiting the generality of the foregoing, the following: o the number of shares constituting that series and the distinctive designation of that series; o the dividend rate on the shares of that series, whether dividends are cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; o whether that series has voting rights, in addition to voting rights provided by law, and, if so, the terms of those voting rights; o whether that series has conversion privileges, and, if so, the terms and conditions of conversion, including provisions for adjusting the conversion rate in such events as our board of directors determines; o whether or not the shares of that series are redeemable, and, if so, the terms and conditions of redemption, including the dates upon or after which they are redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; 41 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, 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 certificate of designations or by resolution of the board of directors providing for the issuance of that series. OPTIONS AND WARRANTS As of January 15, 2003, our employees held options and warrants to purchase 6,891,083 shares of our Class A common stock. These options were granted to our employees under our 1999 Stock Option Plan. The exercise prices ranged from $0.009 to $3.75 per share. All options issued to employees vest at 25% per year and expire in 5 years. Of that total, 705,333 of the options were exercisable, at a weighted average exercise price of $0.576 per share. As of January 15, 2003, we had outstanding, to persons other than employees, options and warrants to purchase 6,558,260 shares of our Class A common stock. These warrants have exercise prices ranging from $0.047 per share to $2.00 per share, with a weighted average exercise price of $0.135 per share. These warrants will expire at various times until May 1, 2006. DEBT As of January 15, 2003, we had outstanding convertible debentures that are convertible into iVoice's Class A common stock at the option of the holder. On January 10 and February 2, 2000, we issued $100,000 and $50,000, respectively, of 12% Convertible Debentures exercisable at a 50% conversion price. The 50% conversion discount totaling $150,000 was recorded as a prepaid debt issue cost and was amortized over the life of the debt. Debt issue costs represent the estimated cost of the conversion discount feature relating to the issuance of iVoice's convertible debentures. In previous years, these costs were amortized and charged to interest expense over the life of the debt. During the year ended December 31, 2001, iVoice charged to expense the fair value of the beneficial conversion features of the convertible debt as measured at the date of issuance in accordance with EITF Issue 98-5. The switch to this method of accounting did not have a material affect on iVoice's financial statements. All amounts outstanding under these debentures have been satisfied by the issuance of shares of capital stock. In June 2002, iVoice raised $255,000 from the sale of 5% convertible debentures. These debentures were convertible into shares of Class A common stock at a price equal to either (a) an amount equal to one hundred twenty percent (120%) of the closing bid price of the common stock as of the closing date or (b) an amount equal to eighty percent (80%) of the average closing bid price of the common stock for the four trading days immediately preceding the conversion date. We issued a total of 129,645,133 Class A common shares upon conversion of $189,725 in outstanding principal and interest. The balance of $70,000 was repaid in cash. As a result, all of the 5% convertible debentures have been repaid in full. In August and November 2002, iVoice borrowed a total of $470,000 from Cornell Capital partners, which amounts are evidenced by two promissory notes. One note was issued in August 2002 in the principal amount of $250,000. This note is due 120 days after issuance. This note bears interest at 8% per year if not paid by the maturity date. The second note was issued in November 2002 in the principal amount of $220,000. This note is due 150 days after issuance. This note bears interest at 12% per year if not paid by the maturity date. As of January 15, 2003, iVoice owed Cornell Capital Partners an aggregate of $179,671 under these two promissory notes. The proceeds under these notes represent advances under the Equity Line of Credit that will be repaid through the issuance of Class A common stock pursuant the terms of the Equity Line of Credit agreement. 42 TRANSFER AGENT iVoice's transfer agent is Fidelity Transfer Company. Its address is 1800 South West Temple, Suite 301, Salt Lake City, Utah 84115. Its telephone number is (801) 484-7222. LIMITATION OF LIABILITY: INDEMNIFICATION Our Bylaws include an indemnification provision under which we have agreed to indemnify directors and officers of iVoice to 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 or officer of iVoice. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of iVoice pursuant to the foregoing, or otherwise, iVoice has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION AUTHORIZED AND UNISSUED STOCK. The authorized but unissued shares of our capital stock are available for future issuance without our stockholders' approval. These additional shares may be utilized for a variety of corporate purposes including but not limited to future public or direct offerings to raise additional capital, corporate acquisitions and employee incentive plans. The issuance of such shares may also be used to deter a potential takeover of iVoice that may otherwise be beneficial to stockholders by diluting the shares held by a potential suitor or issuing shares to a stockholder that will vote in accordance with iVoice's Board of Directors' desires. A takeover may be beneficial to stockholders because, among other reasons, a potential suitor may offer stockholders a premium for their shares of stock compared to the then-existing market price. 43 EXPERTS The financial statements for the year ended December 31, 2001 included in the Prospectus have been audited by Mendlowitz Weitsen, LLP, independent certified public accountants to the extent and for the periods set forth in their report (which contains an explanatory paragraph regarding iVoice's ability to continue as a going concern) appearing elsewhere herein and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. On February 9, 2001, iVoice dismissed Merdinger, Fruchter, Rosen & Corso ("MFR&C") as its independent accountants. The dismissal was approved by iVoice's Board of Directors. The reports of MFR&C on iVoice's financial statements for past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that the reports contained an explanatory paragraph expressing substantial doubt regarding iVoice's ability to continue as a going concern. On February 9, 2001, iVoice retained the firm of Mendlowitz Weitsen, LLP as its new independent accountants. Prior to engaging Mendlowitz Weitsen, LLP, iVoice did not consult with Mendlowitz Weitsen, LLP, on any accounting, auditing, financial reporting or any other matters. LEGAL MATTERS Kirkpatrick & Lockhart LLP, Miami, Florida, will pass upon the validity of the shares of common stock offered hereby for us. HOW TO GET MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form SB-2 under the Securities Act with respect to the securities offered by this prospectus. This prospectus, which forms a part of the registration statement, does not contain all the information set forth in the registration statement, as permitted by the rules and regulations of the Commission. For further information with respect to us and the securities offered by this prospectus, reference is made to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document that we have filed as an exhibit to the registration statement are qualified in their entirety by reference to the to the exhibits for a complete statement of their terms and conditions. The registration statement and other information may be read and copied at the Commission's Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains a web site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission. 44 IVOICE, INC. FINANCIAL STATEMENTS TABLE OF CONTENTS ----------------- Financial Statements as of September 30, 2002 Balance Sheet - September 30, 2002 (Unaudited) F-1 Statements of Operation - For the three months ended September 30, 2002 and 2001 F-2 Statements of Cash Flows - For the three months ended September 30, 2002 and 2001 F-3 Notes to the financial statements F-4 Financial Statements as of December 31, 2001 and 2001 Independent Auditors' Report F-10 Balance Sheets as of December 31, 2001 and 2000 F-11 Statements of Operations for the Years ended December 31, 2001 and 2000 F-12 Statements of Stockholders' Deficiency for the Years Ended December 31, 2001 and 2000 F-13 Statements of Cash Flows for the Years Ended December 31, 2001 and 2000 F-17 Notes to the financial statements F-20
IVOICE, INC. BALANCE SHEETS SEPTEMBER 30, 2002 (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $316,982 Accounts receivable, net of allowance for doubtful accounts of $7,000 55,087 Inventory 12,463 Prepaid expenses and other current assets 6,182 ------------- Total current assets 390,714 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $76,628 79,409 OTHER ASSETS Other Receivable 67,650 Software license costs, net of accumulated amortization of $353,600 190,400 Intangible assets, net of accumulated amortization of $30,885 263,016 Deposits and other assets 11,726 ------------- Total other assets 532,792 ------------- TOTAL ASSETS $1,002,915 ============= LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES Accounts payable and accrued expenses $275,469 Obligations under capital leases - current 23,390 Notes Payable - Note 3 156,547 Billings in excess of estimated costs on uncompleted jobs 24,313 Due to related parties - Note 4 2,009,822 12% Convertible debentures - Note 2 130,800 5% Convertible debentures - Note 2 183,517 ------------- Total current liabilities 2,803,858 ------------- LONG-TERM DEBT - Total liabilities 2,803,858 ------------- COMMITMENTS AND CONTINGENCIES - Note 5 - ------------- STOCKHOLDERS' DEFICIENCY Preferred stock, par value $1.00; authorized 1,000,000 shares, no shares issued or outstanding - Common stock, Class A - par value $.001; authorized 600,000,000 shares, 230,822,928 issued and 230,222,928 shares outstanding 1,251,978 Common stock, Class B - no par value; authorized 3,000,000 shares; 700,000 shares issued; 354,000 shares outstanding 36 Treasury stock, 600,000 Class A shares, at cost (28,800) Additional paid in capital 11,067,350 Accumulated deficit (14,091,507) ------------- Total stockholders' deficiency (1,800,943) ------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $1,002,915 =============
The accompanying notes are an integral part of the financial statement. F-1
IVOICE, INC. STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------- --------------------- 2002 2001 2002 2001 --------- --------- --------- --------- SALES, net $ 140,614 $ 87,043 $ 458,353 $ 303,948 COST OF SALES 38,337 31,161 139,774 130,279 ------------ ---------- ------------- ------------ GROSS PROFIT 102,277 55,882 318,579 173,669 ------------ ---------- ------------- ------------ SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling expenses 35,341 31,171 93,270 138,470 General and administrative expenses 213,890 349,489 1,232,108 1,653,307 Research and development 57,682 90,389 170,819 320,475 Bad debt expense - - 3,000 23,308 Depreciation and amortization 41,200 40,539 122,101 120,718 ------------ ---------- ------------- ------------ Total selling, general and administrative expenses 348,113 511,588 1,621,298 2,256,278 ------------ ---------- ------------- ------------ LOSS FROM OPERATIONS (245,836) (455,706) (1,302,719) (2,082,609) OTHER INCOME (EXPENSE) Non-recurring expense (9,243) - (9,243) (352,706) Other Income - - 28,800 - Interest expense (47,461) (36,782) (377,476) (107,591) ------------ ---------- ------------- ------------ Total other income (expense) (56,704) (36,782) (357,919) (460,297) ------------ ---------- ------------- ------------ LOSS BEFORE INCOME TAXES (302,540) (492,488) (1,660,638) (2,542,906) PROVISION FOR INCOME TAXES - - - - ------------ ---------- ------------- ------------ NET LOSS $ (302,540) $(492,488) $ (1,660,638) $(2,542,906) ============ ========== ============= ============ NET LOSS PER COMMON SHARE Basic $ (0.00) $ (0.00) $ (0.01) $ (0.02) ============ ========== ============= ============ Diluted $ (0.00) $ (0.00) $ (0.01) $ (0.02) ============ ========== ============= ============
The accompanying notes are an integral part of the financial statement. F-2 IVOICE, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 2002 2001 ---------------- -------------- CASH FLOW FROM OPERATING ACTIVITIES Net loss $ (1,660,638) $ (2,542,906) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 30,357 29,274 Amortization of prepaid expense 326,667 - Amortization of intangibles 9,843 9,843 Amortization of software license 81,600 81,600 Bad debt expense 3,000 23,308 Forfeited employee stock compensation (28,800) - Discounts on stock options 316,750 - Debt issue costs 216,977 157,697 Common stock issued for consulting services 45,000 300,138 Common stock issued for compensation - 224,000 Common stock issued for settlements - 211,080 Common stock issued for interest 10,735 6,559 Changes in certain assets and liabilities: Accounts receivable (20,803) 17,560 Inventory 8,123 537 Accounts payable and accrued liabilities 196,760 680,199 Deferred revenue (19,304) 28,294 Other assets 686 87,658 ------------- ------------- Total cash used in operating activities (483,047) (685,159) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (2,641) (1,872) Purchase of goodwill and other intangibles (1,560) (3,390) Total cash used in investing activities (4,201) (5,262) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 102,696 129,931 Collections on stock subscriptions 317,000 - Proceeds from related party loans 3,000 264,000 Repayment of related party loans (90,000) - Proceeds from note payable 250,000 - Repayment of notes payable (93,453) - Repayment of capital lease obligations (25,556) (20,682) Sale of convertible debentures 255,000 275,000 ------------- ------------- Total cash provided by financing activities 718,687 648,249 ------------- ------------- NET DECREASE IN CASH AND CASH EQUIVALENTS 231,439 (42,172) CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 85,543 55,349 ------------- ------------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 316,982 $ 13,177 ============= ============= The accompanying notes are an integral part of the financial statement. F-3 IVOICE, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 FOR THE NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 2002 2001 --------------- -------------- CASH PAID DURING THE PERIOD FOR: Interest expense $ 6,104 $ 10,976 =============== ============== Income taxes $ - $ - =============== ============== SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES SEPTEMBER 30, 2002 - ------------------ a.) During the nine months ended September 30, 2002, iVoice issued 10,000 shares as partial payment for leasehold improvements valued at $540. b.) During the nine months ended September 30, 2002, iVoice issued 2,250,000 shares of Class A common stock for legal services valued at $45,000. c.) During the nine months ended September 30, 2002, iVoice issued 6,200,000 shares of its Class A common stock for fees and services associated with the financing agreement with Cornell Capital, LP, valued at $117,800. d.) During the nine months ended September 30, 2002, iVoice retained 600,000 shares previously issued to an employee as compensation. These shares were deemed as not having been vested with the terminated employee and were recorded as treasury stock at a value of $28,800. e.) During the nine months ended September 30, 2002, iVoice issued 4,364,516 shares of its Class A common stock for interest on its outstanding Convertible Debentures valued at $95,679. Of this amount $10,735 reflects interest incurred in the current period and $84,944 represents amounts accrued in prior periods. f.) During the nine months ended September 30, 2002, iVoice issued 505,921 shares of its Class A common stock for the repayment of $15,000 in principal on its 8% Convertible Debentures. g.) During the nine months ended September 30, 2002, iVoice issued 7,229,230 shares of its Class A common stock for the repayment of $64,000 in principal on its 12% Convertible Debentures. h.) During the nine months ended September 30, 2002, iVoice issued 19,464,744 shares of its Class A common stock for the repayment of $71,483 in principal on its 5% Convertible Debentures. The accompanying notes are an integral part of the financial statement. F-4 IVOICE, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES - Continued SEPTEMBER 30, 2001: - ------------------- a.) During the nine months ended September 30, 2001, iVoice issued 12,194,287 shares of its Class A common stock for services valued at $897,055. iVoice has registered for resale with the SEC, 10,600,000 of these issued shares during this nine-month period. b.) During the nine months ended September 30, 2001, iVoice issued 2,020,834 restricted shares of its Class A common stock as compensation valued at $224,000. c.) During the nine months ended September 30, 2001, iVoice issued 828,000 registered shares and 850,000 restricted shares of its Class A common stock as payment for termination of the Swartz Financing Agreement valued at $154,830. d.) During the nine months ended September 30, 2001, iVoice issued 450,000 restricted shares of its Class A common stock to a holder of its 12% convertible debentures as settlement for failure to register shares under the registration rights agreement related to the 12% convertible debentures valued at $56,250. e.) During the nine months ended September 30, 2001, iVoice issued 328,951 restricted shares of its Class A common stock as repayment of amounts owed to related parties valued at $75,659. f.) During the nine months ended September 30, 2001, iVoice issued 2,892,628 restricted shares of its Class A common stock for the repayment of $142,200 in principal on its 12% Convertible Debentures. g.) During the nine months ended September 30, 2001, iVoice issued 104,110 restricted shares of its Class A common stock for interest on its 12% Convertible Debentures valued at $6,559. h.) During the nine months ended September 30, 2001, iVoice issued $275,000 of its 8% convertible debentures exercisable at an 80% conversion price. The 20% conversion discount totaling $68,750 was recorded as a prepaid debt issue cost and will be amortized over the life of the debt. The accompanying notes are an integral part of the financial statement. F-5 IVOICE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes included in Form 10-KSB for the year ended December 31, 2001. The result of operations for the nine-month periods ended September 30, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year. The accompanying financial statements have been prepared assuming that iVoice will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. iVoice has incurred accumulated net losses totaling $14,091,507 as of September 30, 2002, and has had periodic cash flow difficulties, which raise substantial doubt of iVoice's ability to continue as a going concern. To date, iVoice has funded its operations through the issuances of convertible debt, proceeds from exercised warrants, sales of its Class A common stock, collections from the sale of company products and loans from its principal stockholder, the proceeds of which are derived from sales of this principal stockholder's personal holdings of iVoice's Class A common stock. iVoice operates in an industry segment having inherent risks generally associated with small technology companies. Such risks include, but are not limited to, the ability to: a) generate sales of its product at levels sufficient to cover its costs and provide a return for investors, b) attract additional capital in order to finance growth, c) further develop and successfully market and distribute commercial products and d) successfully compete with other technology companies having financial, production and marketing resources significantly greater than those of iVoice. iVoice recently entered into financing agreement with Cornell Capital, LP that will require the issuance of additional equity as described in Note 4 of these financial statements. Management believes that appropriate funding will be generated by the financing agreement with Cornell enabling iVoice to continue operations through the current fiscal year. Management is also confident that future product sales will generate necessary cash flow, reducing iVoice's need for additional financing. It should be noted however, that no assurance can be given that these future sales will materialize or that additional necessary funding can be raised. F-6 IVOICE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 earnings per share is computed by dividing income available to common stockholders by the weighted average number of outstanding common shares during the period. 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. The shares used in the computations are as follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- ------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Basic and Diluted 196,507,632 132,577,874 172,613,099 117,196,212 NOTE 2 - CONVERTIBLE DEBENTURES iVoice has previously issued convertible debentures consisting of ten notes payable totaling $500,000 bearing interest at 12% per annum and payable on December 1, 2000. These debentures are convertible into shares of iVoice's Class A Common Stock at the option of the holder by dividing the outstanding principal and interest by the conversion price which shall equal 50% of the average bid price during the 20 trading days before the conversion date. As of September 30, 2002, $396,200 in principal of the 12% debentures and $99,644 in accrued interest had been converted into 14,505,718 shares of iVoice's Class A common stock. Total outstanding principal balance of the 12% convertible debentures at September 30, 2002 was $130,800, plus accrued interest of $18,814. iVoice has reached settlement terms with one previous holder of debentures regarding the interest and penalties demanded under default by this former holder whereby iVoice has issued 450,000 shares to this former holder in full settlement of their claim. On June 11, 2002, iVoice entered into a subscription agreement with certain purchasers to issue $255,000 in convertible debentures, with interest payable at 5% per annum. The notes are convertible into iVoice's Class A common stock at a price equal to either (a) an amount equal to one hundred twenty percent (120%) of the closing bid price for the Common Stock on the Closing Date, or (b) an amount equal to eighty percent (80%) of the average of the four (4) lowest Closing Bid Prices of the Common Stock for the five (5) trading days immediately preceding the Conversion Date. F-7 IVOICE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 NOTE 2 - CONVERTIBLE DEBENTURES - CONTINUED As of September 30, 2002, $71,483 in principal of the 5% debentures had been converted into 19,464,744 shares of iVoice's Class A common stock. Total outstanding principal balance of the 5% convertible debentures at September 30, 2002 was $183,517, plus accrued interest of $3,481. NOTE 3 - NOTE PAYABLE On August 20, 2002 iVoice issued a promissory note payable to Cornell Capital Partners, LP in the amount of $250,000 for an advance on the equity-line financing agreement entered into with Cornell in June, 2002. The note matures 120 days from the date of issue with interest accruing at 8% per annum on any balance left unpaid after the 120-day maturity date. It is anticipated that the note will be fully repaid with Class A common stock issuable under the equity-line financing agreement with Cornell Capital. At September 30, 2002, a total of $93,453 has been repaid through the issuance of 36,675,000 Class A common shares of iVoice's stock leaving an unpaid balance of $156,547. NOTE 4 - DUE TO RELATED PARTY During the period from June 2000 to date, Jerome R. Mahoney, President and Chief Executive Officer of iVoice has sold personal holdings of iVoice's Class A common shares and has loaned the proceeds of these sales to iVoice to fund its working capital requirements. iVoice has executed a promissory note and Security Agreement in favor of Mr. Mahoney. As of September 30, 2002, the outstanding loan balance including monies loaned from the proceeds of stock sales, unpaid compensation, income taxes incurred from the sale of stock and unreimbursed expenses, totaled $2,009,822. On August 13, 2002, the board of directors approved amendments to the Promissory Note payable to Jerome Mahoney, iVoice President and Chief Executive Officer, for monies loaned to iVoice from the proceeds of stock sales of personal holdings of iVoice Class A common stock, unpaid compensation, income taxes incurred from the sale of Company stock and unreimbursed expenses. The change allows for the conversion of amounts due under the Promissory Note into either (i) one Class B common stock share of iVoice, Inc., no par value, for each dollar owed, or (ii) the number of Class A common stock shares of iVoice, Inc. calculated by dividing (x) the sum of the principal and interest that the Note holder has decided to prepay by (y) fifty percent (50%) of the lowest issue price of Series A common stock since the first advance of funds under this Note, whichever the Note holder chooses, or (iii) payment of the principal of this Note, before any repayment of interest. F-8 IVOICE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 NOTE 5 - COMMITMENTS AND CONTINGENCIES In June 2002, we entered into an Equity Line of Credit with Cornell Capital Partners, L.P. Pursuant to the Equity Line of Credit, we may, at our discretion, periodically sell to Cornell Capital Partners shares of Class A common stock for a total purchase price of up to $5.0 million to raise capital to fund our working capital needs. For each share of Class A common stock purchased under the Equity Line of Credit, Cornell Capital Partners will pay 91% of the 5 lowest closing bid prices on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the 5 days immediately following the notice date. Pursuant to the agreement with Cornell Capital Partners, LP, we registered for resale on Form SB-2, shares of Class A common stock with the Securities and Exchange Commission which was filed on July 2, 2002 and later amended on August 8, 2002. On August 14, 2002, the Securities and Exchange Commission declared the Form SB-2 filed effective. The offering will terminate 24 months after the Securities and Exchange Commission declares the registration statement effective. On August 20, 2002 we issued a $250,000 promissory note for an advance on the equity-line of credit with Cornell as described in Note 3 of these financial statements. In May 1999, iVoice entered into a five-year employment agreement with its majority stockholder (the "Executive"). He will serve as iVoice's Chairman of the Board and Chief Executive Officer for a term of five years. As consideration, iVoice agrees to pay the Executive a sum of $180,000 the first year with a 10% increase every year thereafter. On August 2, 2002 we reached a settlement agreement with Business Staffing, Inc. who filed a lawsuit against iVoice in the amount of $37,250 for non-payment of placement services provided in the year 2000. The settlement agreement requires iVoice to pay Business Staffing, Inc. $13,500 payable in 10 monthly instalments. iVoice has filed suit against PanAm Wireless, Inc. the parent company of Celpage, Inc. for breach of contract related to the installation of a 196-port Integrated Voice Response System at the customer's Guaynabo, Puerto Rico location. PanAm has refused to accept the remaining ports citing a shortfall in their projected subscriber base. Subsequent to the filing and in response to our claim, PanAm Wireless has entered a counterclaim against iVoice alleging iVoice's failure to supply PanAm Wireless with the required equipment and that the system did not provide the specified services specified in their purchase order. iVoice denies PanAm Wireless' counterclaim allegations and intends to vigorously defend itself in this suit. F-9 IVOICE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 NOTE 6 - CAPITAL LEASE OBLIGATIONS During the year ended December 31, 2000, iVoice incurred two capital lease obligations totaling $92,895 in connection with the acquisition of computers and office furniture. The future minimum lease payments due under the capital leases at September 30, 2002 are follows: Lease payable for computer equipment, payable at $1,367 per month, including interest at 22.31%. Final payment is due June 2003. $ 11,233 Lease payable for furniture, payable at $2,151 per month, including interest at 20.79%. Final payment due April 2003. 12,157 ------------- Present value of net minimum lease payments $ 23,390 ============= The future minimum lease payments $ 25,206 Less amount representing interest 1,816 ------------- Present value of net minimum lease payments 23,390 Less current portion 23,390 ------------- Long term capital lease obligations $ - ============= NOTE 7 - COMMON STOCK In August 2001, iVoice amended its Certificate of Incorporation to change the par value of its Class A common stock from $.01 to $.001 and to increase the number of shares iVoice is authorized to issue of its Class A common stock from 150,000,000 to 600,000,000 and its Class B common stock from 700,000 to 3,000,000. The amendment also granted the board of directors the rights to prescribe and authorize the issuance of 1,000,000 preferred shares, $1.00 par value. A) CLASS A COMMON STOCK Class A common stock consists of the following as of September 30, 2002: 600,000,000 shares of authorized common stock with a par value of $.001. Class A stock has voting rights of 1:1 and as of September 30, 2002, 230,822,928 shares were issued and 230,222,928 shares were outstanding. Each holder of Class A Common stock is entitled to receive ratably dividends, if any, as may be declared by the Board of Directors out of funds legally available for the payment of dividends. iVoice has never paid any dividends on its Common Stock. F-10 IVOICE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 NOTE 7 - COMMON STOCK - CONTINUED For the nine months ended September 30, 2002, iVoice had the following transactions: 1.) iVoice issued 10,000 shares of its Class A Common Stock for partial payment of leasehold improvements valued at $540. 2.) iVoice issued 2,250,000 shares of Class A Common Stock for legal services valued at $45,000. 3.) iVoice issued 505,921 shares of Class A Common Stock for the conversion of $15,000 in debenture principal and 84,766 shares for $2,594 in accrued interest on its 8% Convertible Debentures. 4.) iVoice issued 7,229,230 shares of Class A Common Stock for the conversion of $64,000 in debenture principal and 4,279,750 shares of Class A Common Stock for the conversion of $93,085 in accrued interest on its outstanding 12% Convertible Debentures. 5.) iVoice issued 6,200,000 shares of its Class A common stock for fees and services associated with the financing agreement with Cornell Capital, LP, valued at $117,800. 6.) iVoice issued 19,464,744 shares of its Class A common stock for the conversion of $71,483 in debenture principal on its 5% Convertible Debentures 7.) iVoice issued 36,675,000 shares for repayment of $93,453 in principal on a $250,000 note payable issued for an advance on the equity line financing with Cornell Capital Partners, LP B) CLASS B COMMON STOCK Class B Common Stock consists of 3,000,000 shares of authorized common stock with no par value. Class B stock has voting rights of 100 to 1 with respect to Class A Common Stock. As of September 30, 2002, 700,000 shares were issued; and 354,000 shares were outstanding. Class B common stockholders are not entitled to receive dividends. C) PREFERRED STOCK Preferred Stock consists of 1,000,000 shares of authorized preferred stock with $1.00 par value. As of September 30, 2002, no shares were issued or outstanding. F-11 IVOICE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2002 NOTE 8 - OPTIONS & WARRANTS For the nine-month period ending September 30, 2002, the following options were issued: a.) iVoice issued, to an employee, an option to purchase 5,000,000 shares of iVoice Class A Common Stock at a price of $.009 per share. The options vest at 25% per year and have a five-year expiration from date of issue iVoice has adopted only the disclosure provisions of SFAS No. 123. It applies Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and its related interpretations in accounting for its plan. It does not recognize compensation expense for its stock-based compensation plan other than for restricted stock and options/warrants issued to outside third parties. F-12 IVOICE, INC. FINANCIAL STATEMENTS DECEMBER 31, 2001 F-13 MENDLOWITZ WEITSEN, LLP, CPAS K2 BRIER HILL COURT, EAST BRUNSWICK, NJ 08816-3341 TEL: 732.613.9700 FAX: 732.613.9705 E-MAIL: MW@MWLLP.COM INDEPENDENT AUDITOR'S REPORT ---------------------------- TO THE BOARD OF DIRECTORS AND STOCKHOLDERS' OF IVOICE, INC. Matawan, New Jersey We have audited the accompanying balance sheets of IVOICE, INC. as of December 31, 2001 and 2000, and the related statements of operations, stockholders' deficiency and cash flows for the years then ended. These financial statements are the responsibility of iVoice's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IVOICE, INC. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that iVoice will continue as a going concern. As discussed in Note 1(a), iVoice had net losses and negative cash flows from operations for the years ended December 31, 2001 and 2000, 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 1(a). The financial statements do not include any adjustments that might result from the outcome of this uncertainty. MENDLOWITZ WEITSEN, LLP East Brunswick, New Jersey February 11, 2002 F-14 IVOICE, INC. BALANCE SHEETS
DECEMBER 31, ------------------------- ASSETS 2001 2000 ------ ----------- ---------- CURRENT ASSETS Cash and cash equivalents $ 85,543 $ 55,349 Accounts receivable, net of allowance for doubtful accounts of $4,000 37,284 292,554 and $31,025 Inventory 20,586 20,228 Prepaid expenses and other current assets 331,361 164,711 ----------- ---------- Total current assets 474,774 532,842 ----------- ---------- PROPERTY AND EQUIPMENT, NET 106,585 140,921 ----------- ---------- OTHER ASSETS Other receivable 67,650 - Software license costs, net of accumulated amortization of $272,000 272,000 380,800 and $163,200 Financing costs, net of accumulated amortization of $0 and $1,297 35,427 118,370 Intangible assets, net of accumulated amortization of $21,041 and 271,299 254,584 $7,917 Deposits and other assets 13,900 13,900 ----------- ---------- Total other assets 660,276 767,654 ----------- ---------- TOTAL ASSETS $ 1,241,635 $1,441,417 =========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY ---------------------------------------- CURRENT LIABILITIES Obligations under capital leases - current $ 35,018 $ 28,339 Accounts payable and accrued expenses 1,454,055 566,337 Due to related parties 806,419 648,078 Convertible debentures 359,800 337,000 Billings in excess of costs and estimated earnings 43,617 170,237 ----------- ---------- Total current liabilities 2,698,909 1,749,991 LONG-TERM DEBT Obligations under capital leases - non-current 13,928 48,945 ----------- ---------- Total liabilities 2,712,837 1,798,936 ----------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIENCY Preferred stock, $1 par value; Authorized shares - 1,000,000 in 2001; none in 2000 Issued and outstanding shares - none in 2001 and 2000 Common stock, Class A - par value $.001 in 2001 and $.01 in 2000 Authorized shares - 600,000,000 shares in 2001 and 150,000,000 in 2000 Issued and outstanding shares - 154,123,517 in 2001 and 103,969,715 1,175,278 1,039,697 in 2000 Common stock, Class B - no par value Authorized shares - 3,000,000 in 2001 and 700,000 in 2000 Issued shares - 700,000 Outstanding shares - 354,000 in 2001 and 364,000 in 2000. 36 37 Subscription receivable (783,750) - Additional paid in capital 10,568,103 7,586,182 Accumulated deficit (12,430,869) (8,983,435) ----------- ---------- Total stockholders' deficiency (1,471,202) (357,519) ----------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,241,635 $1,441,417 =========== ========== The accompanying notes are an integral part of the financial statement.
F-15 IVOICE, INC. STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 2001 2000 ----------- ----------- SALES, NET $ 425,948 $ 723,046 COST OF SALES 167,229 302,895 ----------- ----------- GROSS PROFIT 258,719 420,151 ----------- ----------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling expenses 165,617 371,272 General and administrative expenses 2,297,015 1,662,142 Research and development 387,463 423,467 Bad debt expense 24,808 75,195 Depreciation and amortization 161,089 146,234 ----------- ----------- Total selling, general and administrative expenses 3,035,992 2,678,310 ----------- ----------- LOSS FROM OPERATIONS (2,777,273) (2,258,159) OTHER EXPENSE Interest expense (670,161) (633,220) ----------- ----------- LOSS BEFORE INCOME TAXES $(3,447,434) $(2,891,379) PROVISION FOR INCOME TAXES - - ----------- ----------- NET LOSS $(3,447,434) $(2,891,379) =========== =========== NET LOSS PER COMMON SHARE Basic $ (.03) $ (.03) =========== =========== Diluted $ (.03) $ (.03) =========== ===========
The accompanying notes are an integral part of the financial statement. F-16 IVOICE, INC. STATEMENTS OF STOCKHOLDERS' DEFICIENCY FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Common Stock Class A Common Stock Class B ------------------------ --------------------- Shares Amount Shares Amount ----------- ----------- -------- -------- Balance at January 1, 2001 103,969,715 $ 1,039,697 364,000 $ 37 Issuance of common stock for settlements 2,128,000 21,280 - - Issuance of common stock for services 15,194,287 32,693 - - Issuance of common stock for exercise of stock 18,000,000 18,000 - - options Subscriptions received - - - - Issuance of common stock for cash 1,172,000 11,720 - - Issuance of common stock for compensation 2,183,834 20,371 - - Issuance of convertible debentures - - - - Issuance of stock on conversion of Class B shares 1,000,000 1,000 (10,000) (1) Issuance of stock for repayment of amounts due to 328,951 3,290 - - related parties Issuance of stock on debenture conversion 9,829,204 25,972 - - Issuance of stock on interest conversion 317,526 1,255 - - Net loss for the year ended December 31, 2001 - - - - ----------- ----------- ------- ------- Balance at December 31, 2001 154,123,517 $ 1,175,278 354,000 $ 36 =========== =========== ======= =======
The accompanying notes are an integral part of the financial statement. F-17 iVOICE, INC. STATEMENTS OF STOCKHOLDERS' DEFICIENCY (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Stock Additional Total Subscriptions Paid in Accumulated Stockholders' Receivable Capital Deficit Deficiency ------------- ------------ ------------- --------------- Balance at January 1, 2001 $ - $ 7,586,182 $ (8,983,435) $ (357,519) Issuance of common stock for - 189,800 - 211,080 settlements Issuance of common stock for services - 886,212 - 918,905 Issuance of common stock for exercise (990,000) 972,000 - - of stock options Subscriptions received 206,250 - 206,250 Issuance of common stock for cash - 153,370 - 165,090 Issuance of common stock for - 214,060 - 234,431 compensation Issuance of convertible debentures - 106,250 - 106,250 Issuance of stock on conversion of - (999) - - Class B shares Issuance of stock for repayment of - 72,369 75,659 amounts due to related parties Issuance of stock on debenture - 376,229 - 402,201 conversion Issuance of stock on interest - 12,630 - 13,885 conversion Net loss for the year ended December - - (3,447,434) (3,447,434) 31, 2001 ---------- ----------- ------------- ------------ Balance at December 31, 2001 $(783,750) $10,568,103 $(12,430,869) $(1,471,202) ========== =========== ============= ============
The accompanying notes are an integral part of the financial statement. F-18 iVOICE, INC. STATEMENTS OF STOCKHOLDERS' DEFICIENCY FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Common Stock Class A Common Stock Class B ------------------------ -------------------- Shares Amount Shares Amount ----------- ---------- -------- -------- Balance at January 1, 2000 54,093,663 $ 540,937 700,000 $ 70 Issuance of common stock for legal settlement 2,000,000 20,000 - - Issuance of common stock for services 848,718 8,487 - - Issuance of common stock for exercise of stock 9,100,000 91,000 - - options Issuance of common stock for cash 3,240,047 32,400 - - Issuance of common stock for compensation 80,000 800 - - Issuance of convertible debentures - - - - Issuance of stock on conversion of Class B shares 33,600,000 336,000 (336,000) (33) Issuance of stock on debenture conversion 1,007,287 10,073 - - Net loss for the year ended December 31, 2000 - - - - ----------- ---------- -------- ----- Balance at December 31, 2000 103,969,715 $1,039,697 364,000 $ 37 =========== ========== ======== =====
The accompanying notes are an integral part of the financial statement. F-19 iVOICE, INC. STATEMENT OF STOCKHOLDERS' DEFICIENCY (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Additional Total Paid in Accumulated Stockholders' Capital Deficit Deficiency ----------- ------------ ------------- Balance at January 1, 2000 $ 1,395,671 $ (6,092,056) $ (4,155,378) Issuance of common stock for legal settlement 4,480,000 - 4,500,000 Issuance of common stock for services 509,668 - 518,155 Issuance of common stock for exercise of stock options 228,166 - 319,166 Issuance of common stock for cash 936,579 - 968,979 Issuance of common stock for compensation 69,138 - 69,938 Issuance of convertible debentures 150,000 - 150,000 Issuance of stock on conversion of Class B shares (335,967) - - Issuance of stock on debenture conversion 152,927 - 163,000 Net loss for the year ended December 31, 2000 - (2,891,379) (2,891,379) ----------- ------------- ------------- Balance at December 31, 2000 $ 7,586,182 $ (8,983,435) $ (357,519) =========== ============= =============
The accompanying notes are an integral part of the financial statement. F-20 iVOICE, INC. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 2001 2000 ------------ ------------- CASH FLOW FROM OPERATING ACTIVITIES Net loss $ (3,447,434) $ (2,891,379) Adjustments to reconcile net loss to net cash (used in) provided by operating activities Depreciation and amortization 161,089 147,531 Bad debt expense 24,808 75,195 Stock option discounts 56,250 - Debt issue costs 259,780 544,041 Common stock issued for services 536,989 518,155 Common stock issued for compensation 234,431 69,938 Common stock issued for settlements 211,080 - Common stock issued for interest 13,883 - Changes in certain assets and liabilities: (Increase) decrease in accounts receivable 15,587 231,277 (Increase) decrease in inventory (358) (10,088) Decrease in other assets 124,589 23,489 Increase in accounts payable and accrued expenses 916,220 384,583 Increase (decrease) in legal settlement payable - (300,000) Increase (decrease) in billings in excess of costs on uncompleted contracts 20,605 (397,063) ------------ ------------- Total cash used in operating activities (872,481) (1,604,321) ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (4,828) (22,135) Purchase of intangibles (3,090) (382,168) ------------ ------------- Total cash used in investing activities (7,918) (404,303) ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 129,931 818,979 Proceeds from stock option exercise - 319,166 Proceeds from related party loans 354,000 627,078 Repayments of related party loans (120,000) - Prepaid offering and debt issue costs - (31,500) Collections of stock subscriptions 150,000 - Repayment of capital leases payable (28,338) (15,611) Sale of convertible debentures 425,000 150,000 ------------ ------------- Total cash provided by financing activities 910,593 1,868,112 ------------ ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 30,194 (140,512) CASH AND CASH EQUIVALENTS - BEGINNING 55,349 195,861 ------------ ------------- CASH AND CASH EQUIVALENTS - END $ 85,543 $ 55,349 ============ ============= CASH PAID DURING THE YEAR FOR: Interest expense $ 13,872 $ 7,590 ============ ============= Income taxes $ - $ - ============ =============
The accompanying notes are an integral part of the financial statement. F-21 iVOICE, INC. STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 2001 AND 2000 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 2001 - ------------------------------------ a) iVoice issued 15,194,287 shares of its Class A Common Stock for services valued at $1,062,055. Of these shares, iVoice has registered for resale with the U.S. Securities and Exchange Commission, 10,600,000 shares during the year ended December 31, 2001. b) iVoice issued 2,183,834 restricted shares of its Class A Common Stock as compensation to Company employees valued at $234,431. c) iVoice issued 828,000 registered shares and 850,000 restricted shares of its Class A Common Stock as payment for termination of the Swartz Financing Agreement valued at $154,830. d) iVoice issued 450,000 restricted shares of its Class A Common Stock to a holder of its 12% convertible debentures as settlement for failure to register shares under the registration rights agreement related to the 12% Convertible Debentures valued at $56,250. e) iVoice issued 328,951 restricted shares of its Class A Common Stock as repayment of amounts owed to related parties valued at $75,659. f) iVoice issued 2,892,628 shares of its Class A Common Stock for the repayment of $142,200 in principal on its 12% Convertible Debentures. g) iVoice issued 6,936,576 shares of its Class A Common Stock for the repayment of $260,000 in principal on its 8% Convertible Debentures h) iVoice issued 317,526 shares of its Class A Common Stock for interest on its 8% and 12% Convertible Debentures valued at $13,883. i) iVoice issued $425,000 of its 8% Convertible Debentures exercisable at an 80% conversion price. The 20% conversion discount totaling $106,250 was recorded as interest expense. The accompanying notes are an integral part of the financial statement. F-22 iVOICE, INC. STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 2001 AND 2000 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES - CONTINUED FOR THE YEAR ENDED DECEMBER 31, 2000 - ------------------------------------ a) On February 10, 2000, iVoice converted a $4,500,000 legal settlement payable into 2,000,000 shares of its restricted Class A Common Stock. b) On January 10 and February 2, 2000, iVoice issued $100,000 and $50,000 respectively, of its 12% Convertible Debentures exercisable at a 50% conversion price. The 50% conversion discount totaling $150,000 was recorded as a prepaid debt issue cost and will be amortized over the life of the debt. c) During the year ended December 31, 2000, iVoice issued 848,718 shares of its restricted Class A Common Stock for services valued at $518,155. d) On April 24, 2000, iVoice issued 50,000 shares of its restricted Class A Common Stock to Corporate Architects, Inc. with a value of $46,875 as a referral fee for the purchase of ThirdCAI, Inc. ("ThirdCAI") e) During the year iVoice issued 80,000 shares of its restricted Class A Common Stock as compensation valued at $69,938. f) During the year iVoice purchased equipment under capital leases totaling $92,895. The accompanying notes are an integral part of the financial statement. F-23 iVOICE, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001 AND 2000 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Basis of Presentation --------------------- The accompanying financial statements include the accounts of iVoice, Inc. (the "Company" or "iVoice"), formerly known as Visual Telephone International, Inc. ("Visual") which was incorporated under the laws of Utah on December 2, 1995, subsequently changed to Delaware. Effective May 21, 1999, Visual and International Voice Technologies, Corp. ("IVT") entered into a merger agreement whereby iVoice was the surviving entity (see Note 2 for Reorganization). As a result, IVT's former stockholder obtained control of Visual. For accounting purposes, this acquisition has been treated as a re-capitalization of IVT. On August 24, 2001, iVoice amended its certificate of incorporation to change its name to iVoice, Inc. from iVoice.com, Inc. iVoice is publicly traded and is currently traded on the Over The Counter Bulletin Board ("OTCBB") under the symbol "IVOC". As reflected in the accompanying financial statements, iVoice had a loss and a negative cash flow from operations as well as a negative working capital as of December 31, 2001 and 2000. These matters raise substantial doubt about iVoice's ability to continue as a going concern. In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheets is dependent upon continued operations of iVoice, which in turn, is dependent upon iVoice's ability to continue to raise capital and/or generate positive cash flows from operations. To date, iVoice has funded its operations through the issuance of convertible debt, sales of its Class A Common Stock and loans from its principal stockholder, the proceeds of which are derived from sales of this principal stockholder's personal holdings of iVoice's Class A Common Stock. iVoice has incurred accumulated net losses totaling $12,430,869 through the year ended December 31, 2001, and had a cash balance of $85,543 as of that date. Considering expected cash requirements for the up coming year, there is substantial doubt as to iVoice's ability to continue operations. iVoice believes that its' condition resulted from the inherent risks associated with small technology companies. Such risks include, but are not limited to, the ability to: a) generate sales of its product at levels sufficient to cover its costs and provide a return for investors, b) attract additional capital in order to finance growth, c) further develop and successfully market commercial products and d) successfully compete with other technology companies having financial, production and marketing resources significantly greater than those of iVoice. 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 iVoice cannot continue in existence. Throughout the 2001 fiscal year, iVoice has reduced its operating budget to conserve its cash resources. These reductions include renegotiating the lease for its corporate headquarters, staff reductions through consolidation of job functions, consolidation of telecommunication contracts for voice and data service as well as careful analysis of other recurring monthly expense items. In an effort to reach profitability and become less dependent on its requirement to finance continuing operations, iVoice is working on increasing its revenue and profit margins through the establishment of its own dealer and reseller channel. Management believes that leveraging F-24 already existing equipment manufacturers reseller channels will provide an avenue to distribute software only, which produce greater profit margins as opposed to turnkey systems which involve purchasing and sub-assembly of hardware components. The recent introduction of an entirely TAPI (Telephone Application Program Interface) based Speech-enabled Auto Attendant and Name Dialer, allows integration into different PBX systems without the need for additional hardware devices. These integration changes should provide for greater appeal to telephony re-sellers allowing for more economical customer installations with no reduction in the prices iVoice charges for its own software. Furthermore, iVoice intends to add sales personnel in the upcoming fiscal year to increase its efforts in establishing relationships with original equipment manufacturers. Management considers good working relationships with manufacturers will assist in the promotion of iVoice products to the manufacturers authorized re-seller networks. In order to provide necessary working capital in the current fiscal year, iVoice will seek to raise cash through issuances of additional equity, and/or convertible debt arrangements. Management believes that appropriate funding will be generated and future product sales will result from its increased marketing efforts and that iVoice will continue operations through the next fiscal year; however, no assurance can be given that sales will be generated or that additional necessary funding will be raised. b) Line of Business ---------------- iVoice is a communication company primarily engaged in the development, manufacturing and marketing of voice recognition and computerized communication systems for small-to-medium sized businesses and corporate departments. The technology allows these businesses to communicate more effectively by integrating speech recognition into their traditional office telephone systems with voicemail, automated attendant and interactive voice response ("IVR") functions. IVR products allow information in PC databases to be accessed from a standard touch-tone telephone system. iVoice sells its products directly to business customers, through Dealer and Reseller channels as well as through OEM agreements with certain telecommunications and networking companies throughout the United States. c) Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. d) Revenue Recognition ------------------- iVoice obtains its income primarily from the sale of its voice recognition and computer technology communication systems. Revenue for systems which require customization to meet a customer's specific needs or technical requirements, is recognized by the contract method of accounting, using percentage of completion. Progress toward completion is measured by costs incurred to date as a percentage of total estimated costs for each contract. Under the percentage of completion method, the liability "Billings in excess of costs and estimated earnings" represents billings in excess of revenues earned. The completed contract method is used for systems, which do not require customization or installation. iVoice recognizes revenue from support services at the time the service is performed or over the period of the contract for maintenance/support. e) Advertising Costs ----------------- Advertising costs are expensed as incurred and are included in selling expenses. For the years ended December 31, 2001 and 2000, advertising expense amounted to $42,006 and $88,881, respectively. f) Cash and Cash Equivalents ------------------------- iVoice considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. F-25 g) Concentration of Credit Risk ---------------------------- iVoice places its cash in what it believes to be credit-worthy financial institutions. However, cash balances exceeded FDIC insured levels at various times during the year. h) 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. i) Property and Equipment ---------------------- Property and equipment is stated at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets, generally five to seven years. Maintenance and repairs are charged to expense as incurred. j) Software License Cost --------------------- 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 patented by Parwan Electronics, Corp. ("Parwan"), 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", and are being amortized using the straight-line method over a period of five years. As described later in Note 1, iVoice has adopted SFAS No. 121. The carrying value of software license costs are regularly reviewed by iVoice and a loss would be recognized if the value of the estimated un-discounted cash flow benefit related to the asset falls below the unamortizated cost. No impairment loss was recognized as of December 31, 2001. k) Income Taxes ------------ Income taxes are provided for based on the liability method of accounting pursuant to SFAS No. 109, "Accounting for Income Taxes." The liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the reported amount of assets and liabilities and their tax basis. l) Financing Costs --------------- Financing costs consist primarily of professional fees and various commissions paid relating to the issuance of iVoice's convertible debentures. These costs are deferred and amortized over the term of the issues to which they relate. m) Debt Issue Costs ---------------- Debt issue costs represent the estimated cost of the conversion discount feature relating to the issuance of iVoice's convertible debentures. In previous years, these costs were amortized and charged to interest expense over the life of the debt. During the year ended December 31, 2001, iVoice charged to expense the fair value of the beneficial conversion features of the convertible debt as measured at the date of issuance in accordance with EITF Issue 98-5. The switch to this method of accounting did not have a material affect on iVoice's financial statements. n) Fair Value of Financial Instruments ----------------------------------- The carrying value of cash and cash equivalents, accounts receivable, inventory, accounts payable, accrued expenses and deferred revenue approximates fair value due to the relatively short maturity of these instruments. o) Long-Lived Assets ----------------- SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in F-26 circumstances indicate that the carrying amount of an asset may not be recoverable. iVoice has adopted this statement and determined that an impairment loss should not be recognized for applicable assets of continuing operations. p) 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 EPS is computed by dividing income available to common stockholders by the weighted average number of outstanding Common shares during the period. 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. The shares used in the computations are as follows: As of December 31, ----------------------------- 2001 2000 ----------- ---------- Basic and Diluted EPS 125,732,776 87,034,303 =========== ========== q) 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, 2001 and 2000, iVoice has no items that represent comprehensive income, and thus, has not included a statement of comprehensive income. r) Recent Accounting Pronouncements -------------------------------- SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information" requires that a public company report financial and descriptive information about its reportable operating segments. It also requires that an enterprise report certain information about its products and services, the geographic areas in which they operate and their major customers. In determining the requirements of this pronouncement, Management believes that there is no materially reportable segment information with respect to iVoice's operations and does not provide any segment information regarding products and services, major customers, and the material countries in which iVoice holds assets and reports revenue. SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities" requires that certain derivative instruments be recognized in balance sheets at fair value and for changes in fair value to be recognized in operations. Additional guidance is also provided to determine when hedge accounting treatment is appropriate whereby hedging gains and losses are offset by losses and gains related directly to the hedged item. While the standard, as amended, must be adopted in the fiscal year beginning after June 15, 2000, its impact on iVoice's financial statements is not expected to be material as iVoice has not historically used derivative and hedge instruments. SFAS No. 142, "Goodwill and Other Intangible Assets" requires goodwill to be tested for impairment under certain circumstances, and written off when impaired, rather than being amortized as previous standards require. It is effective for fiscal years beginning after December 15, 2001. Early application is permitted for entities with fiscal years beginning after March 15, 2001 provided the first interim period financial statements have not been previously issued. iVoice is currently assessing the impact of this pronouncement on its operating results and financial condition. Statement of Position ("SOP") No. 98-1 specifies the appropriate accounting for costs incurred to develop or obtain computer software for internal use. The new pronouncement provides guidance on which costs should be capitalized, and over what period such costs should be amortized and what disclosures should be made regarding such costs. This pronouncement is effective for fiscal years beginning after December 15, 1998, but earlier application is acceptable. Previously capitalized costs F-27 will not be adjusted. iVoice believes that it is already in substantial compliance with the accounting requirements as set forth in this new pronouncement and therefore believes that adoption will not have a material effect on financial condition or operating results. SOP No. 98-5 requires that companies write-off defined previously capitalized start-up costs including organization costs and expense future start-up costs as incurred. iVoice believes that it is already in substantial compliance with the accounting requirements as set forth in this new pronouncement and therefore believes that adoption will not have a material effect on financial condition or operating results. NOTE 2 - CORPORATE REORGANIZATION AND MERGER On May 21, 1999, iVoice executed a Reorganization Agreement (the "Agreement") that provided that iVoice and International Voice Technologies, Corp. ("IVT") would be merged and iVoice would be the surviving entity. On May 25, 1999, a certificate of merger was filed with the State of Delaware. In connection with the merger transaction, the sole stockholder of IVT, received the following: i) 10,000,000 shares of iVoice's Class A Common Stock; and ii) 400,000 shares of iVoice's Class B Common Stock. In addition, the two controlling stockholders of Visual sold 300,000 shares of iVoice's Class B Common Stock to IVT's sole stockholder and concurrently canceled a total of 2,000,000 shares of their Class A Common Stock. A finder's fee of 2,000,000 shares was issued on August 30, 1999, in connection with the reorganization. The Agreement also provided that certain assets of iVoice would be transferred to Communications Research, Inc., ("CRI"), a wholly owned subsidiary of Visual, and that shares of CRI would be distributed pro rata to the Class A stockholders of iVoice before the issuance of the 10,000,000 shares to the sole stockholder of IVT. The stock of CRI was distributed at the rate of one share of CRI for four shares of iVoice's Class A Common Stock. On September 18, 2000, CRI filed a registration statement with the U.S. Securities and Exchange commission to provide for the distribution of its shares to former Visual stockholders. This merger transaction has been accounted for in the financial statements as a public shell merger. As a result of this transaction the former stockholders of IVT acquired or exercised control over a majority of the shares of Visual. Accordingly, the transaction has been treated for accounting purposes as a recapitalization of IVT and, therefore, these financial statements represent a continuation of the legal entity, IVT, not Visual, the legal survivor. Consequently, the comparative figures are those of iVoice.com, Inc. Because the historical financial statements are presented in this manner, proforma financial statements are not required. In accounting for this transaction: i) IVT is deemed to be the purchaser and surviving company for accounting purposes. Accordingly, its net assets are included in the balance sheet at their historical book values; ii) Control of the net assets and business of Visual was acquired effective May 21, 1999 (the "Effective Date"). This transaction has been accounted for as a purchase of the assets and liabilities of Visual by IVT at the fair value of $138,000. The historical cost of the net assets acquired was $90,780. A summary of the assigned values of the net assets acquired is as follows: Cash and cash equivalents $ 191 Property and equipment 138,809 Accrued expenses (1,000) --------- Net assets acquired $ 138,000 ========= On April 24, 2000, iVoice entered into an agreement and plan of reorganization with all the stockholders of ThirdCAI, another shell company that was a reporting company under the Securities Exchange Act of 1934. In this transaction, which took place by means of a short-form merger, with ThirdCAI's name being changed to iVoice, iVoice acquired all F-28 the issued and outstanding shares of ThirdCAI in exchange for $150,000, and a finder's fee paid to Corporate Architect, Inc., consisting of 50,000 shares of Class A voting Common Stock. The fee was negotiated between iVoice and ThirdCAI. The purpose of this transaction was to enable iVoice's business to be conducted by a reporting company, as pursuant to the "eligibility rule" adopted by the National Association of Securities Dealers, Inc., or "NASD," as only reporting companies may continue to have stock quoted on the OTC Bulletin Board. NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment is summarized as follows: December 31, ------------------------- 2001 2000 ---------- --------- Equipment $ 59,524 $ 56,196 Leasehold improvements 10,184 8,684 Furniture and fixtures 123,394 123,394 ---------- --------- 193,102 188,274 Less: Accumulated depreciation 86,517 47,353 ---------- --------- Property and equipment, net $ 106,585 $ 140,921 ========== ========= Depreciation expense for the years ended December 31, 2001 and 2000 was $39,164 and $29,517, respectively. NOTE 4 - BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS Billings in excess of costs and estimated earnings on uncompleted contracts as of December 31, 2001 and 2000 consists of the following: December 31, ------------------------- 2001 2000 ---------- ---------- Costs incurred on uncompleted contracts $ 56,385 $ 91,745 Estimated earnings 53,763 117,488 ----------- ----------- 110,148 209,233 Less billings to date 153,765 379,450 ----------- ----------- $ (43,617) $ (170,237) =========== =========== NOTE 5 - INCOME TAXES The components of the provision for income taxes are as follows: December 31, ----------------- 2001 2000 ------ ------ Current Tax Expense U.S. Federal $ - $ - State and Local - - ------ ------ Total Current - - ------ ------ Deferred Tax Expense U.S. Federal - - State and Local - - ------ ------ Total Deferred - - ------ ------ Total Tax Provision from Continuing Operations $ - $ - ====== ====== F-29 The reconciliation of the effective income tax rate to the Federal statutory rate is as follows: Federal Income Tax Rate (34.0)% Deferred Tax Charge (Credit) - Effect on Valuation Allowance 38.7% State Income Tax, Net of Federal Benefit (4.1)% -------- Effective Income Tax Rate 0.0% ======== As of December 31, 2001 and 2000, iVoice had net carryforward losses of approximately $6,900,000 and $3,500,000 that can be utilized to offset future taxable income through 2014. Utilization of these net carryforward losses is subject to the limitations of Internal Revenue Code Section 382. Because of the current uncertainty of realizing the benefit of the tax carryforward, a valuation allowance equal to the tax benefit for deferred taxes has been established. The full realization of the tax benefit associated with the carryforward depends predominantly upon iVoice's ability to generate taxable income during the carryforward period. Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of iVoice's deferred tax assets and liabilities are summarized as follows: December 31 ------------------------------- 2001 2000 ------------- ------------- Net Operating Loss Carryforwards $ 2,630,000 $ 1,190,000 Less: Valuation Allowance (2,630,000) (1,190,000) ------------- ------------- Net Deferred Tax Assets $ - $ - ============= ============= Net operating loss carryforwards expire starting in 2007 through 2016. NOTE 6 - DUE TO RELATED PARTY During the period from June 2000 to date, Jerome R. Mahoney, President and Chief Executive Officer of iVoice has sold personal holdings of iVoice's Class A common shares and has loaned the proceeds of these sales to iVoice to fund its working capital requirements. iVoice has executed a promissory note and Security Agreement in favor of Mr. Mahoney. As of December 31, 2001, the outstanding loan balance including monies loaned from the proceeds of stock sales, unpaid compensation, income taxes incurred from the sale of stock unreimbursed expenses and interest on the unpaid balance at 9.5% totaled $1,746,610, of this amount, $940,191 is reflected in accrued expenses. Under the terms of the loan agreements, the note holder may elect prepayment of the principal and interest owed pursuant to this note by issuing Jerome Mahoney, or his assigns, one Class B common share of iVoice, Inc., no par value, for each dollar owed. NOTE 7 - CONVERTIBLE DEBENTURES iVoice has previously issued two series of convertible debentures consisting of ten notes payable totaling $500,000 bearing interest at 12% per annum and payable on December 1, 2000 and fifteen notes payable totaling $425,000 bearing interest at 8% and maturing 5 years from the date of issue. The 12% debentures are convertible into shares of iVoice's Class A Common Stock at the option of the holder by dividing the outstanding principal and interest by the conversion price which shall equal 50% of the average bid price during the 20 trading days before the conversion date. As of December 31, 2001, $305,200 in principal of the 12% debentures and $6,559 in accrued interest had been converted into 2,996,738 shares of iVoice's Class A Common Stock. Total outstanding principal balance of the 12% convertible debentures at December 31, 2001 was $194,800 plus accrued interest of $82,514. F-30 The 8% debentures are convertible into Class A common shares at the lesser of (i) 140% of the closing bid price for the Common Stock on the Closing Date, or (ii) 80% of the average of the three lowest closing bid for the 22 trading days immediately preceding the date of conversion. As of December 31, 2001, $260,000 in principal of the 8% debentures and $7,324 in accrued interest had been converted into 7,149,992 shares of iVoice's Class A Common Stock. Total outstanding principal balance of the 8% convertible debentures at December 31, 2001 was $165,000 plus accrued interest of $3,936. iVoice has been advised by the holders of the 12% debentures that iVoice has breached the following terms of the debentures: (a) Failure to register, on a timely basis, under the Securities Act of 1933, the shares issuable upon the conversion of the debentures, (b) Registering additional shares other than the shares issuable upon the conversion of the debentures, and (c) Failure to provide the debenture holders a perfected security interest in certain assets of iVoice pursuant to a Security Agreement that was part of the debenture documentation. iVoice has reached settlement terms with one previous holder of the 12% debentures regarding the interest and penalties demanded under default by this former holder whereby iVoice has issued 450,000 shares to this former holder in full settlement of their claim. iVoice has not accrued any amounts with respect to iVoice's default on the 12% debentures that may be due to the remaining holders. iVoice anticipates issuing additional shares to settle the debenture holders, claims arising from our default the amount of which is undeterminable at this time. NOTE 8 - CAPITAL LEASE OBLIGATIONS During the year ended December 31, 2000, iVoice incurred two capital lease obligations totaling $92,895 in connection with the acquisition of computers and office furniture. The future minimum lease payments due under the capital leases at December 31, 2001 are follows: Lease payable for computer equipment, payable at $1,367 per month, including interest at 22.31%. Final payment is due June 2003. $ 20,749 Lease payable for furniture, payable at $2,151 per month, including interest at 20.79%. Final payment due April 2003. 28,197 --------- Present value of net minimum lease payments $ 48,946 ========= The future minimum lease payments $ 56,864 Less amount representing interest 7,918 --------- Present value of net minimum lease payments 48,946 Less current portion 35,018 --------- Long term capital lease obligations $ 13,928 ========= NOTE 9 - COMMITMENTS AND CONTINGENCIES a) In April 2000, iVoice entered into a two-year lease agreement for their office currently utilized as the corporate headquarters. Monthly lease payments total $11,000. On December 5, 2001, iVoice renegotiated this lease and reduced the space it occupies. The new lease has an eight-month term with monthly payments of $7,000. At December 31, 2001, iVoice was in arrears on rents due under the original lease for a total of $9,000. Under the renegotiated lease, this arrearage is being paid in monthly amounts of $2,000 along with amounts currently due. Rent expense under operating leases for the year ended December 31, 2001 and 2000 was $176,560 and $153,175, respectively. F-31 iVoice's future net minimum annual aggregate rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year are as follows: December 31, ------------ 2002 $ 65,000 ======== b) On May 1, 1999, iVoice entered into a five-year employment agreement with its majority stockholder (the "Executive"). He will serve as iVoice's Chairman of the Board and Chief Executive Officer for a term of five years. As consideration, iVoice agrees to pay the Executive a sum of $180,000 the first year with a 10% increase every year thereafter. c) In connection with the Reorganization Agreement, iVoice entered into a five-year consulting agreement with one of Visual's Directors (the "Director"). The agreement provided that the Director would receive a fee of $104,000. This agreement was terminated with the Director's resignation on May 16, 2000. d) On June 2, 1999, subsequently amended January 11, 2000, iVoice entered into a three-year employment agreement, expiring on May 31, 2002, with an employee. As compensation, such employee will receive a base salary of $80,000, 250,000 shares of iVoice's Class A Common Stock and options to purchase 140,000 shares of iVoice's Class A Common Stock. On August 23, 2001 this employee was terminated. All unvested options to purchase Company shares were subsequently canceled at the employee's termination date. e) iVoice's revenues for the year ending December 31, 2000 include $140,950 from Celpage, Inc. The amount of the contract dated February 9, 2000 totaled $288,175 for the installation of a 196-port Integrated Voice Response System at the customer's Guaynabo, Puerto Rico location. To date, iVoice has received $42,800 for the installation of 24-ports, which include all database development costs necessary for the entire installation. Celpage has refused to accept the remaining ports citing a shortfall in their projected subscriber base. Other assets of iVoice's balance sheet at December 31, 2001 reflects a receivable of $67,650 representing total amounts due under the contract related to this installation of $245,375 less deferred revenues of $147,225 and a reserve of $30,500. iVoice has made attempts to complete the remaining installation by offering incentives in the form of price reductions however, the customer has refused. iVoice has filed suit against PanAm Wireless, Inc., the parent company of Celpage, Inc., to attempt to recover the balance of the contract. PanAm Wireless, Inc. has subsequently filed a counterclaim against iVoice alleging iVoice's failure to supply PanAm with the required equipment and that the system did not provide the services as specified in the purchase order. iVoice denies PanAm's counterclaim allegations and intends to vigorously defend itself in this lawsuit. f) iVoice is currently involved with three lawsuits in which it is the defendant. Two of these suits were served by employment agencies for non-payment of placement fees in connection with the hiring of employees, one of which has been dismissed without prejudice by the presiding judge. iVoice believes that the amount of the claims will not have a material affect on the financial statements. The third is a claim by a sub-leasee and former subsidiary of iVoice with respect to certain property rights and expenses relating to the tenancy between iVoice and this sub-tenant. Management believes the suit will be dismissed, however, if not, the amount of the claim will not materially affect the financial statements. g) iVoice's assets are subject to a Security Agreement with the majority stockholder. See Note 6. NOTE 10 - COMMON STOCK In August 2001, iVoice amended its Certificate of Incorporation to change the par value of its Class A Common Stock from $.01 to $.001 and to increase the number of shares iVoice is authorized to issue of its Class A Common Stock from 150,000,000 to 600,000,000 and its Class B Common Stock from 700,000 to 3,000,000. The amendment also granted the board of directors the rights to prescribe and authorize the issuance of 1,000,000 preferred shares, $1.00 par value. a) Class A Common Stock -------------------- Class A Common Stock consists of the following as of December 31, 2001: 600,000,000 shares of authorized common stock with a par value of $.001, 154,123,517, shares were issued and outstanding. F-32 As of December 31, 2000, iVoice was authorized to issue 150,000,000 shares of Class A Common Stock with a $.01 par value, 103,969,715 shares were issued and outstanding. Class A Common Stock has voting rights of 1:1. Class A Common Stock has voting rights of 1 to 100 with respect to Class B Common Stock. 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 the payment of dividends. iVoice has never paid any dividends on its Common Stock and does not contemplate doing so in the foreseeable future. iVoice anticipates that any earnings generated from operations will be used to finance the growth objectives. For the year ended December 31, 2001, iVoice had the following transactions in its Class A Common Stock: 1. iVoice issued 15,194,287 shares of its Class A Common Stock for services rendered valued at $1,062,055. 2. iVoice issued 2,183,834 shares of its Class A Common Stock for compensation to Company employees valued at $234,431. 3. iVoice issued 1,172,000 shares of its Class A common to Swartz Private Equity, LLC under the terms of their financing agreement with Swartz for net proceeds of $129,931. 4. iVoice issued 328,951 shares of its Class A Common Stock as repayment of loans to related parties for a total value of $75,659. 5. iVoice issued 9,829,204 shares of Class A Common Stock for the conversion of $402,201 in debenture principal and 317,576 shares for $13,885 in accrued interest. 6. iVoice issued 2,128,000 shares of its Class A Common Stock valued at $211,080 to settle disputes arising from financing agreements entered into by iVoice. 7. iVoice issued 1,000,000 shares of its Class A Common Stock for conversion of 10,000 shares of Class B Common Stock. 8. iVoice issued 18,000,000 shares of its Class A Common Stock for the exercise of a warrant issued to EMCO\Hanover Group, Inc. issued pursuant to a consulting agreement with them. b) Class B Common Stock -------------------- Class B Common Stock consists of the following as of December 31, 2001: 3,000,000 shares of authorized common stock with no par value. As of December 31, 2001, 700,000 shares were issued; and 354,000 shares were outstanding with a total of 346,000 Class B shares converted into 34,600,000 Class A shares. Class B common stockholders are not entitled to receive dividends. As of December 31, 2000, iVoice was authorized to issue 700,000 shares of Class B Common Stock with no par value. As of December 31, 2000, 700,00 shares were issued; and 364,000 were outstanding. On April 24, 2000, iVoice amended its Articles of Incorporation to state that Class B Common Stock is convertible into its Class A Common Stock at a conversion rate of one share of Class B for one hundred shares of Class A Common Stock. The conversion ratio is in relation to the voting ratio. For the year ended December 31, 2001, iVoice had the following transactions in its Class B Common Stock: On November 11, 2001, 10,000 shares of Class B Common Stock were converted into 1,000,000 shares of Class A Common Stock. F-33 c) Preferred Stock --------------- Preferred Stock consists of 1,000,000 shares of authorized preferred stock with $1.00 par value. As of December 31, 2001, no shares were issued or outstanding. As of December 31, 2000, iVoice was not authorized to issue preferred shares. NOTE 11 - STOCK OPTIONS During 2001, iVoice issued various options as follows: a) iVoice issued to its employees, options to purchase 1,655,000 shares of iVoice Class A Common Stock at an average price of $.076 per share. Of these options, 255,000 were cancelled due to employee terminations in 2001. The remaining options vest at 25% per year and have a five-year expiration from date of issue. b) Warrants to purchase 404,510 shares of iVoice Class A Common Stock with an average exercise price of $.1220, to Swartz Private Equity, LLC as drawdown fees under the financing agreement with them. The warrants expire five years from the date of issue. c) Warrants to purchase a total of 343,750 shares of iVoice Class A Common Stock with an exercise price of $.1323 to Owen May and Michael Jacobs of the May Davis Group as a fee for the placement of iVoice's 8% convertible debentures, pursuant to a subscription agreement with them. The warrants expire five years from the date of issue. d) Warrants to purchase 18,000,000 shares of iVoice Class A Common Stock with an exercise price of $.055 to the EMCO\Hanover Group, Inc. pursuant to a consulting agreement with them. The warrants were exercised and are reflected as a subscription receivable. See Note 10 regarding shares issued for exercise of this warrant. e) On November 15, 2001, iVoice issued warrants to purchase a total of 250,000 shares of iVoice Class A Common Stock at $.047 per share to Beacon Capital LLC in consideration for the placement of $150,000 of iVoice's 8% convertible debentures pursuant to an subscription agreement with them. The warrants are exercisable at any time prior to their five (5) year expiration and carry a cash or cashless exercise at the option of the holders. During 2000, iVoice issued various options as follows: a) On August 17, 2000, in connection with a financing agreement with Swartz Private Equity, LLC, iVoice issued a warrant to purchase 5,490,000 shares of Class A Common Stock at $.484 per share The warrant expires in five years on August 16, 2005 and contains strike price reset provisions. F-34 Options outstanding, except options under employee stock option plan, are as follows as of December 31, 2001: Exercise Expiration Date Price Shares --------------------------- -------- --------- December 22, 2003 .1000 10,000 January 5, 2004 .1200 10,000 January 21, 2004 .1177 10,000 February 5, 2004 .1430 10,000 March 17, 2004 .0869 15,000 April 6, 2004 .0583 15,000 August 17, 2005 .1406 5,490,000 January 9, 2006 .1045 200,000 February 27, 2006 .1406 87,310 February 28, 2006 .1458 78,000 March 13, 2006 .1221 39,200 April 30, 2006 .1323 343,750 November 14, 2006 .0470 250,000 ------- 6,558,260 ========= Employee Stock Option Plan -------------------------- During the year ended December 31, 1999, iVoice adopted the Employee Stock Option Plan (the "Plan") in order to attract and retain qualified personnel. Under the Plan, the Board of Directors (the "Board"), in its discretion may grant stock options (either incentive or non-qualified stock options) to officers and employees to purchase iVoice's common stock at no less than 85% of the market price on the date the option is granted. Options generally vest over four years and have a maximum term of five years. During 1999, 20,000,000 shares were reserved for future issuance under the plan. As of December 31, 2001, 11,559,000 options to purchase shares were granted. A total of 9,000,000 of these granted options were exercised. A total of 1,946,083 options to purchase Class A common shares were outstanding and held by company employees. The exercise prices range from $0.06 to $3.75 per share. All options issued to employees vest at 25% per year and expire in 5 years. As of December 31, 2000, employee stock options exercised are as follows: Optionee Exercised # Shares Price -------- --------- -------- ----- Joel Beagleman 03/20/00 9,000,000 0.033 iVoice has adopted only the disclosure provisions of SFAS No. 123. It applies Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and its related interpretations in accounting for its plan. It does not recognize compensation expense for its stock-based compensation plan other than for restricted stock and options/warrants issued to outside third parties. If iVoice had elected to recognize compensation expense based upon the fair value at the grant date for awards under its plan consistent with the methodology prescribed by SFAS No. 123, iVoice's net loss and loss per share would be increased to the proforma amounts indicated below: For The Year Ended, December 31, ------------------------------ 2001 2000 ------------ ------------ Net Loss As Reported $(3,447,434) $(2,891,379) ============ ============ Proforma $(3,848,540) $(3,296,417) ============ ============ Basic Loss Per Share As Reported $ (.03) $ (.03) ============ ============ Proforma $ (.03) $ (.04) ============ ============ F-35 The fair value of these options were estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the years ended December 31, 2001 and 2000: dividend yield of 0%; expected volatility of 320%; risk-free interest rates of 5.50% and 5.56% respectively; and expected life of 4.05 and 4.1 years, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because iVoice's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The following summarizes the stock option and warrant transactions:
Employee Weighted Other Weighted Stock Average Options and Average Options Exercise Warrants Exercise Outstanding Price Price ------------ -------- ----------- --------- Balance, January 1, 2000 9,510,000 $ .033 665,185 $ 0.120 Granted 544,000 $ .806 5,490,000 $ 0.484 Exercised (9,000,000) $ .033 (195,185) $ 0.104 Canceled (290,000) $ .191 - $ 0.110 ----------- ------- ------------ -------- Balance, December 31, 2000 764,000 $ .670 5,960,000 $ 0.456 Granted 1,795,000 $ .078 18,998,260 $ 0.058 Exercised - $ .000 (18,000,000) $ 0.040 Canceled (612,917) $ .246 (400,000) $ 1.328 ----------- ------- ------------ -------- Balance, December 31, 2001 1,946,083 $ .257 6,558,260 $ 0.135 =========== ======= ============ ======== Outstanding and Exercisable, December 31, 2000 66,620 $ .333 5,960,000 $ 0.456 =========== ======= ============ ======== Outstanding and Exercisable, December 31, 2001 265,583 $ .587 6,558,260 $ 0.135 =========== ======= ============ ========
The weighted average remaining contractual lives of the employee stock options is 4.05 years at December 31, 2001. NOTE 12 - SUBSEQUENT EVENTS a) On February 14, 2002, through mutual agreement, iVoice cancelled its subscription agreement for the purchase of $300,000 of iVoice's 8% convertible debentures with Beacon Capital, LLC. As compensation, iVoice issued to Beacon, 2,000,000 restricted shares of its Class A Common Stock. b) On February 14, 2002, iVoice received a notice of conversion of $93,085 in interest from the holders of its 12% convertible debentures. In accordance with the debenture agreements, iVoice issued 4,279,750 of its Class A Common Stock for the conversion of the interest. F-36 WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO PROVIDE ANY INFORMATION OR MAKE ANY REPRESENTATIONS ABOUT IVOICE, INC. EXCEPT THE INFORMATION OR REPRESENTATIONS CONTAINED IN THIS PROSPECTUS. YOU SHOULD NOT RELY ON ANY ADDITIONAL INFORMATION OR REPRESENTATIONS IF MADE. ----------------------- This prospectus does not constitute an offer to ------------- sell, or a solicitation of an offer to buy any PROSPECTUS securities: ------------- [ ] except the common stock offered by this prospectus; 5,000,000,000 SHARES OF COMMON STOCK [ ] in any jurisdiction in which the offer or solicitation is not authorized; [ ] in any jurisdiction where the dealer or other iVOICE, INC. salesperson is not qualified to make the offer or solicitation; [ ] to any person to whom it is unlawful to make the offer or solicitation; or 2003 ------------ ---, [ ] to any person who is not a United States resident or who is outside the jurisdiction of the United States. The delivery of this prospectus or any accompanying sale does not imply that: [ ] there have been no changes in the affairs of iVoice, Inc. after the date of this prospectus; or [ ] the information contained in this prospectus is correct after the date of this prospectus. -----------------------
Until __________, 2003, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS iVoice's bylaws provide that it has the power to indemnify any officer or director against damages if such person acted in good faith and in a manner the person reasonably believed to be in the best interests of iVoice. No indemnification may be made (i) if a person is adjudged liable unless a Court determines that such person is entitled to such indemnification, (ii) with respect to amounts paid in settlement without court approval or (iii) expenses incurred in defending any action without court approval. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth estimated expenses expected to be incurred in connection with the issuance and distribution of the securities being registered. iVoice will pay all expenses in connection with this offering. Securities and Exchange Commission Registration Fee $ 506 Printing and Engraving Expenses $ 1,500 Accounting Fees and Expenses $ 1,000 Legal Fees and Expenses $ 10,000 Miscellaneous $ 1,994 --------- TOTAL $ 15,000 ========= ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES YEAR ENDED DECEMBER 31, 2002. iVoice issued the following unregistered securities pursuant to various exemptions from registration under the Securities Act of 1933: In August and November 2002, iVoice borrowed a total of $470,000 from Cornell Capital partners, which amounts are evidenced by two promissory notes. One note was issued in August 2002 in the principal amount of $250,000. This note is due 120 days after issuance. This note bears interest at 8% per year if not paid by the maturity date. The second note was issued in November 2002 in the principal amount of $220,000. This note is due 150 days after issuance. This note bears interest at 12% per year if not paid by the maturity date. As of January 15, 2003, iVoice owed Cornell Capital Partners an aggregate of $179,671 under these two promissory notes. The proceeds under these notes represent advances under the Equity Line of Credit that will be repaid through the issuance of Class A common stock pursuant the terms of the Equity Line of Credit agreement. iVoice issued 10,000 shares of its Class A common stock for partial payment of leasehold improvements valued at $540. iVoice issued 2,250,000 shares of Class A common stock for legal services valued at $45,000. iVoice issued 505,921 shares of Class A common stock for the conversion of $15,000 in debenture principal and 84,766 shares for $2,594 in accrued interest on its 8% Convertible Debentures. iVoice issued 7,229,230 shares of Class A common stock for the conversion of $64,000 in debenture principal and 4,279,750 shares of Class A Common Stock for the conversion of $93,085 in accrued interest on its outstanding 12% Convertible Debentures. iVoice issued 6,200,000 shares of its Class A common stock for fees and services associated with the financing iVoice issued 19,464,744 shares of its Class A common stock for the conversion of $71,483 in debenture principal on its 5% Convertible Debentures. iVoice issued 36,675,000 shares for repayment of $93,453 in principal on a $250,000 note payable issued for an advance on the equity line financing with Cornell Capital Partners, LP. II-1 During the nine months ending September 30, 2002, we issued the following options and warrants: o On August 23, 2002, iVoice issued, to an employee, an option to purchase 5,000,000 shares of iVoice Class A common stock at a price of $.009 per share. The options vest at 25% per year and have a five-year expiration from date of issue. In June 2002, iVoice issued 5,500,000 shares of Class A common stock to Cornell Capital Partners, L.P., 500,000 shares of Class A common stock to Westrock Advisors and 200,000 shares of Class A common stock to Seth A Farbman, all in connection with the Equity Line of Credit. These shares were valued at $110,000, $10,000 and $4,000, respectively. In May 2002, iVoice issued 2,250,000 shares of Class A common stock to Lawrence A. Muenz for legal services rendered. These legal services were valued at $45,000. In April and May 2002, iVoice issued 2,741,331 shares of Class A common stock for the conversion of $29,823.64 of convertible debentures. In February 2003, we entered into an Equity Line of Credit with Cornell Capital Partners, L.P. Pursuant to the Equity Line of Credit, we may, at our discretion, periodically sell to Cornell Capital Partners shares of Class A common stock for a total purchase price of up to $5.0 million. For each share of Class A common stock purchased under the Equity Line of Credit, Cornell Capital Partners will pay 91% of the lowest closing bid price on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the 5 days immediately following the notice date. Cornell Capital Partners is a private limited partnership whose business operations are conducted through its general partner, Yorkville Advisors, LLC. Further, Cornell Capital Partners will retain 5% of each advance under the Equity Line of Credit. In addition, iVoice engaged Westrock Advisors, Inc., a registered broker-dealer, to advise it in connection with the Equity Line of Credit. For its services, Westrock Advisors received 500,000 shares of iVoice's Class A common stock. The issuance of these shares is conditioned upon iVoice registering these shares with the Securities and Exchange Commission. In June 2002, iVoice raised $255,000 from the sale of convertible debentures. These debentures are convertible into shares of Class A common stock at a price equal to either (a) an amount equal to one hundred twenty percent (120%) of the closing bid price of the common stock as of the closing date or (b) an amount equal to eighty percent (80%) of the average closing bid price of the common stock for the four trading days immediately preceding the conversion date. These convertible debentures accrue interest at a rate of 5% per year and are convertible at the holder's option. These convertible debentures have a term of two years. All amounts outstanding under these convertible debentures have been redeemed. iVoice issued 129,645,133 shares of Class A common stock upon conversion of $189,725, the outstanding balance due under the debentures. YEAR ENDED DECEMBER 31, 2001. In the year ending December 31, 2001, iVoice issued the following unregistered securities pursuant to various exemptions from registration under the Securities Act of 1933: We issued 15,194,287 shares of Class A common stock for services valued at $918,905. We issued 9,829,204 shares of Class A common stock for the conversion of $402,201 in debenture principal and 317,576 shares of Class A common stock for $13,885 in accrued interest. We issued 2,128,000 shares of Class A common stock valued at $211,080 to settle disputes arising from financing agreements. We issued 1,172,000 shares of Class A common stock to Swartz Private Equity, LLC under the terms of a financing agreement for net proceeds of $129,931. We issued $425,000 of 8% Convertible Debentures exercisable at an 80% conversion price. The 20% conversion discount totaling $106,250 was recorded as interest expense. II-2 We issued 2,183,834 shares of our Class A common stock at various times during the year as compensation to employees valued at $234,432. On January 30, 2001, we issued 328,951 shares of our Class A common stock as repayment of amounts owed to related parties valued at $75,659. On November 20, 2001, we issued 1,000,000 shares of our Class A common stock for the conversion of 10,000 shares of our Class B common stock. During 2001, we issued the following options and warrants: o Options to purchase 1,655,000 shares of Class A common stock to employees at an average price of $0.076 per share. Of these options, 255,000 were cancelled due to employee terminations in 2001. The remaining options vest at 25% per year and have a five-year expiration from date of issue. o Warrants to purchase 404,510 shares of Class A common stock with an average exercise price of $0.1220, to Swartz Private Equity, LLC as draw-down fees under a financing agreement. The warrants expire five years from the date of issue. o Warrants to purchase a total of 343,750 shares of Class A common stock with an exercise price of $0.1323 to Owen May and Michael Jacobs of the May Davis Group as a fee for the placement of 8% convertible debentures, pursuant to a subscription agreement. The warrants expire five years from the date of issue. o Warrants to purchase 18,000,000 shares of Class A common stock with an exercise price of $0.055 to the EMCOGroup, Inc. pursuant to a consulting agreement with them. We issued 18,000,000 shares of Class A common stock for the exercise of this warrant. o Warrants to purchase a total of 250,000 shares of Class A common stock at $0.047 per share to Beacon Capital LLC in consideration for the placement of $150,000 of 8% convertible debentures pursuant to an subscription agreement. The warrants are exercisable at any time prior to their five year expiration and carry a cash or cashless exercise at the option of the holders. YEAR ENDED DECEMBER 31, 2000. On February 10, 2000, iVoice settled a $4,500,000 lawsuit by issuing 2,000,000 shares of Class A common stock. These shares were valued at $300,000 on the date of issuance. On January 10 and February 2, 2000, we issued $100,000 and $50,000, respectively, of 12% Convertible Debentures exercisable at a 50% conversion price. The 50% conversion discount totaling $150,000 was recorded as a prepaid debt issue cost and was amortized over the life of the debt. Debt issue costs represent the estimated cost of the conversion discount feature relating to the issuance of iVoice's convertible debentures. In previous years, these costs were amortized and charged to interest expense over the life of the debt. During the year ended December 31, 2001, iVoice charged to expense the fair value of the beneficial conversion features of the convertible debt as measured at the date of issuance in accordance with EITF Issue 98-5. The switch to this method of accounting did not have a material affect on iVoice's financial statements. During the year ended December 31, 2000, iVoice issued 848,718 shares of Class A common stock for services valued at $518,155. On April 24, 2000, iVoice issued 50,000 shares of Class A common stock to Corporate Architects, Inc. with a value of $46,875 as a referral fee for the purchase of ThirdCAI, Inc. During the year ended December 31, 2000, iVoice issued 80,000 shares of Class A common stock as compensation to employees valued at $69,938. During the year ended December 31, 2000, iVoice issued 9,000,000 shares of Class A common stock upon the exercise of options at $0.033 per share for a total of $297,000. During the year ended December 31, 2000, iVoice issued 33,600,000 shares of Class A common stock for the conversion of 336,000 shares of Class B common stock. II-3 During the year ended December 31, 2000, iVoice issued 1,007,287 shares of Class A common stock for the conversion of $163,000 in principal on its outstanding 12% convertible debentures. During the year ended December 31, 2000, iVoice issued 1,240,047 shares of Class A common stock for cash totaling $746,000. On August 17, 2000, in connection with a financing agreement with Swartz Private Equity, LLC, we issued a warrant to purchase 5,490,000 shares of Class A common stock at $0.484 per share. The warrant expires on August 16, 2005 and contains strike price reset provisions. TRANSACTIONS FROM MAY 21, 1999 (THE DATE OF THE MERGER). On May 21, 1999, International Voice Technologies, Corp., a Delaware corporation, merged with and into the predecessor of iVoice, Visual Telephone International, Inc., with Visual Telephone surviving. Simultaneous with the merger, Visual Telephone changed its name to iVoice.com, Inc. and later to iVoice, Inc. In connection with the merger, iVoice issued 36,932,364 shares of Class A common stock to the shareholders of International Voice Technologies. On the date of issuance, these shares were valued at $138,000. In consideration for the merger with International Voice Technologies, Jerome R. Mahoney, the sole stockholder of International Voice Technologies, received 10,000,000 shares of Class A common stock and 700,000 shares of Class B common stock. In addition, the two controlling stockholders of Visual Telephone sold 300,000 shares of Class B common stock to Mr. Mahoney and concurrently canceled a total of 2,000,000 shares of their Class A common stock. The consulting firm of Toby Investments received 2,000,000 shares of common stock for consulting services on the transaction. The agreement also provided that certain of the assets of Visual Telephone would be transferred to Visual Telephone's wholly owned subsidiary, CRI. The merger was accounted for in its financial statements as a public shell merger. In a public shell merger the stockholders of the operating company, in this case International Voice Technologies, become the majority owners of the shell company, in this case Visual Telephone, and the stockholders of Visual Telephone, the public shell company, become minority stockholders in International Voice Technologies, the operating company. On May 22, 1999, iVoice issued 400,000 shares of Class A common stock to Lawrence A. Muenz for legal services. These shares were valued at $32,000 on the date of issuance. On May 22, 1999, iVoice issued 10,000 shares of Class A common stock to Ron Vance for consulting services. These shares were valued at $800 on the date of issuance. On June 15, 1999, iVoice issued 3,200,000 shares of Class A common stock to Suraj Tschand for the purchase of software codes. These shares were valued at $544,000 on the date of issuance. On June 22, 1999, iVoice issued 418,799 shares of Class A common stock to DOTCOM Funding for cash. These shares were valued at $87,949 on the date of issuance. On July 12, 1999, iVoice issued 445,655 shares of Class A common stock to DOTCOM Funding for cash. These shares were valued at $93,589 on the date of issuance. On August 16, 1999, iVoice issued 116,845 shares of Class A common stock to DOTCOM Funding for cash. These shares were valued at $59,591 on the date of issuance. On August 27, 1999, iVoice issued 50,000 shares of Class A common stock to John Mahoney for services. These shares were valued at $7,000 on the date of issuance. John Mahoney is the father of Jerry Mahoney, iVoice's President, Chief Executive Officer and sole director. On August 27, 1999, iVoice issued 50,000 shares of Class A common stock to Daniel Timpone for services. These shares were valued at $7,000 on the date of issuance. On August 31, 1999, iVoice issued 100,000 shares of Class A common stock to RFG, Inc. for services. These shares were valued at $14,000 on the date of issuance. In October 1999, iVoice issued 12% debentures that were convertible into shares of iVoice's Class A common stock at the option of the holder by dividing the outstanding principal and interest by the conversion price which shall equal 50% of the average bid price during the 20 trading days before the conversion date. As of June 30, 2002, $345,200 in principal of the 12% debentures and II-4 $99,644 in accrued interest had been converted into 10,017,819 shares of iVoice's Class A common stock. Total outstanding principal balance of the 12% convertible debentures at June 30, 2002 was $154,800, plus accrued interest of $13,460. Debt issue costs represent the estimated cost of the conversion discount feature relating to the issuance of iVoice's convertible debentures. In previous years, these costs were amortized and charged to interest expense over the life of the debt. During the year ended December 31, 2001, iVoice charged to expense the fair value of the beneficial conversion features of the convertible debt as measured at the date of issuance in accordance with EITF Issue 98-5. The switch to this method of accounting did not have a material affect on iVoice's financial statements. On November 1, 1999, iVoice issued 250,000 shares of Class A common stock to Leo Pudlo as employee compensation. These shares were valued at $87,500 on the date of issuance. On November 23, 1999, iVoice issued 20,000 shares of Class A common stock to Jason Christman for services. These shares were valued at $2,800 on the date of issuance. On November 23, 1999, iVoice issued 100,000 shares of Class A common stock to Merle Katz upon the exercise of options. These shares were valued at $14,000 on the date of issuance. We relied upon the exemption provided in Section 4(2) of the Securities Act and/or Rule 506 thereunder, which cover "transactions by an issuer not involving any public offering," to issue securities discussed above without registration under the Securities Act of 1933. iVoice made a determination in each case that the person to whom the securities were issued did not need the protections that registration would afford. The certificates representing the securities issued displayed a restrictive legend to prevent transfer except in compliance with applicable laws, and our transfer agent was instructed not to permit transfers unless directed to do so by iVoice, after approval by our legal counsel. iVoice believes that the investors to whom securities were issued had such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment. iVoice also believes that the investors had access to the same type of information as would be contained in a registration statement. ITEM 27. EXHIBITS - -------------------------------------------------------------------------------- NO. DESCRIPTION - ------- -------------------------------------------------------------------- 3.1 Certificate of incorporation of Del Enterprises, Inc., filed October 20, 1989 (incorporated herein by reference to Exhibit 3.1 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 3.2 Certificate of amendment to the certificate of incorporation of Del Enterprises, Inc., filed March 14, 2000 (incorporated herein by reference to Exhibit 3.2 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 3.3 Certificate of merger of International Voice Technologies, Inc. into Visual Telephone International, Inc., filed May 21, 1999 (incorporated herein by reference to Exhibit 3.3 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 3.4 Certificate of amendment to the certificate of incorporation of iVoice.com, Inc., filed April 27, 2000 (incorporated herein by reference to Exhibit 3.4 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 3.5 Certificate of amendment to the certificate of incorporation of iVoice.com, Inc., filed August 24, 2001 (incorporated herein by reference to Exhibit 3.5 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 3.6 Bylaws of Del Enterprises, Inc (incorporated herein by reference to Exhibit 3.5 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.1 Debenture No issued by iVoice.com, Inc. for $50,000 in 12% Secured Convertible Debenture Due December 1, 2000 to AJW Partners, LLC on October 29, 1999 (incorporated herein by reference to Exhibit 4.1 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). II-5 - -------------------------------------------------------------------------------- NO. DESCRIPTION - ------- -------------------------------------------------------------------- 4.2 Debenture No. 2 issued by iVoice.com, Inc. for $50,000 in 12% Secured Convertible Debenture Due December 1, 2000 to New Millenium Capital Partners, LLC on October 29, 1999 (incorporated herein by reference to Exhibit 4.2 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.3 Debenture No. 3 issued by iVoice.com, Inc. for $50,000 in 12% Secured Convertible Debenture Due December 1, 2000 to AJW Partners, LLC on October 29, 1999 (incorporated herein by reference to Exhibit 4.3 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.4 Debenture No. 4 issued by iVoice.com, Inc. for $50,000 in 12% Secured Convertible Debenture Due December 1, 2000 to AJW Partners, LLC on October 29, 1999 (incorporated herein by reference to Exhibit 4.4 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.5 Debenture No. 5 issued by iVoice.com, Inc. for $50,000 in 12% Secured Convertible Debenture Due December 1, 2000 to Bank Insinger de Beaufort, N.V. on October 29, 1999 (incorporated herein by reference to Exhibit 4.5 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.6 Debenture No. 6 issued by iVoice.com, Inc. for $100,000 in 12% Secured Convertible Debenture Due December 1, 2000 to New Millenium Capital Partners, LLC on October 29, 1999 (incorporated herein by reference to Exhibit 4.6 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.7 Debenture No. 7 issued by iVoice.com, Inc. for $50,000 in 12% Secured Convertible Debenture Due December 1, 2000 to New Millenium Capital Partners II, LLC on October 29, 1999 (incorporated herein by reference to Exhibit 4.7 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.8 Debenture No. 8 issued by iVoice.com, Inc. for $50,000 in 12% Secured Convertible Debenture Due December 1, 2000 to AJW Partners, LLC on October 29, 1999 (incorporated herein by reference to Exhibit 4.8 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.9 Debenture No. 9 issued by iVoice.com, Inc. for $25,000 in 12% Secured Convertible Debenture Due December 1, 2000 to New Millenium Capital Partners II, LLC on October 29, 1999 (incorporated herein by reference to Exhibit 4.9 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.10 Debenture No. 10 issued by iVoice.com, Inc. for $25,000 in 12% Secured Convertible Debenture Due December 1, 2000 to AJW Partners, LLC, on October 29, 1999 (incorporated herein by reference to Exhibit 4.10 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.11 Form 8% Convertible Debentures issued by iVoice.com, Inc. for $150,000 due April 30, 2006 to the purchasers thereof on April 30, 2001(incorporated herein by reference to Exhibit 4.11 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 4.12 Form 8% Convertible Debentures issued by iVoice.com, Inc. to certain purchasers thereof for an aggregate of $125,000 (incorporated herein by reference to Exhibit 4.12 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 4.13 Form 8% Convertible Debentures to be issued by iVoice.com, Inc. to Beacon Capital, LLC in the amount of $150,000. (incorporated herein by reference to Exhibit 4.12 of the registration statement on Form SB-2, filed with the SEC on December 21, 2001). 5.1* Opinion re: Legality II-6 - -------------------------------------------------------------------------------- NO. DESCRIPTION - ------- -------------------------------------------------------------------- 10.1 iVoice.com, Inc. 1999 Option Stock Plan (incorporated herein by reference to Exhibit 10.1 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 10.2 Investment agreement dated August 17, 2000, between iVoice.com, Inc. and Swartz Private Equity, LLC with exhibits (incorporated herein by reference to Exhibit 10.2 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 10.3 Registration rights agreement dated August 17, 2000, between iVoice.com, Inc. and Swartz Private Equity, LLC (incorporated herein by reference to Exhibit 10.3 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 10.4 Registration rights agreement by and among iVoice.com, Inc. and the investors' signatories thereto dated as of October 28, 1999 (incorporated herein by reference to Exhibit 10.4 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 10.5 Warrant to purchase 5,490,000 shares of iVoice.com, Inc. issued to Swartz Private Equity, LLC, dated August 17, 2000 (incorporated herein by reference to Exhibit 10.5 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 10.6 Subscription agreement between iVoice.com, Inc. and Beacon Capital, LLC, November 20, 2001, for the purchase of an aggregate of $150,000 of 8% Convertible Debentures. (incorporated herein by reference to Exhibit 4.12 of the registration statement on Form SB-2, filed with the SEC on December 21, 2001). 10.7 Registration rights agreement between iVoice.com, Inc. and Beacon Capital, LLC, dated as of November 20, 2001. (incorporated herein by reference to Exhibit 4.12 of the registration statement on Form SB-2, filed with the SEC on December 21, 2001). 10.8 Form of warrant to purchase 250,000 shares of iVoice.com, Inc. to be issued to Beacon Capital, LLC (incorporated herein by reference to Exhibit 4.12 of the registration statement on Form SB-2, filed with the SEC on December 21, 2001). 10.9 Subscription agreement between iVoice.com, Inc. and the purchaser signatories thereof, dated April 30, 2001, for the purchase of an aggregate of $275,000 of 8% Convertible Debentures due April 30, 2001 (incorporated herein by reference to Exhibit 10.9 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 10.10 Registration rights agreement by and among iVoice.com, Inc. and the investor signatories thereto dated as of April 30, 2001 (incorporated herein by reference to Exhibit 10.10 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 10.11 Warrant to purchase 171,875 shares of iVoice.com, Inc. issued to Michael Jacobs of The May Davis Group, Inc., dated April 30, 2001 (incorporated herein by reference to Exhibit 10.11 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 10.12 Warrant to purchase 171,875 shares of iVoice.com, Inc. issued to Owen May of The May Davis Group, Inc., dated April 30, 2001 (incorporated herein by reference to Exhibit 10.12 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 10.13 Consulting agreement entered into on March 15, 2001 by and between iVoice.com, Inc. and Finnigan USA (incorporated herein by reference to Exhibit 10.13 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 10.14 Real Property Lease Agreement dated December 5, 2001 between iVoice.com, Inc. and B&R Holding Company (incorporated herein by reference to Exhibit 10.14 to the Form 10-KSB for the year ended December 31, 2001 filed with the SEC on March 27, 2002). II-7 - -------------------------------------------------------------------------------- NO. DESCRIPTION - ------- -------------------------------------------------------------------- 10.15* Equity Line of Credit Agreement dated as of February 11, 2003 between iVoice, Inc. and Cornell Capital Partners, L.P. 10.16* Registration Rights Agreement dated as of February 11, 2003 between iVoice, Inc. and Cornell Capital Partners, L.P. 10.17* Escrow Agreement dated as of February 11, 2003 among iVoice, Inc., Cornell Capital Partners, L.P., Butler Gonzalez LLP and Wachovia, N.A. 10.18* Placement Agent Agreement dated February 11, 2003 between iVoice, Inc. and Westrock Advisors, Inc. 10.19 Securities Purchase Agreement dated June 2002 between iVoice, Inc. and the buyers identified therein (incorporated herein by reference to Exhibit 10.19 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.20 Registration Rights Agreement dated June 2002 between iVoice, Inc. and the buyers identified therein (incorporated herein by reference to Exhibit 10.20 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.21 Form of Debenture (incorporated herein by reference to Exhibit 10.21 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.22 Escrow Agreement dated June 2002 between iVoice, Inc., the buyers identified therein and Wachovia, N.A. (incorporated herein by reference to Exhibit 10.22 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.23 Transfer Agent Instructions dated June 2002 between iVoice, Inc., Cornell Capital Partners, L.P. and Fidelity Transfer Co. (incorporated herein by reference to Exhibit 10.23 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.24 Letter Agreement dated June 28, 2002 (incorporated herein by reference to Exhibit 10.24 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.25 Promissory Note dated as of August 16, 2002 given by iVoice, Inc. to Cornell Capital Partners, L.P. (incorporated by reference to Exhibit 10.25 to the Registration Statement on Form SB-2 filed on January 24, 2003). 10.26 Promissory Note dated as of November 27, 2002 given by iVoice, Inc. to Cornell Capital Partners, L.P. (incorporated by reference to Exhibit 10.26 to the Registration Statement on Form SB-2 filed on January 24, 2003). 10.27 Letter Agreement dated January 24, 2003 between iVoice, Inc. and Mr. Jerome Mahoney (incorporated by reference to Exhibit 10.27 to the Registration Statement on Form SB-2 filed on January 24, 2003). 23.1* Consent of Mendlowitz Weitsen LLP. 23.2 Consent of Kirkpatrick & Lockhart LLP (incorporated by reference to Exhibit 5.1). - ----------------- * Filed herewith. II-8 ITEM 28. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Sections 10(a)(3) of the Securities Act of 1933 (the "Act"); (ii) Reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (iii) Include any additional or changed material information on the plan of distribution; (2) That, for the purpose of determining any liability under the Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-9 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on our behalf by the undersigned, on February 11, 2003. IVOICE, INC. By: /s/ Jerome R. Mahoney ------------------------------ Name: Jerome R. Mahoney Title: President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated. SIGNATURE TITLE DATE - --------- ----- ---- /s/ Jerome R. Mahoney - ------------------------ President (Principal Executive February 11, 2003 Jerome R. Mahoney Officer), Chief Executive Officer and Director /s/ Kevin Whalen - ------------------------ Chief Financial Officer February 11, 2003 Kevin Whalen (Principal Accounting Officer and Controller) II-10 EX-5 3 ivoice_exhibit5-1.txt (EXHIBIT 5.1) EXHIBIT 5.1 ----------- February 11, 2003 iVoice, Inc. 750 Highway 34 Matawan, New Jersey 07747 Re: iVoice, INC. (THE "CORPORATION") REGISTRATION STATEMENT ON FORM SB-2 (THE "REGISTRATION STATEMENT") Gentlemen: We have acted as special counsel to the Corporation in connection with the preparation of the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "1933 ACT"), relating to the proposed public offering of up to 5,000,000,000 shares of the Corporation's common stock (the "COMMON STOCK"). We are furnishing this opinion to you in accordance with Item 601(b)(5) of Regulation S-B promulgated under the 1933 Act for filing as Exhibit 5.1 to the Registration Statement. We are familiar with the Registration Statement, and we have examined the Corporation's Articles of Incorporation, as amended to date, the Corporation's Bylaws, as amended to date, and minutes and resolutions of the Corporation's Board of Directors and shareholders. We have also examined such other documents, certificates, instruments and corporate records, and such statutes, decisions and questions of law as we have deemed necessary or appropriate for the purpose of this opinion. In addition, we are relying on the opinion of Lawrence A. Muenz, counsel of iVoice, to the effect that the action taken by a majority of the outstanding shares of capital stock on or about October 15, 2002 complied in all respects to applicable law. Further, we are assuming that the shares of Common Stock to be issued in this offering will be at a price not less than the par value of such shares. Based upon the foregoing, we are of the opinion that the shares of Common Stock to be sold by the Selling Stockholder (as defined in the Registration Statement) to the public, when issued and sold in the manner described in the Registration Statement (as amended), will be validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the use of our name in the Prospectus constituting a part thereof. Very truly yours, /s/ Kirkpatrick & Lockhart LLP KIRKPATRICK & LOCKHART LLP EX-10 4 ex10-15.txt EXHIBIT 10.15 EXHIBIT 10.15 ------------- EQUITY LINE OF CREDIT AGREEMENT ------------------------------- AGREEMENT dated as of the February 11, 2003 (the "AGREEMENT") between CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "INVESTOR"), and IVOICE, INC., a corporation organized and existing under the laws of the State of Delaware (the "COMPANY"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investor, from time to time as provided herein, and the Investor shall purchase from the Company up to Five Million ($5,000,000) Dollars of the Company's Class A common stock, par value $0.001 per share (the "COMMON Stock"); and WHEREAS, such investments will be made in reliance upon the provisions of Regulation D ("REGULATION D") of the Securities Act of 1933, as amended, and the regulations promulgated there under (the "SECURITIES ACT"), and or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments to be made hereunder. WHEREAS, the Company has engaged Westrock Advisors, Inc. to act as the Company's exclusive placement agent in connection with the sale of the Company's Common Stock to the Investor hereunder. NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I. CERTAIN DEFINITIONS Section 1.1. "ADVANCE" shall mean the portion of the Commitment Amount requested by the Company in the Advance Notice. Section 1.2. "ADVANCE DATE" shall mean the date Butler Gonzalez LLP/Wachovia Escrow Account is in receipt of the funds from the Investor and Butler Gonzalez LLP, as the Investor's Counsel, is in possession of free trading shares from the Company and therefore an Advance by the Investor to the Company can be made and Butler Gonzalez LLP can release the free trading shares to the Investor. No Advance Date shall be less than six (6) Trading Days after an Advance Notice Date. Section 1.3. "ADVANCE NOTICE" shall mean a written notice to the Investor setting forth the Advance amount that the Company requests from the Investor and the Advance Date. Section 1.4. "ADVANCE NOTICE DATE" shall mean each date the Company delivers to the Investor an Advance Notice requiring the Investor to advance funds to the Company, subject to the terms of this Agreement. No Advance Notice Date shall be less than seven (7) Trading Days after the prior Advance Notice Date. 1 Section 1.5. "BID PRICE" shall mean, on any date, the closing bid price (as reported by Bloomberg L.P.) of the Common Stock on the Principal Market or if the Common Stock is not traded on a Principal Market, the highest reported bid price for the Common Stock, as furnished by the National Association of Securities Dealers, Inc. Section 1.6. "CLOSING" shall mean one of the closings of a purchase and sale of Common Stock pursuant to Section 2.3. Section 1.7. "COMMITMENT AMOUNT" shall mean the aggregate amount of up to Five Million Dollars ($5,000,000) which the Investor has agreed to provide to the Company in order to purchase the Company's Common Stock pursuant to the terms and conditions of this Agreement. Section 1.8. "COMMITMENT PERIOD" shall mean the period commencing on the earlier to occur of (i) the Effective Date, or (ii) such earlier date as the Company and the Investor may mutually agree in writing, and expiring on the earliest to occur of (x) the date on which the Investor shall have made payment of Advances pursuant to this Agreement in the aggregate amount of Five Million Dollars ($5,000,000), (y) the date this Agreement is terminated pursuant to Section 2.5, or (z) the date occurring twenty-four (24) months after the Effective Date. Section 1.9. "COMMON STOCK" shall mean the Company's Class A common stock, par value $0.001 per share. Section 1.10. "CONDITION SATISFACTION DATE" shall have the meaning set forth in Section 7.2. Section 1.11. "DAMAGES" shall mean any loss, claim, damage, liability, costs and expenses (including, without limitation, reasonable attorney's fees and disbursements and costs and expenses of expert witnesses and investigation). Section 1.12. "EFFECTIVE DATE" shall mean the date on which the SEC first declares effective a Registration Statement registering the resale of the Registrable Securities as set forth in Section 7.2(a). Section 1.13. "ESCROW AGREEMENT" shall mean the escrow agreement among the Company, the Investor, the Investor's Counsel and Wachovia, N.A. dated the date hereof. Section 1.14. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated there under. Section 1.15. "MATERIAL ADVERSE EFFECT" shall mean any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement or the Registration Rights Agreement in any material respect. Section 1.16. "MARKET PRICE" shall mean the lowest closing Bid Price of the Common Stock during the Pricing Period. 2 Section 1.17. "MAXIMUM ADVANCE AMOUNT" shall mean $225,000 in any 30-day calendar period, PROVIDED that each of the initial four Advances following the Effective Date shall not exceed $150,000 and each subsequent Advance shall not exceed $75,000. Section 1.18 "NASD" shall mean the National Association of Securities Dealers, Inc. Section 1.19 "PERSON" shall mean an individual, a corporation, a partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. Section 1.20 "PLACEMENT AGENT" shall mean Westrock Advisors, Inc. a registered broker-dealer. Section 1.21 "PRICING PERIOD" shall mean the five (5) consecutive Trading Days after the Advance Notice Date. Section 1.22 "PRINCIPAL MARKET" shall mean the Nasdaq National Market, the Nasdaq SmallCap Market, the American Stock Exchange, the OTC Bulletin Board or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock. Section 1.23 "PURCHASE PRICE" shall be set at ninety one percent (91%) of the Market Price during the Pricing Period. Section 1.24 "REGISTRABLE SECURITIES" shall mean the shares of Common Stock (i) in respect of which the Registration Statement has not been declared effective by the SEC, (ii) which have not been sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act ("RULE 144") or (iii) which have not been otherwise transferred to a holder who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend. Section 1.25 "REGISTRATION RIGHTS AGREEMENT" shall mean the Registration Rights Agreement dated the date hereof, regarding the filing of the Registration Statement for the resale of the Registrable Securities, entered into between the Company and the Investor. Section 1.26 "REGISTRATION STATEMENT" shall mean a registration statement on Form S-1 or SB-2 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate, and which form shall be available for the resale of the Registrable Securities to be registered there under in accordance with the provisions of this Agreement and the Registration Rights Agreement, and in accordance with the intended method of distribution of such securities), for the registration of the resale by the Investor of the Registrable Securities under the Securities Act. Section 1.27 "REGULATION D" shall have the meaning set forth in the recitals of this Agreement. 3 Section 1.28 "SEC" shall mean the Securities and Exchange Commission. Section 1.29 "SECURITIES ACT" shall have the meaning set forth in the recitals of this Agreement. Section 1.30 "SEC DOCUMENTS" shall mean Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K and Proxy Statements of the Company as supplemented to the date hereof, filed by the Company for a period of at least twelve (12) months immediately preceding the date hereof. Section 1.31 "TRADING DAY" shall mean any day during which the New York Stock Exchange shall be open for business. ARTICLE II. ADVANCES Section 2.1. INVESTMENTS. (a) ADVANCES. Upon the terms and conditions set forth herein (including, without limitation, the provisions of Article VII hereof), on any Advance Notice Date the Company may request an Advance by the Investor by the delivery of an Advance Notice. The number of shares of Common Stock that the Investor shall receive for each Advance shall be determined by dividing the amount of the Advance by the Purchase Price. No fractional shares shall be issued. Fractional shares shall be rounded to the next higher whole number of shares. The aggregate maximum amount of all Advances that the Investor shall be obligated to make under this Agreement shall not exceed the Commitment Amount. (b) The Company acknowledges that the Investor may sell the Company's Common Stock purchased pursuant to an Advance Notice during the corresponding Pricing Period. Section 2.2. MECHANICS. (a) ADVANCE NOTICE. At any time during the Commitment Period, the Company may deliver an Advance Notice to the Investor, subject to the conditions set forth in Section 7.2; provided, however, unless waived by the Investor, the amount for each Advance as designated by the Company in the applicable Advance Notice, as well as the aggregate amount of multiple Advances in any thirty (30) calendar day period, shall not be more than the Maximum Advance Amount. The aggregate amount of the Advances pursuant to this Agreement shall not exceed the Commitment Amount, unless otherwise agreed by the Investor in the Investor's sole and absolute discretion. The Company acknowledges that the Investor may sell shares of the Company's Common Stock corresponding with a particular Advance Notice on the day the Advance Notice is received by the Investor. There will be a minimum of seven (7) Trading Days between each Advance Notice Date. 4 (b) DATE OF DELIVERY OF ADVANCE NOTICE. An Advance Notice shall be deemed delivered on (i) the Trading Day it is received by facsimile or otherwise by the Investor if such notice is received prior to 12:00 noon Eastern Time, or (ii) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 12:00 noon Eastern Time on a Trading Day or at any time on a day which is not a Trading Day. No Advance Notice may be deemed delivered, on a day that is not a Trading Day. (c) PRE-CLOSING SHARE CREDIT. Within two (2) business days after the Advance Notice Date, the Company shall cause its transfer agent to issue shares of Common Stock in an amount equal to the amount of the requested Advance divided by the closing Bid Price of the Company's Common Stock as of the Advance Notice Date multiplied by one point one (1.1). Any adjustments to the number of shares to be delivered to the Investor at the Closing as a result of fluctuations in the closing Bid Price of the Company's Common Stock shall be made as of the date of the Closing. Any excess shares shall be credited to the next Advance. In no event shall the number of shares issuable to the Investor pursuant to an Advance cause the Investor to own in excess of nine and 9/10 percent (9.9%) of the then outstanding Common Stock of the Company. (d) HARDSHIP. In the event the Investor sells the Company's Common Stock pursuant to subsection (c) above and the Company fails to perform its obligations as mandated in Section 2.5 and 2.2 (c), and specifically fails to provide the Investor with the shares of Common Stock for the applicable Advance, the Company acknowledges that the Investor shall suffer financial hardship and therefore shall be liable for any and all losses, commissions, fees, or financial hardship caused to the Investor. Section 2.3. CLOSINGS. On each Advance Date, which shall be six (6) Trading Days after an Advance Notice Date, (i) the Company shall deliver to the Investor's Counsel, as defined pursuant to the Escrow Agreement, shares of the Company's Common Stock, representing the amount of the Advance by the Investor pursuant to Section 2.1 herein, registered in the name of the Investor which shall be delivered to the Investor, or otherwise in accordance with the Escrow Agreement and (ii) the Investor shall deliver to Wachovia, N.A. (the "ESCROW AGENT") the amount of the Advance specified in the Advance Notice by wire transfer of immediately available funds which shall be delivered to the Company, or otherwise in accordance with the Escrow Agreement. In addition, on or prior to the Advance Date, each of the Company and the Investor shall deliver to the other through the Investor's Counsel all documents, instruments and writings required to be delivered or reasonably requested by either of them pursuant to this Agreement in order to implement and effect the transactions contemplated herein. Payment of funds to the Company and delivery of the Company's Common Stock to the Investor shall occur in accordance with the conditions set forth above and those contained in the Escrow Agreement; PROVIDED, HOWEVER, that to the extent the Company has not paid the fees, expenses, and disbursements of the Investor, the Investor's counsel or Kirkpatrick & Lockhart LLP in accordance with Section 12.4, the amount of such fees, expenses, and disbursements may be deducted by the Investor (and shall be paid to the relevant party) from the amount of the Advance with no reduction in the amount of shares of the Company's Common Stock to be delivered on such Advance Date. 5 Section 2.4. TERMINATION OF INVESTMENT. The obligation of the Investor to make an Advance to the Company pursuant to this Agreement shall terminate permanently (including with respect to an Advance Date that has not yet occurred) in the event that (i) there shall occur any stop order or suspension of the effectiveness of the Registration Statement for an aggregate of fifty (50) Trading Days, other than due to the acts of the Investor, during the Commitment Period, and (ii) the Company shall at any time fail materially to comply with the requirements of Article VI and such failure is not cured within thirty (30) days after receipt of written notice from the Investor, PROVIDED, HOWEVER, that this termination provision shall not apply to any period commencing upon the filing of a post-effective amendment to such Registration Statement and ending upon the date on which such post effective amendment is declared effective by the SEC.. Section 2.5. AGREEMENT TO ADVANCE FUNDS. -------------------------- (a) The Investor agrees to advance the amount specified in the Advance Notice to the Company after the completion of each of the following conditions and the other conditions set forth in this Agreement: (i) the execution and delivery by the Company, and the Investor, of this Agreement, and the Exhibits hereto; (ii) Investor's Counsel shall have received the shares of Common Stock applicable to the Advance in accordance with Section 2.2(c) hereof; (iii) the Company's Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement shall have been declared effective by the SEC; (iv) the Company shall have obtained all material permits and qualifications required by any applicable state for the offer and sale of the Registrable Securities, or shall have the availability of exemptions there from. The sale and issuance of the Registrable Securities shall be legally permitted by all laws and regulations to which the Company is subject; (v) the Company shall have filed with the Commission in a timely manner all reports, notices and other documents required of a "reporting company" under the Exchange Act and applicable Commission regulations; (vi) the fees as set forth in Section 12.4 below shall have been paid or can be withheld as provided in Section 2.3; and (vii) the conditions set forth in Section 7.2 shall have been satisfied. (viii) The Company shall have provided to the Investor an acknowledgement, to the satisfaction of the Investor, from Mendlowitz Weitsen, LLP, the Company's independent certified public accountant, as to its ability to provide all consents required in order to file a registration statement in connection with this transaction. 6 Section 2.6. LOCK UP PERIOD. -------------- (i) The Company shall not, without the prior consent of the Investor, issue or sell (i) any Common Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance or (ii) issue or sell any warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance. (ii) On the date hereof, the Company shall obtain from each officer and director a lock-up agreement, as defined below, in the form annexed hereto as Schedule 2.6(b) agreeing to only sell in compliance with the volume limitation of Rule 144. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF INVESTOR Investor hereby represents and warrants to, and agrees with, the Company that the following are true and as of the date hereof and as of each Advance Date: Section 3.1. ORGANIZATION AND AUTHORIZATION. The Investor is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority to purchase and hold the securities issuable hereunder. The decision to invest and the execution and delivery of this Agreement by such Investor, the performance by such Investor of its obligations hereunder and the consummation by such Investor of the transactions contemplated hereby have been duly authorized and requires no other proceedings on the part of the Investor. The undersigned has the right, power and authority to execute and deliver this Agreement and all other instruments (including, without limitations, the Registration Rights Agreement), on behalf of the Investor. This Agreement has been duly executed and delivered by the Investor and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligations of the Investor, enforceable against the Investor in accordance with its terms. Section 3.2. EVALUATION OF RISKS. The Investor has such knowledge and experience in financial tax and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. It recognizes that its investment in the Company involves a high degree of risk. Section 3.3. NO LEGAL ADVICE FROM THE COMPANY. The Investor acknowledges that it had the opportunity to review this Agreement and the transactions contemplated by this Agreement with his or its own legal counsel and investment and tax advisors. The Investor is relying solely on such counsel and advisors and not on any statements or representations of the Company or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction. Section 3.4. INVESTMENT PURPOSE. The securities are being purchased by the Investor for its own account, for investment and without any view to the distribution, assignment or resale to others or fractionalization in whole or in part. The Investor agrees not to assign or in any way transfer the Investor's 7 rights to the securities or any interest therein and acknowledges that the Company will not recognize any purported assignment or transfer except in accordance with applicable Federal and state securities laws. No other person has or will have a direct or indirect beneficial interest in the securities. The Investor agrees not to sell, hypothecate or otherwise transfer the Investor's securities unless the securities are registered under Federal and applicable state securities laws or unless, in the opinion of counsel satisfactory to the Company, an exemption from such laws is available. Section 3.5. ACCREDITED INVESTOR. Investor is an "ACCREDITED INVESTOR" as that term is defined in Rule 501(a)(3) of Regulation D of the Securities Act. Section 3.6. INFORMATION. The Investor and its advisors (and its counsel), if any, have been furnished with all materials relating to the business, finances and operations of the Company and information it deemed material to making an informed investment decision. The Investor and its advisors, if any, have been afforded the opportunity to ask questions of the Company and its management. Neither such inquiries nor any other due diligence investigations conducted by such Investor or its advisors, if any, or its representatives shall modify, amend or affect the Investor's right to rely on the Company's representations and warranties contained in this Agreement. The Investor understands that its investment involves a high degree of risk. The Investor is in a position regarding the Company, which, based upon employment, family relationship or economic bargaining power, enabled and enables such Investor to obtain information from the Company in order to evaluate the merits and risks of this investment. The Investor has sought such accounting, legal and tax advice, as it has considered necessary to make an informed investment decision with respect to this transaction. Section 3.7. RECEIPT OF DOCUMENTS. The Investor and its counsel has received and read in their entirety: (i) this Agreement and the Exhibits annexed hereto; (ii) all due diligence and other information necessary to verify the accuracy and completeness of such representations, warranties and covenants; (iii) the Company's Form 10-KSB for the year ended year ended December 31, 2001 and Form 10-QSB for the periods ended September 30, 2001; and (iv) answers to all questions the Investor submitted to the Company regarding an investment in the Company and has relied on the information contained therein and has not been furnished any other documents, literature, memorandum or prospectus. Section 3.8. REGISTRATION RIGHTS AGREEMENT AND ESCROW AGREEMENT. The parties have entered into the Registration Rights Agreement and the Escrow Agreement, each dated the date hereof. Section 3.9. NO GENERAL SOLICITATION. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the shares of Common Stock offered hereby. Section 3.10. NOT AN AFFILIATE. The Investor is not an officer, director or a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with the Company or any "AFFILIATE" of the Company (as that term is defined in Rule 405 of the Securities Act). Neither the Investor nor its Affiliates has an open short position in the Common Stock of the Company, and the Investor agrees that it 8 will not, and that it will cause its Affiliates not to, engage in any short sales of or hedging transactions with respect to the Common Stock, PROVIDED that the Company acknowledges and agrees that upon receipt of an Advance Notice the Investor will sell the Shares to be issued to the Investor pursuant to the Advance Notice, even if the Shares have not been delivered to the Investor. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as stated below, on the disclosure schedules attached hereto or in the SEC Documents (as defined herein), the Company hereby represents and warrants to, and covenants with, the Investor that the following are true and correct as of the date hereof: Section 4.1. ORGANIZATION AND QUALIFICATION. The Company is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority corporate power to own its properties and to carry on its business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect on the Company and its subsidiaries taken as a whole. Section 4.2. AUTHORIZATION, ENFORCEMENT, COMPLIANCE WITH OTHER INSTRUMENTS. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and any related agreements, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and any related agreements by the Company and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and any related agreements have been duly executed and delivered by the Company, (iv) this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and assuming the execution and delivery thereof and acceptance by the Investor and any related agreements constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies. Section 4.3. CAPITALIZATION. The authorized capital stock of the Company consists of 600,000,000 shares of Class A Common Stock, par value $0.001 per share; 3,000,000 shares of Class B Common Stock, no par value per share and 1,000,000 shares of preferred stock, par value $1.00 per share. As of May 1, 2002, the Company had 162,480,163 shares of Class A Common Stock outstanding, 354,000 shares of Class B Common Stock outstanding and no shares of Preferred Stock issued and outstanding. All of such outstanding shares have been validly 9 issued and are fully paid and nonassessable. Except as disclosed in the SEC Documents, no shares of Common Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company. Except as disclosed in the SEC Documents, as of the date hereof, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities and (iii) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of their securities under the Securities Act (except pursuant to the Registration Rights Agreement). There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by this Agreement or any related agreement or the consummation of the transactions described herein or therein.. The Company has furnished to the Investor true and correct copies of the Company's Certificate of Incorporation, as amended and as in effect on the date hereof (the "CERTIFICATE OF INCORPORATION"), and the Company's By-laws, as in effect on the date hereof (the "BY-LAWS"), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto. Section 4.4. NO CONFLICT. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Certificate of Incorporation, any certificate of designations of any outstanding series of preferred stock of the Company or By-laws or (ii) conflict with or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the Principal Market on which the Common Stock is quoted) applicable to the Company or any of its subsidiaries or by which any material property or asset of the Company or any of its subsidiaries is bound or affected and which would cause a Material Adverse Effect. Except as disclosed in the SEC Documents, neither the Company nor its subsidiaries is in violation of any term of or in default under its Certificate of Incorporation or By-laws or their organizational charter or by-laws, respectively, or any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its subsidiaries. The business of the Company and its subsidiaries is not being conducted in violation of any material law, ordinance, regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or the Registration Rights Agreement in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company and its subsidiaries are unaware of any fact or circumstance which might give rise to any of the foregoing. 10 Section 4.5. SEC DOCUMENTS; FINANCIAL STATEMENTS. Since January 1, 2001, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC under of the Exchange Act. The Company has delivered to the Investor or its representatives, or made available through the SEC's website at http://www.sec.gov, true and complete copies of the SEC Documents. As of their respective dates, the financial statements of the Company disclosed in the SEC Documents (the "FINANCIAL STATEMENTS") complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Section 4.6. 10B-5. The SEC Documents do not include any untrue statements of material fact, nor do they omit to state any material fact required to be stated therein necessary to make the statements made, in light of the circumstances under which they were made, not misleading. Section 4.7. NO DEFAULT. Except as disclosed in Section 4.4 or the SEC Documents, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement or any of the exhibits or attachments hereto will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under its Certificate of Incorporation, By-Laws, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound, or any statute, or any decree, judgment, order, rules or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, in each case which default, lien or charge is likely to cause a Material Adverse Effect on the Company's business or financial condition. Section 4.8. ABSENCE OF EVENTS OF DEFAULT. Except for matters described in the SEC Documents and/or this Agreement, no Event of Default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become an Event of Default (as so defined), has occurred and is continuing, which would have a 11 Material Adverse Effect on the Company's business, properties, prospects, financial condition or results of operations. Section 4.9. INTELLECTUAL PROPERTY RIGHTS. The Company and its subsidiaries own or possess adequate rights or licenses to use all material trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. The Company and its subsidiaries do not have any knowledge of any infringement by the Company or its subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, and, to the knowledge of the Company, there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. Section 4.10. EMPLOYEE RELATIONS. Neither the Company nor any of its subsidiaries is involved in any labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such dispute threatened. None of the Company's or its subsidiaries' employees is a member of a union and the Company and its subsidiaries believe that their relations with their employees are good. Section 4.11. ENVIRONMENTAL LAWS. The Company and its subsidiaries are (i) in compliance with any and all applicable material foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval. Section 4.12. TITLE. Except as set forth in the SEC Documents, the Company has good and marketable title to its properties and material assets owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. Any real property and facilities held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries. Section 4.13. INSURANCE. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its subsidiaries are engaged. Neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its 12 business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole. Section 4.14. REGULATORY PERMITS. The Company and its subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. Section 4.15. INTERNAL ACCOUNTING CONTROLS. The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Section 4.16. NO MATERIAL ADVERSE BREACHES, ETC. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is in breach of any contract or agreement which breach, in the judgment of the Company's officers, has or is expected to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Section 4.17. ABSENCE OF LITIGATION. Except as set forth in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending against or affecting the Company, the Common Stock or any of the Company's subsidiaries, wherein an unfavorable decision, ruling or finding would (i) have a Material Adverse Effect on the transactions contemplated hereby (ii) adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein, or (iii) except as expressly disclosed in the SEC Documents, have a Material Adverse Effect on the business, operations, properties, financial condition or results of operation of the Company and its subsidiaries taken as a whole. Section 4.18. SUBSIDIARIES. Except as disclosed in the SEC Documents, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. Section 4.19. TAX STATUS. The Company and each of its subsidiaries has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject and (unless 13 and only to the extent that the Company and each of its subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. Section 4.20. CERTAIN TRANSACTIONS. Except as set forth in the SEC Documents none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. Section 4.21. FEES AND RIGHTS OF FIRST REFUSAL. Except as set forth in the SEC Documents, the Company is not obligated to offer the securities offered hereunder on a right of first refusal basis or otherwise to any third parties including, but not limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties. Section 4.22. USE OF PROCEEDS. The Company represents that the net proceeds from this offering will be used for general corporate purposes. However, in no event shall the net proceeds from this offering be used by the Company for the payment (or loaned to any such person for the payment) of any judgment, or other liability, incurred by any executive officer, officer, director or employee of the Company, except for any liability owed to such person for services rendered, or if any judgment or other liability is incurred by such person originating from services rendered to the Company, or the Company has indemnified such person from liability. Section 4.23. FURTHER REPRESENTATION AND WARRANTIES OF THE Company. For so long as any securities issuable hereunder held by the Investor remain outstanding, the Company acknowledges, represents, warrants and agrees that it will maintain the listing of its Common Stock on the Principal Market Section 4.24. OPINION OF COUNSEL. Investor shall receive an opinion letter from Kirkpatrick & Lockhart LLP, counsel to the Company (updated where applicable) on the date hereof. Section 4.25. OPINION OF COUNSEL. The Company will obtain for the Investor, at the Company's expense, any and all opinions of counsel which may be reasonably required in order to sell the securities issuable hereunder without restriction. 14 Section 4.26. DILUTION. The Company is aware and acknowledges that issuance of shares of the Company's Common Stock could cause dilution to existing shareholders and could significantly increase the outstanding number of shares of Common Stock. ARTICLE V. INDEMNIFICATION The Investor and the Company represent to the other the following with respect to itself: Section 5.1. INDEMNIFICATION. (a) In consideration of the Investor's execution and delivery of this Agreement, and in addition to all of the Company's other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless the Investor, and all of its officers, directors, partners, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "INVESTOR INDEMNITEES") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Investor Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"), incurred by the Investor Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made against such Investor Indemnitee not arising out of any action or inaction of an Investor Indemnitee, and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Investor Indemnitees. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. (b) In consideration of the Company's execution and delivery of this Agreement, and in addition to all of the Investor's other obligations under this Agreement, the Investor shall defend, protect, indemnify and hold harmless the Company and all of its officers, directors, shareholders, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "COMPANY INDEMNITEES") from and against any and all Indemnified Liabilities incurred by the Company Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Investor in this Agreement, the Registration Rights Agreement, or any instrument or document contemplated hereby or thereby executed by the Investor, (b) any breach of any covenant, agreement or obligation of the Investor(s) contained in this Agreement, the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby executed by the Investor, or (c) any cause of action, suit or claim brought or 15 made against such Company Indemnitee based on misrepresentations or due to a breach by the Investor and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Company Indemnitees. To the extent that the foregoing undertaking by the Investor may be unenforceable for any reason, the Investor shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. ARTICLE VI. COVENANTS OF THE COMPANY Section 6.1. REGISTRATION RIGHTS. The Company shall cause the Registration Rights Agreement to remain in full force and effect and the Company shall comply in all material respects with the terms thereof. Section 6.2. LISTING OF COMMON STOCK. The Company shall maintain the Common Stock's authorization for quotation on the National Association of Securities Dealers Over the Counter Bulletin Board. Section 6.3. EXCHANGE ACT REGISTRATION. The Company will cause its Common Stock to continue to be registered under Section 12(g) of the Exchange Act, will file in a timely manner all reports and other documents required of it as a reporting company under the Exchange Act and will not take any action or file any document (whether or not permitted by Exchange Act or the rules there under to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Exchange Act. Section 6.4. TRANSFER AGENT INSTRUCTIONS. Not later than two (2) business days after each Advance Notice Date and prior to each Closing and the effectiveness of the Registration Statement and resale of the Common Stock by the Investor, the Company will deliver instructions to its transfer agent to issue shares of Common Stock free of restrictive legends in accordance with Section 2.2(c) hereof. Section 6.5. CORPORATE EXISTENCE. The Company will take all steps necessary to preserve and continue the corporate existence of the Company. Section 6.6. NOTICE OF CERTAIN EVENTS AFFECTING REGISTRATION; SUSPENSION OF RIGHT TO MAKE AN ADVANCE. The Company will immediately notify the Investor upon its becoming aware of the occurrence of any of the following events in respect of a registration statement or related prospectus relating to an offering of Registrable Securities: (i) receipt of any request for additional information by the SEC or any other Federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the registration statement or related prospectus; (ii) the issuance by the SEC or any other Federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in the 16 Registration Statement or related prospectus of any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; and the Company will promptly make available to the Investor any such supplement or amendment to the related prospectus. The Company shall not deliver to the Investor any Advance Notice during the continuation of any of the foregoing events. Section 6.7. EXPECTATIONS REGARDING ADVANCE NOTICES. Within ten (10) days after the commencement of each calendar quarter occurring subsequent to the commencement of the Commitment Period, the Company must notify the Investor, in writing, as to its reasonable expectations as to the dollar amount it intends to raise during such calendar quarter, if any, through the issuance of Advance Notices. Such notification shall constitute only the Company's good faith estimate and shall in no way obligate the Company to raise such amount, or any amount, or otherwise limit its ability to deliver Advance Notices. The failure by the Company to comply with this provision can be cured by the Company's notifying the Investor, in writing, at any time as to its reasonable expectations with respect to the current calendar quarter. Section 6.8. CONSENT OF INVESTOR TO SELL COMMON STOCK. During the Commitment Period, the Company shall not issue or sell (i) any Common Stock without consideration or for a consideration per share less than its Bid Price determined immediately prior to its issuance, (ii) issue or sell any warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration per share less than such Common Stock's Bid Price determined immediately prior to its issuance, or (iii) file any registration statement on Form S-8. Section 6.9. CONSOLIDATION; MERGER. The Company shall not, at any time after the date hereof, effect any merger or consolidation of the Company with or into, or a transfer of all or substantially all the assets of the Company to another entity (a "CONSOLIDATION EVENT") unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Investor such shares of stock and/or securities as the Investor is entitled to receive pursuant to this Agreement. Section 6.10. ISSUANCE OF THE COMPANY'S COMMON STOCK. The sale of the shares of Common Stock shall be made in accordance with the provisions and requirements of Regulation D and any applicable state securities law. 17 ARTICLE VII. CONDITIONS FOR ADVANCE AND CONDITIONS TO CLOSING Section 7.1. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY. The obligation hereunder of the Company to issue and sell the shares of Common Stock to the Investor incident to each Closing is subject to the satisfaction, or waiver by the Company, at or before each such Closing, of each of the conditions set forth below. (a) ACCURACY OF THE INVESTOR'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Investor shall be true and correct in all material respects. (b) PERFORMANCE BY THE INVESTOR. The Investor shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by the Investor at or prior to such Closing. Section 7.2. CONDITIONS PRECEDENT TO THE RIGHT OF THE COMPANY TO DELIVER AN ADVANCE NOTICE AND THE OBLIGATION OF THE INVESTOR TO PURCHASE SHARES OF COMMON STOCK. The right of the Company to deliver an Advance Notice and the obligation of the Investor hereunder to acquire and pay for shares of the Company's Common Stock incident to a Closing is subject to the satisfaction or waiver by the Investor, on (i) the date of delivery of such Advance Notice and (ii) the applicable Advance Date (each a "CONDITION SATISFACTION DATE"), of each of the following conditions: (a) REGISTRATION OF THE COMMON STOCK WITH THE SEC. The Company shall have filed with the SEC a Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement. As set forth in the Registration Rights Agreement, the Registration Statement shall have previously become effective and shall remain effective on each Condition Satisfaction Date and (i) neither the Company nor the Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to the Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, or intends or has threatened to do so (unless the SEC's concerns have been addressed and the Investor is reasonably satisfied that the SEC no longer is considering or intends to take such action), and (ii) no other suspension of the use or withdrawal of the effectiveness of the Registration Statement or related prospectus shall exist. The Registration Statement must have been declared effective by the SEC prior to the first Advance Notice Date. (b) AUTHORITY. The Company shall have obtained all permits and qualifications required by any applicable state in accordance with the Registration Rights Agreement for the offer and sale of the shares of Common Stock, or shall have the availability of exemptions there from. The sale and issuance of the shares of Common Stock shall be legally permitted by all laws and regulations to which the Company is subject. (c) FUNDAMENTAL CHANGES. There shall not exist any fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post-effective amendment to the Registration Statement. 18 (d) PERFORMANCE BY THE COMPANY. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement (including, without limitation, the conditions specified in Section 2.5 hereof) and the Registration Rights Agreement to be performed, satisfied or complied with by the Company at or prior to each Condition Satisfaction Date. (e) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits or directly and adversely affects any of the transactions contemplated by this Agreement, and no proceeding shall have been commenced that may have the effect of prohibiting or adversely affecting any of the transactions contemplated by this Agreement. (f) NO SUSPENSION OF TRADING IN OR DELISTING OF COMMON STOCK. The trading of the Common Stock is not suspended by the SEC or the Principal Market (if the Common Stock is traded on a Principal Market). The issuance of shares of Common Stock with respect to the applicable Closing, if any, shall not violate the shareholder approval requirements of the Principal Market (if the Common Stock is traded on a Principal market). The Company shall not have received any notice threatening the continued listing of the Common Stock on the Principal Market (if the Common Stock is traded on a Principal Market). (g) MAXIMUM ADVANCE AMOUNT. The amount of the individual Advance, as well as the aggregate amount of Advances in any thirty (30) calendar day period, requested by the Company does not exceed the Maximum Advance Amount unless waived by the Investor. In addition, in no event shall the number of shares issuable to the Investor pursuant to an Advance cause the Investor to own in excess of nine and 9/10 percent (9.9%) of the then outstanding Common Stock of the Company. (h) NO KNOWLEDGE. The Company has no knowledge of any event more likely than not to have the effect of causing such Registration Statement to be suspended or otherwise ineffective. (i) OTHER. On each Condition Satisfaction Date, the Investor shall have received and been reasonably satisfied with such other certificates and documents as shall have been reasonably requested by the Investor in order for the Investor to confirm the Company's satisfaction of the conditions set forth in this Section 7.2, including, without limitation, a certificate executed by an executive officer of the Company and to the effect that all the conditions to such Closing shall have been satisfied as at the date of each such certificate substantially in the form annexed hereto on EXHIBIT A. ARTICLE VIII. DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION Section 8.1. DUE DILIGENCE REVIEW. Prior to the filing of the Registration Statement the Company shall make available for inspection and review by the Investor, advisors to and representatives of the Investor, any underwriter participating in any disposition of the Registrable Securities on behalf of the Investor pursuant to the Registration Statement, any such registration statement 19 or amendment or supplement thereto or any blue sky, NASD or other filing, all financial and other records, all SEC Documents and other filings with the SEC, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such information reasonably requested by the Investor or any such representative, advisor or underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Investor and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of the Registration Statement. Section 8.2. NON-DISCLOSURE OF NON-PUBLIC INFORMATION. ---------------------------------------- (a) The Company shall not disclose non-public information to the Investor, advisors to or representatives of the Investor unless prior to disclosure of such information the Company identifies such information as being non-public information and provides the Investor, such advisors and representatives with the opportunity to accept or refuse to accept such non-public information for review. The Company may, as a condition to disclosing any non-public information hereunder, require the Investor's advisors and representatives to enter into a confidentiality agreement in form reasonably satisfactory to the Company and the Investor. (b) Nothing herein shall require the Company to disclose non-public information to the Investor or its advisors or representatives, and the Company represents that it does not disseminate non-public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts, provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, immediately notify the advisors and representatives of the Investor and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 8.2 shall be construed to mean that such persons or entities other than the Investor (without the written consent of the Investor prior to disclosure of such information) may not obtain non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. 20 ARTICLE IX. CHOICE OF LAW/JURISDICTION Section 9.1. GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New Jersey without regard to the principles of conflict of laws. The parties further agree that any action between them shall be heard in Hudson County, New Jersey, and expressly consent to the jurisdiction and venue of the Superior Court of New Jersey, sitting in Hudson County, New Jersey and the United States District Court of New Jersey, sitting in Newark, New Jersey, for the adjudication of any civil action asserted pursuant to this paragraph. ARTICLE X. ASSIGNMENT; TERMINATION Section 10.1. ASSIGNMENT. Neither this Agreement nor any rights of the Company hereunder may be assigned to any other Person. Section 10.2. TERMINATION. The obligations of the Investor to make Advances under Article II hereof shall terminate twenty-four (24) months after the Effective Date. ARTICLE XI. NOTICES Section 11.1. NOTICES. Any notices, consents, waivers, or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company, to: Ivoice, Inc. Attention: Jerome R. Mahoney, CEO 750 Highway 34 Matawan, NJ 07747 Telephone: (732) 441-7700 Facsimile: (732) 441-9895 21 With a copy to: Kirkpatrick & Lockhart, LLP 201 South Biscayne Boulevard - Suite 2000 Miami, FL 33131-2399 Attention: Clayton E. Parker, Esq. Telephone: (305) 539-3300 Facsimile: (305) 358-7095 If to the Investor(s): Cornell Capital Partners, LP 101 Hudson Street -Suite 3606 Jersey City, NJ 07302 Attention: Mark Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 With a Copy to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, NJ 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973 Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. ARTICLE XII. MISCELLANEOUS Section 12.1. COUNTERPARTS. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall cause four (4) additional original executed signature pages to be physically delivered to the other party within five (5) days of the execution and delivery hereof. Section 12.2. ENTIRE AGREEMENT; AMENDMENTS. This Agreement supersedes all other prior oral or written agreements between the Investor, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. 22 Section 12.3. REPORTING ENTITY FOR THE COMMON STOCK. The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of the Investor and the Company shall be required to employ any other reporting entity. Section 12.4. RESERVED Section 12.5. BROKERAGE. Each of the parties hereto represents that it has had no dealings in connection with this transaction with any finder or broker who will demand payment of any fee or commission from the other party. The Company on the one hand, and the Investor, on the other hand, agree to indemnify the other against and hold the other harmless from any and all liabilities to any person claiming brokerage commissions or finder's fees on account of 23 services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby. Section 12.6. CONFIDENTIALITY. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party (except information publicly available or in such party's domain prior to the date hereof, and except as required by court order) and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herein. IN WITNESS WHEREOF, the parties hereto have caused this Line of Credit Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. COMPANY: IVOICE, INC. By:/s/ Jerome R. Mahoney ------------------------ Name: Jerome R. Mahoney Title: President and CEO INVESTOR: CORNELL CAPITAL PARTNERS, LP By: Yorkville Advisors, LLC Its: General Partner By: /s/ Mark Angelo ------------------------ Name: Mark Angelo Title: Portfolio Manager 24 EXHIBIT A --------- ADVANCE NOTICE/COMPLIANCE CERTIFICATE ------------------------------------- IVOICE, INC. ------------ The undersigned, ________________________________ hereby certifies, with respect to the sale of shares of Common Stock of IVOICE, INC. (the "COMPANY"), issuable in connection with this Advance Notice and Compliance Certificate dated ___________________ (the "NOTICE"), delivered pursuant to the Equity Line of Credit Agreement (the "AGREEMENT"), as follows: 1. The undersigned is the duly elected President and Chief Executive Officer of the Company. 2. There are no fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post effective amendment to the Registration Statement. 3. The Company has performed in all material respects all covenants and agreements to be performed by the Company on or prior to the Advance Date related to the Notice and has complied in all material respects with all obligations and conditions contained in the Agreement. 4. The Advance requested is _____________________. The undersigned has executed this Certificate this ____ day of ________________________. IVOICE, INC. By:__________________________________ Name: JEROME R. MAHONEY -------------------------------- Title: PRESIDENT AND CEO ------------------------------- SCHEDULED 2.6(b) ---------------- IVOICE, INC. ------------ The undersigned hereby agrees that for a period commencing on the date hereof and expiring on the termination of the Agreement dated ________________ between IVOICE, INC. (the "COMPANY"), and Cornell Capital Partners, LP, (the "INVESTOR") (the "LOCK-UP PERIOD"), he, she or it will not, directly or indirectly, without the prior written consent of the Investor, issue, offer, agree or offer to sell, sell, grant an option for the purchase or sale of, transfer, pledge, assign, hypothecate, distribute or otherwise encumber or dispose of except pursuant to Rule 144 of the General Rules and Regulations under the Securities Act of 1933, any securities of the Company, including common stock or options, rights, warrants or other securities underlying, convertible into, exchangeable or exercisable for or evidencing any right to purchase or subscribe for any common stock (whether or not beneficially owned by the undersigned), or any beneficial interest therein (collectively, the "SECURITIES"). In order to enable the aforesaid covenants to be enforced, the undersigned hereby consents to the placing of legends and/or stop-transfer orders with the transfer agent of the Company's securities with respect to any of the Securities registered in the name of the undersigned or beneficially owned by the undersigned, and the undersigned hereby confirms the undersigned's investment in the Company. Dated: _______________, 2002 Signature __________________________________________ Address: ---------------------------------- City, State, Zip Code: -------------------- __________________________________________ Print Social Security Number or Taxpayer I.D. Number EX-10 5 ex10-16.txt EXHIBIT 10.16 EXHIBIT 10.16 ------------- REGISTRATION RIGHTS AGREEMENT ----------------------------- REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of February 11, 2003 by and between IVOICE, INC., a Delaware corporation, with its principal office located at 750 Highway 34, Matawan, NJ 07747 (the "COMPANY"), and CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor"). WHEREAS: A. In connection with the Equity Line of Credit Agreement by and between the parties hereto of even date herewith (the "EQUITY LINE OF CREDIT AGREEMENT"), the Company has agreed, upon the terms and subject to the conditions of the Equity Line of Credit Agreement, to issue and sell to the Investor that number of shares of the Company's Class A common stock, par value $0.001 per share (the "COMMON STOCK"), which can be purchased pursuant to the terms of the Equity Line Credit Agreement for an aggregate purchase price of up to Five Million Dollars ($5,000,000). Capitalized terms not defined herein shall have the meaning ascribed to them in the Equity Line of Credit Agreement. B. To induce the Investor to execute and deliver the Equity Line of Credit Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations there under, or any similar successor statute (collectively, the "1933 ACT"), and applicable state securities laws. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows: 1. DEFINITIONS. ----------- As used in this Agreement, the following terms shall have the following meanings: a. "PERSON" means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency. b. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing one or more Registration Statements (as defined below) in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous or delayed basis ("RULE 415"), and the declaration or ordering of effectiveness of such Registration Statement(s) by the United States Securities and Exchange Commission (the "SEC"). c. "REGISTRABLE SECURITIES" means the shares of Common Stock issuable to Investors pursuant to the Equity Line of Credit Agreement. d. "REGISTRATION STATEMENT" means a registration statement under the 1933 Act which covers the Registrable Securities. 2. REGISTRATION. ------------ a. MANDATORY REGISTRATION. The Company shall prepare and file with the SEC a Registration Statement on Form S-1, SB-2 or on such other form as is available. The Company shall cause such Registration Statement to be declared effective by the SEC prior to the first sale to Investor of the Company's Common Stock pursuant to the Equity Line of Credit Agreement. b. SUFFICIENT NUMBER OF SHARES REGISTERED. In the event the number of shares available under a Registration Statement filed pursuant to Section 2(a) is insufficient to cover all of the Registrable Securities which the Investor has purchased pursuant to the Equity Line of Credit Agreement, the Company shall amend the Registration Statement, or file a new Registration Statement (on the short form available therefore, if applicable), or both, so as to cover all of such Registrable Securities which the Investor has purchased pursuant to the Equity Line of Credit Agreement as soon as practicable, but in any event not later than fifteen (15) days after the necessity therefore arises. The Company shall use it best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. For purposes of the foregoing provision, the number of shares available under a Registration Statement shall be deemed "insufficient to cover all of the Registrable Securities" if at any time the number of Registrable Securities issuable on an Advance Notice Date is greater than the number of shares available for resale under such Registration Statement. 3. RELATED OBLIGATIONS. ------------------- a. The Company shall keep the Registration Statement effective pursuant to Rule 415 at all times until the date on which the Investor shall have sold all the Registrable Securities covered by such Registration Statement (the "REGISTRATION PERIOD"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement. In the case of amendments and supplements to a Registration Statement which are required to be filed pursuant to this Agreement (including pursuant to this Section 3(b)) by reason of the Company's filing a report on Form 10-KSB, Form 10-QSB or Form 8-K 2 or any analogous report under the Securities Exchange Act of 1934, as amended (the "1934 ACT"), the Company shall have incorporated such report by reference into the Registration Statement, if applicable, or shall file such amendments or supplements with the SEC on the same day on which the 1934 Act report is filed which created the requirement for the Company to amend or supplement the Registration Statement. c. The Company shall furnish to the Investor without charge, (i) at least one copy of such Registration Statement as declared effective by the SEC and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, all exhibits and each preliminary prospectus, (ii) ten (10) copies of the final prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as such Investor may reasonably request) and (iii) such other documents as such Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by such Investor. d. The Company shall use its best efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under such other securities or "blue sky" laws of such jurisdictions in the United States as the Investor reasonably requests, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (w) make any change to its certificate of incorporation or by-laws, (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify the Investor of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or "blue sky" laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. e. As promptly as practicable after becoming aware of such event or development, the Company shall notify the Investor in writing of the happening of any event as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (provided that in no event shall such notice contain any material, nonpublic information), and promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to each Investor. The Company shall also promptly notify the Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to the Investor by facsimile on the same day of such effectiveness), (ii) of any request by the 3 SEC for amendments or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate. f. The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction within the United States of America and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify the Investor of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. g. At the reasonable request of the Investor, the Company shall furnish to the Investor, on the date of the effectiveness of the Registration Statement and thereafter from time to time on such dates as the Investor may reasonably request (i) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the Investor. h. The Company shall make available for inspection by (i) the Investor and (ii) one firm of accountants or other agents retained by the Investor (collectively, the "INSPECTORS") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "RECORDS"), as shall be reasonably deemed necessary by each Inspector, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, that each Inspector shall agree, and the Investor hereby agrees, to hold in strict confidence and shall not make any disclosure (except to an Investor) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement of which the Inspector and the Investor has knowledge. The Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. i. The Company shall hold in confidence and not make any disclosure of information concerning the Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the 4 release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning the Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to the Investor and allow the Investor, at the Investor's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. j. The Company shall use its best efforts either to cause all the Registrable Securities covered by a Registration Statement (i) to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange or to secure the inclusion for quotation on the National Association of Securities Dealers, Inc. OTC Bulletin Board for such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(j). k. The Company shall cooperate with the Investor to the extent applicable, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Investor may reasonably request and registered in such names as the Investor may request. l. The Company shall use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities. m. The Company shall make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement. n. The Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder. o. Within two (2) business days after a Registration Statement which covers Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Investor) confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as EXHIBIT A. p. The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investor of Registrable Securities pursuant to a Registration Statement. 5 4. OBLIGATIONS OF THE INVESTOR. --------------------------- The Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e), the Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until the Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(e) or receipt of notice that no supplement or amendment is required. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended certificates for shares of Common Stock to a transferee of the Investor in accordance with the terms of the Equity Line of Credit Agreement in connection with any sale of Registrable Securities with respect to which the Investor has entered into a contract for sale prior to the Investor's receipt of a notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e) and for which the Investor has not yet settled. 5. EXPENSES OF REGISTRATION. ------------------------ All expenses incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers, legal and accounting fees shall be paid by the Company. 6. INDEMNIFICATION. --------------- With respect to Registrable Securities which are included in a Registration Statement under this Agreement: a. To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend the Investor, the directors, officers, partners, employees, agents, representatives of, and each Person, if any, who controls the Investor within the meaning of the 1933 Act or the 1934 Act (each, an "INDEMNIFIED PERSON"), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts paid in settlement or expenses, joint or several (collectively, "CLAIMS") incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("INDEMNIFIED DAMAGES"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered ("BLUE SKY FILING"), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading; or (iii) any violation or 6 alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation there under relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, "VIOLATIONS"). The Company shall reimburse the Investor and each such controlling person promptly as such expenses are incurred and are due and payable, for any legal fees or disbursements or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (x) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto; (y) shall not be available to the extent such Claim is based on a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company, if such prospectus was timely made available by the Company pursuant to Section 3(e); and (z) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person. b. In connection with a Registration Statement, the Investor agrees to indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement and each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (each an "INDEMNIFIED PARTY"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or is based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by the Investor expressly for use in connection with such Registration Statement; and, subject to Section 6(d), the Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to the Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the prospectus was corrected and such new prospectus was delivered to the Investor prior to the Investor's use of the prospectus to which the Claim relates. 7 c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses of not more than one counsel for such Indemnified Person or Indemnified Party to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its prior written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the prior written consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such claim or litigation. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. d. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred. e. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law. 8 7. CONTRIBUTION. ------------ To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (ii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS UNDER THE 1934 ACT. -------------------------- With a view to making available to the Investor the benefits of Rule 144 promulgated under the 1933 Act or any similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("RULE 144") the Company agrees to: a. make and keep public information available, as those terms are understood and defined in Rule 144; b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 6.3 of the Equity Line of Credit Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and c. furnish to the Investor so long as the Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration. 9. AMENDMENT OF REGISTRATION RIGHTS. -------------------------------- Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Investor. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon the Investor and the Company. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of this Agreement unless the same consideration also is offered to all of the parties to this Agreement. 9 10. MISCELLANEOUS. ------------- a. A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. b. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one business day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company, to: Ivoice, Inc. Attention: Jerome R. Mahoney, CEO 750 Highway 34 Matawan, NJ 07747 Telephone: (732) 441-7700 Facsimile: (732) 441-9895 With a copy to: Kirkpatrick & Lockhart LLP 201 South Biscayne Boulevard - Suite 2000 Miami, FL 33131 Attention: Clayton E. Parker, Esq. Telephone: (305) 539-3306 Facsimile: (305) 358-7095 If to the Investor, to: Cornell Capital Partners, LP 101 Hudson Street - Suite 3606 Jersey City, NJ 07302 Attention: Mark Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 With copy to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, NJ 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973 Any party may change its address by providing written notice to the other parties hereto at least five days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, 10 consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. d. The corporate laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and the Investor. All other questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New Jersey, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New Jersey or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New Jersey. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the Superior Courts of the State of New Jersey, sitting in Hudson County, New Jersey and the Federal District Court for the District of New Jersey sitting in Newark, New Jersey, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. e. This Agreement, the Equity Line of Credit Agreement, the Escrow Agreement and the Placement Agent Agreement constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the Equity Line of Credit Agreement, the Escrow Agreement and the Placement Agent Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. 11 f. This Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto. g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. h. This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. j. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party. k. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 12 IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of day and year first above written. COMPANY: IVOICE, INC. By: /s/ Jerome R. Mahoney ------------------------- Name: Jerome R. Mahoney Title: President and CEO INVESTOR: CORNELL CAPITAL PARTNERS, LP By: Yorkville Advisors, LLC Its: General Partner By: /s/ Mark Angelo ------------------------- Name: Mark Angelo Title: Portfolio Manager 13 EXHIBIT A FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT Fidelity Transfer Co. 1800 S.W. Temple, Suite 301 Salt Lake City, UT 84115 (801) 484-7222 Attn:______________________ Re: IVOICE, INC. ------------ Ladies and Gentlemen: We are counsel to IVOICE, INC., a Delaware corporation (the "COMPANY"), and have represented the Company in connection with that certain Equity Line of Credit Agreement (the "EQUITY LINE OF CREDIT AGREEMENT") entered into by and between the Company and Cornell Capital Partners, LP (the "INVESTOR") pursuant to which the Company issued to the Investor shares of its Class A Common Stock, par value $0.001 per share (the "COMMON STOCK"). Pursuant to the Equity Line of Credit Agreement, the Company also has entered into a Registration Rights Agreement with the Investor (the "REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement) under the Securities Act of 1933, as amended (the "1933 ACT"). In connection with the Company's obligations under the Registration Rights Agreement, on ____________ ____, the Company filed a Registration Statement on Form ________ (File No. 333-_____________) (the "REGISTRATION STATEMENT") with the Securities and Exchange Commission (the "SEC") relating to the Registrable Securities which names the Investor as a selling stockholder thereunder. In connection with the foregoing, we advise you that a member of the SEC's staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after telephonic inquiry of a member of the SEC's staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the 1933 Act pursuant to the Registration Statement. Very truly yours, Kirkpatrick & Lockhart LLP By:__________________________________ cc: CORNELL CAPITAL PARTNERS, LP 14 EX-10 6 ex10-17.txt EXHIBIT 10.17 EXHIBIT 10.17 ------------- ESCROW AGREEMENT ---------------- THIS ESCROW AGREEMENT (this "AGREEMENT") is made and entered into as of February 11, 2003, by IVOICE, INC., a Delaware corporation (the "COMPANY"); CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "INVESTOR"); BUTLER GONZALEZ LLP BUTLER GONZALEZ LLP and WACHOVIA, N.A., a national banking association, as Escrow Agent hereunder (the "ESCROW AGENT"). BACKGROUND ---------- WHEREAS, the Company and the Investor have entered into an Equity Line of Credit Agreement (the "EQUITY LINE OF CREDIT AGREEMENT") dated as of the date hereof, pursuant to which the Investor will purchase the Company's Class A Common Stock, par value $0.001 per share (the "COMMON STOCK"), at a price per share equal to the Purchase Price, as that term is defined in the Equity Line of Credit Agreement, for an aggregate price of up to Five Million Dollars ($5,000,000). The Equity Line of Credit Agreement provides that on each Advance Date the Investor, as that term is defined in the Equity Line of Credit Agreement, shall deposit the Advance pursuant to the Advance Notice in a segregated escrow account to be held by Escrow Agent and the Company shall deposit shares of the Company's Common Stock, which shall be purchased by the Investor as set forth in the Equity Line of Credit Agreement, with Butler Gonzalez LLP, in order to effectuate a disbursement to the Company of the Advance by the Escrow Agent and a disbursement to the Investor of the shares of the Company's Common Stock by Butler Gonzalez LLP at a closing to be held as set forth in the Equity Line of Credit Agreement (the "CLOSING"). WHEREAS, Escrow Agent has agreed to accept, hold, and disburse the funds deposited with it in accordance with the terms of this Agreement. WHEREAS, Butler Gonzalez LLP has agreed to accept, hold, and disburse the shares of the Company's Common Stock which have been deposited with it in accordance with the terms of this Agreement. WHEREAS, in order to establish the escrow of funds and shares to effect the provisions of the Equity Line of Credit Agreement, the parties hereto have entered into this Agreement. NOW THEREFORE, in consideration of the foregoing, it is hereby agreed as follows: 1. DEFINITIONS. The following terms shall have the following meanings when used herein: a. "ESCROW FUNDS" shall mean the Advance funds deposited with the Escrow Agent pursuant to this Agreement. b. "JOINT WRITTEN DIRECTION" shall mean a written direction executed by the Investor and the Company directing Escrow Agent to disburse all or a portion of the Escrow Funds or to take or refrain from taking any action pursuant to this Agreement. c. "COMMON STOCK JOINT WRITTEN DIRECTION" shall mean a written direction executed by the Investor and the Company directing Butler Gonzalez LLP to disburse all or a portion of the shares of the Company's Common Stock or to refrain from taking any action pursuant to this Agreement. 2. APPOINTMENT OF AND ACCEPTANCE BY ESCROW AGENT AND BUTLER GONZALEZ LLP. a. The Investor and the Company hereby appoint Escrow Agent to serve as Escrow Agent hereunder. Escrow Agent hereby accepts such appointment and, upon receipt by wire transfer of the Escrow Funds in accordance with Section 3 below, agrees to hold, invest and disburse the Escrow Funds in accordance with this Agreement. b. The Investor and the Company hereby appoint Butler Gonzalez LLP to serve as the holder of the shares of the Company's Common Stock which shall be purchased by the Investor. Butler Gonzalez LLP hereby accepts such appointment and, upon receipt of the certificates representing of the shares of the Company's Common Stock in accordance with Section 3 below, agrees to hold and disburse the shares of the Company's Common Stock in accordance with this Agreement. 3. CREATION OF ESCROW ACCOUNT/COMMON STOCK ACCOUNT. a. On or prior to the date of this Agreement the Escrow Agent shall establish an escrow account for the deposit of the Escrow Funds entitled as follows: Ivoice, Inc./Cornell Capital Partners, LP. The Investor will wire funds to the account of the Escrow Agent as follows: BANK: Wachovia, N.A. ROUTING #: 031201467 ACCOUNT #: 2020000659170 NAME ON ACCOUNT: Butler Gonzalez LLP/Wachovia as Escrow Agent NAME ON SUB-ACCOUNT: Ivoice, Inc./Cornell Capital Partners, LP Escrow Account REFERENCE SUB-ACCOUNT #: 1671-01 ATTN: Robert Mercado (732) 452-3005 Carmela Agugliaro (732) 452-3005 NOTE: Only wire transfers shall be accepted. 2 b. On or prior to the date of this Agreement Butler Gonzalez LLP shall establish an account for the shares of Common Stock. The Company will deliver shares of the Company's Common Stock to the account of Butler Gonzalez LLP as follows: BROKERAGE FIRM: ACCOUNT #: DTC #: NAME ON ACCOUNT: Butler Gonzalez LLP Escrow Account 4. DEPOSITS INTO THE ESCROW ACCOUNT. The Investor agrees that it shall promptly deliver all monies for the payment of the Common Stock to the Escrow Agent for deposit in the Escrow Account. 5. DISBURSEMENTS FROM THE ESCROW ACCOUNT. a. At such time as Escrow Agent has collected and deposited instruments of payment in the total amount of the Advance and Butler Gonzalez LLP has received such Common Stock from the Company which are to be issued to the Investor pursuant to the Equity Line of Credit Agreement, Butler Gonzalez LLP shall notify the Company and the Investor. The Escrow Agent will continue to hold such funds until the Investor and Company execute and deliver a Joint Written Direction directing the Escrow Agent to disburse the Escrow Funds pursuant to Joint Written Direction at which time the Escrow Agent shall wire the Escrow Funds to the Company. In disbursing such funds, Escrow Agent is authorized to rely upon such Joint Written Direction from Company and may accept any signatory from the Company listed on the signature page to this Agreement and any signature from the Investor that Escrow Agent already has on file. Simultaneous with delivery of the executed Joint Written Direction to the Escrow Agent the Investor and Company shall execute and deliver a Common Stock Joint Written Direction to Butler Gonzalez LLP directing Butler Gonzalez LLP to release to the Investor the shares of the Company's Common Stock. In releasing such shares of Common Stock Butler Gonzalez LLP is authorized to rely upon such Common Stock Joint Written Direction from Company and may accept any signatory from the Company listed on the signature page to this Agreement and any signature from the Investor Butler Gonzalez LLP has on file. In the event the Escrow Agent does not receive the amount of the Advance from the Investor, the Escrow Agent shall notify the Company and the Investor. In the event Butler Gonzalez LLP does not receive the shares of Common Stock to be purchased by the Investor Butler Gonzalez LLP shall notify the Company and the Investor. In the event that the Escrow Agent is advised by Butler Gonzalez LLP that the Common Stock has not been received from the Company, in no event will the Escrow Funds be released to the Company until such shares are received by Butler Gonzalez LLP. For purposes of this Agreement, the term "Common Stock certificates" shall mean Common Stock certificates to be purchased pursuant to the respective Advance Notice pursuant to the Equity Line of Credit Agreement. 3 6. COLLECTION PROCEDURE. The Escrow Agent is hereby authorized to forward each wire for collection and, upon collection of the proceeds of each wire deposit the collected proceeds in the Escrow Account. Any wires returned unpaid to the Escrow Agent shall be returned to the Investor. In such cases, the Escrow Agent will promptly notify the Company of such return. 7. SUSPENSION OF PERFORMANCE: DISBURSEMENT INTO COURT. a. ESCROW AGENT. If at any time, there shall exist any dispute between the Company and the Investor with respect to holding or disposition of any portion of the Escrow Funds or any other obligations of Escrow Agent hereunder, or if at any time Escrow Agent is unable to determine, to Escrow Agent's sole satisfaction, the proper disposition of any portion of the Escrow Funds or Escrow Agent's proper actions with respect to its obligations hereunder, or if the parties have not within thirty (30) days of the furnishing by Escrow Agent of a notice of resignation pursuant to Section 9 hereof, appointed a successor Escrow Agent to act hereunder, then Escrow Agent may, in its sole discretion, take either or both of the following actions: i. Suspend the performance of any of its obligations (including without limitation any disbursement obligations) under this Escrow Agreement until such dispute or uncertainty shall be resolved to the sole satisfaction of Escrow Agent or until a successor Escrow Agent shall be appointed (as the case may be); provided however, Escrow Agent shall continue to invest the Escrow Funds in accordance with Section 8 hereof; and/or ii. petition (by means of an interpleader action or any other appropriate method) any court of competent jurisdiction in any venue convenient to Escrow Agent, for instructions with respect to such dispute or uncertainty, and to the extent required by law, pay into such court, for holding and disposition in accordance with the instructions of such court, all funds held by it in the Escrow Funds, after deduction and payment to Escrow Agent of all fees and expenses (including court costs and attorneys' fees) payable to, incurred by, or expected to be incurred by Escrow Agent in connection with performance of its duties and the exercise of its rights hereunder. iii. Escrow Agent shall have no liability to the Company, the Investor, or any person with respect to any such suspension of performance or disbursement into court, specifically including any liability or claimed liability that may arise, or be alleged to have arisen, out of or as a result of any delay in the disbursement of funds held in the Escrow Funds or any delay in with respect to any other action required or requested of Escrow Agent. b. BUTLER GONZALEZ LLP. If at any time, there shall exist any dispute between the Company and the Investor with respect to holding or disposition of any portion of the shares of Common Stock or any other obligations of Butler Gonzalez LLP hereunder, or if at any time Butler Gonzalez LLP is unable to determine, to Butler Gonzalez LLP's sole satisfaction, the proper disposition of any portion of the shares of Common Stock or Butler Gonzalez LLP's proper actions with respect to its obligations hereunder, then Butler Gonzalez LLP may, in its sole discretion, take either or both of the following actions: 4 i. suspend the performance of any of its obligations (including without limitation any disbursement obligations) under this Escrow Agreement until such dispute or uncertainty shall be resolved to the sole satisfaction of Butler Gonzalez LLP or until a successor shall be appointed (as the case may be); and/or ii. petition (by means of an interpleader action or any other appropriate method) any court of competent jurisdiction in any venue convenient to Butler Gonzalez LLP, for instructions with respect to such dispute or uncertainty, and to the extent required by law, pay into such court, for holding and disposition in accordance with the instructions of such court, all shares of the Company's Common Stock funds held by it, after deduction and payment to Butler Gonzalez LLP of all fees and expenses (including court costs and attorneys' fees) payable to, incurred by, or expected to be incurred by Butler Gonzalez LLP in connection with performance of its duties and the exercise of its rights hereunder. iii. Butler Gonzalez LLP shall have no liability to the Company, the Investor, or any person with respect to any such suspension of performance or disbursement into court, specifically including any liability or claimed liability that may arise, or be alleged to have arisen, out of or as a result of any delay in the release of shares of the Company's Common Stock or any delay in with respect to any other action required or requested of Butler Gonzalez LLP. 8. INVESTMENT OF ESCROW FUNDS. The Escrow Agent shall deposit the Escrow Funds in a non-interest bearing money market account. If Escrow Agent has not received a Joint Written Direction at any time that an investment decision must be made, Escrow Agent shall invest the Escrow Fund, or such portion thereof, as to which no Joint Written Direction has been received, in investments described above. The foregoing investments shall be made by the Escrow Agent. Notwithstanding anything to the contrary contained, Escrow Agent may, without notice to the parties, sell or liquidate any of the foregoing investments at any time if the proceeds thereof are required for any release of funds permitted or required hereunder, and Escrow Agent shall not be liable or responsible for any loss, cost or penalty resulting from any such sale or liquidation. 9. RESIGNATION AND REMOVAL OF ESCROW AGENT. Escrow Agent may resign from the performance of its duties hereunder at any time by giving thirty (30) days' prior written notice to the parties or may be removed, with or without cause, by the parties, acting jointly, by furnishing a Joint Written Direction to Escrow Agent, at any time by the giving of ten (10) days' prior written notice to Escrow Agent as provided herein below. Upon any such notice of resignation or removal, the representatives of the Investor and the Company identified in Sections 15a. (iv) and 15b. (iv), below, jointly shall appoint a successor Escrow Agent hereunder, which shall be a commercial bank, trust company or other financial institution with a combined capital and surplus in excess of $10,000,000.00. Upon the acceptance in writing of any appointment of Escrow Agent hereunder by a successor Escrow Agent, such successor Escrow Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Escrow Agent, and the retiring Escrow Agent shall be discharged from its duties and obligations under this Escrow Agreement, but shall not be discharged from any liability for actions taken as Escrow Agent hereunder prior to such succession. After any retiring Escrow 5 Agent's resignation or removal, the provisions of this Escrow Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Escrow Agent under this Escrow Agreement. The retiring Escrow Agent shall transmit all records pertaining to the Escrow Funds and shall pay all funds held by it in the Escrow Funds to the successor Escrow Agent, after making copies of such records as the retiring Escrow Agent deems advisable and after deduction and payment to the retiring Escrow Agent of all fees and expenses (including court costs and attorneys' fees) payable to, incurred by, or expected to be incurred by the retiring Escrow Agent in connection with the performance of its duties and the exercise of its rights hereunder. 10. LIABILITY OF ESCROW AGENT. a. Escrow Agent shall have no liability or obligation with respect to the Escrow Funds except for Escrow Agent's willful misconduct or gross negligence. Escrow Agent's sole responsibility shall be for the safekeeping, investment, and disbursement of the Escrow Funds in accordance with the terms of this Agreement. Escrow Agent shall have no implied duties or obligations and shall not be charged with knowledge or notice or any fact or circumstance not specifically set forth herein. Escrow Agent may rely upon any instrument, not only as to its due execution, validity and effectiveness, but also as to the truth and accuracy of any information contained therein, which Escrow Agent shall in good faith believe to be genuine, to have been signed or presented by the person or parties purporting to sign the same and conform to the provisions of this Agreement. In no event shall Escrow Agent be liable for incidental, indirect, special, and consequential or punitive damages. Escrow Agent shall not be obligated to take any legal action or commence any proceeding in connection with the Escrow Funds, any account in which Escrow Funds are deposited, this Agreement or the Equity Line of Credit Agreement, or to appear in, prosecute or defend any such legal action or proceeding. Escrow Agent may consult legal counsel selected by it in any event of any dispute or question as to construction of any of the provisions hereof or of any other agreement or its duties hereunder, or relating to any dispute involving any party hereto, and shall incur no liability and shall be fully indemnified from any liability whatsoever in acting in accordance with the opinion or instructions of such counsel. The Company and the Investor jointly and severally shall promptly pay, upon demand, the reasonable fees and expenses of any such counsel. b. The Escrow Agent is hereby authorized, in its sole discretion, to comply with orders issued or process entered by any court with respect to the Escrow Funds, without determination by the Escrow Agent of such court's jurisdiction in the matter. If any portion of the Escrow Funds is at any time attached, garnished or levied upon under any court order, or in case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in any case any order judgment or decree shall be made or entered by any court affecting such property or any part thereof, then and in any such event, the Escrow Agent is authorized, in its sole discretion, to rely upon and comply with any such order, writ judgment or decree which it is advised by legal counsel selected by it, binding upon it, without the need for appeal or other action; and if the Escrow Agent complies with any such order, writ, judgment or decree, it shall not be liable to any of the parties hereto or to any other person or entity by reason of such compliance even though such order, writ judgment or decree may be subsequently reversed, modified, annulled, set aside or vacated. 6 11. LIABILITY OF BUTLER GONZALEZ LLP. a. Notwithstanding any liability attributable to Butler Gonzalez LLP as counsel to the Investor, Butler Gonzalez LLP shall have no liability or obligation with respect to the shares of the Company's Common Stock except for Butler Gonzalez LLP's willful misconduct or gross negligence. Butler Gonzalez LLP's sole responsibility shall be for the safekeeping and release of the shares of the Company's Common Stock in accordance with the terms of this Agreement. Butler Gonzalez LLP shall have no implied duties or obligations and shall not be charged with knowledge or notice or any fact or circumstance not specifically set forth herein. Butler Gonzalez LLP may rely upon any instrument, not only as to its due execution, validity and effectiveness, but also as to the truth and accuracy of any information contained therein, which Butler Gonzalez LLP shall in good faith believe to be genuine, to have been signed or presented by the person or parties purporting to sign the same and conform to the provisions of this Agreement. In no event shall Butler Gonzalez LLP be liable for incidental, indirect, special, and consequential or punitive damages. Butler Gonzalez LLP shall not be obligated to take any legal action or commence any proceeding in connection with the shares of the Company's Common Stock, any account in which shares of Common Stock are deposited and this Agreement, or to appear in, prosecute or defend any such legal action or proceeding. Butler Gonzalez LLP may consult legal counsel selected by it in any event of any dispute or question as to construction of any of the provisions hereof or of any other agreement or its duties hereunder, or relating to any dispute involving any party hereto, and shall incur no liability and shall be fully indemnified from any liability whatsoever in acting in accordance with the opinion or instructions of such counsel. The Company and the Investor jointly and severally shall promptly pay, upon demand, the reasonable fees and expenses of any such counsel. b. Butler Gonzalez LLP is hereby authorized, in its sole discretion, to comply with orders issued or process entered by any court with respect to the shares of the Company's Common Stock, without determination by Butler Gonzalez of such court's jurisdiction in the matter. If any portion of the shares of the Company's Common Stock are at any time attached, garnished or levied upon under any court order, or in case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in any case any order judgment or decree shall be made or entered by any court affecting such property or any part thereof, then and in any such event, the Butler Gonzalez LLP is authorized, in its sole discretion, to rely upon and comply with any such order, writ judgment or decree which it is advised by legal counsel selected by it, binding upon it, without the need for appeal or other action; and if Butler Gonzalez LLP complies with any such order, writ, judgment or decree, it shall not be liable to any of the parties hereto or to any other person or entity by reason of such compliance even though such order, writ judgment or decree may be subsequently reversed, modified, annulled, set aside or vacated. 12. INDEMNIFICATION OF ESCROW AGENT. From and at all times after the date of this Agreement, the parties jointly and severally, shall, to the fullest extent permitted by law and to the extent provided herein, indemnify and hold harmless Escrow Agent and each director, officer, employee, attorney, agent and affiliate of Escrow Agent (collectively, the "INDEMNIFIED PARTIES") against any and all actions, claims (whether or not valid), losses, damages, liabilities, costs and expenses of any kind or nature whatsoever (including without limitation reasonable attorney's fees, costs and expenses) incurred by or asserted against any of the Indemnified Parties from and after the date hereof, 7 whether direct, indirect or consequential, as a result of or arising from or in any way relating to any claim, demand, suit, action, or proceeding (including any inquiry or investigation) by any person, including without limitation the parties to this Agreement, whether threatened or initiated, asserting a claim for any legal or equitable remedy against any person under any statute or regulation, including, but not limited to, any federal or state securities laws, or under any common law or equitable cause or otherwise, arising from or in connection with the negotiation, preparation, execution, performance or failure of performance of this Agreement or any transaction contemplated herein, whether or not any such Indemnified Party is a party to any such action or proceeding, suit or the target of any such inquiry or investigation; provided, however, that no Indemnified Party shall have the right to be indemnified hereunder for liability finally determined by a court of competent jurisdiction, subject to no further appeal, to have resulted solely from the gross negligence or willful misconduct of such Indemnified Party. If any such action or claim shall be brought or asserted against any Indemnified Party, such Indemnified Party shall promptly notify the Company and the Investor hereunder in writing, and the and the Company shall assume the defense thereof, including the employment of counsel and the payment of all expenses. Such Indemnified Party shall, in its sole discretion, have the right to employ separate counsel (who may be selected by such Indemnified Party in its sole discretion) in any such action and to participate and to participate in the defense thereof, and the fees and expenses of such counsel shall be paid by such Indemnified Party, except that the Investor and/or the Company shall be required to pay such fees and expense if (a) the Investor or the Company agree to pay such fees and expenses, or (b) the Investor and/or the Company shall fail to assume the defense of such action or proceeding or shall fail, in the sole discretion of such Indemnified Party, to employ counsel reasonably satisfactory to the Indemnified Party in any such action or proceeding, (c) the Investor and the Company are the plaintiff in any such action or proceeding or (d) the named or potential parties to any such action or proceeding (including any potentially impleaded parties) include both Indemnified Party the Company and/or the Investor and Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company or the Investor. The Investor and the Company shall be jointly and severally liable to pay fees and expenses of counsel pursuant to the preceding sentence, except that any obligation to pay under clause (a) shall apply only to the party so agreeing. All such fees and expenses payable by the Company and/or the Investor pursuant to the foregoing sentence shall be paid from time to time as incurred, both in advance of and after the final disposition of such action or claim. The obligations of the parties under this section shall survive any termination of this Agreement, and resignation or removal of the Escrow Agent shall be independent of any obligation of Escrow Agent. 13. INDEMNIFICATION OF BUTLER GONZALEZ LLP. From and at all times after the date of this Agreement, the parties jointly and severally, shall, to the fullest extent permitted by law and to the extent provided herein, indemnify and hold harmless Butler Gonzalez LLP and each partner, director, officer, employee, attorney, agent and affiliate of Butler Gonzalez LLP (collectively, the "INDEMNIFIED PARTIES") against any and all actions, claims (whether or not valid), losses, damages, liabilities, costs and expenses of any kind or nature whatsoever (including without limitation reasonable attorney's fees, costs and expenses) incurred by or asserted against any of the Indemnified Parties from and after the date hereof, whether direct, indirect or consequential, as a result of or arising from or in any way relating to any claim, demand, suit, action, or proceeding (including any inquiry or investigation) by any person, 8 including without limitation the parties to this Agreement, whether threatened or initiated, asserting a claim for any legal or equitable remedy against any person under any statute or regulation, including, but not limited to, any federal or state securities laws, or under any common law or equitable cause or otherwise, arising from or in connection with the negotiation, preparation, execution, performance or failure of performance of this Agreement or any transaction contemplated herein, whether or not any such Indemnified Party is a party to any such action or proceeding, suit or the target of any such inquiry or investigation; provided, however, that no Indemnified Party shall have the right to be indemnified hereunder for liability finally determined by a court of competent jurisdiction, subject to no further appeal, to have resulted solely from the gross negligence or willful misconduct of such Indemnified Party. If any such action or claim shall be brought or asserted against any Indemnified Party, such Indemnified Party shall promptly notify the Company and the Investor hereunder in writing, and the Investor and the Company shall assume the defense thereof, including the employment of counsel and the payment of all expenses. Such Indemnified Party shall, in its sole discretion, have the right to employ separate counsel (who may be selected by such Indemnified Party in its sole discretion) in any such action and to participate and to participate in the defense thereof, and the fees and expenses of such counsel shall be paid by such Indemnified Party, except that the Investor and/or the Company shall be required to pay such fees and expense if (a) the Investor or the Company agree to pay such fees and expenses, or (b) the Investor and/or the Company shall fail to assume the defense of such action or proceeding or shall fail, in the sole discretion of such Indemnified Party, to employ counsel reasonably satisfactory to the Indemnified Party in any such action or proceeding, (c) the Investor and the Company are the plaintiff in any such action or proceeding or (d) the named or potential parties to any such action or proceeding (including any potentially impleaded parties) include both Indemnified Party the Company and/or the Investor and the Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company or the Investor. The Investor and the Company shall be jointly and severally liable to pay fees and expenses of counsel pursuant to the preceding sentence, except that any obligation to pay under clause (a) shall apply only to the party so agreeing. All such fees and expenses payable by the Company and/or the Investor pursuant to the foregoing sentence shall be paid from time to time as incurred, both in advance of and after the final disposition of such action or claim. The obligations of the parties under this section shall survive any termination of this Agreement. 14. EXPENSES OF ESCROW AGENT. Except as set forth in Section 12 the Company shall reimburse Escrow Agent for all of its reasonable out-of-pocket expenses, including attorneys' fees, travel expenses, telephone and facsimile transmission costs, postage (including express mail and overnight delivery charges), copying charges and the like. All of the compensation and reimbursement obligations set forth in this Section shall be payable by the Company, upon demand by Escrow Agent. The obligations of the Company under this Section shall survive any termination of this Agreement and the resignation or removal of Escrow Agent. 15. WARRANTIES. a. The Investor makes the following representations and warranties to the Escrow Agent and Butler Gonzalez LLP: 9 i. The Investor has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. ii. This Agreement has been duly approved by all necessary action of the Investor, including any necessary approval of the limited partner of the Investor, has been executed by duly authorized officers of the Investor's general partner, enforceable in accordance with its terms. iii. The execution, delivery, and performance of the Investor of this Agreement will not violate, conflict with, or cause a default under the agreement of limited partnership of the Investor, any applicable law or regulation, any court order or administrative ruling or degree to which the Investor is a party or any of its property is subject, or any agreement, contract, indenture, or other binding arrangement. iv. Mark A. Angelo has been duly appointed to act as the representative of Investor hereunder and has full power and authority to execute, deliver, and perform this Agreement, to execute and deliver any Joint Written Direction, to amend, modify, or waive any provision of this Agreement, and to take any and all other actions as the Investor's representative under this Agreement, all without further consent or direction form, or notice to, the Investor or any other party. v. No party other than the parties hereto have, or shall have, any lien, claim or security interest in the Escrow Funds or any part thereof. No financing statement under the Uniform Commercial Code is on file in any jurisdiction claiming a security interest in or describing (whether specifically or generally) the Escrow Funds or any part thereof. vi. All of the representations and warranties of the Investor contained herein are true and complete as of the date hereof and will be true and complete at the time of any disbursement from the Escrow Funds. b. The Company makes the following representations and warranties to Escrow Agent, the Investor and Butler Gonzalez LLP: i. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware, and has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. ii. This Agreement has been duly approved by all necessary corporate action of the Company, including any necessary shareholder approval, has been executed by duly authorized officers of the Company, enforceable in accordance with its terms. iii. The execution, delivery, and performance by the Company of this Escrow Agreement is in accordance with the Equity Line of Credit Agreement and will not violate, conflict with, or cause a default under the certificate of incorporation or bylaws of the Company, any applicable law or regulation, any court order or administrative ruling or decree to which the Company is a party or any of its property is subject, or any agreement, contract, indenture, or other binding arrangement. 10 iv. Jerome R. Mahoney has been duly appointed to act as the representative of the Company hereunder and has full power and authority to execute, deliver, and perform this Agreement, to execute and deliver any Joint Written Direction, to amend, modify or waive any provision of this Agreement and to take all other actions as the Company's Representative under this Agreement, all without further consent or direction from, or notice to, the Company or any other party. v. No party other than the parties hereto shall have, any lien, claim or security interest in the Escrow Funds or any part thereof. No financing statement under the Uniform Commercial Code is on file in any jurisdiction claiming a security interest in or describing (whether specifically or generally) the Escrow Funds or any part thereof. vi. All of the representations and warranties of the Company contained herein are true and complete as of the date hereof and will be true and complete at the time of any disbursement from the Escrow Funds. 16. CONSENT TO JURISDICTION AND VENUE. In the event that any party hereto commences a lawsuit or other proceeding relating to or arising from this Agreement, the parties hereto agree that the United States District Court for the District of New Jersey shall have the sole and exclusive jurisdiction over any such proceeding. If all such courts lack federal subject matter jurisdiction, the parties agree that the Superior Court Division of New Jersey, Chancery Division of Essex County shall have sole and exclusive jurisdiction. Any of these courts shall be proper venue for any such lawsuit or judicial proceeding and the parties hereto waive any objection to such venue. The parties hereto consent to and agree to submit to the jurisdiction of any of the courts specified herein and agree to accept the service of process to vest personal jurisdiction over them in any of these courts. 17. NOTICE. All notices and other communications hereunder shall be in writing and shall be deemed to have been validly served, given or delivered five (5) days after deposit in the United States mails, by certified mail with return receipt requested and postage prepaid, when delivered personally, one (1) day delivered to any overnight courier, or when transmitted by facsimile transmission and addressed to the party to be notified as follows: If to Investor, to: Cornell Capital Partners, LP 101 Hudson Street - Suite 3606 Jersey City, NJ 07302 Attention: Mark Angelo Facsimile: (201) 985-8622 With a copy to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, NJ 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973 11 If to Company, to: Ivoice, Inc. Attention: Jerome R. Mahoney, CEO 750 Highway 34 Matawan, NJ 07747 Telephone: (732) 441-7700 Facsimile: (732) 441-9895 With copy to: Kirkpatrick & Lockhart LLP 201 South Biscayne Boulevard - Suite 2000 Miami, Florida 33131-2399 Attention: Clayton Parker, Esq. Telephone: (305) 539-3306 Facsimile: (305) 358-7095 If to the Escrow Agent, to: Wachovia, N.A. 407 Main Street Metuchen, New Jersey 08840 Attention: Robert Mercado Carmela Agugliaro Facsimile: (732) 548-5973 If to Butler Gonzalez LLP Butler Gonzalez LLP 1000 Stuyvesant Avenue Suite 6 Union, New Jersey 07083 Attention: David Gonzalez, Esq. Facsimile: (908) 810-0973 Or to such other address as each party may designate for itself by like notice. 18. AMENDMENTS OR WAIVER. This Agreement may be changed, waived, discharged or terminated only by a writing signed by the parties of the Escrow Agent. No delay or omission by any party in exercising any right with respect hereto shall operate as waiver. A waiver on any one occasion shall not be construed as a bar to, or waiver of, any right or remedy on any future occasion. 19. SEVERABILITY. To the extent any provision of this Agreement is prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition, or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 20. GOVERNING LAW. This Agreement shall be construed and interpreted in accordance with the internal laws of the State of New Jersey without giving effect to the conflict of laws principles thereof. 12 21. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement between the parties relating to the holding, investment, and disbursement of the Escrow Funds and sets forth in their entirety the obligations and duties of the Escrow Agent with respect to the Escrow Funds. 22. BINDING EFFECT. All of the terms of this Agreement, as amended from time to time, shall be binding upon, inure to the benefit of and be enforceable by the respective heirs, successors and assigns of the Investor, the Company, or the Escrow Agent. 23. EXECUTION OF COUNTERPARTS. This Agreement and any Joint Written Direction may be executed in counter parts, which when so executed shall constitute one and same agreement or direction. 24. TERMINATION. Upon the first to occur of the disbursement of all amounts in the Escrow Funds pursuant to Joint Written Directions or the disbursement of all amounts in the Escrow Funds into court pursuant to Section 7 hereof, this Agreement shall terminate and Escrow Agent shall have no further obligation or liability whatsoever with respect to this Agreement or the Escrow Funds. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 13 IN WITNESS WHEREOF the parties have hereunto set their hands and seals the day and year above set forth. IVOICE, INC. By: /s/ Jerome R. Mahoney Name: Jerome R. Mahoney Title: President and Chief Executive Officer WACHOVIA, N.A. By: /s/ Robert Mercado Name: Robert Mercado Title: As the Escrow Agent CORNELL CAPITAL PARTNERS, LP By: Yorkville Advisors, LLC Its: General Partner By: /s/ Mark A. Angelo Name: Mark A. Angelo Title: Portfolio Manager BUTLER GONZALEZ LLP By: /s/ David Gonzalez Name: David Gonzalez, Esq. Title: Partner 14 EX-10 7 ex10-18.txt EXHIBIT 10.18 EXHIBIT 10.18 IVOICE, INC. PLACEMENT AGENT AGREEMENT ------------------------- Dated as of: February 11, 2003 Westrock Advisors, Inc. 230 Park Avenue, Floor 9 New York, New York 10169 Ladies and Gentlemen: The undersigned, IVOICE, INC., a Delaware corporation (the "Company"), hereby agrees with Westrock Advisors, a New York Corporation (the "Placement Agent") and Cornell Capital Partners, LP, A Delaware Limited Partnership (the "Investor") as follows: 1. OFFERING. The Company hereby engages the Placement Agent to act as its exclusive placement agent in connection with the Equity Line of Credit Agreement dated the date hereof, (the "Equity Line of Credit Agreement") pursuant to which the Company shall issue and sell to the Investor, from time to time, and the Investor shall purchase from the Company (the "Offering") up to Five Million Dollars ($5,000,000) of the Company's Class A common stock (the "Commitment Amount"), par value $0.001 per share (the "Common Stock"), at price per share equal to the Purchase Price, as that term is defined in the Equity Line of Credit Agreement. Pursuant to the terms hereof, the Placement Agent shall render consulting services to the Company with respect to the Equity Line of Credit Agreement and shall be available for consultation in connection with the advances to be requested by the Company pursuant to the Equity Line of Credit Agreement All capitalized terms used herein and not otherwise defined herein shall have the same meaning ascribed to them as in the Equity Line of Credit Agreement. The Investor will be granted certain registration rights with respect to the Common Stock as more fully set forth in the Registration Rights Agreement between the Company and the Investor dated the date hereof (the "Registration Rights Agreement"). The documents to be executed and delivered in connection with the Offering, including, but not limited, to this Agreement, the Equity Line of Credit Agreement, the Registration Rights Agreement, and the Escrow Agreement with Wachovia, N.A. (the "Escrow Agreement"), are referred to sometimes hereinafter collectively as the "Offering Materials." The Company's Common Stock is sometimes referred to hereinafter as the "Securities." The Placement Agent shall not be obligated to sell any Securities and this Offering by the Placement Agent shall be solely on a "best efforts basis." 2. Compensation. ------------ A. Upon the execution of this Agreement the Company shall issue to the Placement Agent or its designee an amount equal to 500,000 shares of the Company's Common Stock (collectively, the "Placement Agent's Shares "). The Placement Agent shall be entitled to "piggy-back" registration rights triggered upon registration of any shares of Common Stock by the Investor with respect to the Placement Agent's Shares pursuant to the Registration Rights Agreement dated the date hereof. 3. Representations, Warranties and Covenants of the Placement Agent. ----------------------------------------------------------------- A. The Placement Agent represents, warrants and covenants as follows: (i) The Placement Agent has the necessary power to enter into this Agreement and to consummate the transactions contemplated hereby . (ii) The execution and delivery by the Placement Agent of this Agreement and the consummation of the transactions contemplated herein will not result in any violation of, or be in conflict with, or constitute a default under, any agreement or instrument to which the Placement Agent is a party or by which the Placement Agent or its properties are bound, or any judgment, decree, order or, to the Placement Agent's knowledge, any statute, rule or regulation applicable to the Placement Agent. This Agreement when executed and delivered by the Placement Agent, will constitute the legal, valid and binding obligations of the Placement Agent, enforceable in accordance with their respective terms, except to the extent that (a) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, (b) the enforceability hereof or thereof is subject to general principles of equity, or (c) the indemnification provisions hereof or thereof may be held to be in violation of public policy. (iii) Upon receipt and execution of this Agreement the Placement Agent will promptly forward copies of this Agreement to the Company or its counsel and the Investor or its counsel. (iv) The Placement Agent will not intentionally take any action that it reasonably believes would cause the Offering to violate the provisions of the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934 (the "1934 Act"), the respective rules and regulations promulgated there under (the "Rules and Regulations") or applicable "Blue Sky" laws of any state or jurisdiction. (v) The Placement Agent will use all reasonable efforts to determine (a) whether the Investor is an Accredited Investor and (b) that any information furnished by the Investor is true and accurate. The Placement Agent shall have no obligation to insure that (x) any check, note, draft or other means of payment for the Common Stock will be honored, paid or enforceable against the Investor in accordance with its terms, or (y) subject to the performance of the Placement Agent's obligations and the accuracy of the Placement Agent's 2 representations and warranties hereunder, (1) the Offering is exempt from the registration requirements of the 1933 Act or any applicable state "Blue Sky" law or (2) the Investor is an Accredited Investor. (vi) The Placement Agent is a member of the National Association of Securities Dealers, Inc., and is a broker-dealer registered as such under the 1934 Act and under the securities laws of the states in which the Securities will be offered or sold by the Placement Agent unless an exemption for such state registration is available to the Placement Agent. The Placement Agent is in compliance with all material rules and regulations applicable to the Placement Agent generally and applicable to the Placement Agent's participation in the Offering. 4. Representations and Warranties of the Company. --------------------------------------------- A. The Company represents and warrants as follows: (i) The execution, delivery and performance of each of this Agreement, the Equity Line of Credit Agreement, the Escrow Agreement, and the Registration Rights Agreement has been or will be duly and validly authorized by the Company and is, or with respect to this Agreement, the Equity Line of Credit Agreement, the Escrow Agreement, and the Registration Rights Agreement will be, a valid and binding agreement of the Company, enforceable in accordance with its respective terms, except to the extent that (a) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, (b) the enforceability hereof or thereof is subject to general principles of equity or (c) the indemnification provisions hereof or thereof may be held to be in violation of public policy. The Securities to be issued pursuant to the transactions contemplated by this Agreement and the Equity Line of Credit Agreement have been duly authorized and, when issued and paid for in accordance with (x) this Agreement, the Equity Line of Agreement and the certificates/instruments representing such Securities, (y) will be valid and binding obligations of the Company, enforceable in accordance with their respective terms, except to the extent that (1) the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, and (2) the enforceability thereof is subject to general principles of equity. All corporate action required to be taken for the authorization, issuance and sale of the Securities has been duly and validly taken by the Company. (ii) The Company has a duly authorized, issued and outstanding capitalization as set forth herein and in the Equity Line of Credit Agreement. The Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the agreements described herein and as described in the Equity Line of Credit Agreement, dated the date hereof and the agreements described therein. All issued and outstanding securities of the Company, have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission or preemptive rights with respect thereto and are not subject to personal liability solely by reason of being security holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company. The authorized capital stock of the Company consists of 600,000,000 shares of Class A Common Stock, par value $0.001 per share; 3,000,000 shares of Class B Common Stock, no par value per share and 1,000,000 shares of preferred stock, par value $1.00 per share. As of May 1, 2002, the Company had 162,480,163 shares of Class A Common Stock outstanding, 354,000 shares of Class B Common Stock outstanding and no shares of Preferred Stock issued and outstanding. (iii) The Common Stock to be issued in accordance with this Agreement and the Equity Line of Credit Agreement has been duly authorized and when issued and paid for in accordance with this Agreement, the Equity Line of Credit Agreement and the certificates/instruments representing such Common Stock, will be validly issued, fully-paid and non-assessable; the holders thereof will not be subject to personal liability solely by reason of being such holders; such Securities are not and will not be subject to the preemptive rights of any holder of any security of the Company. (iv) The Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property necessary to conduct its business (including, without limitation, any real or personal property stated in the Offering Materials to be owned or leased by the Company), free and clear of all liens, encumbrances, claims, security interests and defects of any material nature whatsoever, other than those set forth in the Offering Materials and liens for taxes not yet due and payable. (v) There is no litigation or governmental proceeding pending or, to the best of the Company's knowledge, threatened against, or involving the properties or business of the Company, except as set forth in the Offering Materials. (vi) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware. Except as set forth in the Offering Materials, the Company does not own or control, directly or indirectly, an interest in any other corporation, partnership, trust, joint venture or other business entity. The Company is duly qualified or licensed and in good standing as a foreign corporation in each jurisdiction in which the character of its operations requires such qualification or licensing and where failure to so qualify would have a material adverse effect on the Company. The Company has all requisite corporate power and authority, and all material and necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies (domestic and foreign) to conduct its businesses (and proposed business) as described in the Offering Materials. Any disclosures in the Offering Materials concerning the effects of foreign, federal, state and local regulation on the Company's businesses as currently conducted and as contemplated are correct in all material respects and do not omit to state a material fact. The Company has all corporate power and authority to enter into this Agreement, the Equity Line of Credit Agreement, the Registration Rights Agreement, and the Escrow Agreement, to carry out the provisions and conditions hereof and thereof, and all consents, authorizations, approvals and orders required in connection herewith and therewith have been obtained. No consent, authorization or order of, and no filing with, any court, government agency or other body is required by the Company for the issuance of the Securities or execution and delivery of the Offering Materials except for applicable federal and state securities laws. 4 The Company, since its inception, has not incurred any liability arising under or as a result of the application of any of the provisions of the 1933 Act, the 1934 Act or the Rules and Regulations. (vii) There has been no material adverse change in the condition or prospects of the Company, financial or otherwise, from the latest dates as of which such condition or prospects, respectively, are set forth in the Offering Materials, and the outstanding debt, the property and the business of the Company conform in all material respects to the descriptions thereof contained in the Offering Materials. (viii) Except as set forth in the Offering Materials, the Company is not in breach of, or in default under, any term or provision of any material indenture, mortgage, deed of trust, lease, note, loan or Equity Line of Credit Agreement or any other material agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which it is a party or by which it or any of its properties may be bound or affected. The Company is not in violation of any provision of its charter or by-laws or in violation of any franchise, license, permit, judgment, decree or order, or in violation of any material statute, rule or regulation. Neither the execution and delivery of the Offering Materials nor the issuance and sale or delivery of the Securities, nor the consummation of any of the transactions contemplated in the Offering Materials nor the compliance by the Company with the terms and provisions hereof or thereof, has conflicted with or will conflict with, or has resulted in or will result in a breach of, any of the terms and provisions of, or has constituted or will constitute a default under, or has resulted in or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or pursuant to the terms of any indenture, mortgage, deed of trust, note, loan or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company may be bound or to which any of the property or assets of the Company is subject except (a) where such default, lien, charge or encumbrance would not have a material adverse effect on the Company and (b) as described in the Offering Materials; nor will such action result in any violation of the provisions of the charter or the by-laws of the Company or, assuming the due performance by the Placement Agent of its obligations hereunder, any material statute or any material order, rule or regulation applicable to the Company of any court or of any foreign, federal, state or other regulatory authority or other government body having jurisdiction over the Company. (ix) Subsequent to the dates as of which information is given in the Offering Materials, and except as may otherwise be indicated or contemplated herein or therein and the securities offered pursuant to the Securities Purchase Agreement dated the date hereof, the Company has not (a) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, or (b) entered into any transaction other than in the ordinary course of business, or (c) declared or paid any dividend or made any other distribution on or in respect of its capital stock. Except as described in the Offering Materials, the Company has no outstanding obligations to any officer or director of the Company. (x) There are no claims for services in the nature of a finder's or origination fee with respect to the sale of the Common Stock or any other 5 arrangements, agreements or understandings that may affect the Placement Agent's compensation, as determined by the National Association of Securities Dealers, Inc. (xi) The Company owns or possesses, free and clear of all liens or encumbrances and rights thereto or therein by third parties, the requisite licenses or other rights to use all trademarks, service marks, copyrights, service names, trade names, patents, patent applications and licenses necessary to conduct its business (including, without limitation, any such licenses or rights described in the Offering Materials as being owned or possessed by the Company) and, except as set forth in the Offering Materials, there is no claim or action by any person pertaining to, or proceeding, pending or threatened, which challenges the exclusive rights of the Company with respect to any trademarks, service marks, copyrights, service names, trade names, patents, patent applications and licenses used in the conduct of the Company's businesses (including, without limitation, any such licenses or rights described in the Offering Materials as being owned or possessed by the Company) except any claim or action that would not have a material adverse effect on the Company; the Company's current products, services or processes do not infringe or will not infringe on the patents currently held by any third party. (xii) Except as described in the Offering Materials, the Company is not under any obligation to pay royalties or fees of any kind whatsoever to any third party with respect to any trademarks, service marks, copyrights, service names, trade names, patents, patent applications, licenses or technology it has developed, uses, employs or intends to use or employ, other than to their respective licensors. (xiii) Subject to the performance by the Placement Agent of its obligations hereunder and the offer and sale of the Securities comply, and will continue to comply in all material respects with the requirements of Rule 506 of Regulation D promulgated by the SEC pursuant to the 1933 Act and any other applicable federal and state laws, rules, regulations and executive orders. Neither the Offering Materials nor any amendment or supplement thereto nor any documents prepared by the Company in connection with the Offering will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. All statements of material facts in the Offering Materials are true and correct as of the date of the Offering Materials. (xiv) All material taxes which are due and payable from the Company have been paid in full or adequate provision has been made for such taxes on the books of the Company except for those taxes disputed in good faith the Company does not have any tax deficiency or claim outstanding assessed or proposed against it. (xv) None of the Company nor any of its officers, directors, employees or agents, nor any other person acting on behalf of the Company, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic 6 or foreign) or other person who is or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) which (A) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, or (B) if not given in the past, might have had a materially adverse effect on the assets, business or operations of the Company as reflected in any of the financial statements contained in the Offering Materials, or (C) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company in the future. 5. Representations, Warranties and Covenants of the Investor. --------------------------------------------------------- A. The Investor represents, warrants and covenants as follows: (i) The Investor has the necessary power to enter into this Agreement and to consummate the transactions contemplated hereby. (ii) The execution and delivery by the Investor of this Agreement and the consummation of the transactions contemplated herein will not result in any violation of, or be in conflict with, or constitute a default under, any agreement or instrument to which the Investor is a party or by which the Investor or its properties are bound, or any judgment, decree, order or, to the Investor's knowledge, any statute, rule or regulation applicable to the Investor. This Agreement when executed and delivered by the Investor, will constitute the legal, valid and binding obligations of the Investor, enforceable in accordance with their respective terms, except to the extent that (a) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, (b) the enforceability hereof or thereof is subject to general principles of equity, or (c) the indemnification provisions hereof or thereof may be held to be in violation of public policy. (iii) The Investor will promptly forward copies of any and all due diligence questionnaires compiled by the Investor to the Placement Agent. 6. Certain Covenants and Agreements of the Company. ----------------------------------------------- The Company covenants and agrees at its expense and without any expense to the Placement Agent as follows: A. To advise the Placement Agent of any material adverse change in the Company's financial condition, prospects or business or of any development materially affecting the Company or rendering untrue or misleading any material statement in the Offering Materials occurring at any time as soon as the Company is either informed or becomes aware thereof. B. To use its commercially reasonable efforts to cause the Common Stock issuable in connection with the Equity Line of Credit to be qualified or registered for sale on terms consistent with those stated in the Registration Rights Agreement and under the securities laws of such jurisdictions as the Placement Agent and the Investor shall reasonably request. Qualification, 7 registration and exemption charges and fees shall be at the sole cost and expense of the Company. C. Upon written request, to provide and continue to provide the Placement Agent and the Investor copies of all quarterly financial statements and audited annual financial statements prepared by or on behalf of the Company, other reports prepared by or on behalf of the Company for public disclosure and all documents delivered to the Company's stockholders. D. To deliver, during the registration period of the Equity Line Credit Agreement, to the Placement Agent upon the Placement Agent's request, within forty five (45) days, a statement of its income for each such quarterly period, and its balance sheet and a statement of changes in stockholders' equity as of the end of such quarterly period, all in reasonable detail, certified by its principal financial or accounting officer; (ii) within ninety (90) days after the close of each fiscal year, its balance sheet as of the close of such fiscal year, together with a statement of income, a statement of changes in stockholders' equity and a statement of cash flow for such fiscal year, such balance sheet, statement of income, statement of changes in stockholders' equity and statement of cash flow to be in reasonable detail and accompanied by a copy of the certificate or report thereon of independent auditors if audited financial statements are prepared; and (iii) a copy of all documents, reports and information furnished to its stockholders at the time that such documents, reports and information are furnished to its stockholders. E. To comply with the terms of the Offering Materials. F. To ensure that any transactions between or among the Company, or any of its officers, directors and affiliates be on terms and conditions that are no less favorable to the Company, than the terms and conditions that would be available in an "arm's length" transaction with an independent third party. 7. Indemnification. --------------- A. The Company hereby agrees that it will indemnify and hold the Placement Agent and each officer, director, shareholder, employee or representative of the Placement Agent and each person controlling, controlled by or under common control with the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the SEC's Rules and Regulations promulgated there under (the "Rules and Regulations"), harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Placement Agent or such indemnified person of the Placement Agent may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon (i) any untrue statement or alleged 8 untrue statement of a material fact contained in (a) Section 4 of this Agreement, (b) the Offering Materials (except those written statements relating to the Placement Agent given by an indemnified person for inclusion therein), (c) any application or other document or written communication executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Common Stock under the securities laws thereof, or any state securities commission or agency; (ii) the omission or alleged omission from documents described in clauses (a), (b) or (c) above of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iii) the breach of any representation, warranty, covenant or agreement made by the Company in this Agreement. The Company further agrees that upon demand by an indemnified person, at any time or from time to time, it will promptly reimburse such indemnified person for any loss, claim, damage, liability, cost or expense actually and reasonably paid by the indemnified person as to which the Company has indemnified such person pursuant hereto. Notwithstanding the foregoing provisions of this Paragraph 6(A), any such payment or reimbursement by the Company of fees, expenses or disbursements incurred by an indemnified person in any proceeding in which a final judgment by a court of competent jurisdiction (after all appeals or the expiration of time to appeal) is entered against the Placement Agent or such indemnified person based upon specific finding of fact that the Placement Agent or such indemnified person's gross negligence or willful misfeasance will be promptly repaid to the Company. B. The Placement Agent hereby agrees that it will indemnify and hold the Company and each officer, director, shareholder, employee or representative of the Company, and each person controlling, controlled by or under common control with the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations, harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Company or such indemnified person of the Company may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon (i) the conduct of the Placement Agent or its officers, employees or representatives in its acting as Placement Agent for the Offering or (ii) the material breach of any representation, warranty, covenant or agreement made by the Placement Agent in this Agreement (iii) any false or misleading information provided to the Company by one of the Placement Agent's indemnified persons. C. The Investor hereby agrees that it will indemnify and hold the Placement Agent and each officer, director, shareholder, employee or representative of the Placement Agent, and each person controlling, controlled by or under common control with the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations, harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in 9 connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Placement Agent or such indemnified person of the Placement Agent may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon (i) the conduct of the Investor or its officers, employees or representatives in its acting as the Investor for the Offering or (ii) the material breach of any representation, warranty, covenant or agreement made by the Investor in the Offering Materials (iii) any false or misleading information provided to the Placement Agent by one of the Investor's indemnified persons. D. The Placement Agent hereby agrees that it will indemnify and hold the Investor and each officer, director, shareholder, employee or representative of the Investor, and each person controlling, controlled by or under common control with the Investor within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations, harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Investor or such indemnified person of the Investor may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon (i) the conduct of the Placement Agent or its officers, employees or representatives in its acting as the Placement Agent for the Offering or (ii) the material breach of any representation, warranty, covenant or agreement made by the Placement Agent in this Agreement (iii) any false or misleading information provided to the Investor by one of the Placement Agent's indemnified persons. E. Promptly after receipt by an indemnified party of notice of commencement of any action covered by Section 7(A), (B), (C) or (D), the party to be indemnified shall, within five (5) business days, notify the indemnifying party of the commencement thereof; the omission by one (1) indemnified party to so notify the indemnifying party shall not relieve the indemnifying party of its obligation to indemnify any other indemnified party that has given such notice and shall not relieve the indemnifying party of any liability outside of this indemnification if not materially prejudiced thereby. In the event that any action is brought against the indemnified party, the indemnifying party will be entitled to participate therein and, to the extent it may desire, to assume and control the defense thereof with counsel chosen by it which is reasonably acceptable to the indemnified party. After notice from the indemnifying party to such indemnified party of its election to so assume the defense thereof, the indemnifying party will not be liable to such indemnified party under such Section 7(A), (B), (C), or (D) for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, but the indemnified party may, at its own expense, participate in such defense by counsel chosen by it, without, however, impairing the indemnifying party's control of the defense. Subject to the proviso of this sentence and 10 notwithstanding any other statement to the contrary contained herein, the indemnified party or parties shall have the right to choose its or their own counsel and control the defense of any action, all at the expense of the indemnifying party if, (i) the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action at the expense of the indemnifying party, or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to such indemnified party to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses of one additional counsel shall be borne by the indemnifying party; provided, however, that the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstance, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all such indemnified parties. No settlement of any action or proceeding against an indemnified party shall be made without the consent of the indemnifying party. F. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 7(A) or 7(B) is due in accordance with its terms but is for any reason held by a court to be unavailable on grounds of policy or otherwise, the Company and the Placement Agent shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with the investigation or defense of same) which the other may incur in such proportion so that the Placement Agent shall be responsible for such percent of the aggregate of such losses, claims, damages and liabilities as shall equal the percentage of the gross proceeds paid to the Placement Agent and the Company shall be responsible for the balance; provided, however, that no person guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the 1933 Act shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7(F), any person controlling, controlled by or under common control with the Placement Agent, or any partner, director, officer, employee, representative or any agent of any thereof, shall have the same rights to contribution as the Placement Agent and each person controlling, controlled by or under common control with the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and each officer of the Company and each director of the Company shall have the same rights to contribution as the Company. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against the other party under this Section 7(D), notify such party from whom contribution may be sought, but the omission to so notify such party shall not relieve the party from whom contribution may be sought from any obligation they may have hereunder or otherwise if the party from whom contribution may be sought is not materially prejudiced thereby. The indemnity and contribution agreements contained in this Section 7 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified person or any termination of this Agreement. 11 8. Payment of Expenses. ------------------- The Company hereby agrees to bear all of the expenses in connection with the Offering, including, but not limited to the following: filing fees, printing and duplicating costs, advertisements, postage and mailing expenses with respect to the transmission of Offering Materials, registrar and transfer agent fees, escrow agent fees and expenses, fees of the Company's counsel and accountants, issue and transfer taxes, if any. 9. Conditions of Closing --------------------- The Closing shall be held at the offices of the Investor or its counsel. The obligations of the Placement Agent hereunder shall be subject to the continuing accuracy of the representations and warranties of the Company herein as of the date hereof and as of the Date of Closing (the "Closing Date") with respect to the Company as if it had been made on and as of such Closing Date; the accuracy on and as of the Closing Date of the statements of the officers of the Company made pursuant to the provisions hereof; and the performance by the Company on and as of the Closing Date of its covenants and obligations hereunder and to the following further conditions: A. Upon the effectiveness of a registration statement covering the Equity Line of Credit Agreement, the Placement Agent shall receive the opinion of Counsel to the Company, dated as of the date thereof, which opinion shall be in form and substance reasonably satisfactory to the Investor, their counsel and the Placement Agent. B. At or prior to the Closing, the Placement Agent shall have been furnished such documents, certificates and opinions as it may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Agreement and the Offering Materials, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained. C. At and prior to the Closing, (i) there shall have been no material adverse change nor development involving a prospective change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Offering Materials; (ii) there shall have been no transaction, not in the ordinary course of business except the transactions pursuant to the Securities Purchase Agreement entered into by the Company which has not been disclosed in the Offering Materials or to the Placement Agent in writing; (iii) except as set forth in the Offering Materials, the Company shall not be in default under any provision of any instrument relating to any outstanding indebtedness for which a waiver or extension has not been otherwise received; (iv) except as set forth in the Offering Materials, the Company shall not have issued any securities (other than those to be issued as provided in the Offering Materials) or declared or paid any dividend or made any distribution of its capital stock of any class and there shall not have been any change in the indebtedness (long or short term) or liabilities or obligations of the Company (contingent or otherwise) and trade payable debt; (v) no material amount of the assets of the Company shall have been pledged or mortgaged, except as indicated in the Offering Materials; and (v) no action, suit or proceeding, at law or in equity, against the Company or affecting any of its properties or businesses shall be pending or threatened 12 before or by any court or federal or state commission, board or other administrative agency, domestic or foreign, wherein an unfavorable decision, ruling or finding could materially adversely affect the businesses, prospects or financial condition or income of the Company, except as set forth in the Offering Materials. D. At Closing, the Placement Agent shall receive a certificate of the Company signed by an executive officer and chief financial officer, dated as of the applicable Closing, to the effect that the conditions set forth in subparagraph (C) above have been satisfied and that, as of the applicable closing, the representations and warranties of the Company set forth herein are true and correct. 10. Termination. ----------- This Agreement shall be co-terminus with, and terminate upon the same terms and conditions as those set forth in, the Equity Line of Credit Agreement. The rights of the Investor and the obligations of the Company under the Registration Rights Agreement, and the rights of the Placement Agent and the obligations of the Company shall survive the termination of this Agreement unabridged. 11. Miscellaneous. ------------- A. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all which shall be deemed to be one and the same instrument. B. Any notice required or permitted to be given hereunder shall be given in writing and shall be deemed effective when deposited in the United States mail, postage prepaid, or when received if personally delivered or faxed (upon confirmation of receipt received by the sending party), addressed as follows: 13 If to Placement Agent, to: Westrock Advisors, Inc. 230 Park Avenue, Floor 9 New York, New York 10169 If to the Company, to: Ivoice, Inc. Attention: Jerome R. Mahoney, CEO 750 Highway 34 Matawan, NJ 07747 Telephone: (732) 441-7700 Facsimile: (732) 441-9895 With a copy to: Kirkpatrick & Lockhart, LLP Miami Center - 20th Floor 201 South Biscayne Boulevard Miami, FL 33131-2399 Attention: Clayton E. Parker, Esq. Telephone: (305) 539-3306 Facsimile: (305) 358-7095 If to the Investor: Cornell Capital Partners, LP 101 Hudson Street - Suite 3606 Jersey City, NJ 07302 Attention: Mark A. Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 With Copies to: Butler Gonzalez LLP 1000 Stuyvesant Avenue _ Suite No.: 6 Union, NJ 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973 or to such other address of which written notice is given to the others. C. This Agreement shall be governed by and construed in all respects under the laws of the State of New York, without reference to its conflict of laws rules or principles. Any suit, action, proceeding or litigation arising out of or relating to this Agreement shall be brought and prosecuted in such federal or state court or courts located within the State of New York as provided by law. The parties hereby irrevocably and unconditionally consent to the jurisdiction of each such court or courts located within the State of New York and to service of process by registered or certified mail, return receipt requested, or by any other manner provided by applicable law, and hereby irrevocably and unconditionally waive any right to claim that any suit, action, proceeding or litigation so commenced has been commenced in an inconvenient forum. 14 D. This Agreement and the other agreements referenced herein contain the entire understanding between the parties hereto and may not be modified or amended except by a writing duly signed by the party against whom enforcement of the modification or amendment is sought. E. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMPANY: IVOICE, INC. By: /s/ Jerome R. Mahoney --------------------------------- Name: Jerome R. Mahoney Title: President and CEO PLACEMENT AGENT: WESTROCK ADVISORS, INC. By: /s/ --------------------------------- Name: Title: INVESTOR: CORNELL CAPITAL PARTNERS, LP By: Yorkville Advisors, LLC Its: General Partner By: /s/ Mark A. Angelo --------------------------------- Name: Mark A. Angelo Title: Portfolio Manager 16 EX-23 8 exhibit23-1.txt (EXHIBIT 23.1) EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form SB-2 dated February 11, 2003, of our report dated February 11, 2002, relating to the financial statements of iVoice, Inc. as of December 31, 2001 and 2000 and the reference to our firm as experts in the Registration Statement. /s/ Mendlowitz Weitsen, LLP ------------------------------- Mendlowitz Weitsen, LLP East Brunswick, New Jersey February 11, 2003 -----END PRIVACY-ENHANCED MESSAGE-----