-----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, ObqFoQ9fFMZlOwGxEvV0hqVDJm2iwVOO4j4ywrITMp7E8wt+cWcr2eLSPdRLopSd jOZ/Sj9RC8Q5LS7s7BYlpQ== 0000922423-01-501175.txt : 20020413 0000922423-01-501175.hdr.sgml : 20020413 ACCESSION NUMBER: 0000922423-01-501175 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20011221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IVOICE COM INC /DE CENTRAL INDEX KEY: 0001105064 STANDARD INDUSTRIAL CLASSIFICATION: [9995] IRS NUMBER: 521750786 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-75740 FILM NUMBER: 1821143 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 kl12003_sb-2.txt FORM SB-2 REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on December 21, 2001 Registration No. 333-_____ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- IVOICE, INC. (Exact name of registrant as specified in its charter) Delaware 7373 52-1750786 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification No.) incorporation or Classification Code organization) Number) 750 Highway 34 Matawan, New Jersey 07747 (732) 441-7700 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------- JEROME R. MAHONEY 750 Highway 34 Matawan, New Jersey 07747 (732) 441-7700 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------------- COPIES TO: SCOTT S. ROSENBLUM, ESQ. LAWRENCE A. MUENZ, ESQ. Kramer Levin Naftalis & Frankel LLP Meritz & Muenz LLP 919 Third Avenue Three Hughes Place New York, New York 10022 Dix Hills, New York 11746 (212) 715-9100 (631) 242-7384 Approximate date of commencement of proposed sale to the public: At such time or times as may be determined by the selling stockholders after this registration statement becomes effective. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] 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, as amended (the "Securities Act"), 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 the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] 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 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- Proposed Maximum Proposed Number of Shares Offering Maximum Amount of Title of Shares to be Price Aggregate Registration to be Registered Registered Per Share (1) Offering Price Fee - -------------------------------------------------------------------------------- Class A common 50,000,000 (2) $0.075 $3,750,000 $896.25 stock, par value $.01 per share - -------------------------------------------------------------------------------- (1) Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based on the average of the high and low sales prices for our Class A common stock reported on the Over-the-Counter Bulletin Board on December 11, 2001. (2) Represents the shares of our Class A common stock that (a) in good faith, we anticipate we will be required to issue to Beacon Capital, LLC, upon conversion of $300,000 of our 8% convertible debentures issued to Beacon Capital, LLC; and (b) are issuable upon exercise of a five-year signing warrants issued to Beacon Capital, LLC as a commitment fee for purchasing an aggregate of $300,000 of our 8% convertible debentures. PROSPECTUS 50,000,000 SHARES COMMON STOCK iVOICE, INC. Beacon Capital, LLC, the selling stockholder, may offer to sell up to 35,250,00 shares of our Class A common stock. Our Class A common stock is traded on the NASD Over-the-Counter Bulletin Board under the symbol "IVOC." Investing in our common stock involves certain risks. See "Risk Factors" beginning on page 2. Neither the Securities and Exchange Commission nor any state securities commission has 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 information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. The date of this prospectus is ______________, 2002. TABLE OF CONTENTS Prospectus Summary...........................................................2 Risk Factors.................................................................2 Use of Proceeds..............................................................8 Market for Common Equity.....................................................8 Management's Discussion and Analysis or Plan of Operation....................9 Description of Business.....................................................13 Management and Executive Compensation.......................................18 Security Ownership of Certain Beneficial Owners.............................18 Certain Relationship and Related Transactions...............................19 Description of Property.....................................................19 Description of Securities...................................................20 Transaction with Selling Stockholders.......................................22 Selling Stockholder.........................................................24 Plan of Distribution........................................................25 Legal Proceedings...........................................................26 Experts and Counsel.........................................................27 Disclosure of Commission Position on Indemnification for Securities Act Liabilities.................................................................27 Where You Can Find More Information.........................................27 Index to Financial Statements...............................................28 PROSPECTUS SUMMARY This summary highlights the information we present more fully in the rest of this prospectus. We encourage you to read the entire prospectus carefully. iVoice, Inc. We are a communication company primarily engaged in developing, manufacturing, and marketing voice recognition and computer technology communication systems for businesses and corporate departments with between two and 20,000 telephones. This technology allows businesses to communicate more effectively by integrating their traditional office telephone systems with voicemail, automated attendant, and interactive voice response functions. These products allow information in PC databases to be accessed from a standard touch-tone telephone. Our offices are located at 750 Highway 34, Matawan, New Jersey 07747, and our telephone number is (732) 441-7700. The Offering In accordance with our obligations under the subscription agreement we entered into with Beacon Capital, LLC for the purchase of our 8% convertible debentures, we are registering the following 50,000,000 shares of our Class A common stock for resale by Beacon Capital. Class A common stock Up to 49,500,000 shares of our Class A common stock offered by Beacon that in good faith, we anticipate we will be required Capital,LLC to issue upon conversion by Beacon Capital of an aggregate of $300,000 of our 8% convertible debentures issued to Beacon Capital. Up to 500,000 shares of our Class A common stock that in good faith, we anticipate we will be required to issue upon exercise of a warrant issued to Beacon Capital as a commitment fee for the purchase of $300,000 of our 8% convertible debentures. Use of Proceeds We will not receive any of the proceeds from the sale by Beacon Capital of shares of our Class A common stock. However, upon exercise of the warrants issued to Beacon Capital, we will receive cash in consideration for issuing our Class A common stock. We intend to use these proceeds to repay short-term debt and for working capital and general corporate purposes. RISK FACTORS Investing in our Class A common stock involves a high degree of risk, and you should be able to bear losing your entire investment. You should consider carefully the following risks, in addition to the other information contained in this prospectus. Our Financial Condition and Need for Additional Funding We may need additional financing sooner than anticipated. Based on our potential rate of cash operating expenditures and our current plans, the proceeds of the 8% convertible debentures being issued under the subscription agreements and underlying certain of the shares of our Class A common stock included in this offering may constitute our principal source of financing for the foreseeable future. 2 We have a history of losses, expect to encounter future losses and may not achieve or sustain profitability. To date, we have incurred significant losses. As of September 30, 2001, our accumulated deficit was $11,526,341. For the year ending December 31, 2000, we incurred a net loss of $2,891,379, and for the previous fiscal year ending December 31, 1999, we incurred a net loss of $6,054,364. We will incur operating losses in the future until sales of our voice-recognition systems exceed our administrative, selling, and research-and-development costs. This may never happen. Our accountants have expressed substantial doubt about our ability to continue as an operating concern. In connection with the reports on our consolidated financial statements for the fiscal years ending December 31, 2000 and 1999, our independent certified public accountants expressed substantial doubt about our ability to continue operating as a going concern. Their doubt was based on our low levels of cash, our negative working capital, and our failure to establish a source of revenues sufficient to cover our operating costs. We may receive a similar opinion in connection with the next audit of our financial statements. Our Operations We have a limited operating history. We did not begin our voice-recognition business until December 1997. Accordingly, we have a limited operating history on which to base your evaluation of our business and prospects. 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; 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. We cannot accurately forecast our future revenues and operating results, which may fluctuate. Our short operating history and the rapidly changing nature of the markets in which we compete make it difficult to accurately forecast our revenues and operating results. Furthermore, we expect our revenues and operating results to fluctuate in the future due to a number of factors, including the following: o the timing of sales of our products and services, particularly given that we depend on a relatively small number of large orders; o the timing of product implementation, particularly large design projects; o unexpected delays in introducing new products and services; 3 o increased expenses, whether related to sales and marketing, product development, or administration; o deferral in the recognition of revenue in accordance with applicable accounting principles, due to the time required to complete projects; o the mix of product license and services revenue; and o costs related to possible acquisitions of technology or businesses. We may fail to develop new products, or may incur unexpected expenses or delays. Although we currently have fully developed products available for sale, we are also developing various products and technologies and will rely on them to remain competitive. Due to the risks inherent in developing new products and technologies--limited financing, competition, obsolescence, loss of key personnel, and other factors--we may fail to develop these technologies and products, or may experience lengthy and costly delays in doing so. Although we may be able to license some of our technologies in their current stage of development, we cannot assure that we will be able to do so. Our technologies and products could contain 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. 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. We face significant competition. The call-processing and voice-recognition industries are 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. 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. We may be unable to protect our trademarks and proprietary rights. To succeed, we will need to protect our intellectual property rights. In August 2000, we filed three patent applications, and in January 2001 we filed another patent application. In September 2000 we filed two trademark applications. Each of the foregoing applications may not 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 management's time and attention away from our business. 4 We may unintentionally infringe on the proprietary rights of others. Many lawsuits currently are being brought in the software industry alleging violation of intellectual property rights. In addition, a large number of patents have been awarded in the voice-recognition area. Although we do not believe that we are infringing on any patent rights, patent holders may claim that we are doing so. Any such claim would likely be time-consuming and expensive to defend, particularly if we are unsuccessful, and could prevent us from selling our products or services. In addition, we may also be forced to enter into costly and burdensome royalty and licensing agreements. We may be unable to obtain component products from our vendors. We purchase major components of our products from outside suppliers. At any given time we may find ourselves unable to obtain those components, which could prevent us from meeting customer demand. We may be unable to attract and retain qualified employees, and we depend upon key employees. Our future success depends on our finding, hiring, training, motivating, and retaining highly qualified technical, managerial, and other personnel, but we may not be able to meet our needs in this regard, given the considerable competition for qualified employees. If we lose the services of any of our executive officers or other key employees, our business could suffer. We may be unable to manage our significant growth. We intend to continue to expand our business operations significantly. Such growth would require us to expand our management, operational, financial, and human resources systems and could strain the capacity of our current management team. Our Securities We do not expect to pay dividends in the foreseeable future. We intend to retain any future earnings to finance the growth and development of our business. Therefore, we do not expect to pay any cash dividends in the foreseeable future. Any future dividends will depend on our earnings, if any, and our financial requirements. Our stock price is volatile. The market price of our common stock has been and is likely to continue to be volatile and could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, changes in financial estimates by securities analysts, overall equity market conditions, or other events or factors. Because our stock is more volatile than the market as a whole, our stock is likely to be disproportionately harmed by factors that significantly harm the market, such as economic turmoil or political uncertainty, even if those factors do not relate to our business. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. If securities class action litigation is brought against us, such litigation could result in substantial costs and would divert management's attention and resources. Trading in our common stock may be limited. Our common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board is not, however, an exchange, and trading in securities on the OTC Bulletin Board is often more sporadic than trading in securities listed on an exchange or NASDAQ. Consequently, you may have difficulty reselling any shares of our Class A common stock that you purchase from the selling stockholders. 5 Because "penny stock" rules apply to trading in our Class A common stock, you may find it difficult to sell the shares you purchase in this offering. Our Class A common stock is a "penny stock," as it is not listed on an exchange and trades at less than $5.00 a share. Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the Securities and Exchange Commission, or the "SEC." This document provides information about penny stocks and the nature and level of risks involved in investing in the penny-stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser, and obtain the purchaser's written agreement to the purchase. Consequently, the penny stock rules may make it difficult for you to sell your shares of our Class A common stock. One of our officers and directors controls a significant percentage of our Class A common stock. As of September 30, 2001, Jerome R. Mahoney, our President and Chief Executive Officer, owned approximately 41.6% of our outstanding Class A common stock on a fully-diluted basis. Mr. Mahoney is able to influence all matters requiring stockholder approval, including 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. Future sales of our Class A common stock could cause our stock price to decline. The sale of a large number of our shares, or the perception that such a sale may occur, could lower our stock price. Such sales could make it more difficult for us to sell equity securities in the future at a time and price that we consider appropriate. As of September 30, 2001, 58,739,542 shares of our Class A common stock could be considered "restricted securities" and saleable only upon registration under the Securities Act of 1933, upon compliance with Rule 144 of the Securities Act, or pursuant to another exemption from registration. Many of these shares will be eligible for sale in the public market in 2001. Issuance of our reserved shares of Class A common stock may significantly dilute the equity interest of existing stockholders. We have reserved for issuance shares of our Class A common stock upon exercise or conversion of stock options, warrants, or other convertible securities that are currently outstanding. Issuance of these shares will have the effect of diluting the equity interest of our existing stockholders and could have an adverse effect on the market price for our Class A common stock. Including the shares of our Class A common stock reserved for issuance under this registration statement, of which this prospectus forms a part, and the registration statement on Form SB-2 that we filed on September 7, 2001, and subsequently amended on December 7, 2001, as of December 20, 2001, we had approximately 280,000,000 shares of Class A common stock reserved for possible future issuance. Under our subscription agreements, the number of shares of Class A common stock issued to the holders of our 8% convertible debentures upon conversion is based on a formula tied to the market price of our Class A common stock prior to: o conversion of $275,000 in convertible debentures plus interest at 8% issued to certain purchasers under the subscription agreement with those purchasers; and o conversion of $300,000 in convertible debentures plus interest at 8% issued to Beacon Capital, LLC under the subscription agreement with Beacon Capital, LLC. 6 The lower the average trading price of our common stock at the time of a conversion, the greater the number of shares of our Class A common stock that will be issued. Accordingly, this causes a greater risk of dilution. The perceived risk of dilution may cause the purchasers of our debentures, as well as other stockholders, to sell their shares, which could have a depressive effect on the price of our Class A common stock. We issued warrants under a previous financing agreement that may significantly dilute your ownership interest. On August 17, 2000, we entered into an equity-line investment agreement with Swartz Private Equity, LLC. As part of that agreement, we were required to issue warrants to purchase our Class A common stock to Swartz at certain prices that reset every six months. As a result of that equity-line investment agreement, we issued warrants to purchase a total of 5,894,510 shares of our Class A common shares at a current average strike price of $0.139. Notwithstanding the termination of the financing agreement with Swartz, these warrants will remain outstanding and will expire five years from the date of issue. We issued 12% senior convertible debentures on terms that may significantly dilute your ownership interest. During the fourth quarter of 1999 and the first quarter of 2000, we issued an aggregate principal amount of $500,000 of 12% senior convertible debentures. These debentures are convertible into shares of our Class A common stock at any time, in whole or in part, at the election of the holder, at a conversion price equal to 50% of the average of the bid price during the 20 trading days immediately preceding a conversion date, which period may be extended upon the occurrence of certain events. As of September 30, 2001 the debenture holders have converted $305,00 of the principal amount of the debenture and $6,559 of interest into 2,996,738 shares of our Class A common stock. At September 30, 2001, the remaining outstanding principal balance and unpaid interest amounted to $194,800 and $76,670 respectively. As a result, the lower the stock price at the time the remaining holders convert, the more shares of our Class A common stock the holders will receive upon conversion. If the holders of the debenture were to fully convert the 12% senior convertible debentures plus unpaid interest into Class A common stock on September 30, 2001, approximately 9,265,187 additional shares of Class A common stock would be issued. 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: (1) a 20% increase in the principal amount of the debentures; (2) 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 (3) 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 our 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 attempting to resolve the default issues in a mutually favorable manner. 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. 7 USE OF PROCEEDS We will not receive any of the proceeds from the sale by Beacon Capital of the shares of Class A common stock offered under this prospectus. We will, however receive funds under the agreement as follows: o $150,000 from the issuance and sale of 8% convertible debentures to certain purchasers pursuant to a subscription agreement with Beacon Capital; and o any additional amounts we may receive if the warrants we issued to purchase shares of our Class A common stock are exercised. We intend to use the net proceeds received in accordance with the foregoing in the following order of priority: Expenses of financing (registration, $ 49,000 issuance, and distribution) Sales and marketing $150,000 Research and development $ 70,000 Working capital and general corporate purposes (includes salaries not included above, cost of additional personnel, support and management systems, legal and professional costs, occupancy costs and capital costs for computers and related equipment) $ 31,000 -------- Total proceeds $300,000 ======== The amount and timing of actual expenditures will depend on numerous factors, including; o market acceptance of our call-processing and voice-recognition products and services; o the amount of cash generated by our operations; and o products and services introduced by our competitors. We may also use a portion of the net proceeds to acquire or invest in businesses or technologies that are complimentary to our business. Market For Common Equity The following table shows the high and low closing prices for the periods indicated. High Low 1999 ---- --- First Quarter (1) -- -- Second Quarter (1) $0.6875 $0.3200 Third Quarter $0.3300 $0.1250 Fourth Quarter $0.3400 $0.1250 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 8 2001 First Quarter $0.4000 $0.0950 Second Quarter $0.1700 $0.0500 Third Quarter $0.0820 $0.0430 (1) Trading prices are only available for the period commencing May 28, 1999. Our Class A common stock is quoted on the OTC Bulletin Board under the symbol "IVOC." As of September 30, 2001, there were 416 record holders of our Class A common stock. All of the issued and outstanding shares of our Class A common stock were issued in accordance with an exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended. 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. This discussion and analysis of our financial condition and results of operations includes "forward-looking" statements that reflect our current views with respect to future events and financial performance. We use words such as we "expect," "anticipate," "believe," and "intend" and similar expressions to identify forward-looking statements. You should be aware that actual results may differ materially from our expressed expectations because of risks and uncertainties inherent in future events, particularly those risks identified in the "Risk Factors" section of this prospectus, and you should not rely unduly on these forward looking statements. We will not necessarily update the information in this discussion if any forward-looking statement later turns out to be inaccurate. This discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements included in the prospectus. Recent Developments On July 18, 2001, our stockholders voted to amend our certificate of incorporation to effect the following changes: o to change our name to iVoice, Inc.; o to increase the authorized number of shares of our Class A common stock to a total of 600,000,000 shares; o to increase in the authorized number of shares Class B common stock to a total of 3,000,000 shares; o to change the par value of the Class A common stock from $.01 to $.001 per share; and o to authorize us to issue up to 1,000,000 shares of preferred stock with a par value of $1.00 per share. On August 24, 2001, we filed a certificate of amendment to our certificate of incorporation with the Secretary of State of the State of Delaware to effect the changes voted upon by our stockholders on July 18, 2001. On July 18, 2001, we entered into a subscription agreement with Meridian Equities International, Inc. pursuant to which we agreed to sell, and Meridian agreed to purchase, up to a maximum of $150,000 of our 8% convertible debentures. In addition, we agreed to issue to Meridian upon funding a warrant to purchase 250,000 shares of our Class A common stock. In accordance with the terms of the subscription agreement, and as a condition to funding by Meridian, we filed a registration statement to register for resale, among other shares, the shares of Class A common stock into which the debentures were convertible and the shares of Class A common stock into which the warrant was exercisable. 9 On September 20, 2001, the Securities and Exchange Commission declared the registration statement effective and we consequently requested that Meridian purchase the entire $150,000 of the convertible debentures. Meridian failed to comply with our request, stating that we had failed to meet all of the specified conditions to funding. We were unable to reach agreement on this issue with Meridian and so we agreed to terminate the subscription agreement. On December 7, 2001, we filed a post-effective amendment to our registration statement on Form SB-2, file no. 333-65814, to deregister 35,250,000 shares of our Class A common stock that would have been issued to Meridian upon conversion of the debentures and upon exercise of the warrant. On November 20, 2001, we entered into a subscription agreement with Beacon Capital, LLC in which we agreed to sell to Beacon Capital, and Beacon Capital agreed to purchase, $150,000 of our 8% convertible debentures on terms substantially identical to those we offered to Meridian. In addition, on December 17, 2001, we agreed to sell to Beacon Capital, and Beacon Capital agreed to purchase, an additional $150,000 of our 8% convertible debentures on terms identical to the terms of our initial sale to Beacon Capital of $150,000 of our 8% convertible debentures. As one of the con ditions to funding, we are required to register for resale the shares of Class A common stock into which the debentures are convertible and into which the warrants may be exercised. In addition, on July 18, 2001, we entered into a subscription with certain purchasers pursuant to which we agreed to sell and they agreed to purchase, up to a maximum of $150,000 of our 8% convertible debentures. The convertible debentures are set to mature on the fifth anniversary of the date of issuance and are convertible into Class A common stock at the lesser of (i) 140% of the closing bid price for the Class A common stock on the date we receive the funds and (ii) 80% of the Market Price (defined as the average of the three lowest closing bid prices for the Class A common stock). Through November 30, 2001, holders of our 8% convertible debentures converted $177,100 in principal and $2,086 in interest into 4,456,073 shares of our Class A common stock. September 30, 2001 Compared to September 30, 2000 We derive our revenues primarily from 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 30,2001, were $87,043 and $303,948, respectively, as compared to $175,343 and $677,062 for the three and nine-months ended September 30, 2000, a decrease of $88,300, or 50.4%, and $373,114, or 55.1%, respectively. This decrease in sales for these three- and nine-month periods is largely attributable to weak economic conditions resulting in weak demand for our products, as well as our lack of sufficient capital resources to effectively develop a successful sales campaign. We will continue to market and promote our products to telephony reseller networks in order to leverage those resellers' existing customer bases. On October 30, 2001, we announced that we had joined the 3Com(R) NBX Solution Providers Program. This will give us direct access to the fast-growing networked-telephony market. As we have demonstrated to 3Com that our Speech Enabled Auto Attendant is fully integratable with the NBX platform, 3Com has designated as a 3Com NBX Solution Provider and 3Com and iVoice will jointly market our speech-enabled applications to 3Com NBX authorized resellers. We also sell directly to end users in locations where an existing telephone equipment dealer relationship does not exist. On direct sales orders, we are able to achieve greater profit margins through higher direct selling prices. Furthermore, at the end of the quarter ending September 30, 2001, we had totaling $65,000 received follow-up orders for additional product installations at existing customer locations totaling. Of this amount, only $12,504 is recorded in sales as earned revenue in the current quarterly period. The remaining $52,496 has been recorded as deferred revenue and we anticipate that we will fully recognize these contracts in the fourth quarter of 2001. We believe that the terrorist attacks of September 11, 2001 delayed our receipt and completion of these orders. Unless special arrangements are made, we receive 50% of the contract as a down payment on any product purchased, with the balance due when we finish installing the product. We accept company checks or Visa/Mastercard. We recognize our revenue using the percentage-of-completion method. We estimate installation costs for any given contract by estimating the hardware costs and how long it will take to configure and install the system. We then recognize revenues in proportion to the costs incurred as of the reporting date over the total estimated costs. 10 Gross profit for the three- and nine-months ended September 30, 2001 was $55,882 and $173,669, or 64.2% and 57,1%, respectively, as compared to $104,680 and $444,597, or 59.7% and 65.7%, for the three- and nine-months ended September 30,2000. Gross profit depends, 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 our technology personnel to efficiently configure and install our communications products. Our gross profit dollar amount 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. Out total operating expenses decreased, from $686,123 for the three-months ended September 30, 2000, to $511,588 for the three-months ended September 30, 2001, a decrease of $174,535. In recent months, we have reduced our working capital requirements to preserve our cash resources. Pursuant to this policy, cash operating expenses for the three-month comparative period reflect a reduction in payroll and related benefits of $149,924, a reduction in travel costs of $10,033 and a reduction in telephone costs of $5,904. Offsetting these reductions was an increase in consulting expenses of $105,691 for services provided by EMCO/Hanover Group, Inc. paid for with Class A common stock. Although the nine-month period ending September 30, 2001 reflects an increase in operating expenses of $220,683 compared to the same nine-month period of 2000, the increase is a result of higher payroll costs incurred in the first quarter of 2001 compared to the prior year. In order to preserve our cash, as of September 30, 2001, we had reduced our staff to 10 full-time employees and 3 part-time employees for a total of 13 individuals. The loss from operations for the three- and nine-months ended September 30, 2001 was $455,706 and $2,082,609, compared to $581,443 and $1,590,998 for the three- and nine-months ended September 30, 2000, a decrease of $125,737 in the three-month comparative period and an increase of $491,611 for the nine-month comparative period. We incurred interest expense of $36,782 and $107,591 for the three- and nine-month period ending September 30, 2001 as compared to $170,767 and $491,986 for the three- and nine-month period ending September 30, 2000, respectively. This decrease of $133,985 and $384,395 for the three- and nine-month comparative periods reflects a lower outstanding principal balance of our 12% debentures in 2001 as well as the absence in the quarter ending September 30, 2001, of the amortized debt discount recorded in the quarter ending September 30, 2000. 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 our 12% convertible debentures. Net loss for the three- and nine-month period ending September 30, 2001 was $492,488 and $2,542,906 as compared to $752,210 and $2,082,984 for the three- and nine-months of 2000. The respective changes in net loss for the comparative periods were a result of the factors discussed above. December 31, 2000 Compared to December 31, 1999 Sales for the year ended December 31, 2000 were $723,046, a decrease of $53,727, or 6.9%, over the prior year's sales of $776,773. The decrease was a result of $128,150 in unrecognized revenues on the installation of an Integrated Voice Response system at a single customers location, which was expected to be completed in the current year but remains deferred due to the customer's refusal to accept the balance of their installation contract. Currently, we have focused our efforts on developing distribution relationships with telephony dealers and OEM manufacturers with intentions of promoting and reselling our products. We feel confident that the evaluation and acceptance of iVoice products by these telephony dealers will enable us to leverage existing telephony distribution channels and produce desired revenue results in the near future. 11 Our gross profit for the year ended December 31, 2000, decreased to $420,151 from $496,456 in 1999, a decrease of $76,305, or 15.4%. Our gross margin percentage for the twelve-months ended December 31, 2000 was 58.1% versus 63.9% for the prior year. This represents a 9% decrease over the gross profit percentage recorded for the same prior year period. This decrease is a result of constant labor costs allocated to cost of goods sold relative to lower revenues in the current year. Operating expenses decreased from $6,514,361 for the year ended December 31, 1999 to $2,678,310 for the year ended December 31, 2000, a decrease of $3,836,051, or 58.9%. The prior year included non-recurring expenses totaling $5,028,000, which consisted of a $4,800,000 legal settlement charge and $228,000 in merger costs which were not incurred in the current year. Excluding the non-recurring expenses of the prior year, operating expenses reflects an increase of $1,191,949, or 80.2%, versus the same period of the prior year. This increase was the result of $423,467 in research and development costs not incurred in 1999 and an increase in general & administrative expenses of $484,412 and an increase in selling expenses of $202,565. The predominant increase in each of these categories overall was an increase in payroll and employee benefit costs. The net loss from operations for the year ending December 31, 2000 was $2,258,159 compared to $6,017,905 for the year ended December 31, 1999. This decrease of $3,836,051 was a result of the factors discussed above. Other expense, comprised only of interest expense, increased $596,761 to $633,220 in the year ended December 31, 2000 compared to $36,459 in 1999. The year ended December 31, 2000 reflects interest and discount amortization on our 12% convertible debentures that were outstanding for most of the year 2000 and were only partially outstanding in the fourth quarter of the prior year. Liquidity and Capital Resources We have incurred substantial losses, we have accumulated a deficit, and we require additional financing. As of September 30, 2001 we had negative working capital of $1,993,742 and a cash balance of $13,177. This raises substantial doubt about our ability to continue as a going concern. We anticipate that we will require additional financing on an ongoing basis for the foreseeable future. We have funded our operations principally from (1) loans from our principal stockholder; (2) proceeds of the sale of convertible debentures; (3) proceeds from the exercise of warrants; and (4) sales of our products. To date, we have had difficulty in raising sufficient cash to effectively implement our business plan, and we are unsure whether we can secure sufficient financing to meet our current operating requirements. In November 2001, we entered into a subscription agreement with Beacon Capital, LLC, in which we agreed to issue to Beacon Capital, and Beacon Capital agreed to purchase $150,000 of our 8% convertible debentures and a warrant to purchase 250,000 shares of our Class A common stock. In addition, on December 17, 2001, we agreed to issue to Beacon Capital, and Beacon Capital agreed to purchase an additional $150,000 of our 8% convertible debentures and a warrant to purchase an additional 250,000 of our Class A common stock, The proceeds of the 8% convertible debentures purchased by Beacon Capital will provide only short-term working capital requirements and we will need additional financing. We are unsure whether we will be able to secure sufficient financing to meet out current operating requirements. We are searching for potential merger candidates with compatible technology and products, which Management feels may make financing more appealing to potential investors, although we have not entered into any agreements or letters of intent to, bind us. 12 Description of Business Background Our current corporate configuration is the result of a number of separate transactions over the past three 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 this 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; the stockholders of Visual Telephone, the public shell company, became 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 are to receive 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. 13 On April 24, 2000, we entered into an agreement and plan of reorganization with all the stockholders 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 of 50,000 shares of our voting Class A common stock paid to Corporate Architect, Inc. The fee was negotiated between us and ThirdCAI. 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," only reporting companies may continue to have stock quoted on the OTC Bulletin Board. Our Business We design, manufacture, and market voice and computer communications systems for businesses and corporate departments. Among our products are interactive voice response products that allow information in PC databases to be accessed from a standard touch-tone telephone using a telephone keypad or voice commands. We sell our products directly to end-users, through dealer and reseller channels, as well as through original equipment manufacture, or "OEM," agreements with telecommunication and networking companies. Our principal offices and facilities are located at 750 Highway 34, Matawan, NJ 07747, and our telephone number is (732) 441-7000. Our common stock is quoted on the OTC Bulleting Board under the trading symbol "IVOC." Products and Services Our software products enable our customers to communicate more effectively by integrating speech recognition into their traditional office telephone systems, voice mail, automated attendant, and interactive voice response, or "IVR," functions. We provide IVR products that allow information in PC databases to be accessed from a standard touch-tone telephone using speech or the telephone keypad. Our products are designed to be "people oriented," with features that can be readily used without special training or manuals. Our principal products, Unified Messaging, iVoice Voice Mail and iVoice IVR, incorporate this philosophy. We also design, market, and support voice recognition products. We sell our products directly to end-users via our direct sales force and through dealer and reseller channels, as well as through agreements with original-equipment manufacturers, or "OEMs," who incorporate our products into a final assembled product or system. Our products use standard open-architecture PC platforms and Microsoft Windows NT Server and Workstation operating systems, thereby facilitating the rapid adoption of new PC-based technologies while reducing overall product costs. Due to market demands, the platform will be changing to Windows NT. 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. Furthermore, we use standard PC-related hardware components in our products, in part to limit our need to manufacture components. Our manufacturing operations consist of final assembly and quality-control testing of materials, subassemblies, and systems. We obtain from suppliers components such as PCs, circuit boards, application cards, faxboards, and voiceboards. iVoice IVR is 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 are 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 limitless other applications. The advanced, innovative technology, backed by a simple, easy-to-use drag-and-drop interface, makes writing applications simple. 14 We have updated the IVR to incorporate an Internet access tool, which can be either connected to the IVR system or run as a standalone. This 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 IRV 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. The following call-processing features can be used independently or in conjunction with the above IVR platforms: o 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. o Speech Recognition. This is the process by which the PC translates spoken words into commands. You may now speak to all of your Voice Mail or IVR applications. o Unified Messaging. This is a unified inbox application for Windows NT auto attendant/voice mail system and Windows NT IVR system. 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. o Interactive Voice Response/Web Applications. Using the Internet to access the IVR system, you access 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 can enter selections and get information by clicking on icons or choosing items from menus. o Voice Mail. This allows a caller to store voice messages and reply via the computer. This method permits 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. o 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 extremely accurate and reliable. Callers no longer need to punch in letters on a telephone keypad. We are currently focusing on upgrading and enhancing existing products, with the aim of adding to some products a full toolkit that would enable a product to be based on natural language and capable of handling spoken sentences rather than just single words. In addition to enhancing our existing products, we are currently developing the following new products: o iVoice ACD (Automatic Call Distribution) call-center applications provide advanced automatic distribution of incoming calls and other interactions for contact centers and e-businesses. In addition to telephone calls, iVoice ACD can also queue and distribute text chats, e-mails, and other Web-based interactions using the same routing procedure used for telephone calls. o iVoice Speech SDK (Software Developers Kit) is a unique tool for application developers that will convert common command and control functions to speech commands. The SDK will allow software developers to write applications that can treat the voice as an input device, just like a mouse, keyboard, or joystick. Marketing Our marketing strategy is to emphasize to our potential customers that our products are 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: 15 o 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. o Use standard, Microsoft NT-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. o Focus on businesses and corporate departments having between two and 20,000 telephones. Our products are designed for use by businesses and corporate departments with between two and 20,000 telephones in a wide range of markets, including manufacturing, retail, service, healthcare, and government. These businesses desire features offered by large, proprietary call processing systems, but at a more affordable price. This is what our products offer. o 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. which has user prompts that encourage conversation between callers and subscriber and uses simplified screens and menus for ease of installation. o Minimize distribution overhead. We are able to achieve broad market coverage in the U.S. via a direct sales force, 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. We employ two sales people, four telemarketers, and several independent sales representatives to bring our products directly to our target market. Currently we make 80% of our sales through direct sales and 20% through our dealer channel. We have historically been top-heavy in research and development personnel. Once we secure sufficient financing, however, we intend to focus on increasing our sales force and establishing more satellite locations to better serve clients. To date, our telemarketing efforts have been focused on selling discounted demonstration systems to various telephony and communication product dealers throughout the United States. In addition, we intend to expand product awareness by displaying our products at shows and conventions and in industry literature. We are, however, as yet unsure of the extent to which, and when, we will need to increase our marketing efforts in order to become profitable. Fee Structure We generally require customers to pay 50% down on any product purchased, with the balance due when installation has been completed. We accept company checks or Visa/Mastercard. Sales by Geographic Area 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. Competition The call-processing industry is highly competitive. Given added competition in the form of businesses that have recently entered this market and strengthened competition in the form of merged competitors, we believe that the competitive pressures we face will only intensify. Competition means pressure to lower prices and profit margins. 16 Currently, our principal competitors fall into two categories: o Telephone equipment and independent call-processing system manufacturers that offer their own call-processing systems or offer their systems as private labels and whose products integrate with multiple telephone systems and are based on PC-based products like ours. These competitors include Lucent Technologies, Inc., Nortel Networks Corp., and Toshiba America Information Systems, Inc., Applied Voice Technologies Inc., Microlog Corporation, and Active Voice Corporation. o Speech recognition software providers that enable enterprises and communications carriers to offer automated, speech-activated services over any telephone. These competitors include companies such as Nuance Communications, Speechworks Intl. Inc., Phillips Electronics, N.V., and Sound Advantage, LLC. Suppliers Our suppliers include Dialogic Corporation, Catalyst Telecom, Inc. and Bicom, Inc., for voiceboards, and iTox, Inc. and Ingram-Micro, Inc., for computer components. Research and Development Our research-and-development efforts focus on enhancing our existing product line and our development of new products to be integrated with our existing product line. We are concentrating on improving the technology through ease of use and increased reliability. Prior to 2000, we conducted no research and development. During the first and second quarter of 2000, we began hiring qualified technical personnel to strengthen our product line and maintain a competitive edge. We intend to increase our research-and-development program once we gain access to financing. Licenses We have a licensing agreement with Nuance Communications, Inc. to resell their natural language toolkit. Natural language software allows a system to understand spoken language rather than just simple words, and incorporating this toolkit in an iVoice IVR allows users to engage in a question-and-response dialog by telephone, which shortens the time it takes to process calls. This license includes the right to grant sublicenses to end users. We also have a worldwide, non-exclusive, irrevocable, royalty-free, fully paid license with Entropic, Inc., a Microsoft company, to incorporate their speech engine into customized software applications for our customers. Thirdly, a license with Fonix Corporation enables 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 September 30, 2001, we employed 13 individuals, consisting of 10 full-time employees and 3 part-time employees. None of our employees are represented by a labor organization and we are not a party to any collective bargaining agreements. 17 MANAGEMENT Summary Compensation Table The following table sets forth compensation information for services rendered by certain of our executive officers in all capacities during the 2000 and 1999 fiscal years. The following information includes the dollar value of base salaries, bonus awards, the number of stock options granted, and certain other compensation, if any, whether paid or deferred.
Other Securities Annual Restricted Underlying LTIP All Other Name and Position(s) Year Salary ($) Bonus Compensation Stock Options/SARPs Payouts Compensation - -------------------- ---- ---------- ----- ------------ ----- ------------- ------- ------------ Jerome R. Mahoney 2000 $226,000 -- -- -- -- -- -- Chief Executive 1999 $120,000 -- -- -- -- -- -- Officer and President Joel G. Beagelman (1) 2000 $ 44,000 -- -- -- -- -- -- Former CFO, 1999 $104,000 -- -- -- -- -- -- Secretary and Treasurer
(1) Effective May 16, 2000, Mr. Beagelman resigned as our Chief Financial Officer, Secretary, and Treasurer. Employment Contracts On May 1, 1999, we entered into a five-year employment agreement with Jerome R. Mahoney, our majority stockholder. Mr. Mahoney will serve as Chairman of the Board and Chief Executive Officer if iVoice for a term of five years. As consideration, we agreed to pay Mr. Mahoney a salary of $180,000 the first year with a 10% increase every year thereafter. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information known to us with respect to the beneficial ownership of our Class A common stock and our Class B common stock as of November 30, 2001 by (1) all persons who are beneficial owners of 5% or more of our common stock, (2) each director and nominee, (3) the executive officers named in the "Summary Compensation Table," and (4) all directors and executive officers as a group. The number of shares beneficially owned is determined under rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under those rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days of November 30, 2001, through the exercise or conversion of any stock option, convertible security, warrant or other right. Including those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares that power with that person's spouse) with respect to all shares of capital stock listed as owned by that person or entity. The shares of our Class A common stock represented here include the shares of our Class A common stock that the beneficial holders would directly possess if they converted all shares of our Class B common stock held by them into Class A common stock. 18 Name and Address of Amount and Nature Percentage of Beneficial Owner Title of Class of Beneficial Owner Class (1) ---------------- -------------- ------------------- ------------- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS Joel Beagelman Class A common stock 8,703,184 (2) 4.7% 750 Highway 34 Matawan, NJ 07747 SECURITY OWNERSHIP OF MANAGEMENT Jerome R. Mahoney Class A common stock 39,010,056 (3) 39.9% c/o iVoice, Inc. Class B common stock 354,000 (4) 100% 750 Highway 34 Matawan, New Jersey 07747 (1) Based on 151,266,598 outstanding shares of our Class A common stock and 354,000 shares of our Class B common stock, which Class B shares are convertible into 35,400,000 shares of Class A common stock. (2) Includes 300,000 shares held by Mr. Beagelman's three children and 3,184 shares held by his wife. (3) Includes 450,000 shares of our Class A common stock held by Mr. Mahoney's minor children and 354,000 shares of Class B common stock held by Mr. Mahoney that have the voting power of, and may be converted into 35,400,000 shares of Class A common stock. (4) The shares of Class B common stock held by Mr. Mahoney have the voting power of, and may be converted into 35,400,000 shares of Class A common stock. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. During the period from June 2000 to June 2001, Jerome R. Mahoney, our President and Chief Executive Officer, sold shares of our Class A common stock and has loaned proceeds of these sales to us to fund our working capital requirements. We have executed a promissory note and security agreement in favor of Mr. Mahoney. As of September 30, 2001, 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 $1,574,658. Under the terms of our loan agreements with Mr. Maloney, we may elect to prepay the principal and interest owed pursuant to the promissory note by issuing Mr. Mahoney, or his assigns, one share of our Class B common stock for each dollar owed. DESCRIPTION OF PROPERTY We do not own any real property for use in our operations or otherwise. On March 15, 2000, we entered into a lease for approximately 8,000 square feet of office space to house our corporate headquarters and research facilities. The office is located at 750 Highway 34, Matawan, New Jersey 07747. The term of the lease is for two years with a monthly rent of $11,000. On May 21, 1999, we entered into a lease for 1,500 square feet in South Hackensack, New Jersey, for one and one half years from Mejor Angora, L.L.C, at an annual rental of $19,800, subject to certain escalations. We vacated this space on December 28, 2000, and continue to pay for our share of the remaining lease through October 2001 in the amount of $1,990 per month. 19 In order to reduce our overhead expenses, we are negotiating with the landlord of our corporate headquarters to reduce our monthly rent for the balance of our lease term. DESCRIPTION OF SECURITIES Pursuant to our certificate of incorporation, as amended on August 24, 2001, we are authorized to issue 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 and 1,000,000 shares of preferred stock, par value of $1.00 per share. 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. A total of 148,808,854 shares of Class A common stock were issued and outstanding as of November 5, 2001. 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 not entitled to receive dividends. Jerome R. Mahoney is the sole owner of our Class B common stock, of which there are 3,000,000 shares authorized and 364,000 shares issued and outstanding as of August 31, 2001. A holder of Class B common stock has the right to convert each share of Class B common stock into 100 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. There are no cumulative voting rights with respect to election of directors, so holders of more than 50% of the outstanding shares of Class A common stock can elect all of the directors if they choose to do so. Preferred Stock On August 24, 2001, we filed a certificate of 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 November 27, 2001, 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; 20 o whether that series has conversion privileges, and, if so, the terms and conditions of conversion, including provisions for adjusting the conversion rate in such events as our board of directors determines; o whether or not the shares of that series are redeemable, and, if so, the terms and conditions of redemption, including the dates upon or after which they are redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; o whether that series has a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of that sinking fund; o the rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of iVoice, 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 September 30, 2001, our employees held options to purchase 2,559,000 shares of our Class A common stock. These options were granted to our employees under our 1999 Stock Option Plan. One of these options vests in increments of 33% per year and all other options vest 25% annually. All options expire five years from the date of grant. The exercise price of the options ranges between $0.06 and $3.75 per share. As of June 30, 2001, 210,740 of the options were exercisable. As of September 30, 2001, we had outstanding, to persons other than employees, warrants to purchase 6,308,260 shares of our Class A common stock. These warrants have exercise prices ranging from $0.0583 per share to $2.00 per share. These warrants will expire at various times between January 1, 2001 and May 1, 2006. Debt As of September 30, 2001, we had outstanding convertible debentures with an aggregate principal amount of $227,000 and $69,861 in interest. These debentures bear interest at 12% per year, and are convertible into shares of our Class A common stock at the option of the holder by dividing the outstanding principal and interest by the conversion price. The conversion price equals 50% of the average bid price during the 20 trading days before the conversion date. We are in default of several provisions of the agreements pursuant to which we issued the debentures, in particular the requirement that we register the shares issuable upon conversion of the debentures within 150 days of October 18, 1999 (the effective date of the debentures). Statutory Provisions Under Delaware General Corporation Law Section 203 of the Delaware General Corporation Law provides, in general, that a stockholder acquiring more than 15% of the outstanding voting shares of a publicly-held Delaware corporation subject to the statute (an "interested stockholder") may not engage in certain "business combinations" with the corporation for a period of three years, subsequent to the date on which the stockholder became an interested stockholder unless (i) prior to such date the corporation's board of directors approved either the business combination or the transaction in which the stockholder became an interested stockholder, or (ii) upon consummation of the business combination, the interested stockholder owns 85% or more of the outstanding voting stock of the corporation (excluding shares owned by directors who are also officers of the corporation or shares held by employee stock option plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer), or (iii) the business combination is approved by the corporation's board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the 21 affirmative vote of at least two-thirds of the outstanding voting stock of the corporation not owned by the interested stockholder. Section 203 defines the term "business combination" to encompass a wide variety of transactions with or caused by an interested stockholder in which the interested stockholder receives or could receive a benefit on other than a pro rata basis with other stockholders, including mergers, certain asset sales, certain issuances of additional shares to the interested stockholder or transactions in which the interested stockholder receives certain other benefits. These provisions could have the effect of delaying, deferring or preventing a change of control. Our stockholders, by adopting an amendment to our certificate of incorporation or bylaws, may elect not to be governed by Section 203, effective twelve months after adoption. Neither our certificate of incorporation nor our bylaws currently exclude us from the restrictions imposed by Section 203. The Delaware General Corporation Law permits a corporation, through its certificate of incorporation, to eliminate the personal liability of its directors to the corporation or its stockholders for monetary damages for breach of fiduciary duty of loyalty and care as a director with certain exceptions. The exceptions include a breach of the director's duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, and improper personal benefit. Our certificate of incorporation exonerates our directors from monetary liability to the fullest extent permitted by this statutory provision. Transfer Agent and Registrar Our transfer agent and registrar is Fidelity Transfer Company, 1800 South West Temple, Suite 301, Salt Lake City, UT 84115. TRANSACTION WITH SELLING STOCKHOLDER The shares of our Class A common stock to be registered pursuant to this registration statement and this prospectus have been, or will be, issued in a private transaction exempted pursuant to Section 4(2) of the Securities Act of 1933, as amended. The offering of the shares of our Class A common stock was made to an "accredited investor" as defined in Rule 501 of Regulation D under the Securities Act, and as a result, such offering qualifies as exempt from registration in accordance with Rule 506 of Regulation D. The following pages generally describe the transaction we entered into with Beacon Capital, LLC with respect to the shares of our Class A common stock registered under this prospectus. The description not intended to be complete and the discussion in this prospectus is qualified in its entirety by reference to the documents included or referenced in the exhibits to the registration statement of which this prospectus forms a part. SALE OF $300,000 of OUR 8% CONVERTIBLE DEBENTURES On October 22, 2001, we agreed to terminate the subscription agreement between Meridian Equities International, Inc. and us dated July, 2001, in which we agreed to sell to Meridian and Meridian agreed to purchase, $150,000 of our 8% convertible debentures. On November 20, 2001, we entered into a subscription agreement with Beacon Capital, LLC in which we agreed to sell to Beacon Capital and Beacon Capital agreed to purchase, $150,000 of our 8% convertible debentures on terms substantially the same terms as the terms we offered Meridian. In addition, on December 17, 2001, we agreed to sell to Beacon Capital and Beacon Capital agreed to purchase an additional $150,000 of our 8% convertible debentures on the same terms as the initial $150,000 of our 8% convertible debentures purchased by Beacon Capital. The convertible debentures are set to mature on the fifth anniversary of the date of issuance. 22 Beacon Capital will pay us $300,000 for our 8% convertible debentures when the following events occur: (1) the daily average trading volume of our Class A common stock, multiplied by the volume weighted average closing price ("VWAP") for the 30 trading days preceding funding, is a minimum of $25,000, subject to waiver by the purchaser of the debenture; (2) we have canceled and terminated our equity-line of credit financing with Swartz Private Equity, LLC; (3) there is 600% of the number of shares of our Class A common stock registered to cover the conversions at the time of the funding for the amount being funding; (4) the par value of our Class A common stock has been changed to $.001; and (5) the VWAP for the 30 trading days prior to receipt by the purchaser of the debentures of a written request from us for funding is not less than $.05. As a commitment fee for purchasing our 8% convertible debentures, we will pay Beacon Capital a placement fee of 10% of the principal amount of those debentures plus 2% for non-accountable expenses. In addition, Beacon Capital will receive upon funding warrants to purchase an aggregate of 500,000 shares of our Class A common stock. The warrant is exercisable at any time after issuance and up to five years thereafter. The shares of Class A common stock underlying the warrant will have piggyback registration rights requiring registration in accordance with the terms and conditions of the registration rights agreement executed simultaneously with the subscription agreement. The warrant will be exercisable, in whole or in part, at 115% of the closing bid price of our Class A common stock on the day of funding and shall contain a provision for a cash or cashless exercise, at the option of Beacon Capital. Beacon Capital has the right to convert all or part of each debenture into shares of our Class A common stock at any time following the closing date, except that if less than all the principal amount is converted, the converted portion must be $5,000 or a whole multiple of $5,000. Notwithstanding the foregoing, any unconverted portion of the convertible debentures that remains outstanding at the end of five years from the date of issuance will be automatically converted into shares of Class A common stock. Upon conversion, the conversion rate shall be the lesser of (1) 140% of the closing bid price for the Class A common stock on the Closing Date (the date we receive the funds), or (2) 80% of the Market Price (defined as the average of the three lowest closing bid prices for the Class A common stock as reported by Bloomberg, L.P. during the 22 trading days immediately preceding the conversation date). We are required to pay accrued interest on the unpaid principal amount in cash or in shares of our Class A common stock, at our sole discretion. If we decide to pay accrued interest in shares of Class A common stock, the number of shares of Class A common stock to be delivered to Beacon Capital will be determined by dividing the dollar amount of the interest by the lesser of (1) 140% of the closing bid price for the Class A common stock on the Closing Date (the date we receive the funds) and (2) 80% of the Market Price (defined as the average of the three lowest closing bid prices for the Class A common stock as reported by Bloomberg, L.P. during the 22 trading days immediately preceding the conversation date). We must pay accrued interest, whether in cash or shares of Class A common stock, to Beacon Capital. within five business days of the date of conversion. If we do not delivery the Class A common stock within the five business days of the date of conversion, we will be obligated to pay to the holder of the debentures, in cash, a late payment fee as stated in the debenture. If there is an event of default by virtue of (a) our failure to make payment of principal of the debenture when it becomes due and payable at maturity, upon redemptions or otherwise, (b) our failure to make a payment, other than a principal payment, for a period of five business days thereafter, (c) any of our representations and warranties contained in the subscription agreement or debenture were false when made or we fail to comply with any of the other agreements referred to in the subscription agreement or debentures and that failure continues after notice is provided, as set forth in the debenture (except that there will be no default until the holders of at least 25% of the aggregate principal amount of the debentures outstanding notify us of a default and it is not cured by us within 30 business days after we receive that notice), (d) we file for bankruptcy or (e) our Class A common stock is suspended or no longer is listed on a recognized exchange, including the OTC Bulletin Board, for in excess of five consecutive trading days, then by notice the holder may declare the remaining principal amount of the debenture, together with all accrued interest and any liquidated damages, to be due and payable. 23 If at the time we receive a notice of conversion from Beacon Capital we do not have available enough authorized but unissued shares of Class A common stock necessary to effect the conversion in full, we will be required to issue to that holder the number of shares of Class A common stock that are then available for issuance upon conversion as well as make an additional payment for a conversion default in the amount of (N/365) multiplied by (.24) multiplied by the initial issuance price of the outstanding and/or tendered but unconverted debentures held by each holder, with N equaling the number of days from the date the conversion default occurs to the date we authorize a sufficient number of shares of Class A common stock to effect the conversion in full. Any payments made as a result of a conversion default must be paid, at the option of the holder, in cash or converted into shares of Class A common stock at the conversion rate (set forth above). If by the fifth business day after the date we receive notice of conversion from Beacon Capital, the transfer agent fails for any reason to deliver the shares of Class A common stock to Beacon Capital and Beacon Capital purchases, in an open market transaction or otherwise, shares of Class A common stock solely in order to make delivery in satisfaction of a sale of shares of Class A common stock by Beacon Capital, we will be required to pay Beacon Capital, in addition to any other amounts due to Beacon Capital, a buy-in adjustment amount, equal to the excess, if any, of (x) Beacon Capital's total purchase price (including brokerage commissions, if any) for the shares so purchased by the holder over (y) the net proceeds (after brokerage commissions, if any) received by Beacon Capital from the sale of such shares of Class A common stock. We have the right, at our sole option, to redeem any percentage of the balance of a convertible debenture by providing advance written notice to Beacon Capital. Upon exercise of this redemption right, we are required to pay 125% of the balance remaining on the debenture, plus accrued but unpaid interest and outstanding liquidated damages. Notwithstanding the foregoing, the holder is entitled to convert the debenture any time up to the date we intend to redeem. If we provide notice of our intention to redeem and then fail to do so, we will be precluded from effecting any further redemption. SELLING STOCKHOLDER The following table sets forth certain information with respect to Beacon Capital, LLC as of December 12, 2001. Beacon Capital is not an affiliate of ours or has not had a material relationship with us during the past three years. Because the conversion rate of the debentures and payment of interest thereon depends in part upon the market price of the Class A common stock prior to a conversion and is subject to certain conversion limitations described elsewhere in this prospectus, the actual number of shares of Class A common stock that will then be issued in respect of conversion or interest payments and subsequently offered for sale under this registration statement, cannot be determined at this time. We have contractually agreed to include in this prospectus 50,000,000 shares of Class A common stock issuable upon conversion of the debentures, payment of interest thereunder and exercise of the warrants issued to the selling stockholder and have disregarded the conversion limitations for purposes of the table below.
Amount and percentage of Maximum number of Class A common stock Number of shares of shares of Class A beneficially owned Class A common common stock that may after the offering (1) stock owned be offered under Name of Selling Stockholder prior to this offering this prospectus Amount Percentage - --------------------------- ---------------------- -------------------- ------ ---------- Beacon Capital, LLC 0 50,000,000 (2) 0 0%
(1) Assumes that Beacon Capital will sell all of its shares of our Class A common stock offered in this prospectus. We cannot assure you that the selling stockholder will sell all or any of its shares of Class A common stock. 24 (2) Includes the sum of (a) 49,500,000 shares of our Class A common stock issuable upon conversion by of $300,000 of our 8% convertible debentures; and (b) 500,000 shares of our Class A common stock issuable upon exercise of outstanding warrants issued as a commitment fee for purchasing our 8% convertible debentures subscription agreement. The shares of Class A common stock, when issued to Beacon Capital, will be owned beneficially by Katherine B. Wagner. PLAN OF DISTRIBUTION We are registering the resale of our Class A common stock on behalf of Beacon Capital, LLC. For purposes of the plan of distribution, a "selling stockholder" includes donees, transferees and pledges selling shares of Class A common stock received from Beacon Capital after the date of this prospectus. This prospectus may also be used by transferees of the selling stockholder or by other persons acquiring shares, including brokers who borrow the shares to settle short sales of our Class A common stock. If the selling stockholder transfer any of its shares, each transferee must be bound to the same restrictions and limitations that apply to the selling stockholder described in this prospectus. We will bear all costs, expenses and fees in connection with the registration of the shares offered in this prospectus. The selling stockholder will bear all brokerage commissions and similar selling expenses associated with the sale of the shares. The selling stockholder may offer its shares of our Class A common stock at various times in one or more of the following transactions: o on any stock exchange, market or trading facility on which our Class A common stock is traded; o in privately negotiated transactions or otherwise, including an underwritten offering; o in connection with short sales of the shares of our Class A common stock; o in ordinary brokerage transactions and transactions in which a broker solicits purchasers; o in connection with the writing of non-traded and exchange-traded call or put options, in hedge transactions and in settlement of other transactions in standardized or over-the-counter options; o in a block trade in which a broker-dealer, as agent, may resell a portion of the block, as principal, in order to facilitate the transaction; o in a purchase by a broker-dealer, as principal, and resale by the broker-dealer for its account; o in a combination of any of the above transactions; or o any other method permitted pursuant to applicable law. The selling stockholder may sell its shares of Class A common stock at market prices prevailing at the time of sale, at prices related to the prevailing market prices, at negotiated prices or at fixed prices. The selling stockholder reserves the right to accept, and together with its agents from time to time, to reject, in whole or in part, any proposed purchase of the Class A common stock to be made directly or through agents. The selling stockholder may use broker-dealers to sell its shares of Class A common stock in which case broker-dealers will either receive discounts, commissions or concessions from purchasers of shares of Class A common stock for whom they act as agents. Broker-dealers engaged by the selling stockholder may allow other broker-dealers to participate in resales. 25 The selling stockholder and any broker-dealers or agents that act in connection with the sale of shares of Class A common stock might be deemed to be underwriters and any commissions received by those broker-dealers and any profit on resale of the shares of Class A common stock sold by them while acting as principals might be deemed to be underwriting discounts or commissions under the Securities Act. Because the selling stockholder might be deemed to be an underwriter, it will be subject to the prospectus delivery requirements of the Securities Act. We have informed the selling stockholder that the anti-manipulative provisions of Regulation M promulgated under the Securities Exchange Act of 1934 may apply to their sale of our Class A common stock in the market. In addition to selling shares of our Class A common stock under this prospectus, the selling stockholder may resell all or a portion of their shares of our Class A common stock in open market transactions in reliance upon Rule 144 under the Securities Act, provided that they meet the criteria and conform to the requirements of Rule 144. We will file one or more post-effective amendments to the registration statement of which this prospectus is a part to describe any material information with respect to the plan of distribution not previously disclosed in this prospectus or any material change to such information in this prospectus. LEGAL PROCEEDINGS On August 24, 2001, we filed a summons and complaint in the U.S. District Court against PanAm Wireless, doing business as Celpage, Inc. The complaint alleges that Celpage breached the software\hardware agreement we entered into with Celpage by refusing to accept and pay for the balance of a system installation specified in the agreement. We are seeking damages in the amount of $245,375, together with interest from January 17, 2001. Our balance sheet at September 30, 2001, reflects, in "other assets," a receivable in the amount of $67,650, representing the $245,375 less deferred revenues of $147,225 and a reserve of $30,500. We have been named as a defendant in a lawsuit brought about by Communication Research, Inc., or "CRI." In this lawsuit, CRI makes claims of constructive eviction, trespass, breach of contract, conversion, interference with economic relations, and quantum merit. We believe that we will prevail in the case, and in any event does not believe that unfavorable the outcome will have a material adverse effect on its business. We have been named as a defendant in a lawsuit brought by Lighthouse Technical Consulting, Inc. filed July 9, 2001. In this lawsuit, the plaintiff is claiming that we failed to pay Lighthouse $15,000 for placement services it performed for us. We have expressed to Lighthouse our interest in negotiating a payment schedule acceptable to both parties, but we may not succeed in doing so. We have accrued, and have included in our June 30, 2001, balance sheet, the amount that we owe Lighthouse. We have been named as a defendant in a lawsuit brought by Business Staffing, Inc. filed April 12, 2001. In this lawsuit, the plaintiff claims non-payment of $37,250 for placement services performed by Business Staffing. We have accrued $21,250 of this claim. We dispute that we owe the $16,000 balance of the claimed amount and intend to vigorously defend the suit. We have been named as a defendant in a lawsuit brought by Lorelei Personnel, Inc. filed November 28, 2000. In this lawsuit, the plaintiff claims non-payment of $6,000 for placement services performed by Lorelei Personnel, Inc. On November 29, 2001, the plaintiff was awarded $6,000 for placement services performed, plus legal fees and court costs. We have filed an objection with the court for the legal fees and court costs awarded in the judgment and are considering an appeal of the entire decision, however, the judgment will not have a material adverse effect on our operations. 26 EXPERTS AND LEGAL COUNSEL The audited consolidated financial statements for the year ended December 31, 2000 included in this prospectus have been examined by Mendlowitz Weitsen, LLP, independent certified public accountants and are included herein in reliance upon the report of said firm given upon their authority as experts in accounting and auditing. Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New York 10022, has passed on the validity of the Class A common stock being offered in this prospectus. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Insofar as indemnification for liabilities arising under the Securities Act of paragraph 33, as amended (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the SEC 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 Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant 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 Registrant 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 Securities Act and will be governed by the final adjudication of such issue. WHERE YOU CAN FIND MORE INFORMATION We have filed a registration statement on Form SB-2 with the SEC relating to the Class A common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Statements contained in this prospectus concerning the contents of any contract or other document referred to are not necessarily complete and in each instance we refer you to the copy of the contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. For further information with respect to us and the common stock we are offering, please refer to the registration statement. A copy of the registration statement can be inspected by anyone without charge at the public reference room of the Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at 7 World Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison Street, Chicago, Illinois 60601. Please call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference room. Copies of these materials can be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a website (http://www.sec.gov) that contains information regarding registrants that file electronically with the Commission. 27 INDEX TO FINANCIAL STATEMENTS FINANCIAL STATEMENTS December 31, 2000 Item Page - ---- ---- Independent Auditors' Report............................................ F-1 Balance Sheets as of December 31, 2000 and 1999......................... F-2 Statements of Operations for the years ended December 31, 2000 and 1999........................................................... F-3 Statements of Changes in Shareholders' Equity for the years ended December 31, 2000 and 1999.............................................. F-4 Statements of Cash Flows for the years ended December 31, 2000 and 1999................................................................ F-8 Notes to Financial Statements........................................... F-11 FINANCIAL STATEMENTS September 30, 2001 Item Page - ---- ---- Balance Sheets as of September 30, 2001 (unaudited) .................... F-29 Statements of Operations for the three months ended September 30, 2001 and September 30, 2000 and the nine months ended September 30, 2001 and September 30, 2000 (unaudited) ..... F-30 Statements of Cash Flows for the nine months ended June 30, 2001 and 2000 (unaudited).................................................... F-31 Notes to Financial Statements........................................... F-33 28 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.COM, INC. Matawan, New Jersey We have audited the accompanying balance sheet of iVoice.com, Inc. as of December 31, 2000, and the related statements of operations, stockholders' deficiency and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of iVoice.com, Inc. as of December 31, 1999, were audited by other auditors whose report dated April 24, 2000, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of iVoice.com, Inc. as of December 31, 2000, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1(a), the Company had a loss and a negative cash flow from operations along with 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 March 2, 2001 F-1 iVOICE.COM, INC. BALANCE SHEETS
December 31, 2000 1999 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 55,349 $ 195,861 Accounts receivable, net of allowance for doubtful accounts of $31,025 and $50,000 292,554 599,026 Inventory 20,228 10,140 Prepaid expenses and other current assets 164,711 52,100 Debt issue costs -- 362,541 ----------- ----------- Total current assets 532,842 1,219,668 ----------- ----------- PROPERTY AND EQUIPMENT, net 140,921 55,408 ----------- ----------- OTHER ASSETS Software license costs, net of accumulated amortization of $163,200 and $54,400 380,800 489,600 Financing costs, net of accumulated amortization of $1,297 118,370 -- Intangible assets, net of accumulated amortization of $7,917 254,584 -- Deposits and other assets 13,900 -- ----------- ----------- Total other assets 767,654 489,600 ----------- ----------- TOTAL ASSETS $ 1,441,417 $ 1,764,676 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES Obligations under capital leases - current $ 28,339 $ -- Accounts payable and accrued expenses 566,337 181,754 Legal settlement payable -- 4,800,000 Due to related parties 648,078 21,000 Convertible debentures 337,000 350,000 Billings in excess of estimated costs on uncompleted contracts 170,227 567,300 ----------- ----------- Total current liabilities 1,749,991 5,920,054 LONG-TERM DEBT Obligations under capital leases - non-current 48,945 -- ----------- ----------- Total liabilities 1,798,936 5,920,054 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIENCY Common stock, Class A - par value $.01; authorized 150,000,000 and 75,000,000 shares, 103,969,715 and 54,093,663 shares issued and outstanding 1,039,697 540,937 Common stock, Class B - no par value; authorized 700,000 shares, 364,000 and 700,000 shares issued and outstanding 37 70 Additional paid in capital 7,586,182 1,395,671 Accumulated deficit (8,983,435) (6,092,056) ----------- ----------- Total stockholders' deficiency (357,519) (4,155,378) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,441,417 $ 1,764,676 =========== ===========
The accompanying notes are an integral part of the financial statement. F-2 iVOICE.COM, INC. STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000 1999 ----------- ----------- SALES, net $ 723,046 $ 776,773 COST OF SALES 302,895 280,317 ----------- ----------- GROSS PROFIT 420,151 496,456 ----------- ----------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling expenses 371,272 168,707 General and administrative expenses 1,662,142 1,177,730 Research and development 423,467 -- Bad debt expense 75,195 39,874 Provision for obsolescence -- 31,000 Non-recurring expenses (see Note 12) -- 5,028,000 Depreciation and amortization 146,234 69,050 ----------- ----------- Total selling, general and administrative expenses 2,678,310 6,514,361 ----------- ----------- LOSS FROM OPERATIONS (2,258,159) (6,017,905) OTHER EXPENSE Interest expense (633,220) (36,459) ----------- ----------- LOSS BEFORE INCOME TAXES (2,891,379) (6,054,364) PROVISION FOR INCOME TAXES -- -- ----------- ----------- NET LOSS $(2,891,379) $(6,054,364) =========== =========== NET LOSS PER COMMON SHARE Basic $ (.03) $ (.20) =========== =========== Diluted $ (.03) $ (.20) =========== ===========
F-3 iVOICE.COM, INC. STATEMENTS OF STOCKHOLDERS' DEFICIENCY FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
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 options 9,100,000 91,000 -- -- 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 =========== =========== =========== ===========
F-4 iVOICE.COM, INC. STATEMENTS OF STOCKHOLDERS' DEFICIENCY (Continued) FOR THE YEARS ENDED DECEMBER 31, 2000 AND1999
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) =========== =========== ===========
F-5 iVOICE.COM, INC. STATEMENTS OF STOCKHOLDERS' DEFICIENCY FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Stock Class A Common Stock Class B Shares Amount Shares Amount ------ ------ ------ ------ Balance at January 1, 1999 10,000,000 $ 100,000 400,000 $ 40 Acquisition of net asset of Visual 36,932,364 369,324 300,000 30 Issuance of common stock for software license costs 3,200,000 32,000 -- -- Issuance of common stock for services 2,630,000 26,300 -- -- Issuance of common stock for exercise of stock options 100,000 1,000 -- -- Issuance of common stock for cash 981,299 9,813 -- -- Issuance of common stock for compensation 250,000 2,500 -- -- Issuance of stock options as compensation -- -- -- -- Issuance of convertible debentures -- -- -- -- Net loss for the year ended December 31, 1999 -- -- -- -- ---------- ---------- ---------- ---------- Balance at December 31,1999 54,093,663 $ 540,937 700,000 $ 70 ========== ========== ========== ==========
F-6 iVOICE.COM, INC. STATEMENT OF STOCKHOLDERS' DEFICIENCY (Continued) FOR THE YEARS ENDED DECEMBER 31, 2000 AND1999
Additional Total Paid in Accumulated Stockholders' Capital Deficit Deficiency ------- ------- ---------- Balance at January 1, 1999 $ (85,289) $ (37,692) $ (22,941) Acquisition of net asset of Visual (231,354) -- 138,000 Issuance of common stock for software license costs 512,000 -- 544,000 Issuance of common stock for services 264,500 -- 290,800 Issuance of common stock for exercise of stock options 13,000 -- 14,000 Issuance of common stock for cash 231,314 -- 241,127 Issuance of common stock for compensation 85,000 -- 87,500 Issuance of stock options as compensation 256,500 -- 256,500 Issuance of convertible debentures 350,000 -- 350,000 Net loss for the year ended December 31, 1999 -- (6,054,364) (6,054,364) ----------- ----------- ----------- Balance at December 31, 1999 $ 1,395,671 $(6,092,056) $(4,155,378) =========== =========== ===========
F-7 iVOICE.COM, INC. STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000 1999 ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES Net loss $(2,891,379) $(6,054,364) Adjustments to reconcile net loss to net cash (used in) provided by operating activities Depreciation and amortization 147,531 69,050 Bad debt expense 75,195 42,500 Provision for obsolescence -- 31,000 Legal settlement -- 4,500,000 Debt issue costs 544,041 32,959 Common stock issued for services 518,155 290,800 Common stock issued for compensation 69,938 56,500 Stock options issued as compensation -- 256,500 Changes in certain assets and liabilities: (Increase) decrease in accounts receivable 231,277 (594,661) (Increase) decrease in inventory (10,088) 81,191 Decrease in other assets 23,489 -- Increase in accounts payable and accrued expenses 384,583 49,638 Increase (decrease) in legal settlement payable (300,000) 300,000 Increase (decrease) in billings in excess of costs on uncompleted contracts (397,063) 567,300 ----------- ----------- Total cash used in operating activities (1,604,321) (371,587) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (22,135) (1,189) Purchase of goodwill & intangibles (382,168) -- ----------- ----------- Total cash used in investing activities (404,303) (1,189) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 818,979 255,127 Proceeds from stock option exercise 319,166 -- Proceeds from related party loans 627,078 -- Prepaid offering and debt issue costs (31,500) (95,500) Repayment of notes payable -- (12,318) Repayment of capital leases payable (15,611) -- Sale of convertible debentures 150,000 350,000 ----------- ----------- Total cash provided by financing activities 1,868,112 497,309 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (140,512) 124,533 CASH AND CASH EQUIVALENTS - beginning 195,861 71,328 ----------- ----------- CASH AND CASH EQUIVALENTS - end $ 55,349 $ 195,861 =========== =========== CASH PAID DURING THE YEAR FOR: Interest expense $ 7,590 $ 41,708 =========== =========== Income taxes $ -- $ -- =========== ===========
F-8 iVOICE.COM, INC. STATEMENTS OF CASH FLOWS (Continued) YEARS ENDED DECEMBER 31, 2000 AND 1999 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES For the Year Ended December 31, 2000 ------------------------------------ a) On February 10, 2000, the Company 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, the Company 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, the Company issued 848,718 shares of its restricted Class A common stock for services valued at $518,155. d) On April 24, 2000, the Company 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 ended December 31, 2000, the Company issued 80,000 shares of its restricted Class A common stock as compensation valued at $69,938. f) During the year ended December 31, 2000, the Company purchased equipment under capital leases totaling $92,895. For the Year Ended December 31, 1999 ------------------------------------ a) On May 21, 1999, the Company executed a Reorganization Agreement that provided that the Company and International Voice Technologies, Corp. ("IVT") would be merged and the Company would be the surviving entity. In connection with the merger transaction, the sole stockholder of IVT, received the following: i) 10,000,000 shares of the Company's Class A common stock and ii)400,000 shares of the Company's Class B common stock. b) On May 14, 1999, the Company issued 9,000,000 stock options to purchase the Company's class A common stock for $.033 per share. c) On June 15, 1999, the Company issued 250,000 shares of Class A common stock ($87,500 value) in relation to an employee agreement. F-9 iVOICE.COM, INC. STATEMENTS OF CASH FLOWS (Continued) DECEMBER 31, 2000 AND 1999 d) On June 25, 1999, the Company issued 3,200,000 shares of Class A common stock valued at .17 per share or $544,000 in connection with the purchase of pre-developed software codes. e) In connection with the Reorganization Agreement, the stock price was calculated using an average of the share price before the merger when the agreement was accepted. A consulting company received 2,000,000 shares of the Company's Class A common stock, valued at .114 per share or $228,000 for services performed during April and May 1999. f) The Company issued 230,000 shares of its Class A common stock valued at $30,800 for services performed relating to the merger during May 1999. g) The Company issued 400,000 shares of its Class A common stock for legal services valued at $32,000 for services performed relating to the merger during April and May 1999. h) The Company incurred non-cash debt issue costs totaling $350,000 in relation to their 50% discount on the issuance of the 12% convertible bonds (see Note 7). i) As described in Note 12, the Company issued 2,000,000 shares of its Class A common stock valued at $4,500,000 in relation to a legal settlement. F-10 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- a) Basis of Presentation --------------------- Certain amounts in the financial statements for 1999 have been reclassified to conform to the presentation in 2000 The accompanying financial statements include the accounts of iVoice.com, 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 the Company would be 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. The 1999 financial statements presented include only the accounts of IVT through May 21, 1999, and that of iVoice (Visual and IVT merged) from May 22, 1999 through December 31, 1999. The Company 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, the Company had a loss and a negative cash flow from operations as well as a negative working capital as of December 31, 2000 and 1999. These matters raise substantial doubt about the Company'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 the Company, which in turn, is dependent upon the Company's ability to continue to raise capital and generate positive cash flows from operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence. Management plans to take the following steps that it believes will be sufficient to provide the Company with the ability to continue in existence: F-11 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 o On August 17, 2000, the Company entered into an investment agreement with Swartz Private Equity, LLC. The investment agreement entitles the Company to issue and sell its Class A common stock from time to time for up to an aggregate of $20,000,000. The investment agreement will be effective for a maximum of three years commencing November 17, 2000, the effective date of the registration statement filed to register the stock under the agreement. This financing will allow iVoice to issue common stock and warrants at the Company's discretion as often as monthly as funds are needed in amounts based upon certain market conditions, and subject to an effective registration statement. The pricing of each common stock sale is based upon current market prices at the time of each drawdown, and iVoice may set a floor price for the shares at the Company's discretion. There is no assurance that this financing arrangement will enable the Company to implement their long-term growth strategy. Accordingly, the sources of financing are uncertain if the desired proceeds from the Swartz equity financing arrangement is not obtained. o Re-negotiate the penalty terms relating to their 12% convertible debentures (see Note 7). o Structure arrangements for the provision of services by outside consultants and third party providers in a manner which reserves the cash flow of the Company, such as through agreements which require those consultants or service providers to take a portion of any agreed-upon fee in stock or stock options. o Expand the technical staff which will enable the Company to develop and integrate new technology with their existing technology. o Expand the sales force to help increase sales through direct sales to customers as well as reseller channels. b) Line of Business ---------------- The Company is a communication company primarily engaged in the development, manufacturing and marketing of voice recognition and computer technology communication systems for small-to-medium sized businesses and corporate departments. The technology allows these businesses to communicate more effectively by integrating 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. The Company sells its products directly to business customers, through Dealer and Reseller channels as well F-12 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 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 ------------------- The Company 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. The Company 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, 2000 and 1999, advertising expense amounted to $88,881 and $42,136, respectively. f) Cash and Cash Equivalents ------------------------- The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. g) Concentration of Credit Risk ---------------------------- The Company 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. F-13 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 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 the lower of cost or 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, the Company has adopted SFAS No. 121. The carrying value of software license costs are regularly reviewed by the Company and a loss would be recognized if the value of the estimated un-discounted cash flow benefit related to the asset falls below the unamortizated cost. No impairment loss was recognized as of December 31, 2000. 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) Offering Costs -------------- Offering costs consist primarily of professional fees. These costs are charged against the proceeds of the sale of common stock in the periods in which they occur. As of December 31, 2000 and 1999 the Company had prepaid offering costs totaling $-0- and $50,000, respectively. m) Debt Issue Costs ---------------- Debt issue costs represent various commissions paid and the estimated cost of the 50% conversion discount feature relating to the issuance of the Company's convertible debentures. These costs were being amortized over the life of the debt and is included in interest expense (see Note 7). n) Fair Value of Financial Instruments ----------------------------------- The carrying value of cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued expenses and deferred revenue approximates fair value due to the relatively short maturity of these instruments. F-14 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 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 circumstances indicate that the carrying amount of an asset may not be recoverable. The Company 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, 2000 1999 ---- ---- Basic and Diluted EPS 87,034,303 30,500,000 ========== ========== 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, 2000 and 1999, the Company 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" changes the way public companies report information about segments. SFAS No. 131, which is based on the selected segment information quarterly and entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenue. This statement is effective for the Company's 2000 and 1999 fiscal year. The Company is in the process of evaluating the disclosure requirements under this standard. F-15 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 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 the Company's financial statements is not expected to be material as the Company has not historically used derivative and hedge instruments. 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. The Company 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. The Company 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, the Company executed a Reorganization Agreement (the "Agreement") that provided that the Company and International Voice Technologies, Corp. ("IVT") would be merged and the Company 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 the Company's Class A common stock; and ii) 400,000 shares of the Company's Class B common stock. In addition, the two controlling stockholders of Visual sold 300,000 shares of the Company'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. F-16 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 The Agreement also provided that certain assets of the Company 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 the Company 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 the Company'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 ======== F-17 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 On April 24, 2000, the Company 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, the Company 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 Class A voting common stock. The fee was negotiated between the Company and ThirdCAI. The purpose of this transaction was to enable the Company'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, 2000 1999 -------------- ------------ Equipment $ 56,196 $ 8,932 Leasehold improvements 8,684 - Furniture and fixtures 123,394 64,312 ------------- ------------ 188,274 73,244 Less: Accumulated depreciation 47,353 17,836 ------------- ------------ Property and equipment, net $ 140,921 $ 55,408 ============= ============ Depreciation expense for the years ended December 31, 2000 and 1999 was $29,517 and $14,650, 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, 2000 and 1999 consists of the following: December 31, 2000 1999 ----------- ----------- Costs incurred on uncompleted contracts $ 91,735 $ - Estimated earnings 117,488 - ----------- ----------- 209,223 - Less billings to date 379,450 567,300 ----------- ----------- $ (170,227) $ (567,300) =========== =========== F-18 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE 5 - INCOME TAXES - --------------------- The components of the provision for income taxes are as follows: December 31, 2000 1999 --------- ------- 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 ======== ======= 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 34.0% State Income Tax, Net of Federal Benefit - --------- Effective Income Tax Rate 0.0% ========= As of December 31, 2000 and 1999, the Company had net carryforward losses of approximately $3,500,000 and $1,700,000 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 the Company'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 the Company's deferred tax assets and liabilities are summarized as follows: December 31 ----------- 2000 1999 ----------- ------------ Net Operating Loss Carryforwards $ 1,190,000 $ 578,000 Less: Valuation Allowance (1,190,000) (578,000) ----------- ------------ Net Deferred Tax Assets $ - $ - =========== ============ F-19 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 Net operating loss carryforwards expire starting in 2007 through 2015. NOTE 6 - DUE TO RELATED PARTY - ----------------------------- During the period June 1 through June 8, 2000, Jerome R. Mahoney, President and Chief Executive Officer, sold 971,000 shares of the Company's common stock under Rule 144 of the Securities Act of 1933, as amended, realizing $396,798 of aggregate proceeds from these sales. On July 24, 2000, Mr. Mahoney loaned the Company these proceeds pursuant to a loan agreement in order to fund working capital requirements. During the period August 24 through September 29, 2000, Mr. Mahoney sold a further 537,000 shares of common stock under Rule 144 realizing $239,118 of aggregate proceeds from these sales. On November 7, 2000, Mr. Mahoney loaned to the Company these proceeds pursuant to a second loan agreement to fund working capital requirements Under the terms of the loan agreements, the Company will repay Mr. Mahoney with a number of shares of Class B common stock equal to the number of shares that he sold, plus additional Class B common stock shares to reimburse him for the income tax he paid upon the sale of his shares, plus additional shares with a value equal to interest calculated at the prime rate. As of December 31, 2000 the total outstanding principal balance related to amounts loaned to the Company from sales of the Company's common stock, under Rule 144, to Mr. Mahoney amounted to $648,078. Also due to Mr. Mahoney and reflected in accrued expenses at December 31, 2000, was unpaid salary of $143,756, unpaid commissions of $34,000 and unpaid expense reimbursements of $7,200, totaling $184,956. As of December 31, 1999, due to related parties represented a non-interest bearing advance of $21,000 from Mr. Mahoney. F-20 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 NOTE 7 - CONVERTIBLE DEBENTURES - ------------------------------- From October 1999 through February 2000, the Company 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 the Company'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, 2000, $163,000 in principal had been converted into 1,007,287 shares of the Company's Class A common stock leaving an outstanding balance of $337,000. Notes payable totaling $350,000 were outstanding as of December 31, 1999. The Company has been advised by several of the debenture holders that the Company 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 the Company pursuant to a Security Agreement that was part of the debenture documentation. The Company is currently in negotiations with the debenture holders to reach settlement terms regarding the penalties for default under the debenture agreements. NOTE 8 - CAPITAL LEASE OBLIGATIONS - ---------------------------------- During the year ended December 31, 2000, the Company 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, 2000 are follows: Lease payable for computer equipment, payable at $1,367 per month, including interest at 22.31%. Final payment is due June 2003. $ 31,216 Lease payable for furniture, payable at $2,151 per month, including interest at 20.79%. Final payment due April 2003. 46,068 --------- Present value of net minimum lease payments $ 77,284 ========== F-21 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 The future minimum lease payments $ 99,075 Less amount representing interest 21,791 ---------- Present value of net minimum lease payments 77,284 Less current portion 28,339 ---------- Long term capital lease obligations $ 48,945 =========== NOTE 9 - COMMITMENTS AND CONTINGENCIES - -------------------------------------- a) The Company'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, ------------ 2001 $ 175,513 2002 56,223 --------- Total $ 231,736 ========= Rent expense under operating leases for the year ended December 31, 2000 and 1999 was $153,175 and $70,185, respectively. b) In April 2000, the Company entered into a two-year lease agreement for their office currently utilized as the corporate headquarters. Monthly lease payments total $11,000. c) On May 1, 1999, the Company entered into a five-year employment agreement with its majority stockholder (the "Executive"). He will serve as the Company's Chairman of the Board and Chief Executive Officer for a term of five years. As consideration, the Company agrees to pay the Executive a sum of $180,000 the first year with a 10% increase every year thereafter. d) In connection with the Reorganization Agreement, the Company 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. e) On June 2, 1999, subsequently amended January 11, 2000, the Company 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 the Company's Class A common stock and options to purchase 140,000 shares of the Company's Class A common stock. f) The Company'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, the Company 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 F-22 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 citing a shortfall in their projected subscriber base. The Company's balance sheet at December 31, 2000 reflects accounts receivable of $245,375 and deferred revenues of $147,225 related to this installation. The Company has made attempts to complete the remaining installation by offering incentives in the form of price reductions however, the customer has refused. The matter has been forwarded to the Company's attorneys and believe a lawsuit to be pending to attempt to recover the balance of the contract. g) The Company is involved with two law suits in which it is the defendant. One is from an employment agency for placement fees in connection with the hiring of an employee. The Company believes the suit will be dismissed, however, if not, the amount of the claim will not have a material affect on the financial statements. The second is a claim by a sub-leasee of the Company with respect to certain property rights and expenses relating to the tenancy between the Company and this sub-tenant. Management believes the suit will also be dismissed, however, if not, the amount of the claim will not materially affect the financial statements. NOTE 10 - COMMON STOCK - ---------------------- The company has two classes of common stock: a) Class A Common Stock -------------------- Class A common stock consists of 150,000,000 shares at December 31, 2000 and 75,000,000 shares at December 31, 1999, of authorized common stock with a par value of $.01. Class A stock has voting rights of 1 to 100 with respect to Class B stock and as of December 31, 2000 and 1999, 103,969,715 and 54,093,663 were issued and outstanding, respectively. 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. As of December 31, 2000, the Company has not paid any dividends on its common stock and do not contemplate doing so in the foreseeable future. The Company anticipates that any earnings generated from operations will be used to finance the growth objectives. b) Class B Common Stock -------------------- Class B common stock consists of 700,000 shares of authorized common stock with no intrinsic value. Class B stock has voting rights of 100 to 1 with respect to Class A common stock. As of December 31, 2000 and 1999, 700,000 were authorized with 364,000 and 700,000 issued and outstanding, respectively. Class B common stockholders are not entitled to receive dividends. F-23 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 On April 24, 2000, the Company 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. On December 6, 2000, the Company filed Form DEF-14C with the U.S. Securities and Exchange Commission indicating its intention of increasing the authorization of Class A shares to 300,000,000 and Class B shares to 3,000,000. NOTE 11 - STOCK OPTIONS - ----------------------- During 1999, the Company issued various options as follows: a) On January 5, 1999, issued options to purchase 10,000 share of Class A common stock at $.12 per share expiring in five years. b) On January 21, 1999, issued options to purchase 10,000 shares of Class A common stock at $.107 per share expiring in five years. c) On February 5, 1999, issued options to purchase 10,000 shares of Class A common stock at $.107 per share expiring in five years. d) On March 17, 1999, issued options to purchase 10,000 shares of Class A common stock at $.107 per share expiring in five years. e) On April 6, 1999, issued options to purchase 10,000 shares of Class A common stock at $.107 per share expiring in five years. f) On May 14, 1999, the Company issued an option to purchase 9,000,000 shares of Class A common stock at $.033 per share expiring in five years. (This option was exercised during 2000) During 2000, the Company issued various options as follows: g) On August 17, 2000, in connection with a financing agreement with Swartz Private Equity, LLC, the Company 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. Options outstanding, except options under employee stock option plan, are as follows as of December 31, 2000: F-24 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 Expiration Date Exercise Price Shares ---------------- --------------- ---------- January 1, 2001 .3100 100,000 January 1, 2001 1.0000 100,000 January 1, 2001 2.0000 200,000 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 -------- 470,000 h) Employee Stock Option Plan -------------------------- During the year ended December 31, 1999, the Company 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 the company'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 to ten years. During the year ended December 31, 1999, 20,000,000 shares were reserved for future issuance under the plan of which 9,510,000 shares were granted in 1999 and 254,000 in 2000, for total of 9,764,000 shares. At December 31, 2000, a total of 764,000 options were to purchase Class A common shares were outstanding and held by company employees. The exercise prices ranged from $0.29 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 The Company 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 the Company 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, the Company's net loss and loss per share would be increased to the proforma amounts indicated below: F-25 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 For The Year Ended, December 31, ------------------------- 2000 1999 ----------- ----------- Net Loss As Reported $(2,891,379) $(6,054,364) =========== =========== Proforma $(3,296,417) $(6,336,785) =========== =========== Basic Loss Per Share As Reported $ (.03) $ (.20) =========== =========== Proforma $ (.04) $ (.21) =========== =========== These proforma amounts may not be representative of future disclosures because they do not take into effect proforma compensation expense related to grants made before 1997. 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, 2000 and 1999: dividend yield of 0%; expected volatility of 320%; risk-free interest rates of 5.56%; and expected life of 4.1 and 3.0 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 the Company'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:
Weighted Other Weighted Employee Average Options Average Stock Options Exercise and Exercise Outstanding Price Warrants Price ----------- ----------- ------------ ------------ Balance, January 1, 1999 - $ - 731,051 $ 0.120 Granted 9,510,000 $ .033 60,000 $ 0.110 Exercised - $ - - $ - Canceled - $ - (125,866) $ 0.110 ----------- ----------- ------------ ------------ Balance, December 31, 1999 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 ----------- ----------- ------------ ------------
F-26 iVOICE.COM, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999
Weighted Other Weighted Employee Average Options Average Stock Options Exercise and Exercise Outstanding Price Warrants Price ----------- ----------- ------------ ------------ Balance, December 31, 2000 764,000 $ .670 5,960,000 $ 0.456 ============ =========== =========== ========== Outstanding and Exercisable, December 31, 1999 9,000,000 $ .033 665,185 $ 0.120 ============ =========== =========== ========== Outstanding and Exercisable, December 31, 2000 66,620 $ .333 5,960,000 $ 0.456 ============ =========== =========== ==========
The weighted average remaining contractual lives of the employee stock options is 4.15 years at December 31, 2000. NOTE 12 - NON-RECURRING EXPENSES - -------------------------------- Non-recurring expenses consisted of the following for the year ended December 31, 1999: Legal Settlements (a) $ 4,800,000 Merger Costs (b) 228,000 ----------- Total non-recurring expenses $ 5,028,000 =========== a) The Company recognized $4,800,000 of expenses relating to legal settlements. During February 2000, the Company settled a lawsuit and agreed to pay $300,000 in cash and issue 2,000,000 shares of its restricted Class A common stock valued at $4,500,000. b) In connection with the Reorganization Agreement, a consulting company received 2,000,000 shares of the Company's Class A common stock, valued at .114 per share or $228,000 for services performed. These shares were for services performed during the merger (see Note 2). NOTE 13 - SUBSEQUENT EVENTS - ----------------------------- a) On January 9, 2001 The Company received $150,000 in proceeds from a put to sell 2,000,000 Class A common stock in accordance with the investment agreement with Swartz Private Equity, LLC, dated August 17, 2000. Also in conjunction with this put, the Company issued Swartz a warrant to purchase 200,000 shares of the Company's Class A common stock at $.1045 per share. b) On January 10, 2001 the holders of the 12% convertible debentures converted $50,000 in debenture principal and $6,559 in interest into 897,761 Class A common stock at $.063 per share in accordance with the conversion terms of the debenture agreement. F-27 c) On January 30, the Company issued 328,951 shares of its Class A common stock to Jerome Mahoney as partial repayment of amounts loaned to the Company by Mr. Mahoney. d) In January 2001, the Company filed a patent application for the iVoice Speech Enabled Name Dialer with the U.S. Patent & Trademark Office. The Name Dialer is an automatic phone dialing system. The system imports the necessary contact information for dialing (names and phone numbers) from almost any PIM or contact manager, including, 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. e) On February 9, 2001, the Company dismissed Merdinger, Fruchter, Rosen & Corso, P.C., as its independent accountants and engaged Mendlowitz Weitsen, LLP, as its new independent accountants. During the Company's two most recent fiscal years and through February 9, 2001, the Company did not consult with Mendlowitz Weitsen, LLP on any accounting, auditing, financial reporting or any other matters. f) On February 17, 2001 in accordance with the investment agreement with Swartz Private Equity, LLC, dated August 17, 2000, the commitment warrant issued on August 17, 2000, to purchase 5,490,000 shares of the Company's Class A common stock at $.484 per share was reset to $.1406. g) On February 20, 2001, the lawsuit brought about by Fisher Scientific International, Inc., seeking compensatory damages of $17,999 plus reasonable internal costs associated with the assistance of a voicemail installation and punitive damages of $20,000 was dismissed in arbitration with no amount being awarded. h) On March 12, 2001, the Company issued to all of its employees options to purchase the Company's Class A common stock at $0.10 per share. A total of 795,000 options were issued, each option contract vests with the employee at 25% per year and expire in 5 years. F-28
IVOICE, INC. BALANCE SHEETS SEPTEMBER 30, 2001 (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 13,177 Accounts receivable, net of allowance for doubtful accounts of $2,500 36,811 Inventory 19,691 Prepaid expenses and other current assets 545,353 ----------- Total current assets 615,032 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $76,628 113,519 OTHER ASSETS Other Receivable 67,650 Software license costs, net of accumulated amortization of $244,800 299,200 Financing costs, net of accumulated amortization of $4,167 137,950 Intangible assets, net of accumulated amortization of $17,760 274,881 Deposits and other assets 13,900 ----------- Total other assets 793,581 ----------- TOTAL ASSETS $ 1,522,132 =========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES Accounts payable and accrued expenses $ 1,218,036 Obligations under capital leases - current 33,213 Billings in excess of estimated costs on uncompleted jobs 51,306 Due to related parties 836,419 12% Convertible debentures 194,800 8% Convertible debentures 275,000 ----------- Total current liabilities 2,608,774 ----------- LONG-TERM DEBT Obligation under Capital leases - non-current 23,389 ----------- Total liabilities 2,632,163 COMMITMENTS AND CONTINGENCIES - 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, 142,810,525 issued and outstanding 1,163,966 Common stock, Class B - no par value; authorized 3,000,000 shares; 700,000 shares issued; 364,000 shares outstanding 37 Subscriptions receivable (990,000) Additional paid in capital 10,242,307 Accumulated deficit (11,526,341) ----------- Total stockholders' deficiency (1,110,031) ----------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,522,132 ===========
The accompanying notes are an integral part of the financial statement. F-29
IVOICE, INC. STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended For the Nine Months Ended September 30, September 30, -------------------------- ------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- SALES, net $ 87,043 $ 175,343 $ 303,948 $ 677,062 COST OF SALES 31,161 70,663 130,279 232,465 ----------- ----------- ----------- ----------- GROSS PROFIT 55,882 104,680 173,669 444,597 ----------- ----------- ----------- ----------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling expenses 31,171 69,960 138,470 323,734 General and administrative expenses 349,489 407,501 1,653,307 1,305,976 Research and development 90,389 152,011 320,475 260,620 Bad debt expense - 16,652 23,308 39,152 -- Depreciation and amortization 40,539 39,999 120,718 106,113 ----------- ----------- ----------- ----------- Total selling, general and administrative expenses 511,588 686,123 2,256,278 2,035,595 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (455,706) (581,443) (2,082,609) (1,590,998) OTHER EXPENSE Non-recurring expense -- -- 352,706 -- Interest expense 36,782 170,767 107,591 491,986 ----------- ----------- ----------- ----------- Total other expenses 36,782 170,767 460,297 491,986 ----------- ----------- ----------- ----------- LOSS BEFORE INCOME TAXES (492,488) (752,210) (2,542,906) (2,082,984) PROVISION FOR INCOME TAXES -- -- -- -- ----------- ----------- ----------- ----------- NET LOSS $ (492,488) $ (752,210) $(2,542,906) $(2,082,984) =========== =========== =========== =========== NET LOSS PER COMMON SHARE Basic $ ( 0.00) $ (0.01) $ ( 0.02) $ ( 0.03) =========== =========== =========== =========== Diluted $ ( 0.00) $ (0.01) $ ( 0.02) $ ( 0.03) =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statement. F-30
IVOICE, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, ------------------------- 2001 2000 -------- -------- CASH FLOW FROM OPERATING ACTIVITIES Net loss $ (2,542,906) (2,082,984) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 120,717 106,113 Bad debt expense 23,308 39,152 Amortization of debt issue costs 157,697 432,750 Common stock issued for consulting services 300,138 382,619 Common stock issued for compensation 224,000 69,938 Common stock issued for settlements 211,080 - Common stock issued for interest 6,559 - Changes in certain assets and liabilities: Accounts receivable 17,560 (243,674) Inventory 537 (8,735) Accounts payable and accrued liabilities 680,199 200,538 Legal settlement payable - (300,000) Deferred revenue 28,294 - Other assets 87,658 (66,986) ------------ ---------- Total cash used in operating activities (685,159) (1,471,269) ------------ ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (1,872) (112,801) Purchase of goodwill and other intangibles (3,390) (152,355) ------------ ---------- Total cash used in investing activities (5,262) (265,156) ------------ ---------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 129,931 746,000 Proceeds from exercise of options on common stock - 319,166 Proceeds from officer loans 264,000 396,798 Prepaid offering and debt issue costs - (31,500) Increase in borrowing under capital lease obligations - 92,895 Repayment of capital lease obligations (20,682) - Repayment of notes payable - (9,414) Sale of convertible debentures 275,000 150,000 ------------- ----------- Total cash provided by financing activities 648,249 1,663,945 ------------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (42,172) (72,480) CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 55,349 195,861 ------------- ----------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 13,177 $ 123,381 ------------- ----------- CASH PAID DURING THE PERIOD FOR: Interest expense $ 10,976 $ 7,590 ============= =========== Income taxes $ - $ - ============= ===========
The accompanying notes are an integral part of the financial statement. F-31 IVOICE, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES SEPTEMBER 30, 2001: a) During the nine months ended September 30, 2001, the Company issued 12,194,287 shares of its Class A common stock for services valued at $897,055. The Company 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, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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, the Company 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. SEPTEMBER 30, 2000: a) During the nine months ended September 30, 2000, the Company converted a $4,500,000 legal settlement payable into 2,000,000 shares of its Class A restricted common stock. b) During the nine months ended September 30, 2000, the Company issued $150,000 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 nine months ended September 30, 2000, the Company issued 578,820 shares of its restricted Class A common stock for services valued at $415,972. d) During the nine months ended September 30, 2000, 179,898 of options were exercised at the strike price of $0.1035 per share. These shares were exercised for $18,619 of services performed by the option holder. e) During the nine months ended September 30, 2000, the Company issued 50,000 shares of its restricted Class A common stock to Corporate Architects, Inc. with a value of $46,875 for the purchase of ThirdCAI, Inc. f) During the nine months ended September 30, 2000, the Company issued 80,000 shares of its restricted Class A common stock as compensation valued at $69,938. The accompanying notes are an integral part of the financial statement. F-32 IVOICE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements have been prepared in accordance with generally accepted accounting principles 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, 2000. The result of operations for the nine-month periods ended September 30, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has sustained significant net losses which have resulted in an accumulated deficit at September 30, 2001 of $11,526,341, and periodic cash flow difficulties, which raise substantial doubt of the Company's ability to continue as a going concern. The net loss for the year ended December 31, 2000 was $2,891,379 and the Company recorded a net loss of $2,542,906 for the nine months ended September 30, 2001. To date, the Company has funded its operations through the issuances 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 the Company's Class A common stock. The Company anticipates a net loss for the year ended December 31, 2001, and with a cash balance of $13,177 at September 30, 2001 and expected cash requirements for the year, there is substantial doubt as to the Company's ability to continue operations. The Company believes that these conditions have 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 the Company. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence. The Company is attempting to improve these conditions by way of financial assistance through collaborative partnering agreements, issuances of additional equity, debt arrangements, and product sales. Management believes that appropriate funding will be generated and future product sales will result from these opportunities and that the Company will continue operations through the next fiscal year; however, no assurance can be given that sales will be generated or that the additional necessary funding will be raised. On August 24, 2001, the Company amended its certificate of incorporation to a) change its name to iVoice Inc.; b) to increase the number of shares it is authorized to issue of its Class A common stock to 600,000,000 shares; c) to increase the number of shares it is authorized to issue of its Class B common stock to 3,000,000 shares; d) to change the par value of its Class A common stock to $.001 per share; and e) to give the board of directors the authority to issue up to 1,000,000 shares of preferred stock with $1.00 par value. F-33 IVOICE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2001 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, ------------------ ----------------- 2001 2000 2001 2000 ------ ------ ------ ------ Basic and Diluted 132,577,874 99,719,095 117,196,212 81,831,436
NOTE 2 - CONVERTIBLE DEBENTURES The Company 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 fourteen notes payable totaling $275,000 bearing interest at 8% and maturing 5 years from the date of issue. The 12% debentures are convertible into shares of the Company'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, 2001, $305,200 in principal of the 12% debentures and $6,559 in accrued interest had been converted into 2,996,738 shares of the Company's Class A common stock. Total outstanding principal balance of the 12% convertible debentures at September 30, 2001 was $194,800 plus accrued interest of $76,670. 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. Total outstanding principal balance of the 8% convertible debentures at September 30, 2001 was $275,000 plus accrued interest of $5,995. The Company has been advised by the holders of the 12% debentures that the Company 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 the Company pursuant to a Security Agreement that was part of the debenture documentation. The Company 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 the Company has issued 450,000 shares to this former holder in full settlement of their claim. The Company has not accrued any amounts with respect to the Company's default on the 12% debentures that may be due to the remaining holders. The Company anticipates issuing additional shares to settle the debenture holders, claims arising from our default the amount of which is undeterminable at this time. F-24 IVOICE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2001 NOTE 3 - DUE TO RELATED PARTY During the period from June 2000 to date, Jerome R. Mahoney, President and Chief Executive Officer of the Company has sold personal holdings of the Company's Class A common shares and has loaned the proceeds of these sales to the Company to fund its working capital requirements. The Company has executed a promissory note and Security Agreement in favor of Mr. Mahoney. As of September 30, 2001, 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 $1,700,678, of this amount, $864,259 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 4 - COMMITMENTS AND CONTINGENCIES In April 2000, the Company entered into a two-year lease agreement for their office currently utilized as the corporate headquarters. Monthly lease payments total $11,000. In May 1999, the Company entered into a five-year employment agreement with its majority stockholder (the "Executive"). He will serve as the Company's Chairman of the Board and Chief Executive Officer for a term of five years. As consideration, the Company agrees to pay the Executive a sum of $180,000 the first year with a 10% increase every year thereafter. The Company has been named a defendant in a lawsuit brought about by Communication Research, Inc., or "CRI." In this lawsuit, CRI makes claims against the Company of constructive eviction, trespass, breach of contract, conversion, interference with economic relations, and quantum merit. The Company believes that it will prevail in the case, and in any event does not believe that unfavorable the outcome will have a material adverse effect on its business The Company has been named defendant in a lawsuit brought by Lighthouse Technical Consulting, Inc. filed July 2, 2001. In this lawsuit, the plaintiff makes claim for non-payment of $15,000 for placement services performed by Lighthouse. The Company is in dispute of the amount owed and intends to vigorously defend itself in this suit. The Company has been named defendant in a lawsuit brought by Business Staffing, Inc. filed April 12, 2001. In this lawsuit, the plaintiff makes claim for non-payment of $37,250 for placement services performed by Business Staffing. The Company is in dispute of the amount owed and intends to vigorously defend itself in this suit. The Company has been named defendant in a lawsuit brought by Lorelei Personnel, Inc. filed November 28, 2000. In this lawsuit, the plaintiff makes claim for non-payment of $6,000 for placement services performed by Lorelei Personnel, Inc. The Company disputes the amount owed and intends to vigorously defend itself in this suit. In an arbitration hearing held in July 2001, the arbitrator determined that no amount is due to Lorelei. The Company filed a Summons and Complaint in U.S. District Court against PanAm Wireless, doing business as Celpage, Inc. The Complaint alleges that Celpage breached the Software\Hardware Agreement between iVoice and Celpage by refusing to accept and pay for the balance of a system installation specified in the Agreement. The Company is seeking damages in the amount of $245,375 together with interest from January 17, 2001. The Company's balance sheet at September 30, 2001 reflects, in other assets, a receivable in the amount of $67,650 representing the $245,375 less deferred revenues of $147,225 and a reserve of $30,500. F-35 IVOICE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2001 NOTE 5 - CAPITAL LEASE OBLIGATIONS During the year ended December 31, 2000, the Company 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, 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. $ 23,586 Lease payable for furniture, payable at $2,151 per month, including interest at 20.79%. Final payment due April 2003. 33,015 -------- Present value of net minimum lease payments $ 56,601 ======== The future minimum lease payments $ 67,414 Less amount representing interest 10,813 -------- Present value of net minimum lease payments 56,601 Less current portion 33,213 -------- Long term capital lease obligations 23,388 ======== NOTE 6 - COMMON STOCK In August 2001, the Company 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 the Company 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, 2001: 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, 2001, 142,810,525 shares were issued and outstanding. Each holder of Class A Common stock is entitled to receive ratably dividends, if any, as may be declared by the Board of Directors out of funds legally available for the payment of dividends. The Company has never paid any dividends on its Common Stock. For the nine months ended September 30, 2001, the Company had the following transactions: 1. The Company issued 12,194,287 shares of its Class A common stock for services rendered valued at $897,055. 2. The Company issued 2,020,834 shares of its Class A common stock for compensation valued at $224,000. 3. The Company 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 F-36 IVOICE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2001 NOTE 6 - COMMON STOCK - (Continued) a) Class A Common Stock - (continued) 4. The Company 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. The Company issued 2,996,738 shares of Class A common stock for the conversion of $142,200 in debenture principal and $6,559 in accrued interest. 6. The Company 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 the Company. The Company 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 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, 2001, 700,000 shares were issued; and 364,000 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, 2001, no shares were issued or outstanding. NOTE 7 - OPTIONS & WARRANTS For the nine-month period ending September 30, 2001, the Company issued various options as follows: a) 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. b) Warrants to purchase 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 the Company's 8% convertible debentures, pursuant to a subscription agreement with them. The warrants expire five years from the date of issue. c) 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 6 regarding shares issued for exercise of this warrant. d) Options to purchase 1,540,000 shares of iVoice Class A common stock with an average exercise price of $.074 to company employees pursuant to the iVoice Employee Stock Option Plan. Options generally vest over four years and have a maximum term of five years. The Company 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-37 No dealer, salesman or other person has been authorized to give any information or to make representations other than those contained in this prospectus, and if given or made, such information or representations must not be relied upon as having been authorized by us or the selling stockholders. Neither the delivery of this prospectus nor any sale hereunder will, under any circumstances, create an implication that the information herein is correct as of any time subsequent to its date. This prospectus does not constitute an offer to or solicitation of offers by anyone in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making such an offer is not qualified to do so or to anyone to whom it is unlawful to make such an offer or solicitation. 50,000,000 SHARES IVOICE, INC. COMMON STOCK PROSPECTUS ______, 2002 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers Our certificate of incorporation provides that a director shall not be liable to iVoice or our stockholders for monetary damages for breach of fiduciary duty as a director. In addition, our certificate of incorporation provides that we shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to any action, suit or proceeding, whether criminal, civil, administrative or investigative (a "legal action"), whether such legal action be by or in the right of the corporation or otherwise, by reason of the fact that such person is or was a director or officer of the company, or serves or served at the request of the Company as a director or officer, of another corporation, partnership, joint venture, trust or any other enterprise. In addition, our certificate of incorporation provides for indemnification of any person made or threatened to be made a party to any legal action by reason of the fact that such person is or was a director or officer of the Company and is or was serving as a fiduciary of, or otherwise rendering to, any employee benefit plan of or relating to the Company. The indemnification obligation of the Company in our certificate of incorporation is permitted under Section 145 of the General Corporation Law of the State of Delaware. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore unenforceable. Item 25. Other Expenses of Issuance and Distribution. The Registrant estimates that expenses payable by the Registrant in connection with the offering described in this Registration Statement will be as follows: Total SEC registration fee (actual) .........................................$896.25 Accounting fees and expenses ........................................$1,000.00 Legal fees and expenses..............................................$1,000.00 Printing and engraving expenses..........................................$0.00 Miscellaneous expenses................................................$1000.00 Item 26. Recent Sales of Unregistered Securities The following table denotes the sales of securities made within the past three years which were exempt from registration pursuant to Rule 504 of Regulation D. All shares issued were shares of our Class A common stock and were purchased for cash. Name Date Issued No. of Shares - ---- ----------- ------------- H. Glenn Bagwell, Jr. 12/21/98 1,300,000 H. Glenn Bagwell, Jr. 1/4/99 1,000,000 Toby Investments Group 1/14/99 1,353,000 J V O Consulting, Inc. 1/19/99 285,715 H. Glenn Bagwell, Jr. 1/19/99 750,000 Bon Temps Roule, Inc. 1/22/99 285,715 H. Glenn Bagwell, Jr. 3/15/99 2,500,000 Toby Investments Group 3/18/99 500,000 H. Glenn Bagwell, Jr. 4/5/99 2,500,000 Dot Com Funding 6/2/99 981,299 H. Glenn Bagwell, Jr. 4/5/00 1,240,047 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.1 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). 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. 5.1 * Opinion of Kramer Levin Naftalis & Frankel LLP. 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. 10.7* Registration rights agreement between iVoice.com, Inc. and Beacon Capital, LLC, dated as of November 20, 2001. 10.8* Form of warrant to purchase 250,000 shares of iVoice.com, Inc. to be issued to Beacon Capital, LLC 10.9* Agreement between iVoice, Inc. and Beacon Capital, LLC, dated as of December 17, 2001, for the purchase of an additional $150,000 of our 8% convertible debentures. 10.10 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). 10.11 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). 10.12 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). 10.13 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). 10.14 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). 11 * Statements regarding computation of per share earnings. 13.1 Form 10-SB12G (incorporated by reference and previously filed on February 4, 2000 with the Commission). 13.2 Form 10-K for the year ending December 31, 2000 (incorporated by reference and previously filed with the Commission). 13.3 Form 10-QSB for the quarter ending March 31, 2001 (incorporated by reference and previously filed with the Commission). 13.4 Form 10-QSB for the quarter ending June 30, 2001 (incorporated by reference and previously filed with the Commission). 13.5 Form 10-QSB for the quarter ending September 30, 2001 (incorporated by reference and previously filed with the Commission). 15 Letter on unaudited interim financial information (incorporated by reference and previously filed with the Commission). 23.1* Consent of Merdinger, Fruchter, Rosen & Corso, P.C. 23.2* Consent of Kramer Levin Naftalis & Frankel LLP (contained in the opinion filed as Exhibit 5.1 hereto). 23.3* Consent of Mendlowitz Weitsen, LLP 24.1* Power of attorney (contained on the signature page of this Registration Statement). - ------------------- * Filed herewith Item 28. Undertakings The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: i. To include any prospectus required by Section 10(a)(3) of the Securities Act; ii. To 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; iii. To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; provided, however, that clauses (i) and (ii) do not apply if the Registration Statement is on Form S-3, Form S-8 or Form F-3, and the information required to be included in a post-effective amendment by such clauses is contained in periodic reports file with or furnished to the Commission by the Registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement; (2) That, for the purpose of determining any liability under the Securities 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 initial bona fide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Matawan, New Jersey, on December 20, 2001. IVOICE, INC. By: /s/ Jerome R. Mahoney ---------------------------- Jerome R. Mahoney President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jerome R. Mahoney his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Jerome R. Mahoney Chief Executive Officer, President December 20, 2001 - ---------------------- and Director ----------------- Jerome R. Mahoney /s/ Kevin Whalen Chief Financial Officer December 20, 2001 - --------------------- ----------------- Kevin Whalen EX-4 4 kl12003_ex4-13.txt EXHIBIT 4.13 FORM OF DEBENTURE Exhibit 4.13 FORM OF DEBENTURE THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. AMOUNT $150,000 DEBENTURE NUMBER NOV-2001-115 ISSUANCE DATE November 15, 2001 MATURITY DATE November 15, 2006 FOR VALUE RECEIVED, iVoice, Inc., a Delaware corporation (the "Company"), hereby promises to pay Beacon Capital, LLC (the "Holder") on November 15, 2006, (the "Maturity Date"), the principal amount of One Hundred Fifty Thousand Dollars ($150,000) U.S., and to pay interest on the principal amount hereof, in such amounts, at such times and on such terms and conditions as are specified herein. Article 1. Interest The Company shall pay interest on the unpaid principal amount of this Debenture (the "Debenture") at the time of each conversion until the principal amount hereof is paid in full or has been converted. The Debentures shall pay 8% cumulative interest, in cash or in shares of Class A common stock, par value $.001 per share, of the Company ("Common Stock"), at the Company's option, at the time of each conversion. If paid in Common Stock, the number of shares of the Company's Common Stock to be received shall be determined by dividing the dollar amount of the interest by the lesser of (i) 140% of the closing bid price for the Common Stock on the Closing Date, as that term is defined below or (ii) 80% of the Market Price, each being referred to as the "Conversion Price". "Market Price" shall mean the average of the three (3) lowest closing bid prices for the Common Stock, as reported by Bloomberg, LP, during the twenty-two (22) trading days immediately preceding the date of conversion. The closing shall be deemed to have occurred on the date the funds are received by the Company (the "Closing Date"). If the interest is to be paid in cash, the Company shall make such payment within five (5) business days of the date of conversion. If the interest is to be 1 paid in Common Stock, said Common Stock shall be delivered to the Holder, or per Holder's instructions, within five (5) business days of the date of conversion. The Debentures are subject to automatic conversion at the end of five (5) years from the date of issuance at which time all Debentures outstanding will be automatically converted based upon the formula set forth in Section 3.2. Article 2. Method of Payment This Debenture must be surrendered to the Company in order for the Holder to receive payment of the principal amount hereof. The Company shall have the option of paying the interest on this Debenture in United States dollars or in Common Stock upon conversion pursuant to Article 1 hereof. The Company may draw a check for the payment of interest to the order of the Holder of this Debenture and mail it to the Holder's address as shown on the Register (as defined in Section 7.2 below). Interest and principal payments shall be subject to withholding under applicable United States Federal Internal Revenue Service Regulations. Article 3. Conversion Section 3.1. Conversion Privilege (a) The Holder of this Debenture shall have the right, at its option, to convert it into shares of Common Stock at any time following the Closing Date and which is before the close of business on the Maturity Date, except as set forth in Section 3.1(c) below. The number of shares of Common Stock issuable upon the conversion of this Debenture is determined pursuant to Section 3.2 and rounding the result to the nearest whole share. (b) Less than all of the principal amount of this Debenture may be converted into Common Stock if the portion converted is $5,000 or a whole multiple of $5,000 and the provisions of this Article 3 that apply to the conversion of all of the Debenture shall also apply to the conversion of a portion of it. This Debenture may not be converted, whether in whole or in part, except in accordance with Article 3. (c) In the event all or any portion of this Debenture remains outstanding on the Maturity Date, the unconverted portion of such Debenture will automatically be converted into shares of Common Stock on such date in the manner set forth in Section 3.2. Section 3.2. Conversion Procedure. (a) Debentures. Upon receipt by the Company or its designated attorney of a facsimile or original of Holder's signed of Conversion (See Exhibit A attached hereto) preceded by, together with or followed by receipt of the original Debenture to be converted in whole or in part in the manner set forth in 3.2(b) below, the Company shall instruct its transfer agent to issue one or more Certificates representing that number of shares of Common Stock into which the Debenture is convertible. The Seller's transfer agent or 2 attorney shall act as Registrar and shall maintain an appropriate ledger containing the necessary information with respect to each Debenture. (b) Conversion Procedures. The face amount of this Debenture may be converted, in whole or in part, anytime following the Closing Date. Such conversion shall be effectuated by surrendering to the Company, or its attorney, this Debenture to be converted together with a facsimile or original of the signed Notice of Conversion which evidences Holder's intention to convert the Debenture indicated. The date on which the Notice of Conversion is effective ("Conversion Date") shall be deemed to be the date on which the Holder has delivered to the Company or its designated attorney a facsimile or original of the signed Notice of Conversion, as long as the original Debenture(s) to be converted are received by the Company or its designated attorney within five (5) business days thereafter. Notwithstanding the above, any Notice of Conversion not received by 5:00 P.M. EST, shall be deemed to have been received the next business day. Unless otherwise notified by the Company in writing via facsimile the Company's designated attorney is Lawrence Muenz, Esq. Meritz & Muenz, L.L.P., Three Hughes Place, Dix Hills, New York 11746 (P) 631-242-7384 (F) 631-242-6715. (c) Common Stock to be Issued. Upon the conversion of any Debentures and upon receipt by the Company or its attorney of a facsimile or original of Holder's signed Notice of Conversion Seller shall instruct Seller's transfer agent to issue Stock Certificates without restrictive legend or stop transfer instructions, if at that time the Registration Statement has been deemed effective (or with proper restrictive legend if the Registration Statement has not as yet been declared effective), provided that the shares have been sold in accordance with the prospectus, in such denominations to be specified at conversion representing the number of shares of Common Stock issuable upon such conversion, as applicable. Seller warrants that no instructions, other than these instructions, have been given or will be given to the transfer agent and that the Common Stock shall otherwise be freely transferable on the books and records of Seller, except as may be set forth herein. (d) Conversion Rate. Holder is entitled, at its option to convert the face amount of this Debenture, plus accrued interest, anytime following the Closing Date, at the lesser of (i) 140% of the closing bid price for Common Stock on the Closing Date or (ii) 80% of the Market Price as defined in Article 1, each being referred to as the "Conversion Price". No fractional shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded up or down, as the case may be, to the nearest whole share. (e) Nothing contained in this Debenture shall be deemed to establish or require the payment of interest to the Holder at a rate in excess of the maximum rate permitted by governing law. In the event that the rate of interest required to be paid exceeds the maximum rate permitted by governing law, the rate of interest required to be paid thereunder shall be automatically reduced to the maximum rate permitted under the governing law and such excess shall be returned with reasonable promptness by the Holder to the Company. 3 (f) It shall be the Company's responsibility to take all necessary actions and to bear all such costs to issue the Common Stock as provided herein, including the responsibility and cost for delivery of an opinion letter to the transfer agent, if so required. The person in whose name the certificate of Common Stock is to be registered shall be treated as a shareholder of record on and after the conversion date. Upon surrender of any Debentures that are to be converted in part, the Company shall issue to the Holder a new Debenture equal to the unconverted amount, if so requested in writing by Holder. (g) Within five (5) business days after receipt of the documentation referred to above in Section 3.2(b), the Company shall deliver a certificate, in accordance with Section 3.2(c) for the number of shares of Common Stock issuable upon the conversion. In the event the Company does not make delivery of the Common Stock, as instructed by Holder, within five (5) business days after delivery of this original Debenture, then in such event the Company shall pay to Holder an amount, in cash in accordance with the following schedule, wherein "No. Business Days Late" is defined as the number of business days beyond the five (5) business days delivery period. Late Payment for Each $10,000 of Debenture No. Business Days Late Amount Being Converted - ---------------------- ---------------------- 1 $100 2 $200 3 $300 4 $400 5 $500 6 $600 7 $700 8 $800 9 $900 10 $1,000 >10 $1,000 + $100 for each Business Day Beyond 10 The Company acknowledges that its failure to deliver the Common Stock within five (5) business days after the Conversion Date will cause the Holder to suffer damages in an amount that will be difficult to ascertain. Accordingly, the parties agree that it is appropriate to include in this Debenture a provision for liquidated damages. The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties' good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty. The payment of liquidated damages shall not relieve the Company from its obligations to deliver the Common Stock pursuant to the terms of this Debenture. 4 To the extent that the failure of the Company to issue the Common Stock pursuant to this Section 3.2(g) is due to the unavailability of authorized but unissued shares of Common Stock, the provisions of this Section 3.2(g) shall not apply but instead the provisions of Section 3.2(h) shall apply. The Company shall make any payments incurred under this Section 3.2(g) in immediately available funds within five (5) business days from the date the Common Stock is fully delivered. Nothing herein shall limit a Holder's right to pursue actual damages or cancel the conversion for the Company's failure to issue and deliver Common Stock to the Holder within five (5) business days after the Conversion Date. (h) The Company shall at all times reserve (or make alternative written arrangements for reservation or contribution of shares) and have available all Common Stock necessary to meet conversion of the Debentures by all Holders of the entire amount of Debentures then outstanding. If, at any time Holder submits a Notice of Conversion and the Company does not have sufficient authorized but unissued shares of Common Stock (or alternative shares of Common Stock as may be contributed by Stockholders) available to effect, in full, a conversion of the Debentures (a "Conversion Default", the date of such default being referred to herein as the "Conversion Default Date"), the Company shall issue to the Holder all of the shares of Common Stock which are available, and the Notice of Conversion as to any Debentures requested to be converted but not converted (the "Unconverted Debentures"), upon Holder's sole option, may be deemed null and void. The Company shall provide notice of such Conversion Default ("Notice of Conversion Default") to all existing Holders of outstanding Debentures, by facsimile, within three (3) business day of such default (with the original delivered by overnight or two day courier), and the Holder shall give notice to the Company by facsimile within five business days of receipt of the original Notice of Conversion Default (with the original delivered by overnight or two day courier) of its election to either nullify or confirm the Notice of Conversion. The Company agrees to pay to all Holders of outstanding Debentures payments for a Conversion Default ("Conversion Default Payments") in the amount of (N/365) x (.24) x the initial issuance price of the outstanding and/or tendered but not converted Debentures held by each Holder where N = the number of days from the Conversion Default Date to the date (the "Authorization Date") that the Company authorizes a sufficient number of shares of Common Stock to effect conversion of all remaining Debentures. The Company shall send notice ("Authorization Notice") to each Holder of outstanding Debentures that additional shares of Common Stock have been authorized, the Authorization Date and the amount of Holder's accrued Conversion Default Payments. The accrued Conversion Default shall be paid in cash or shall be convertible into Common Stock at the Conversion Rate, at the Holder's option, payable as follows: (i) in the event Holder elects to take such payment in cash, cash payments shall be made to such Holder of outstanding Debentures by the fifth day of the following calendar month, or (ii) in the event Holder elects to take such payment in stock, the Holder may convert such payment amount into Common Stock at the conversion rate set forth in section 3.2(d) at anytime after the 5th day of the calendar month following 5 the month in which the Authorization Notice was received, until the expiration of the mandatory 4 year conversion period. The Company acknowledges that its failure to maintain a sufficient number of authorized but unissued shares of Common Stock to effect in full a conversion of the Debentures will cause the Holder to suffer damages in an amount that will be difficult to ascertain. Accordingly, the parties agree that it is appropriate to include in this Agreement a provision for liquidated damages. The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties' good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty. The payment of liquidated damages shall not relieve the Company from its obligations to deliver the Common Stock pursuant to the terms of this Debenture. Nothing herein shall limit the Holder's right to pursue actual damages for the Company's failure to maintain a sufficient number of authorized shares of Common Stock. (i) If, by the fifth (5th) business day after the Conversion Date of any portion of the Debentures to be converted (the "Delivery Date"), the transfer agent fails for any reason to deliver the Common Stock upon conversion by the Holder and after such Delivery Date, the Holder purchases, in an open market transaction or otherwise, shares of Common Stock (the "Covering Shares") solely in order to make delivery in satisfaction of a sale of Common Stock by the Holder (the "Sold Shares"), which delivery such Holder anticipated to make using the Common Stock issuable upon conversion (a "Buy-In"), the Company shall pay to the Holder, in addition to any other amounts due to Holder pursuant to this Debenture, and not in lieu thereof, the Buy-In Adjustment Amount (as defined below). The "Buy In Adjustment Amount" is the amount equal to the excess, if any, of (x) the Holder's total purchase price (including brokerage commissions, if any) for the Covering Shares over (y) the net proceeds (after brokerage commissions, if any) received by the Holder from the sale of the Sold Shares. The Company shall pay the Buy-In Adjustment Amount to the Holder in immediately available funds within five (5) business days of written demand by the Holder. By way of illustration and not in limitation of the foregoing, if the Holder purchases shares of Common Stock having a total purchase price (including brokerage commissions) of $11,000 to cover a Buy-In with respect to shares of Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment Amount which the Company will be required to pay to the Holder will be $1,000. (j) The Company shall furnish to Holder such number of prospectuses and other documents incidental to the registration of the shares of Common Stock underlying the Debentures, including any amendment of or supplements thereto. (k) Limitation on Issuance of Shares. If the Company's Common Stock becomes listed on the Nasdaq SmallCap Market after the issuance of the Debentures, the Company may be limited in the number of shares of Common Stock it may issue by virtue of (X) the number of authorized shares or (Y) the applicable rules and regulations of the principal securities market on which the Common Stock is listed or traded, including, but not necessarily limited to, NASDAQ Rule 4310(c)(25)(H)(i) 6 or Rule 4460(i)(1), as may be applicable (collectively, the "Cap Regulations"). Without limiting the other provisions thereof, the Debentures shall provide that (i) the Company will take all steps reasonably necessary to be in a position to issue shares of Common Stock on conversion of the Debentures without violating the Cap Regulations and (ii) if, despite taking such steps, the Company still cannot issue such shares of Common Stock without violating the Cap Regulations, the holder of a Debenture which cannot be converted as result of the Cap Regulations (each such Debenture, an "Unconverted Debenture") shall have the option, exercisable in such holder's sole and absolute discretion, to elect either of the following remedies: (x) if permitted by the Cap Regulations, require the Company to issue shares of Common Stock in accordance with such holder's Notice of Conversion at a conversion purchase price equal to the average of the closing bid price per share of Common Stock for any five (5) consecutive trading days (subject to certain equitable adjustments for certain events occurring during such period) during the sixty (60) trading days immediately preceding the Conversion Date; or (y) require the Company to redeem each Unconverted Debenture for an amount (the "Redemption Amount"), payable in cash, equal to the sum of (i) one hundred thirty-three percent (133%) of the principal of an Unconverted Debenture, plus (ii) any accrued but unpaid interest thereon through and including the date (the "Redemption Date") on which the Redemption Amount is paid to the holder. A holder of an Unconverted Debenture may elect one of the above remedies with respect to a portion of such Unconverted Debenture and the other remedy with respect to other portions of the Unconverted Debenture. The Debentures shall contain provisions substantially consistent with the above terms, with such additional provisions as may be consented to by the Holder. The provisions of this section are not intended to limit the scope of the provisions otherwise included in the Debentures. (l) Limitation on Amount of Conversion and Ownership. Notwithstanding anything to the contrary in this Debenture, in no event shall the Holder be entitled to convert that amount of Debenture, and in no event shall the Company permit that amount of conversion, into that number of shares, which when added to the sum of the number of shares of Common Stock beneficially owned, (as such term is defined under Section 13(d) and Rule 13d-3 of the Securities Exchange Act of 1934, as may be amended, (the "1934 Act")), by the Holder, would exceed 4.99% of the number of shares of Common Stock outstanding on the Conversion Date, as determined in accordance with Rule 13d-1(j) of the 1934 Act. In the event that the number of shares of Common Stock outstanding as determined in accordance with Section 13(d) of the 1934 Act is different on any Conversion Date than it was on the Closing Date, then the number of shares of Common Stock outstanding on such Conversion Date shall govern for purposes of determining whether the Holder would be acquiring beneficial ownership of more than 7 4.99% of the number of shares of Common Stock outstanding on such Conversion Date. (m) Right of Redemption by the Company. The Company shall have the right, at its sole option, to require a redemption of any percentage of the balance of this Debenture by giving ten (10) business day written notice to the Purchaser via facsimile transmission stating the date that the Company shall redeem. Upon exercise of redemption by the Company, the Company shall be required to pay 125% of the balance remaining on the Debenture, plus accrued but unpaid interest and outstanding liquidated damages. The Holder shall be entitled to convert the Debenture up to the date that the Company intends to redeem. In the event the Company sends notice of redemption to the Holder but fails to redeem as stated in the redemption notice, the Company shall be precluded from effecting any further redemptions. (n) Legend. The Holder acknowledges that each certificate representing the Debentures, and the Common Stock unless registered pursuant to the Registration Rights Agreement, shall be stamped or otherwise imprinted with a legend substantially in the following form: THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE OFFERED OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) IF AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. (o) Prior to conversion of all the Debentures and exercise of all the Warrants, if at anytime the conversion of all the Debentures and exercise of all the Warrants outstanding would result in an insufficient number of authorized shares of Common Stock being available to cover all the conversions, then in such event, the Company will move to call and hold a shareholder's meeting or have shareholder action with written consent of the proper number of shareholders within thirty (30) days of such event, or such greater period of time if statutorily required or reasonably necessary as regards standard brokerage house and/or SEC requirements and/or procedures, for the purpose of authorizing additional shares of Common Stock to facilitate the conversions. In such an event management of the Company shall recommend to all shareholders to vote their shares in favor of increasing the authorized number of shares of Common Stock. Management of the Company shall vote all of its shares of Common Stock in favor of increasing the number of shares of authorized Common Stock. Company represents and warrants that under no circumstances will it deny or prevent Holder's right to convert the Debentures as permitted under the terms of this Subscription Agreement or the Registration Rights Agreement. Nothing in this Section shall limit the obligation of the Company to make the payments set forth in Section 3.2(g). In the event the 8 Company's shareholder's meeting does not result in the necessary authorization, the Company shall redeem the outstanding Debentures for an amount equal to (x) the sum of the principal of the outstanding Debentures plus accrued interest thereon multiplied by (y) 133%. Section 3.3. Fractional Shares. The Company shall not issue fractional shares of Common Stock, or scrip representing fractions of such shares, upon the conversion of this Debenture. Instead, the Company shall round up or down, as the case may be, to the nearest whole share. Section 3.4. Taxes on Conversion. The Company shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion of this Debenture. However, the Holder shall pay any such tax which is due because the shares are issued in a name other than its name. Section 3.5. Company to Reserve Stock. The Company shall reserve the number of shares of Common Stock required pursuant to and upon the terms set forth in the Subscription Agreement to permit the conversion of this Debenture. All shares of Common Stock which may be issued upon the conversion hereof shall upon issuance be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof. Section 3.6. Restrictions on Transfer. This Debenture has not been registered under the Securities Act of 1933, as amended, (the "Act") and is being issued under Section 4(2) of the Act and Rule 506 of Regulation D promulgated under the Act. This Debenture and the Common Stock issuable upon the conversion thereof may only be offered or sold pursuant to registration under or an exemption from the Act. Section 3.7. Mergers, Etc. If the Company merges or consolidates with another corporation or sells or transfers all or substantially all of its assets to another person and the holders of the Common Stock are entitled to receive stock, securities or property in respect of or in exchange for Common Stock, then as a condition of such merger, consolidation, sale or transfer, the Company and any such successor, purchaser or transferee shall amend this Debenture to provide that it may thereafter be converted on the terms and subject to the conditions set forth above into the kind and amount of stock, securities or property receivable upon such merger, consolidation, sale or transfer by a holder of the number of shares of Common Stock into which this Debenture might have been converted immediately before such merger, consolidation, sale or transfer, subject to adjustments which shall be as nearly equivalent as may be practicable to adjustments provided for in this Article 3. Article 4. Mergers The Company shall not consolidate or merge into, or transfer all or substantially all of its assets to, any person, unless such person assumes in writing the obligations of the Company under this Debenture and immediately after such transaction no Event of Default exists. Any reference herein to the Company shall refer to such surviving or 9 transferee corporation and the obligations of the Company shall terminate upon such written assumption. Article 5. Reports The Company will mail to the Holder hereof at its address as shown on the Register a copy of any annual, quarterly or current report that it files with the Securities and Exchange Commission promptly after the filing thereof and a copy of any annual, quarterly or other report or proxy statement that it gives to its shareholders generally at the time such report or statement is sent to shareholders. Article 6. Defaults and Remedies Section 6.1. Events of Default. An "Event of Default" occurs if (a) the Company does not make the payment of the principal of this Debenture when the same becomes due and payable at maturity, upon redemption or otherwise, (b) the Company does not make a payment, other than a payment of principal, for a period of five (5) business days thereafter, (c) any of the Company's representations or warranties contained in the Subscription Agreement or this Debenture were false when made or the Company fails to comply with any of its other agreements in the Subscription Agreement or this Debenture and such failure continues for the period and after the notice specified below, (d) the Company pursuant to or within the meaning of any Bankruptcy Law (as hereinafter defined): (i) commences a voluntary case; (ii) consents to the entry of an order for relief against it in an involuntary case; (iii) consents to the appointment of a Custodian (as hereinafter defined) of it or for all or substantially all of its property or (iv) makes a general assignment for the benefit of its creditors or (v) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company in an involuntary case; (B) appoints a Custodian of the Company or for all or substantially all of its property or (C) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for sixty (60) calendar days, (e) the Company's Common Stock is suspended or no longer listed on any recognized exchange including electronic over-the-counter bulletin board for in excess of five (5) consecutive trading days. As used in this Section 6.1, the term "Bankruptcy Law" means Title 11 of the United States Code or any similar federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. A default under clause (c) above is not an Event of Default until the holders of at least 25% of the aggregate principal amount of the Debentures outstanding notify the Company of such default and the Company does not cure it within thirty (30) business days after the receipt of such notice, unless the Company commences to cure such default within such period, which must specify the default, demand that it be remedied and state that it is a "Notice of Default". Section 6.2. Acceleration. If an Event of Default occurs and is continuing, the Holder hereof by notice to the Company, may declare the remaining principal amount of this Debenture, together with all accrued interest and any liquidated damages, to be due and payable. Upon such declaration, the remaining principal amount shall be due and payable immediately. 10 Section 6.3 Seniority. No indebtedness of the Company is senior to this Debenture in right of payment, whether with respect to interest, damages or upon liquidation or dissolution or otherwise. The Company will not and will not permit any of its subsidiaries to, directly or indirectly, enter into, create, incur, assume or suffer to exist any indebtedness of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom that is senior in any respect to the Company's obligations under the Debentures. Section 6.4 Liquidation Value. The liquidation value of this Debenture shall be equal to 125% of the outstanding balance remaining on this Debenture plus accrued but unpaid interest and liquidated damages. Article 7. Registered Debentures Section 7.1. Series. This Debenture is one of a numbered series of Debentures which are identical except as to the principal amount and date of issuance thereof and as to any restriction on the transfer thereof in order to comply with the Securities Act of 1933 and the regulations of the Securities and Exchange Commission promulgated thereunder. Such Debentures are referred to herein collectively as the "Debentures". The Debentures shall be issued in whole multiples of $5,000. Section 7.2. Record Ownership. The Company, or its attorney, shall maintain a register of the holders of the Debentures (the "Register") showing their names and addresses and the serial numbers and principal amounts of Debentures issued to or transferred of record by them from time to time. The Register may be maintained in electronic, magnetic or other computerized form. The Company may treat the person named as the Holder of this Debenture in the Register as the sole owner of this Debenture. The Holder of this Debenture is the person exclusively entitled to receive payments of interest on this Debenture, receive notifications with respect to this Debenture, convert it into Common Stock and otherwise exercise all of the rights and powers as the absolute owner hereof. Section 7.3. Registration of Transfer. Transfers of this Debenture may be registered on the books of the Company maintained for such purpose pursuant to Section 7.2 above (i.e., the Register). Transfers shall be registered when this Debenture is presented to the Company with a request to register the transfer hereof and the Debenture is duly endorsed by the appropriate person, reasonable assurances are given that the endorsements are genuine and effective, and the Company has received evidence satisfactory to it that such transfer is rightful and in compliance with all applicable laws, including tax laws and state and federal securities laws. When this Debenture is presented for transfer and duly transferred hereunder, it shall be canceled and a new Debenture showing the name of the transferee as the record holder thereof shall be issued in lieu hereof. When this Debenture is presented to the Company with a reasonable request to exchange it for an equal principal amount of Debentures of other denominations, the Company shall make such exchange and shall cancel this Debenture 11 and issue in lieu thereof Debentures having a total principal amount equal to this Debenture in such denominations as agreed to by the Company and Holder. Section 7.4. Worn or Lost Debentures. If this Debenture becomes worn, defaced or mutilated but is still substantially intact and recognizable, the Company or its agent may issue a new Debenture in lieu hereof upon its surrender. Where the Holder of this Debenture claims that the Debenture has been lost, destroyed or wrongfully taken, the Company shall issue a new Debenture in place of the original Debenture if the Holder so requests by written notice to the Company actually received by the Company before it is notified that the Debenture has been acquired by a bona fide purchaser and the Holder has delivered to the Company an indemnity bond in such amount and issued by such surety as the Company deems satisfactory together with an affidavit of the Holder setting forth the facts concerning such loss, destruction or wrongful taking and such other information in such form with such proof or verification as the Company may request. Article 8. Notice. Any notice, other than the Notice of Conversion, which is required or convenient under the terms of this Debenture shall be duly given if it is in writing and delivered in person or mailed by first class mail, postage prepaid and directed to the Holder of the Debenture at its address as it appears on the Register or if to the Company to its principal executive offices, with a copy by fax to Lawrence Muenz, Esq. Meritz & Muenz, L.L.P., Three Hughes Place, Dix Hills, New York 11746 (P) 631-242-7384 (F) 631-242-6715. The time when such notice is sent shall be the time of the giving of the notice. Article 9. Time Where this Debenture authorizes or requires the payment of money or the performance of a condition or obligation on a Saturday or Sunday or a public holiday, or authorizes or requires the payment of money or the performance of a condition or obligation within, before or after a period of time computed from a certain date, and such period of time ends on a Saturday or a Sunday or a public holiday, such payment may be made or condition or obligation performed on the next succeeding business day, and if the period ends at a specified hour, such payment may be made or condition performed, at or before the same hour of such next succeeding business day, with the same force and effect as if made or performed in accordance with the terms of this Debenture. A "business day" shall mean a day on which the banks in New York are not required or allowed to be closed. Article 10. Waivers The holders of a majority in principal amount of the Debentures may waive a default or rescind the declaration of an Event of Default and its consequences except for a default in the payment of principal or conversion into Common Stock. 12 Article 11. Rules of Construction. In this Debenture, unless the context otherwise requires, words in the singular number include the plural, and in the plural include the singular, and words of the masculine gender include the feminine and the neuter, and when the sense so indicates, words of the neuter gender may refer to any gender. The numbers and titles of sections contained in the Debenture are inserted for convenience of reference only, and they neither form a part of this Debenture nor are they to be used in the construction or interpretation hereof. Wherever, in this Debenture, a determination of the Company is required or allowed, such determination shall be made by a majority of the Board of Directors of the Company and if it is made in good faith, it shall be conclusive and binding upon the Company and the Holder of this Debenture. Article 12. Governing Law The validity, terms, performance and enforcement of this Debenture shall be governed and construed by the provisions hereof and in accordance with the laws of the State of New York applicable to agreements that are negotiated, executed, delivered and performed solely in the State of New York. Article 13. Litigation (a) Forum Selection and Consent to Jurisdiction. Any litigation arising out of, under, or in connection with, this Debenture or any course of conduct, course of dealing, statements (whether oral or written) or actions of the Company or Holder shall be brought and maintained exclusively in the courts of the State of New York. The Company hereby expressly and irrevocably submits to the jurisdiction of the state and federal courts of the State of New York for the purpose of any such litigation as set forth above and irrevocably agrees to be bound by any final judgment rendered thereby in connection with such litigation. The Company further irrevocably consents to the service of process by registered mail, postage prepaid, or by personal service within or without the State of New York. The Company hereby expressly and irrevocably waives, to the fullest extent permitted by law, any objection which it may have or hereafter may have to the laying of venue of any such litigation brought in any such court referred to above and any claim that any such litigation has been brought in any inconvenient forum. To the extent that the Company has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution or otherwise) with respect to itself or its property, the Company hereby irrevocably waives such immunity in respect of its obligations under this Debenture. (b) Waiver of Jury Trial. The Holder and the Company hereby knowingly, voluntarily and intentionally waive any rights they may have to a trial by jury in respect of any litigation based hereon, or arising out of, under, or in connection with, this Debenture, or any course of conduct, course of dealing, statements (whether oral or written) or actions of the Holder or the Company. The Company acknowledges and agrees that it has received full and sufficient consideration for this provision and that this provision is a material inducement for the Holder purchasing this Debenture. 13 (c) Governing Law. The terms of this Debenture shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to the conflicts of laws principles thereof. IN WITNESS WHEREOF, the Company has duly executed this Debenture as of the date first written above. iVoice, Inc. By ---------------------------------- Name: Jerome R. Mahoney, Title: Chief Executive Officer 14 Exhibit C NOTICE OF CONVERSION (To be Executed by the Registered owner in order to Convert the Debentures.) The undersigned hereby irrevocably elects, as of ______________, 200_ to convert $__________ of Convertible Debentures into Common Stock of iVoice.com, Inc. (the "Company") according to the conditions set forth in the Subscription Agreement dated July of 2001. Date of Conversion__________________________________________ Applicable Conversion Price__________________________________ Number of Shares Issuable upon this conversion_________________ Signature___________________________________________________ [Name] Address_____________________________________________________ - ------------------------------------------------------------ Phone______________________ Fax____________________________ 15 EX-5 5 kl12003_ex5-1.txt EXHIBIT 5.1 OPINION EXHIBIT 5.1 KRAMER LEVIN NAFTALIS & FRANKEL LLP 919 THIRD AVENUE NEW YORK, N.Y. 10022 - 3852 TEL (212) 715-9100 47, Avenue Hoche FAX (212) 715-8000 75008 Paris France December 20, 2001 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Registration Statement on Form SB-2 ----------------------------------- Ladies and Gentlemen: We have acted as counsel to iVoice, Inc., a Delaware corporation formerly known as iVoice.com, Inc. ("iVoice"), in connection with the preparation and filing of a registration statement on Form SB-2 (the "Registration Statement") with the Securities and Exchange Commission (the "Commission") with respect to the registration for resale under the Securities Act of 1933, as amended (the "Act"), of an aggregate of 50,000,000 shares of iVoice's Class A common stock, par value $.001 per share (the "Shares"), issued or issuable by iVoice to Beacon Capital, LLC ("Beacon Capital"), the selling stockholder named in the Registration Statement as follows: 1. 49,500,000 Shares that iVoice may issue to Beacon Capital upon conversion of $150,000 of iVoice's 8% convertible debentures (the "Debenture"); and 2. 500,000 Shares that iVoice may issue upon exercise of a warrant iVoice issued to Beacon Capital as a commitment fee for purchasing the Debenture (the "Warrant"). In connection with registration of the Shares, we have reviewed such documents and records as we have deemed necessary to enable us to express an opinion on the matters covered hereby, including but not limited to the Debenture, the Warrant and copies of resolutions of iVoice's board of directors authorizing the issuance of the Shares and their registration pursuant to the Registration Statement. In rendering this opinion, we have (a) assumed (1) the genuineness of all signatures on all documents examined by us, (2) the authenticity of all documents submitted to us as originals, and (3) the conformity to original documents of all documents submitted to us as photostatic or conformed copies and the authenticity of the originals of such copies; and (b) relied on (1) certificates of public officials and (2) as to matters of fact, statements and certificates of officers and representatives of iVoice. Based upon the foregoing, we are of the opinion that the Shares, when issued in accordance with the terms of the Debenture and the Warrant, for consideration equal to or greater than the par value at the time of issuance, will be validly issued, fully paid and non-assessable. We are attorneys admitted to the Bar of the State of New York, and we express no opinion as to the laws of any other jurisdiction other than the laws of the United States of America and the General Corporation Law of the State of Delaware. The opinion expressed herein are based upon the laws in effect on the date hereof, and we assume no obligation to revise or supplement this opinion should any such law be changed by legislative action, judicial decision, or otherwise. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and the use of our name under the heading "Expert and Counsel" in the prospectus forming part of the Registration Statement. In giving the foregoing consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission thereunder. Very truly yours, /s/ Kramer Levin Naftalis & Frankel LLP EX-10 6 kl12003_ex10-6.txt EXHIBIT 10.6 SUBSCRIPTION AGREEMENT Exhibit 10.6 -------------------------------------------- iVoice.com, Inc. -------------------------------------------- THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. Offering: $150,000 This offering consists of $150,000 of iVoice.com, Inc. Convertible Debentures, convertible into Common Stock as provided in this Subscription Agreement. -------------------- SUBSCRIPTION AGREEMENT ------------------- 1 SUBSCRIPTION AGREEMENT This Subscription Agreement ("Agreement") is made between IVoice.com, Inc., ("Company") a Delaware corporation, and the undersigned prospective purchaser ("Purchaser") who is subscribing hereby for the Company's convertible debentures (the "Debentures"), to purchase up to $150,000 of the Company's Class A Common Stock, par value $.001 per share common stock ("Common Stock"). A copy of the form of Debenture is attached hereto as Exhibit A. The Debentures being offered will be separately transferable, to the extent that any such transfer is permitted by law. The Debentures and the underlying shares of Common Stock are collectively referred to as the "Securities". This subscription is submitted to you in accordance with and subject to the terms and conditions described in this Subscription Agreement together with any Exhibits thereto, relating to an offering (the "Offering") of the Company's Securities. This Offering is comprised of an offering of the Securities to accredited investors in accordance with the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"), and Rule 506 of Regulation D promulgated under the 1933 Act ("Regulation D"). 1. SUBSCRIPTION. (a) The Purchaser hereby subscribes for that amount of the Company's Debentures as is stated on the "Signature Page" of this Agreement. The Debentures shall pay 8% cumulative interest in cash or in freely trading Common Stock of the Company, at the Company's option, at the time of each conversion. If accrued interest shall be paid in Common Stock, the number of shares of the Company's Common Stock to be received shall be determined by dividing the dollar amount of the dividend by the lesser of: (i) 140% of the closing bid price for the Common Stock on the Closing Date (as defined below), or (ii) 80% of the Market Price. "Market Price" shall mean the average of the three (3) lowest closing bid prices for the Common Stock as reported by Bloomberg, L.P. during the twenty-two (22) trading days immediately preceding the conversion date. If the interest is to be paid in cash, the Company shall make such payment within five (5) business days of the date of conversion. If the accrued interest is to be paid in Common Stock, said Common Stock shall be delivered to the Purchaser, or per Purchaser's instructions, within five (5) business days of the date of conversion. The Debentures are subject to automatic conversion at the end of five (5) years from the date of issuance at which time all Debentures outstanding will be automatically converted based upon the formula set forth in the Debenture. The closing shall be deemed to have occurred on the date the funds are received by the Company (the "Closing Date"). (b) Conditions Precedent. The following shall be conditions precedent to funding and release from escrow: (i) the daily average trading volume of the Common Stock multiplied by the volume weighted average closing price ("VWAP") for the thirty (30) trading days preceding funding must be a minimum of 2 $25,000, subject to waiver by the Purchaser; (ii) the Company has canceled and terminated the equity credit line financing with Swartz Private Equity, LLC. (iii) there is 600% of the number of shares of Common Stock registered to cover the conversions at the time of the funding for the amount being funding; (iv) the par value of the company's Class A Common Stock has been changed to $.001; and (v) the VWAP for the thirty (30) trading days prior to the Purchaser's receipt of a written request from the Company for funding is not less than $.05. (c) The Purchaser, or its designee, shall also receive Warrants to purchase 250,000 shares of Common Stock. The Warrants shall be exercisable anytime after issuance, for up to five (5) years after issuance and the Common Stock underlying the Warrant shall carry piggy-back registration rights requiring registration in this Offering. The Warrants shall be exercisable in whole or in part at 115% of the closing bid price of the Company's Common Stock on the day of funding and carry a cash or cashless exercise provision, at the Purchaser's option. (d) Jerome Mahoney agrees that he shall only sell up to that number of shares of Common Stock per calendar quarter after the effective date of the registration statement being filed for this Offering to cover his personal taxes related to his sale of the Common Stock, where the proceeds were loaned to the Company. Prior to effectiveness of the registration statement being filed for this Offering, Jerome Mahoney agrees that he shall only sell shares of Common Stock if the proceeds are being loaned to the Company. Furthermore, Jerome Mahoney represents and warrants that he shall not sell any shares of Common Stock during the thirty (30) calendar day period following the funding of the Debenture. 2. PURCHASER'S REPRESENTATIONS AND WARRANTIES. ------------------------------------------ The Purchaser represents and warrants to the Company that: (a) Investment Purpose. The Purchaser is acquiring the Securities for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempted under the 1933 Act; provided, however, that by making the representations herein, the Purchaser does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act. Purchaser is neither an underwriter of, nor a dealer in, the Securities and is not participating in the distribution or resale of the Securities. 3 (b) Accredited Purchaser Status; Sophisticated Purchaser. The Purchaser is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D under the 1933 Act. The Purchaser has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities. (c) Reliance on Exemptions. The Purchaser understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and the Purchaser's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of the Purchaser to acquire such Securities. (d) Information. The Purchaser and its advisors, if any, have been furnished with or have had access to all materials relating to the business, have had access to all of the Securities Exchange Act of 1934 (the "1934 Act") filings and press releases filed and issued by the Company, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the Purchaser. The Purchaser and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigations conducted by the Purchaser or its advisors, if any, or its representatives shall modify, amend or affect the Purchaser's right to rely on the Company's representations and warranties contained in Section 3 below. The Purchaser understands that its investment in the Securities involves a high degree of risk. The Purchaser has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities. (e) No Governmental Review. The Purchaser understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities. (f) Transfer or Resale. The Purchaser understands that except as provided in the Registration Rights Agreement: (i) the Securities have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold or transferred unless (A) subsequently registered for resale thereunder and sold or transferred in accordance with an effective registration statement, (B) the Purchaser shall have received from the Company's counsel, an opinion, in a generally acceptable form, to the effect that such Securities to be sold or transferred may be sold or transferred pursuant to 4 an exemption from such registration, or (C) the Purchaser provides the Company with assurance reasonably acceptable to the Company that such Securities can be sold or transferred pursuant to Rule 144 promulgated under the 1933 Act (or a successor rule thereto) ("RULE 144"); (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. The Purchaser agrees that the sale of the Securities will be in compliance with all applicable state and federal securities laws, rules and regulations and the rules and regulations of the Principal Market, if applicable. The "Principal Market" shall mean the principal market or principal securities exchange or trading market on which the Common Stock is traded or listed. (g) Legends. The Purchaser understands that, until such time as the Securities have been transferred to a person who may trade the Common Stock without restriction under the 1933 Act as contemplated by the Registration Rights Agreement, the certificates representing the Securities, except as set forth below, shall bear a restrictive legend in substantially the following form: THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE OFFERED OR SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) IF AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Securities upon which it is stamped, if, unless otherwise required by state securities laws, (i) such Securities are registered for resale under the 1933 Act, (ii) in connection with a sale transaction, such holder receives from the Company's counsel, an opinion, in a generally acceptable form, to the effect that a public sale or transfer of such Securities may be made without registration under the 1933 Act, or (iii) such holder provides the Company with assurances reasonably acceptable to the Company that such Securities can be sold pursuant to Rule 144 without any restriction as to (A) the number of securities acquired as of a particular date that can then be immediately sold or (B) manner of sale. The Purchaser covenants 5 that, in connection with any transfer of Securities by it pursuant to an effective registration statement under the 1933 Act, it will (i) comply with the applicable prospectus delivery requirements of the 1933 Act, provided that copies of a current prospectus relating to such effective registration statement are or have been supplied to the Purchaser, and (ii) comply with the "Plan of Distribution" section of the current prospectus relating to such effective registration statement. (h) Authorization; Enforcement. This Agreement has been duly and validly authorized, executed and delivered on behalf of the Purchaser and is a valid and binding agreement of the Purchaser enforceable against the Purchaser in accordance with its terms, subject as to enforceability to general principles of equity and to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors' rights and remedies.. (i) No Conflicts. The execution, delivery and performance of this Agreement by the Purchaser and the consummation by the Purchaser of the transactions contemplated hereby will not (i) result in a violation of the Articles of Incorporation or the By-laws or (ii) conflict with, or constitute a material default (or an event which with notice or lapse of time or both would become a material default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, contract, indenture, mortgage, indebtedness or instrument to which the Purchaser or any of its Subsidiaries ("Subsidiaries" means any entity in which the Company, directly or indirectly, owns capital stock or holds an equity or similar interest) is a party, or result in a violation of any law, rule, regulation, order, judgment or decree applicable to the Purchaser or any of its Subsidiaries or by which any property or asset of the Purchaser or any of its Subsidiaries is bound or affected. 3. COMPANY'S REPRESENTATIONS AND WARRANTIES. ---------------------------------------- Except as set forth in the Schedules attached hereto, the Company represents and warrants to the Purchaser that: (a) Organization and Qualification. The Company and its Subsidiaries are corporations duly organized and validly existing in good standing under the laws of the State of Delaware, and have the requisite corporate power and authorization to own their properties and to carry on their business as now being conducted. The Company represents and warrants that the Company and its Subsidiaries are in material compliance, to the extent applicable, with all reporting obligations under either Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "1934 Act"). 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 its ownership of property or 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 6 would not have a Material Adverse Effect. As used in this Agreement, "Material Adverse Effect" means any material adverse effect on the business, properties, assets, operations, results of operations, financial condition or prospects of the Company and its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements and instruments to be entered into in connection herewith, or on the authority or ability of the Company to perform its obligations under this Agreement, the Registration Rights Agreement and the Debenture (collectively, the "Transaction Documents"). (b) Authorization; Enforcement; Compliance with Other Instruments. (i) The Company has the requisite corporate power and authority to enter into and perform all actions contemplated by the Transaction Documents and to issue the Common Stock in accordance with the terms hereof and thereof, (ii) the execution and delivery of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby, including without limitation the reservation for issuance and the issuance of the Common Stock pursuant to this Agreement, have been duly and validly 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 shareholders, (iii) the Transaction Documents have been duly and validly executed and delivered by the Company, and (iv) the Transaction Documents 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. (c) Capitalization. As of the date hereof, the authorized capital stock of the Company consists of (i) 150,000,000 shares of Class A Common Stock authorized, of which as of April 1, 2001, 110,236,548 shares were issued and outstanding, (ii) 700,000 shares of Class B Common Stock authorized, of which as of April 1, 2001, 364,000 shares are issued and outstanding (Note: one share of Series B Common Stock is convertible into 100 shares of Series A Common Stock), and (iii) no shares of Preferred Stock are authorized. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable. Furthermore, (i) no shares of the Company's capital stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company, (ii) there are no outstanding debt securities, (iii) there are no outstanding shares of capital stock, 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 7 securities or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries, (iv) 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 1933 Act (except the Registration Rights Agreement and the currently effective Registration Statement on Form SB-2), (v) there are no outstanding securities of the Company or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries, (vi) there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities as described in this Agreement, (vii) the Company does not have any stock appreciation rights or "phantom stock" plans or agreements or any similar plan or agreement and (viii) there is no dispute as to the class of any shares of the Company's capital stock. The Company has furnished to the Purchaser, or the Purchaser has had access through EDGAR ("Electronic Data Gathering, Analysis, and Retrieval System") to, true and correct copies of the Company's Articles of Incorporation, as in effect on the date hereof (the "Articles 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. (d) Issuance of Common Stock. At least 35,000,000 shares of Common Stock, have been duly authorized and reserved for issuance pursuant to this Agreement. Upon issuance in accordance with this Agreement after the effective date of the Registration Statement, the Common Stock will be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. The issuance by the Company of the Debentures is exempt from registration under the 1933 Act. In the event the Company cannot register sufficient shares, due to the remaining number of authorized shares of Common Stock being insufficient, the Company will use its best efforts to register the maximum number of shares it can based on the remaining balance of authorized shares and will use its best efforts to increase the number of its authorized shares as soon as reasonably practicable. (e) No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby will not (i) result in a violation of the Articles of Incorporation, any Certificate of Designations, Preferences and Rights of any outstanding series of preferred stock of the Company or the By-laws or (ii) conflict with, or constitute a material default (or an event which with notice or lapse of time or both would become a material default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, contract, indenture mortgage, indebtedness 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 8 decree (including United States federal and state securities laws and regulations and the rules and regulations of the Principal Market) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected. Neither the Company nor its Subsidiaries is in violation of any term of, or in default under, the Articles of Incorporation, any Certificate of Designations, Preferences and Rights of any outstanding series of preferred stock of the Company or the By-laws or their organizational charter or by-laws, respectively, or any contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its Subsidiaries, except for possible conflicts, defaults, terminations, amendments, accelerations, cancellations and violations that would not individually or in the aggregate have a Material Adverse Effect. The business of the Company and its Subsidiaries is not being conducted, and shall not be conducted, in violation of any law, statute, ordinance, rule, order or regulation of any governmental authority or agency, regulatory or self-regulatory agency, or court, except for possible violations the sanctions for which either individually or in the aggregate would not have a Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the 1933 Act, the Company is not required to obtain any consent, authorization, permit or order of, or make any filing or registration (except the filing of a registration statement) with, any court, governmental authority or agency, regulatory or self-regulatory agency or other third party in order for it to execute, deliver or perform any of its obligations under, or contemplated by, the Transaction Documents in accordance with the terms hereof or thereof. All consents, authorizations, permits, 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 and are in full force and effect as of the date hereof. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company is not, and will not be, in violation of the listing requirements of the Principal Market as in effect on the date hereof and on the Closing Date shall not be aware of any facts which would reasonably lead to delisting of the Common Stock by the Principal Market in the foreseeable future. (f) SEC Documents; Financial Statements. Since January 2000, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the "SEC Documents"). The Company has delivered to the Purchaser or its representatives, or they have had access through EDGAR, true and complete copies of the SEC Documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1933 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the 9 SEC, contained any untrue statement of a material fact or omitted 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. As of their respective dates, the financial statements of the Company included in the SEC Documents 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 written information provided by or on behalf of the Company to the Purchaser which is not included in the SEC Documents, including, without limitation, information referred to in Section 3(d) of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstance under which they are or were made, not misleading. Neither the Company nor any of its Subsidiaries or any of their officers, directors, employees or agents have provided the Purchaser with any material, nonpublic information which was not publicly disclosed prior to the date hereof and any material, nonpublic information provided to the Purchaser by the Company or its Subsidiaries or any of their officers, directors, employees or agents prior to any Closing Date shall be publicly disclosed by the Company prior to such Closing Date. (g) Absence of Certain Changes. Except as disclosed in the SEC Documents filed at least five (5) days prior to the date hereof, since January 2000, there has been no change or development in the business, properties, assets, operations, financial condition, results of operations or prospects of the Company or its Subsidiaries which has had or reasonably could have a Material Adverse Effect. The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy law nor does the Company or its Subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings. (h) Absence of Litigation. Except as disclosed 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 or, to the knowledge of the executive officers of Company or any of its Subsidiaries, threatened against or affecting the Company, the Common Stock or any of the Company's Subsidiaries or any of the Company's or the Company's Subsidiaries' officers or directors in their capacities as such, in which an adverse decision could have a Material Adverse Effect. 10 (i) Acknowledgment Regarding Purchaser's Purchase of the Debentures. The Company acknowledges and agrees that the Purchaser is acting solely in the capacity of arm's length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby. The Company further acknowledges that the Purchaser is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby and any advice given by the Purchaser or any of its respective representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to the Purchaser's purchase of the Securities. The Company further represents to the Purchaser that the Company's decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives. (j) No Undisclosed Events, Liabilities, Developments or Circumstances. No event, liability, development or circumstance has occurred or exists, or to its knowledge is contemplated to occur, with respect to the Company or its Subsidiaries or their respective business, properties, assets, prospects, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws on a registration statement filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly announced. (k) 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 1933 Act) in connection with the offer or sale of the Securities. (l) No Integrated Offering. To its knowledge, neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration under the 1933 Act of the Company's sale and issuance of the Securities to the Purchaser or cause this Offering to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable shareholder approval provisions, including, without limitation, under the rules and regulations of the Principal Market, nor will the Company or any of its Subsidiaries take any action or steps that would require registration under the 1933 Act of the Company's sale and issuance of the Securities to the Purchaser or cause the offering of the Securities to be integrated with other offerings. (m) Employee Relations. Neither the Company nor any of its Subsidiaries is involved in any union labor dispute nor, to the knowledge of the Company or any of its Subsidiaries, is any such dispute threatened. Neither the 11 Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that relations with their employees are good. No executive officer (as defined in Rule 501(f) of the 1933 Act) has notified the Company that such officer intends to leave the Company's employ or otherwise terminate such officer's employment with the Company. (n) Intellectual Property Rights. The Company and its Subsidiaries own or possess adequate rights or licenses to use all 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. None of the Company's trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, government authorizations, trade secrets or other intellectual property rights necessary to conduct its business as now or as proposed to be conducted have expired or terminated, or are expected to expire or terminate within two years from the date of this Agreement. 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, or of any such development of similar or identical trade secrets or technical information by others and 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. The Company and its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties. (o) Environmental Laws. The Company and its Subsidiaries (i) are in compliance with any and all applicable 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 where, in each of the three foregoing cases, the failure to so comply would have, individually or in the aggregate, a Material Adverse Effect. (p) Title. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the 12 Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its Subsidiaries. Any real property and facilities held under lease by the Company or any of 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. (q) 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 business at a cost that would not have a Material Adverse Effect. (r) Regulatory Permits. The Company and its Subsidiaries have in full force and effect all certificates, approvals, authorizations and permits from the appropriate federal, state, local or foreign regulatory authorities and comparable foreign regulatory agencies, necessary to own, lease or operate their respective properties and assets and 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, approval, authorization or permit, except for such certificates, approvals, authorizations or permits which if not obtained, or such revocations or modifications which, would not have a Material Adverse Effect. (s) 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. (t) No Materially Adverse Contracts, Etc. 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 13 Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement which in the judgment of the Company's officers has or is expected to have a Material Adverse Effect. (u) Tax Status. The Company and each of its Subsidiaries has made or filed all United States federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless 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) and 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. (v) Certain Transactions. Except as set forth in the SEC Documents filed at least ten days prior to the date hereof and except for arm's length transactions pursuant to which the Company makes payments in the ordinary course of business upon terms no less favorable than the Company could obtain from third parties and none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (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. (w) Dilutive Effect. The Company understands and acknowledges that the number of shares of Common Stock issuable upon purchases pursuant to this Agreement will increase in certain circumstances. The Company's executive officers and directors have studied and fully understand the nature of the transactions contemplated by this Agreement and recognize that they have a potential dilutive effect. The board of directors of the Company has concluded, in its good faith business judgment, that such issuance is in the best interests of the Company. The Company specifically acknowledges that, subject to such limitations as are expressly set forth in the Transaction Documents, its obligation to issue shares of Common Stock upon purchases pursuant to this Agreement is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company. (x) Right of First Refusal. The Company shall give Purchaser the right of first refusal for future fund raising (including the equity credit line financing being 14 entered into simultaneously with this Offering) for twelve (12) months following the effective date of the registration statement covering this Offering. The Purchaser shall have five (5) business days in which to accept such offers upon receipt of a written term sheet from the Company. (y) Pending and Threatened Litigation. Except as otherwise disclosed in Exhibit B, there is (i) no action, suit or proceeding before or by any court, arbitrator or governmental body now pending or, to the knowledge of the Company, threatened or contemplated to which the Company or any of its Subsidiaries is or may be a party or to which the business or property of the Company or any of its Subsidiaries is or may be bound or subject, (ii) no law, statute, rule, regulation, order or ordinance that has been enacted, adopted or issued by any Governmental Body or that, to the knowledge of the Company, has been proposed by any Governmental Body adversely affecting the Company or any of its Subsidiaries, (iii) no injunction, restraining order or order of any nature by a federal, state or foreign court or Governmental Body of competent jurisdiction to which the Company or any of its Subsidiaries is subject issued that, in the case of clauses (i), (ii) and (iii) above, (A) is reasonably likely, singly or in the aggregate, to result in a material adverse effect on the business, condition, (financial or otherwise), operations, earnings, performance, properties or prospects of the Company, and its Subsidiaries taken as a whole or (B) would interfere with or adversely affect the issuance of the Securities or would be reasonably likely to render any of the Transaction Documents or the Securities, or any portion thereof, invalid or unenforceable. (z) Notwithstanding anything herein to the contrary, the Company may issue, without the consent of the Purchaser, any form of security or a debt instrument that is convertible into the common stock of the Company, so long as the purpose and the use of this equity or debt funding is strategic in nature to consummate the purchase of assets and/or a merger or acquisition and the Company agrees that it shall not grant demand or piggy-back registration rights as part of such funding. 4. COVENANTS OF THE COMPANY (a) Best Efforts. The Company shall use its best efforts timely to satisfy each of the conditions to be satisfied by it as provided in the Transaction Documents. (b) Reporting Status. Until the earlier of (i) the date on which the Purchaser may sell all of the Securities acquired pursuant to this Agreement without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto), or (ii) the date on which the Purchaser has sold all the Securities issuable hereunder, the Company shall file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status as a reporting company under the 1933 Act. 15 (c) Use of Proceeds. The Company will use the proceeds from the sale of the Securities (excluding amounts paid by the Company for escrow fees, legal fees, filing fees and other fees and expenses related to the sale of these Securities) for working capital. (d) Financial Information. The Company agrees to make available to the Purchaser via EDGAR or other electronic means the following to the Purchaser during the Registration Period: (i) within five (5) Trading Days after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K and any Registration Statements or amendments filed pursuant to the 1933 Act; (ii) on the same day as the release thereof, facsimile copies of all press releases issued by the Company or any of its Subsidiaries, (iii) copies of any notices and other information made available or given to the shareholders of the Company generally, contemporaneously with the making available or giving thereof to the shareholders and (iv) within two (2) calendar days of filing or delivery thereof, copies of all documents filed with, and all correspondence sent to, the Principal Market, any securities exchange or market, or the National Association of Securities Dealers, Inc. (e) Transactions With Affiliates. The Company shall not, and shall cause each of its Subsidiaries not to, enter into, amend, modify or supplement, or permit any Subsidiary to enter into, amend, modify or supplement, any agreement, transaction, commitment or arrangement with any of its or any Subsidiary's officers, directors, persons who were officers or directors at any time during the previous two years, shareholders who beneficially own 5% or more of the Common Stock, or affiliates or with any individual related by blood, marriage or adoption to any such individual or with any entity in which any such entity or individual owns a 5% or more beneficial interest (each a "Related Party"), except for (i) customary employment arrangements and benefit programs on reasonable terms, (ii) any agreement, transaction, commitment or arrangement on an arms-length basis on terms no less favorable than terms which would have been obtainable from a person other than such Related Party, (iii) any agreement, transaction, commitment or arrangement which is approved by a majority of the disinterested directors of the Company, or (iv) loans made by Jerome Mahoney, Chief Executive Officer of the Company, to the Company for working capital needs. For purposes hereof, any director who is also an officer of the Company or any Subsidiary of the Company shall not be a disinterested director with respect to any such agreement, transaction, commitment or arrangement. "Affiliate" for purposes hereof means, with respect to any person or entity, another person or entity that, directly or indirectly, (i) has a 5% or more equity interest in that person or entity, (ii) has 5% or more common ownership with that person or entity, (iii) controls that person or entity, or (iv) shares common control with that person or entity. "Control" or "Controls" for purposes hereof means that 16 a person or entity has the power, direct or indirect, to conduct or govern the policies of another person or entity. (f) Filing of Form 8-K. On or before the date which is five (5) business days after the Closing Date, the Company shall file a press release and/or a Current Report on Form 8-K with the SEC describing the terms of the transaction contemplated by the Transaction Documents in the form required by the 1934 Act, if such filing is required. (g) Notice of Certain Events Affecting Registration. The Company shall promptly notify Purchaser upon the occurrence of any of the following events in respect of a Registration Statement or related prospectus in respect of an offering of the 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 any 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 Shares 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 such Registration Statement or related prospectus or 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 a 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 shall promptly make available to Purchaser any such supplement or amendment to the related prospectus. (h) Reimbursement. If (i) Purchaser, other than by reason of its negligence or willful misconduct, becomes involved in any capacity in any action, proceeding or investigation brought by any shareholder of the Company, in connection with or as a result of the consummation of the transactions contemplated by the Transaction Documents, or if Purchaser is impleaded in any such action, proceeding or investigation by any person, or (ii) Purchaser, other than by reason of its negligence or willful misconduct or by reason of its trading of the Common Stock in a manner that is illegal under the federal securities laws, becomes involved in any capacity in any action, proceeding or investigation brought by the 17 SEC against or involving the Company or in connection with or as a result of the consummation of the transactions contemplated by the Transaction Documents, or if Purchaser is impleaded in any such action, proceeding or investigation by any person, then in any such case, the Company will reimburse Purchaser for its reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith, as such expenses are incurred. In addition, other than with respect to any matter in which Purchaser is a named party, the Company will pay to Purchaser the charges, as reasonably determined by Purchaser, for the time of any officers or employees of Purchaser devoted to appearing and preparing to appear as witnesses, assisting in preparation for hearings, trials or pretrial matters, or otherwise with respect to inquiries, hearing, trials, and other proceedings relating to the subject matter of this Agreement. The reimbursement obligations of the Company under this section shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any affiliates of Purchaser that are actually named in such action, proceeding or investigation, and partners, directors, agents, employees, attorneys, accountants, auditors and controlling persons (if any), as the case may be, of Purchaser and any such affiliate, and shall be binding upon and inure to the benefit of any successors, heirs and personal representatives of the Company, Purchaser and any such affiliate and any such person. (i) Indemnification. In consideration of the Purchaser's execution and delivery of the this Agreement and the Registration Rights Agreement and acquiring the Debentures hereunder and in addition to all of the Company's other obligations under the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless the Purchaser and all of their shareholders, officers, directors, employees and direct or indirect investors and any of the foregoing person's agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "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 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 any Indemnitee as a result of, or arising out of, or relating to (i) any misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (ii) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (iii) any cause of action, suit or claim brought or made against such Indemnitee by a third party and arising out of or resulting from the execution, delivery, performance or enforcement of the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (iv) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Debentures or (v) 18 the status of the Purchaser or holder of the Debentures as an investor in the Company, except insofar as any such untrue statement, alleged untrue statement, omission or alleged omission is made in reliance upon and in conformity with written information furnished to the Company by the Purchaser which is specifically intended by the Purchaser for use in the preparation of any such Registration Statement, preliminary prospectus or prospectus. 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. The indemnity provisions contained herein shall be in addition to any cause of action or similar rights the Purchaser may have, and any liabilities to which the Purchaser may be subject. 5. Cover. ----- If, the number of Shares represented by any conversion notice become restricted or are no longer freely trading for any reason, and after the applicable Closing Date, the Purchaser purchases, in an open market transaction or otherwise, the Company's Common Stock (the "Covering Shares") in order to make delivery in satisfaction of a sale of Common Stock by the Purchaser (the "Sold Shares"), which delivery such Purchaser anticipated to make using the Common Stock to be delivered pursuant to the conversion notice (a "Buy-In"), so long as the shares issuable upon conversion of this Debenture were freely trading at the time of conversion, the Company shall pay to the Purchaser, the Buy-In Adjustment Amount (as defined below). The "Buy-In Adjustment Amount" is the amount equal to the excess, if any, of (a) the Purchaser's total purchase price (including brokerage commissions, if any) for the Covering Shares over (b) the net proceeds (after brokerage commissions, if any) received by the Purchaser from the sale of the Sold Shares. The Company shall pay the Buy-In Adjustment Amount to the Purchaser in immediately available funds immediately upon demand by the Purchaser. By way of illustration and not in limitation of the foregoing, if the Purchaser purchases Common Stock having a total purchase price (including brokerage commissions) of $11,000 to cover a Buy-In with respect to the Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment Amount which the Company will be required to pay to the Purchaser will be $1,000. 6. PUBLICITY. --------- The Company and Purchaser shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and no party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is 19 required by law, in which such case the disclosing party shall provide the other party with prior notice of such public statement. 7. Delivery Instructions. --------------------- Prior to or on the Closing Date the Company shall deliver to the Purchaser and Escrow Agent the Pending or Threatened Litigation Schedule to be attached hereto as Exhibit B and a signed Registration Rights Agreement in the form attached hereto as Exhibit C. Also, prior to or on the Closing Date the Company shall deliver to the Purchaser and Escrow Agent an opinion letter signed by counsel for the Company in the form attached hereto as Exhibit D and a copy of a fully executed board resolution approving this Offering to be attached as Exhibit E. The Debentures being purchased hereunder shall be delivered to the Escrow Agent on or prior to the Closing Date, so that on the Closing Date the Escrow Agent can deliver the Debentures to the Purchaser and wire the funds, less fees, to the Company. 8. UNDERSTANDINGS. -------------- The Purchaser understands, acknowledges and agrees with the Company as follows: (a) This Subscription may be rejected, in whole or in part, by the Company in its sole and absolute discretion at any time before the date set for closing unless the Company has given notice of acceptance of the Purchaser's subscription by signing this Agreement. (b) The representations, warranties and agreements of the Purchaser and the Company contained herein and in any other writing delivered in connection with the transactions contemplated hereby shall be true and correct in all material respects on and as of the date of the sale of the Debentures, and as of the date of the conversion thereof, as if made on and as of such date and shall survive the execution and delivery of this Agreement and the purchase of the Debentures. (c) This Offering is intended to be exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and the provisions of Rule 506 of Regulation D thereunder, which is in part dependent upon the truth, completeness and accuracy of the statements made by the Purchaser herein and in the Questionnaire. 9. Litigation. ---------- (a) Forum Selection and Consent to Jurisdiction. Any litigation arising out of, under, or in connection with, this Agreement or any course of conduct, course of dealing, statements (whether oral or written) or actions of the Company 20 or Purchaser shall be brought and maintained exclusively in the courts of the State of New York. The Company hereby expressly and irrevocably submits to the jurisdiction of the state and federal courts of the State of New York for the purpose of any such litigation as set forth above and irrevocably agrees to be bound by any final judgment rendered thereby in connection with such litigation. The Company further irrevocably consents to the service of process by registered mail, postage prepaid, or by personal service within or without the State of New York. The Company hereby expressly and irrevocably waives, to the fullest extent permitted by law, any objection which it may have or hereafter may have to the laying of venue of any such litigation brought in any such court referred to above and any claim that any such litigation has been brought in any inconvenient forum. To the extent that the Company has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution or otherwise) with respect to itself or its property, the Company hereby irrevocably waives such immunity in respect of its obligations under this Agreement and the other loan documents. (b) Waiver of Jury Trial. The Purchaser and the Company hereby knowingly, voluntarily and intentionally waive any rights they may have to a trial by jury in respect of any litigation based hereon, or arising out of, under, or in connection with, this agreement, or any course of conduct, course of dealing, statements (whether oral or written) or actions of the Purchaser or the Company. The Company acknowledges and agrees that it has received full and sufficient consideration for this provision and that this provision is a material inducement for the Purchaser entering into this Agreement. (c) Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to the conflicts of laws principles thereof. 10. MISCELLANEOUS. ------------- (a) All pronouns and any variations thereof used herein shall be deemed to refer to the masculine, feminine, impersonal, singular or plural, as the identity of the person or persons may require. (b) Neither this Agreement nor any provision hereof shall be waived, modified, changed, discharged, terminated, revoked or canceled, except by an instrument in writing signed by the party effecting the same against whom any change, discharge or termination is sought. (c) Notices required or permitted to be given hereunder shall be in writing and shall be deemed to be sufficiently given when personally delivered, received by facsimile transmission and, other than the Notice of Conversion, sent by registered mail, return receipt requested, addressed: (i) if to the Company, at 21 IVoice.com, Inc., Attention: Jerome R. Mahoney, CEO, 750 Highway 34, Matawan, NJ 07747, (p) 732-441-7700, (f) 732-441-9895, with a copy by facsimile to Meritz & Muenz LLP, Three Hughes Place, Dix Hills, New York 11746 (p) 631-242-7384, (f) 631-242-6715 and (ii) if to the Purchaser, at the address for correspondence set forth in the Questionnaire, or at such other address as may have been specified by written notice given in accordance with this Section 10(c). (d) If any provision of this Agreement is invalid or unenforceable under any applicable statue or rule of law, then such provisions shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof that may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. (e) This Agreement, together with Exhibits A, B, C, D and E attached hereto and made a part hereof, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and may be amended only by a writing executed by both parties hereto. An executed facsimile copy of the Agreement shall be effective as an original. The Exhibits are as follows: Exhibit A - Debenture Exhibit B - Pending or Threatened Litigation Exhibit C - Registration Rights Agreement Exhibit D - Opinion Letter Exhibit E - Board Resolution Approving the Offering [Balance of this page intentionally left blank.] 22 IVOICE.COM, INC. QUESTIONNAIRE The information contained in this Questionnaire is being furnished in order to determine whether the undersigned's subscription to purchase the Debentures described in the Subscription Agreement may be accepted. ALL INFORMATION CONTAINED IN THIS QUESTIONNAIRE WILL BE TREATED CONFIDENTIALLY. The undersigned understands, however, that the Company may present this Questionnaire to such parties as it deems appropriate if called upon to establish that the proposed offer and sale of the Securities is exempt from registration under the Securities Act of 1933, as amended. Further, the undersigned understands that the offering is required to be reported to the Securities and Exchange Commission, NASDAQ and to various state securities and "blue sky" regulators. IN ADDITION TO SIGNING THE SIGNATURE PAGE, THE UNDERSIGNED MUST COMPLETE FORM W-9 ATTACHED HERETO. I. PLEASE CHECK EACH OF THE STATEMENTS BELOW THAT APPLIES. [ ] 1. The undersigned: (a) has total assets in excess of $5,000,000; (b) was not formed for the specific purpose of acquiring the Securities and (c) has its principal place of business in ___________. [ ] 2. the undersigned is a natural person whose individual net worth* or joint net worth with his or her spouse exceeds $1,000,000. [ ] 3. the undersigned is a natural person who had an individual income* in excess of $200,000 in each of 1999 and 2000 and who reasonably expects an individual income in excess of $200,000 in 2001. Such income is solely that of the undersigned and excludes the income of the undersigned's spouse. [ ] 4. The undersigned is a natural person who, together with his or her spouse, has had a joint income* in excess of $300,000 in each of 1999 and 2000 and who reasonably expects a joint income in excess of $300,000 during 2001. 23 * For purposes of this Questionnaire, the term "net worth" means the excess of total assets over total liabilities. In determining "income", an investor should add to his or her adjusted gross income any amounts attributable to tax-exempt income received, losses claimed as a limited partner in any limited partnership, deductions claimed for depletion, contributions to IRA or Keogh retirement plan, alimony payments and any amount by which income from long-term capital gains has been reduced in arriving at adjusted gross income. [ ] 5. The undersigned is: (a) a bank as defined in Section 3(a)(2) of the Securities Act; or (b) a savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; or (c) a broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934; or (d) an insurance company as defined in Section 2(13) of the Securities Act; or (e) An investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940; or (f) a small business investment company licensed by the U.S. Small Business Administration under Section 301 (c) or (d) of the Small Business Investment Act of 1958; or [ ] 6. The undersigned is an entity in which all of the equity owners are accredited investors. 24 II. INVESTOR INFORMATION. If the undersigned is an individual: Name _________________________________________ Street Address __________________________________ City, State, Zip Code _____________________________ Phone, Fax ____________________________________ Social Security Number (or Taxpayer Identification Number ----------------------------------------------- Send Correspondence to: ----------------------------------------------- ----------------------------------------------- ----------------------------------------------- ----------------------------------------------- If the undersigned is a Partnership or Other Entity: Contact Name ___________________________________ State of Organization ______________________________ Principal Business Address _________________________ City, State, Zip Code ______________________________ Taxpayer Identification Number _____________________ Phone, Fax _____________________________________ 25 IVOICE.COM, INC. SIGNATURE PAGE Your signature on this Signature Page evidences your agreement to be bound by the Questionnaire and the Subscription Agreement. 1. The undersigned hereby represents that (a) the information contained in the Questionnaire is complete and accurate and (b) the undersigned will notify IVOICE.COM, INC. immediately if any material change in any of the information occurs prior to the acceptance of the undersigned's subscription and will promptly send IVOICE.COM, INC. written confirmation of such change. 2. The undersigned signatory hereby certifies that he/she has read and understands the Subscription Agreement and Questionnaire, and the representations made by the undersigned in the Subscription Agreement and Questionnaire are true and accurate. - ------------------------------ ------------------------ Amount of Debentures subscribed for Date ------------------------ (Purchaser) By: _____________________ (Signature) Name: __________________ (Please Type or Print) Title: ____________________ (Please Type or Print) THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS SUCH SECURITIES ARE INCLUDED IN AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT. 26 COMPANY ACCEPTANCE PAGE This Subscription Agreement accepted and agreed to this ____ day of July, 2001 IVOICE.COM, INC. BY___________________________________________ Jerome R. Mahoney, its CEO duly authorized AS TO SECTION 1(f) ONLY: BY______________________________________ Jerome R. Mahoney individually 27 Exhibit B PENDING OR THREATENDED LITIGATION Communication Research, Inc. vs. iVoice.com, Inc. Filed April 2000 Superior Court of New Jersey Chancery Division Bergen County This suit brought by a subtenant against the Company seeking equitable relief and damages in connection with its tenancy, as well as, conversion of office furniture and equipment, wrongful eviction, interference of economic relations and quantum merit. The law firm Ferrara, Turitz, Harraka & Goldberg, 505 Main Street, Hackensack, NJ 07601, is defending this action. The Company believes that this action is without merit and intends to vigorously defend this suit. Lorelei Personnel, Inc. vs. iVoice.com, Inc. Filed February 12, 2001 Superior Court of New Jersey Middlesex County This action is for consulting\employee placement services allegedly rendered by Lorelei. The payment terms that Lorelei claims, were never agreed to by iVoice. Furthermore, the employee referred by Lorelei was terminated within 30 days of hire for failure to perform in an adequate manner. The plaintiff is seeking damages of $6,000, plus interest, legal fees and court costs. The Company believes that this action is without merit and intends to vigorously defend this suit. This action is being defended by the law firm Reid Weinman, P.C.,158 Livingston, Ave., New Brunswick, NJ 08901. The Company believes that this action is without merit and intends to vigorously defend this suit. Lighthouse Technical Consulting, Inc. vs. iVoice.com, Inc. Filed March, 2001 Superior Court of New Jersey Monmouth County This action is for failure to pay for consulting\employee placement services rendered by Lighthouse. IVoice is making monthly payments in the amount of $500 and does not deny that the liability exists. This action is being defended by the law firm Reid Weinman, P.C.,158 Livingston, Ave., New Brunswick, NJ 08901. The Company believes that this action is without merit and intends to vigorously defend this suit. 28 EXHIBIT D Purchasers of [Company] [Describe Securities] _______________, 2001 Re: [Company] Ladies and Gentlemen: This firm has acted as counsel to [Company], a corporation incorporated under the laws of the State of _________ (the "Company"), in connection with the proposed issuance and sale of convertible debentures (the "Securities" or "Debentures") pursuant to the Subscription Agreement (including all Exhibits and Appendices thereto) (collectively the "Agreements"). In connection with rendering the opinions set forth herein, we have examined drafts of the Agreement, the Company's Certificate of Incorporation, and its Bylaws, as amended to date [other documents - describe], the proceedings of the Company's Board of Directors taken in connection with entering into the Agreements, and such other documents, agreements and records as we deemed necessary to render the opinions set forth below. In conducting our examination, we have assumed the following: (i) that each of the Agreements has been executed by each of the parties thereto in the same form as the forms which we have examined, (ii) the genuineness of all signatures, the legal capacity of natural persons, the authenticity and accuracy of all documents submitted to us as originals, and the conformity to originals of all documents submitted to us as copies, (iii) that each of the Agreements has been duly and validly authorized, executed and delivered by the party or parties thereto other than the Company, and (iv) that each of the Agreements constitutes the valid and binding agreement of the party or parties thereto other than the Company, enforceable against such party or parties in accordance with the Agreements' terms. Based upon the subject to the foregoing, we are of the opinion that: 1. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of __________, is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions where the Company owns or leases properties, maintains employees or conducts business, except for jurisdictions in which the failure to so qualify would not have a material adverse effect on the Company, and has all requisite corporate power and authority to own its properties and conduct its business. 29 2. The authorized capital stock of the Company consists of _______ shares of Common Stock, ________ par value per share, ("Common Stock") and ______________ Preferred Stock, par value $________ per share; [describe classes if applicable] 3. The Common Stock is registered pursuant to Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934, as amended and the Company has timely filed all the material required to be filed pursuant to Sections 13(a) or 15(d) of such Act for a period of at least twelve months preceding the date hereof; 4. When duly countersigned by the Company's transfer agent and registrar, and delivered to you or upon your order against payment of the agreed consideration therefor in accordance with the provisions of the Agreements, the Securities [and any Common Stock to be issued upon the conversion of the Securities] as described in the Agreements represented thereby will be duly authorized and validly issued, fully paid and nonassessable; 5 The Company has the requisite corporate power and authority to enter into the Subscription Agreement and to sell and deliver the Securities and the Common Stock to be issued upon the conversion of the Securities as described in the Agreements; each of the Agreements has been duly and validly authorized by all necessary corporate action by the Company to our knowledge, no approval of any governmental or other body is required for the execution and delivery of each of the Agreements by the Company or the consummation of the transactions contemplated thereby; each of the Agreements has been duly and validly executed and delivered by and on behalf of the Company, and is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as enforceability may be limited by general equitable principles, bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other laws affecting creditors rights generally, and except as to compliance with federal, state, and foreign securities laws, as to which no opinion is expressed; 6. To the best of our knowledge, after due inquiry, the execution, delivery and performance of the Subscription Agreement and Debenture by the Company and the performance of its obligations thereunder do not and will not constitute a breach or violation of any of the terms and provisions of, or constitute a default under or conflict with or violate any provision of (i) the Company's Certificate of Incorporation or By-Laws, (ii) any indenture, mortgage, deed of trust, agreement or other instrument to which the Company is party or by which it or any of its property is bound, (iii) any applicable statute or regulation or as other, (iv) or any judgment, decree or order of any court or governmental body having jurisdiction over the Company or any of its property. 7. The issuance of Common Stock upon conversion of the Debentures in accordance with the terms and conditions of the Debenture and 30 the Subscription Agreement, will not violate the applicable listing agreement between the Company and any securities exchange or market on which the Company's securities are listed. 8. To the best of our knowledge, after due inquiry, there is no pending or threatened litigation, investigation or other proceedings against the Company. 9. The Company complies with the eligibility requirements for the use of Form S-3, under the Securities Act of 1933, as amended. Note: Use this where Registration Rights were included in the offering and the Company is S-3 eligible. This opinion is rendered only with regard to the matters set out in the numbered paragraphs above. No other opinions are intended nor should they be inferred. This opinion is based solely upon the laws of the United States and the State of _____________ and does not include an interpretation or statement concerning the laws of any other state or jurisdiction. Insofar as the enforceability of the Subscription Agreement and Debenture may be governed by the laws of other states, we have assumed that such laws are identical in all respects to the laws of the State of ___________. The opinions expressed herein are given to you solely for your use in connection with the transaction contemplated by the Subscription Agreement and Debenture and may not be relied upon by any other person or entity or for any other purpose without our prior consent. Very truly yours, By: _______________________ 31 Schedule 3(a) - Subsidiaries None. 32 Schedule 3(c) - Capitalization (c) Capitalization. As of the date hereof, the authorized capital stock of the Company consists of (i) 150,000,000 shares of Class A Common Stock authorized, of which as of April 1, 2001, 110,236,548 shares are issued and outstanding, (ii) 700,000 shares of Class B Common Stock authorized, of which as of April 1, 2001, 364,000 are issued and outstanding, (iii) no shares of Preferred Stock are authorized. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable. Note: One share of Class B Common Stock is convertible into one hundred shares of Class A Common Stock. It is anticipated that the Company will increase the authorized number of Class A Common Stock shares to 600 million shares and revise the par value of the Class A stock from $.01 to $.001. Immediately following the execution of this Agreement, the Company will file an Information Statement with the Securities Exchange Commission. Ten days thereafter, the majority of shareholders of the Company will approve an Amendment to the Certificate of Incorporation increasing the number of authorized Class A Common Stock shares and revising the par value of the Class A common stock. As of April 1, 2001, the Company had 110,236,548 Class A shares issued and outstanding and 364,000 Class B shares issued and outstanding. Class B shares hold voting power of 100 shares of Class A stock. Therefore, the outstanding Class B shares hold a total of 36,400,000 votes. Jerome Mahoney, President and Chief Executive Officer of the Company holds voting control of: 39,150,000 Class A votes 36,400,000 Class B votes 75,550,000 votes Total votes at a meeting of shareholders equals: 110,236,548 Class A votes 36,400,000 Class B votes 146,636,548 Total Votes Jerry Mahoney holds 51.52% of the votes to authorize an increase in the authorized Class A shares to 600 million shares and a revision of the par value. 33 Convertible Debentures. These debentures are convertible into shares of the Company'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 April 23, 2001, $287,000 remained outstanding. The Company has been advised by one of the debenture holders that the Company was in breach of some of the terms of the debentures. The Company has reached settlement terms with this one previous holder of $50,000 in debentures regarding the interest and penalties that have been demanded by this former holder whereby the Company will issue 450,000 shares to this former holder in full settlement of the former debenture holder's claim. Due to Related Party During the period from June 2000 to date, Jerome R. Mahoney, President and Chief Executive Officer of the Company, sold Common Stock Shares of the Company and has loaned proceeds of these sales to the Company to fund its working capital requirements. The Company has executed a promissory note and Security Agreement in favor of Mr. Mahoney. As of April 23, 2001, 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 $1,568,327. 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 stock share of iVoice.com, Inc., no par value, for each dollar owed. 34 Schedule 3(e) - Conflicts It is anticipated that the Company will increase the authorized number of Class A Common Stock shares to 600 million shares. Immediately following the execution of this Agreement, the Company will file an Information Statement with the Securities Exchange Commission. Ten days thereafter, the majority of shareholders of the Company will approve an Amendment to the Certificate of Incorporation increasing the number of authorized Class A Common Stock shares. 35 Schedule 3(g) - Material Changes None. 36 Schedule 3(h) Litigation Communication Research, Inc. vs. iVoice.com, Inc. Filed April 2000 Superior Court of New Jersey Chancery Division Bergen County This suit brought by a subtenant against the Company seeking equitable relief and damages in connection with its tenancy, as well as, conversion of office furniture and equipment, wrongful eviction, interference of economic relations and quantum merit. The law firm Ferrara, Turitz, Harraka & Goldberg, 505 Main Street, Hackensack, NJ 07601, is defending this action. The Company believes that this action is without merit and intends to vigorously defend this suit. Lorelei Personnel, Inc. vs. iVoice.com, Inc. Filed February 12, 2001 Superior Court of New Jersey Middlesex County This action is for consulting\employee placement services allegedly rendered by Lorelei. The payment terms that Lorelei claims, were never agreed to by iVoice. Furthermore, the employee referred by Lorelei was terminated within 30 days of hire for failure to perform in an adequate manner. The plaintiff is seeking damages of $6,000, plus interest, legal fees and court costs. The Company believes that this action is without merit and intends to vigorously defend this suit. This action is being defended by the law firm Reid Weinman, P.C.,158 Livingston, Ave., New Brunswick, NJ 08901. The Company believes that this action is without merit and intends to vigorously defend this suit. Lighthouse Technical Consulting, Inc. vs. iVoice.com, Inc. Filed March, 2001 Superior Court of New Jersey Monmouth County This action is for failure to pay for consulting\employee placement services rendered by Lighthouse. IVoice is making monthly payments in the amount of $500 and does not deny that the liability exists. This action is being defended by the law firm Reid Weinman, P.C.,158 Livingston, Ave., New Brunswick, NJ 08901. The Company believes that this action is without merit and intends to vigorously defend this suit. 37 Schedule 3(l) - Intellectual Property None. 38 Schedule 3(n) Liens SECURITY AGREEMENT This SECURITY AGREEMENT dated March 20, 2001, between Jerome Mahoney, an individual with offices at c/o iVoice.com, Inc. 750 Highway 34, Matawan, New Jersey 07747 (the "Secured Party") and iVoice.com, Inc., a Delaware corporation, with offices at 750 Highway 34, Matawan, New Jersey 07747 (the "Debtor"). 1. Obligation to Pay. The Debtor concurrently with the execution and delivery of this AGREEMENT, has borrowed One Million and Five Hundred Thousand and Sixty-eight Dollars and 0/100 Cents ($1,568,327), from the Secured Party, which borrowing is evidenced by the Debtor's promissory note., and in consideration therefor, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Debtor hereby grants the Secured Party a security interest as set forth in Paragraph 2 herein. 2. Collateral. The Debtor desires to enter into this AGREEMENT for the purpose of creating a security interest in favor of the Secured Party in the assets annexed as Exhibit I hereto, in all additions and accessions thereto, substitutions therefore and all proceeds of their sale or disposition (all hereinafter referred to collectively as "Assets"). 3. Creation of security interest. The Debtor, in order to secure payment of the debt evidenced by the promissory note originally for the sum of $1,568,327,, including accrued interest, renewals, extensions thereof and additional borrowings that shall be evidenced by additional promissory notes; and all costs and expenses incurred in collection of the hereby grants to the Secured Party a security interest in the Assets. 4. Debtor's warranties and agreements. The Debtor warrants and agrees that: (a) Transfer. The Debtor will not: (a) sell or exchange the Assets outside of the ordinary course of business, (b) lease, encumber or pledge the Assets, (c) create any security interest therein except that created by this AGREEMENT, without the prior written consent of the Secured Party. (b) Filings The Debtor will pay all costs of filing any financing, continuation, or termination statements with respect to the security interest created by this Agreement. The Secured Party is hereby appointed the Debtor's attorney-in-fact to do all acts and things which the Secured Party may deem necessary to perfect and continue perfected the security interest created by this Agreement and to protect the goods. A reproduction of this Agreement, or any financing statement signed by the Debtor, is sufficient as a financing statement. (c) Place of business The Debtor will promptly notify the Secured Party of any change in the location of any place of business and of the establishment of any new place of business. 39 5. Default and remedies. In the event of default in the payment of the debts referred to in paragraph 1, or any past or future advances, expenditures, or liabilities hereby secured, or in the due observance or performance or any of the other conditions or agreements hereof; or if any of the warranties of the Debtor shall prove to be false or misleading; or if the Debtor shall become insolvent or shall be adjudicated a bankrupt, or if bankruptcy, insolvency, reorganization, arrangement, debt adjustment, or liquidation proceedings, or receivership proceedings in which the Debtor is alleged to be insolvent or unable to pay his debts as they mature, shall be instituted by or against the Debtor, and the Debtor shall consent to the same or admit in writing the material allegations of the petition filed in such proceedings, or such proceedings shall not be dismissed within 30 days after their institution; then, upon the occurrence of any of the above events, the Secured Party may declare the unpaid balance of the debt and all advances, expenditures, and liabilities immediately due and payable without demand or notice, and the Secured Party may enter judgment on such note or otherwise reduce such debt, advances, expenditures, and liabilities to judgment, and in addition proceed to exercise one or more of the rights accorded by the Uniform Commercial Code in force in the State of Nevada at the date of this Agreement. It is understood and agreed that this Agreement has been made and entered into pursuant to the Uniform Commercial Code and that the Secured Party has all rights and remedies accorded thereby. If any provisions of the Agreement shall for any reason be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof, but this Agreement shall be construed as if such invalid or unenforceable provision had never been contained in this Agreement. 6. Benefit. The rights and privileges of the Secured Party under this Agreement shall inure to the benefit of its successors and assigns. All covenants, warranties, and agreements of the Debtor contained in this Agreement are joint and several and shall bind personal representatives, heirs, successors and assigns. Jerome Mahoney By: _____________________ Date: ______________ iVoice.com, Inc. By: _____________________ Date: ______________ Name: ____________________ Title: _____________________ EXHIBIT I All assets of the Debtor including by not limited to intellectual property, patents, trademarks, software, artwork, copyrighted materials, accounts receivable and all proceeds, cash, inventory, office equipment, telephones, furniture, and motor vehicles. Additionally, all proceeds payable to the Debtor under the Key Man life insurance policy issued by Massachusetts Mutual Policy Number 11073319. 40 Schedule 3(t) - Certain Transactions See Schedule 3(n) 41 EX-10 7 kl12003_ex10-7.txt EXHIBIT 10.7 REGISTRATION RIGHTS AGREEMENT Exhibit 10.7 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of November 20, 2001, by and between iVoice.com, Inc., a company organized under the laws of state of Delaware, with its principal executive office at 750 Highway 34, Matawan, NJ 07747 (the "Company"), and the undersigned (the "Investor"). WHEREAS, upon the terms and subject to the conditions of the Subscription Agreement between the Investor and the Company (the "Subscription Agreement"), the Company has agreed to issue and sell to the Investor convertible debentures of the Company (the "Debentures"), which will be convertible into shares of the Class A common stock, $.001 par value per share (the "Common Stock"), of the Company upon the terms and subject to the conditions of such Debentures; and WHEREAS, To induce the Investor to execute and deliver the Subscription Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 Act"), and applicable state securities laws, with respect to the shares of Common Stock issuable pursuant to the Subscription Agreement and Debenture. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained hereinafter 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. "Closing Date" means the date funds are received by the Company or its designated attorney pursuant to the Subscription Agreement. b. "Holder" means the Investor. c. "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. d. "Potential Material Event" means any of the following: (i) the possession by the Company of material information not ripe for disclosure in a Registration Statement, which shall be evidenced by determinations in good faith by the Board of Directors of the Company that disclosure of such information in the Registration Statement would be detrimental to the business and affairs of the Company, or (ii) any material engagement 1 or activity by the Company which would, in the good faith determination of the Board of Directors of the Company, be adversely affected by disclosure in a Registration Statement at such time, which determination shall be accompanied by a good faith determination by the Board of Directors of the Company that the Registration Statement would be materially misleading absent the inclusion of such information. e. "Principal Market" means either The American Stock Exchange, Inc., The New York Stock Exchange, Inc., the Nasdaq National Market, The Nasdaq SmallCap Market or the National Association of Securities Dealer's, Inc. OTC electronic bulletin board whichever is the principal market on which the Common Stock is listed. f. "Register," "Registered," and "Registration" refer to a registration effected by preparing and filing one or more Registration Statements 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 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"). g. "Registrable Securities" means the shares of Common Stock issued or issuable (i) pursuant to the Subscription Agreement and Debenture, (ii) upon exercise of the Warrants issued to the Investor or its designee, and (iii) any shares of capital stock issued or issuable with respect to the such shares of Common Stock and Warrants, if any, as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, which have not been (x) included in a Registration Statement that has been declared effective by the SEC, (y) sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the 1933 Act or (z) otherwise transferred to a holder who may trade such shares without restriction under the 1933 Act. h. "Registration Statement" means a registration statement of the Company filed under the 1933 Act. All capitalized terms used in this Agreement and not otherwise defined herein shall have the same meaning ascribed to them as in the Subscription Agreement and Debenture. 2. REGISTRATION. a. Mandatory Registration. The Company shall prepare, and, as soon as practicable but in no event later than sixty (60) calendar days from the date hereof, file with the SEC a Registration Statement or Registration Statements (as is necessary) on Form SB-2 (or, if such form is unavailable for such a registration, on such other form as is available for such a registration), covering the resale of all of the Registrable Securities, which Registration Statement(s) shall state that, in accordance with Rule 416 promulgated under the 1933 Act, such Registration Statement(s) also covers such indeterminate number of additional shares of Common Stock as may become issuable 2 upon stock splits, stock dividends or similar transactions. The Company shall initially register for resale 35,000,000 shares of Common Stock. In the event the Company cannot register sufficient shares of Common Stock, due to the remaining number of authorized shares of Common Stock being insufficient, the Company will use its best efforts to register the maximum number of shares it can based on the remaining balance of authorized shares and will use its best efforts to increase the number of its authorized shares as soon as reasonably practicable. b. Counsel. Subject to Section 5 hereof, in connection with any offering pursuant to this Section 2, the Holder, at the Holder's sole cost and expense, shall have the right to select one legal counsel to administer its interests in the offering. The Company shall reasonably cooperate with any such counsel. 3. RELATED OBLIGATIONS. At such time as the Company is obligated to prepare and file a Registration Statement with the SEC pursuant to Section 2(a), the Company will use its best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, with respect thereto, the Company shall have the following obligations: a. The Company shall use its best efforts to cause such Registration Statement relating to the Registrable Securities to become effective within one hundred twenty (120) calendar days after the date of the filing thereof, and shall keep such Registration Statement effective pursuant to Rule 415 until the earlier of (i) the date as of which the Holders may sell all of the Registrable Securities without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto) or (ii) the date on which (A) the Holders shall have sold all the Registrable Securities, (B) the Investor has no right to acquire any additional shares of Common Stock under the Subscription Agreement, and (C) the Investor has no right to receive Common Stock underlying the Warrants, respectively (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. If the Registration Statement covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a) hereof is not declared effective within one hundred twenty (120) calendar days following the Closing Date, then the Company shall pay the Initial Investor the sum of 2% of the Liquidation Value of the Debentures outstanding as liquidated damages and not as a penalty for each thirty (30) calendar day period, pro rata, following the one hundred twenty (120) calendar day period until the Registration Statement is declared effective. If the Registration Statement covering the Registrable Securities required to be filed by the Company pursuant to Section 2(a) hereof is declared effective, but after the 3 effective date the Initial Investor's right to sell is suspended, then the Company shall pay the Initial Investor the sum of 2% of the purchase price paid by the Investor for the Registrable Securities pursuant to the Subscription Agreement for each thirty (30) calendar day period, pro rata, following the suspension until such suspension ceases. Notwithstanding the foregoing, the amounts payable by the Company pursuant to this provision shall not be payable to the extent any delay in the effectiveness of the Registration Statement occurs because of an act of, or a failure to act or to act timely by the Investor or its counsel. The above damages shall continue until the obligation is fulfilled and shall be paid within three (3) business days after each thirty (30) day period, or portion thereof, until the Registration Statement is declared effective or such suspension is released. Failure of the Company to make payment within said three (3) business days shall be considered a default. The Company acknowledges that its failure to have the Registration Statement declared effective within said one hundred twenty (120) calendar day period or to permit the suspension of the effectiveness of the Registration Statement, will cause the Initial Investor to suffer damages in an amount that will be difficult to ascertain. Accordingly, the parties agree that it is appropriate to include in this Agreement a provision for liquidated damages. The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties' good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty. The payment of liquidated damages shall not relieve the Company from its obligations to register the Common Stock and deliver the Common Stock pursuant to the terms of this Agreement, the Subscription Agreement and the Debenture. 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 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 Investor thereof as set forth in such Registration Statement. In the event the number of shares of Common Stock available under a Registration Statement filed pursuant to this Agreement is at any time insufficient to cover all of the Registrable Securities, the Company shall amend such Registration Statement, or file a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover all of the Registrable Securities, in each case, as soon as practicable, but in any event within thirty (30) calendar days after the necessity therefor arises (based on the then Purchase Price of the Common Stock and other relevant factors on which the Company reasonably elects to rely), assuming the Company has sufficient authorized shares at that time, and if it does not, within thirty (30) calendar days after such shares are authorized. The Company shall use it best 4 efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. c. The Company shall furnish to each Holder whose Registrable Securities are included in any Registration Statement and its legal counsel without charge (i) promptly after the same is prepared and filed with the SEC at least one copy of such Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits, the prospectus included in such Registration Statement (including each preliminary prospectus) and, with regards to such Registration Statement(s), any correspondence by or on behalf of the Company to the SEC or the staff of the SEC and any correspondence from the SEC or the staff of the SEC to the Company or its representatives, (ii) upon the effectiveness of any Registration Statement, ten (10) copies of the prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as such Holder may reasonably request) and (iii) such other documents, including copies of any preliminary or final prospectus, as such Holder may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by such Holder. d. The Company shall use reasonable efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under such other securities or "blue sky" laws of such states in the United States as any Holder 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 (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 each Holder who holds Registrable Securities 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 threatening of any proceeding for such purpose. e. As promptly as practicable after becoming aware of such event, the Company shall notify each Holder 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, ("Registration Default") and use all diligent efforts to promptly prepare a supplement or amendment to such Registration Statement 5 and take any other necessary steps to cure the Registration Default, (which, if such Registration Statement is on Form S-3, may consist of a document to be filed by the Company with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act (as defined below) and to be incorporated by reference in the prospectus) to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to each Holder (or such other number of copies as such Holder may reasonably request). Failure to cure the Registration Default within ten (10) business days shall result in the Company paying liquidated damages of 2% of the cost of all Common Stock then held by the Holders for each thirty (30) calendar day period or portion thereof, beginning on the date of suspension. The Company shall also promptly notify each Holder 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 each Holder by facsimile on the same day of such effectiveness and by overnight mail), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate, (iv) in the event the Registration Statement is no longer effective or, (v) the Registration Statement is stale for a period of more than five (5) Trading Days as a result of the Company's failure to timely file its financials. The Company acknowledges that its failure to cure the Registration Default within ten (10) business days will cause the Investor to suffer damages in an amount that will be difficult to ascertain. Accordingly, the parties agree that it is appropriate to include in this Debenture a provision for liquidated damages. The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties' good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty. It is the intention of the parties that interest payable under any of the terms of this Agreement shall not exceed the maximum amount permitted under any applicable law. If a law, which applies to this Agreement which sets the maximum interest amount, is finally interpreted so that the interest in connection with this Agreement exceeds the permitted limits, then: (1) any such interest shall be reduced by the amount necessary to reduce the interest to the permitted limit; and (2) any sums already collected (if any) from the Company which exceed the permitted limits will be refunded to the Company. The Investor may choose to make this refund by reducing the amount that the Company owes under this Agreement or by making a direct payment to the Company. If a refund reduces the amount that the Company owes the Investor, the reduction will be treated as a partial payment. In case any provision of this Agreement is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Agreement will not in any way be affected or impaired thereby. 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 6 the qualification of any of the Registrable Securities for sale in any jurisdiction 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 each Holder who holds Registrable Securities being sold 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. The Company shall permit each Holder and a single firm of counsel, designated as selling shareholders' counsel by the Holders who hold a majority of the Registrable Securities being sold, to review and comment upon a Registration Statement and all amendments and supplements thereto at least five (5) business days prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects. The Company shall not submit to the SEC a request for acceleration of the effectiveness of a Registration Statement or file with the SEC a Registration Statement or any amendment or supplement thereto without the prior approval of such counsel, which approval shall not be unreasonably withheld. h. At the request of any Holder, the Company shall cause to be furnished to such Holder, on the date of the effectiveness of a Registration Statement, an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in the form of Exhibit D attached to the Subscription Agreement. i. The Company shall make available for inspection by (i) any Holder and (ii) one firm of attorneys and one firm of accountants or other agents retained by the Holders (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 hold in strict confidence and shall not make any disclosure (except to a Holder) 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 has knowledge. Each Holder 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. j. The Company shall hold in confidence and not make any disclosure of information concerning a Holder provided to the Company unless (i) disclosure of such 7 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 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 a Holder is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Holder and allow such Holder, at the Holder's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. k. The Company shall use its best efforts to secure designation and quotation of all the Registrable Securities covered by any Registration Statement on the Principal Market. If, despite the Company's best efforts, the Company is unsuccessful in satisfying the preceding sentence, it shall use its best efforts to cause all the Registrable Securities covered by any Registration Statement to be listed on each other national securities exchange and automated quotation system, if any, 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 system. If, despite the Company's best efforts, the Company is unsuccessful in satisfying the two preceding sentences, it will use its best efforts to secure the inclusion for quotation on the Nasdaq SmallCap Market for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register with the National Association of Securities Dealers, Inc. as such with respect to such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(k). l. The Company shall cooperate with the Investor 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 Holders may reasonably request and registered in such names of the Persons who shall acquire such Registrable Securities from the Holders, as the Holders may request. m. The Company shall provide a transfer agent for all the Registrable Securities not later than the effective date of the first Registration Statement filed pursuant hereto. n. If requested by the Holders holding a majority of the Registrable Securities, the Company shall (i) as soon as reasonably practical incorporate in a prospectus supplement or post-effective amendment such information as such Holders reasonably determine should be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the offering of the Registrable Securities to be sold in such offering; (ii) make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters 8 to be incorporated in such prospectus supplement or post-effective amendment; and (iii) supplement or make amendments to any Registration Statement if reasonably requested by such Holders. o. 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. p. The Company shall make generally available to its security holders as soon as reasonably practical, but not later than one hundred and five (105) calendar 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 any Registration Statement. q. 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. r. Within one (1) business day after the Registration Statement which includes Registrable Securities is declared 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. s. At or prior to the date of the Closing Date of the Debenture (as that term is defined in the Subscription Agreement) and at such other times as the Holders may reasonably request, the Company shall cause to be delivered, letters from the Company's independent certified public accountants (i) addressed to the Holders that such accountants are independent public accountants within the meaning of the 1933 Act and the applicable published rules and regulations thereunder, and (ii) in customary form and covering such financial and accounting matters as are customarily covered by letters of independent certified public accountants delivered to underwriters in connection with public offerings. t. The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Holders of Registrable Securities pursuant to a Registration Statement. u. Notwithstanding the foregoing, if at any time or from time to time after the date of effectiveness of the Registration Statement, the Company notifies Holder in writing of the existence of a Potential Material Event ("Blackout Notice"), Holder shall not offer or sell any Registrable Securities, or engage in any other transaction involving or relating to the Registrable Securities, from the time of the giving of notice with respect to a Potential Material Event until Holder receives written notice from the Company that such 9 Potential Material Event either has been disclosed to the public or no longer constitutes a Potential Material Event; provided, however, that (i) the Company may not so suspend the right to such Holders of Registrable Securities for more than two fifteen (15) calendar day periods in the aggregate during any 12-month period ("Blackout Period") with at least a ten (10) business day interval between such periods, during the periods the Registration Statement is required to be in effect, or (ii) that if such Blackout Period exceeds the permitted fifteen (15) day periods, the Company shall pay liquidated damages of 2% of the cost of all Common Stock then held by the Holder for each thirty (30) day period or portion thereof, beginning on the date of the suspension. 4. OBLIGATIONS OF THE HOLDERS. a. At least five (5) business days prior to the first anticipated filing date of a Registration Statement the Company shall notify each Holder in writing of the information the Company requires from each such Holder if such Holder elects to have any of such Holder's Registrable Securities included in such Registration Statement. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Holder that such Holder shall furnish in writing to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall reasonably be required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. Each Holder covenants and agrees that, in connection with any disposition or transfer of Registrable Securities by it pursuant to a Registration Statement, it shall comply with the "Plan of Distribution" section of the current prospectus relating to such Registration Statement. b. Each Holder, by such Holder's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder, unless such Holder has notified the Company in writing of such Holder's election to exclude all of such Holder's Registrable Securities from such Registration Statement. c. Each Holder 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), such Holder will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or the first sentence of 3(e). 10 5. EXPENSES OF REGISTRATION. All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printing and accounting fees, and fees and disbursements of counsel for the Company shall be paid by the Company. 6. INDEMNIFICATION. In the event any Registrable Securities 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 each Holder who holds such Registrable Securities, the directors, officers, partners, employees, agents, representatives of, and each Person, if any, who controls, any Holder within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), (each, an "Indemnified Person"), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, 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, in light of the circumstances under which the statements therein were made, not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in the 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 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 thereunder 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"). Subject to the restrictions set forth in Section 6(c) with respect to the number of legal counsel, the Company shall reimburse the Holders and each such controlling person, promptly as such expenses are incurred and are due and payable, for any reasonable legal fees or 11 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): (i) shall not apply to a Claim 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 any Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus were timely made available by the Company pursuant to Section 3(c); (ii) shall not be available to the extent such Claim is based on (a) a failure of the Holder to deliver or to cause to be delivered the prospectus made available by the Company or (b) the Indemnified Person's use of an incorrect prospectus despite being promptly advised in advance by the Company in writing not to use such incorrect prospectus; and (iii) 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 and shall survive the transfer of the Registrable Securities by the Holders pursuant to Section 9. b. In connection with any Registration Statement in which a Holder is participating, each such Holder agrees to severally and not jointly 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, each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (collectively and together with an Indemnified Person, 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 are 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 such Holder expressly for use in connection with such Registration Statement; and, subject to Section 6(c), such Holder 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 such Holder, which consent shall not be unreasonably withheld; provided, further, however, that the Holder 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 such Holder 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 and shall survive the transfer of the Registrable Securities by the Holders pursuant to Section 9. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus were corrected on a timely basis 12 in the prospectus, as then amended or supplemented. 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 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 indemnifying party shall pay for only one separate legal counsel for the Indemnified Persons or the Indemnified Parties, as applicable, and such counsel shall be selected by Holders holding a majority-in-interest of the Registrable Securities included in the Registration Statement to which the Claim relates, if the Holders are entitled to indemnification hereunder, or the Company, if the Company is entitled to indemnification hereunder, as applicable. 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 appraised 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 written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the 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. Following indemnification as provided for hereunder, the indemnifying party shall be surrogated 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. 13 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. 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 contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6; (ii) 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 (iii) 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 other similar rule or regulation of the SEC that may at any time permit the Holders 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 4(c) of the Subscription 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, 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. 14 9. ASSIGNMENT OF REGISTRATION RIGHTS. The rights under this Agreement are not assignable. 10. 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 Holders who hold two-thirds (2/3) of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Holder and the Company. No such amendment shall be effective to the extent that it applies to less than all of the Holders of the Registrable Securities. 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. 11. MISCELLANEOUS. a. A Person is deemed to be a Holder of Registrable Securities whenever such Person owns 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 a confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) 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: IVOICE.COM, INC. 750 Highway 34 Matawan, NJ 07747 Attention: Jerome R. Mahoney, CEO Telephone: 732-441-7700 Facsimile: 732-441-9895 With a copy to: 15 Meritz & Muenz, LLP. Three Hughes Place Dix Hills, NY 11746 Telephone: 631-242-7384 Facsimile: 631-242-6715 If to the Investor: Beacon Capital, LLC C\o Applegate, Quinn, & Magee 78 Main St P.O. Box 10 Madison, NJ 07940-0010 Attention: Katherine Wagner Telephone: 908-719-0913 Facsimile: 908-719-0959 With a copy to: Each party shall provide five (5) business days prior notice to the other party of any change in address, phone number or facsimile number. 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 laws of the State of New York shall govern all issues concerning the relative rights of the Company and its stockholders. All other questions shall be governed by and interpreted in accordance with the laws of the State of New York without regard to the principles of conflict of laws. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan, 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. 16 e. This Agreement and the Transaction Documents 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. f. This Agreement and the Transaction Documents supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. 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 two or more 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. All consents and other determinations to be made by the Holders pursuant to this Agreement shall be made, unless otherwise specified in this Agreement, by Holders holding a majority of the Registrable Securities. k. 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. [Balance of this page intentionally left blank.] 17 IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of the day and year first above written. iVoice.com, Inc. By: ______________________ Name: Jerome R. Mahoney Title: CEO Investor By: ______________________ Name: Title: 18 EXHIBIT A FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT Date: __________ [TRANSFER AGENT] Re: iVoice.com, Inc. Ladies and Gentlemen: We are counsel to IVoice.com, Inc., a Delaware corporation (the "Company"), and have represented the Company in connection with that certain Subscription Agreement (the "Subscription Agreement") entered into by and among the Company and _________________________ (the "Investor") pursuant to which the Company has agreed to issue to the Investor shares of the Company's common stock, $.001 par value per share (the "Common Stock") on the terms and conditions set forth in the Subscription Agreement and Debenture. Pursuant to the Subscription Agreement and the Debenture, 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), including the shares of Common Stock issued or issuable under the Subscription Agreement and Debenture and upon exercise of various warrants issued or issuable pursuant to the Subscription Agreement and Debenture, under the Securities Act of 1933, as amended (the "1933 Act"). In connection with the Company's obligations under the Registration Rights Agreement, on ____________ ___, 2001, the Company filed a Registration Statement on Form S- ___ (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 shareholder 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 the time of effectiveness] on [enter the date of effectiveness] and to the best of our knowledge, after telephonic inquiry of a member of the SEC's staff, no stop order suspending its effectiveness has been issued and no 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, [Company Counsel] By: ____________________ cc: [Investor] 19 EX-10 8 kl12003_ex10-8.txt EXHIBIT 10.8 WARRANT Exhibit 10.8 THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION" LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION. iVoice, Inc. WARRANT Dated: November 15, 2001 iVoice, Inc. a corporation organized under the laws of the State of Delaware (the "Company"), hereby certifies that, for value received Beacon Capital, LLC. or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of Two Hundred Fifty Thousand (250,000) shares of Common Stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $.047 per share (as adjusted from time to time as provided in Section 8, the "Exercise Price"). This Warrant may be exercised at any time following issuance. This Warrant will expire on the fifth (5th) anniversary of its issuance (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 1 2. Registration of Transfers and Exchanges. --------------------------------------- (a) The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Transfer Agent or to the Company at the office specified in or pursuant to Section 3(b). Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (b) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified in or pursuant to Section 3(b) for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 3. Duration and Exercise of Warrants. --------------------------------- (a) This Warrant shall be exercisable by the registered Holder on any business day before 5:00 P.M., New York City time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. Prior to the Expiration Date, the Company may not call or otherwise redeem this Warrant without the prior written consent of the Holder. (b) Subject to Sections 2(b), 6 and 10, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice set forth in Section 12 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except (i) either in the event that a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective or the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) if this Warrant shall have been issued pursuant to a written agreement between the original Holder and the Company, 2 as required by such agreement. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise (as defined in this subsection) of this Warrant. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. In the event the Common Stock representing the Warrant Shares is not delivered per the written instructions of the Purchaser, within 10 (ten) business days after the Notice of Election and Warrant is received by the Company (the "Delivery Date"), then in such event the Company shall pay to Holder one-half percent (0.5%) in cash, of the dollar value of the Warrant Shares to be issued per each day after the Delivery Date that the Warrant Shares are not delivered. The Company acknowledges that its failure to deliver the Warrant Shares by the Delivery Date will cause the Holder to suffer damages in an amount that will be difficult to ascertain. Accordingly, the parties agree that it is appropriate to include in this Warrant a provision for liquidated damages. The parties acknowledge and agree that the liquidated damages provision set forth in this section represents the parties' good faith effort to quantify such damages and, as such, agree that the form and amount of such liquidated damages are reasonable and will not constitute a penalty. The payment of liquidated damages shall not relieve the Company from its obligations to deliver the Common Stock pursuant to the terms of this Warrant. To the extent that the failure of the Company to issue the Common Stock pursuant to this Section is due to the unavailability of authorized but unissued shares of Common Stock, the provisions of this Section 3 shall not apply but instead the provisions of Section 7 shall apply. The Company shall make any payments incurred under this Section 3 in immediately available funds within ten (10) business days from the date of issuance of the applicable Warrant Shares. Nothing herein shall limit Holder's right to pursue actual damages or cancel the Notice of Election for the Company's failure to issue and deliver Common Stock to the Holder within ten (10) business days following the Delivery Date. 4. Piggyback Registration Rights. During the term of this Warrant, the Company may not file any registration statement with the Securities 3 and Exchange Commission (other than registration statements of the Company filed on Form S-8 or Form S-4, each as promulgated under the Securities Act, pursuant to which the Company is registering securities pursuant to a Company employee benefit plan or pursuant to a merger, acquisition or similar transaction including supplements thereto, but not additionally filed registration statements in respect of such securities) at any time when there is not an effective registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder (unless the Warrant Shares are otherwise freely transferable without volume restrictions pursuant to Rule 144(k) promulgated under the Act), unless the Company includes all of the applicable Warrant Shares therein. The piggyback registration rights granted to the Holder pursuant to this Section shall continue until all of the Holder's Warrant Shares have been sold in accordance with an effective registration statement or upon the Expiration Date. The Company will pay all registration expenses in connection therewith. 5. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. In the event the Company fails to have sufficient authorized but unissued 4 Common Stock to allow for the issuance of Warrant Shares upon the exercise of the Warrant the Company shall be liable for liquidated damages in the amount of 2% interest per thirty calendar day period on the value of the Warrant Shares based on the closing bid price of the Company's Common Stock on the business day prior to the Company's receipt of its Election to Purchase. The damages shall accrue until the Common Stock is issued. 8. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock and not the Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant 5 Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 9(b) upon any exercise following any such reclassification, consolidation, merger, sale, transfer or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 8(a), (b) and (d)), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser"). (d) If, at any time while this Warrant is outstanding, the Company shall issue or cause to be issued rights or warrants to acquire or otherwise sell or distribute shares of Common Stock for a consideration per share less than the Exercise Price then in effect, then, forthwith upon such issue or sale, the Exercise Price shall be reduced to the price (calculated to the nearest cent) determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issuance, and (ii) the number of shares of Common Stock which the aggregate consideration received (or to be received, assuming exercise or conversion in full of such rights, warrants and convertible securities) for the issuance of such additional shares of Common Stock would purchase at the Exercise Price, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately after the issuance of such additional shares. Such adjustment shall be made successively whenever such an issuance is made. (e) For the purposes of this Section 8, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities 6 convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (f) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (g) Whenever the Exercise Price is adjusted pursuant to Section 8(c) above, the Holder, after receipt of the determination by the Appraiser, shall have the right to select an additional appraiser (which shall be a nationally recognized accounting firm), in which case the adjustment shall be equal to the average of the adjustments recommended by each of the Appraiser and such appraiser. The Holder shall promptly mail or cause to be mailed to the Company, a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such adjustment shall become effective immediately after the record date mentioned above. (h) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of 7 the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 9. Payment of Exercise Price. The Holder may pay the Exercise Price in one of the following manners: (a) Cash Exercise. The Holder shall deliver immediately available funds; or (b) Cashless Exercise. The Holder shall surrender this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y (A-B)/A where: X = the number of Warrant Shares to be issued to the Holder. 8 Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the closing bid price of the Common Stock for the trading day immediately prior to the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. 10. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 10, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 11. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:00 p.m. (New York City time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:00 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to, iVoice, Inc. Attention: Jerome R. Mahoney, CEO, 750 Highway 34, Matawan, NJ 07747 Telephone: 732-441-7700 or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 11. 12. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or 9 any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 13. Miscellaneous. ------------- (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 13(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to the principles of conflicts of law thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan, 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, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument 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. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially 10 reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. iVoice, Inc. By: --------------------------------------------- Jerome R. Mahoney its CEO 11 FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To: IVoice.com, Inc. In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase _____________ shares of Common Stock ("Common Stock"), $.001 par value per share, of IVoice.com, Inc., Inc., and, if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, encloses herewith $________ in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER __________________________________ _______________________________________________________________________________ (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: _______________________________________________________________________________ (Please print name and address) _______________________________________________________________________________ Dated:_____________, ____ Name of Holder: (Print) ----------------------------- (By:) ------------------------------- (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) 12 FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of IVoice.com, Inc., Inc. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of IVoice.com, Inc., Inc. with full power of substitution in the premises. Dated: - ---------------, ---- ------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ------------------------------------- Address of Transferee ------------------------------------- ------------------------------------- In the presence of: - -------------------------- 13 EX-10 9 kl12003_ex10-9.txt EXHIBIT 10.9 AGREEMENT Exhibit 10.9 AGREEMENT This agreement is dated December 17, 2001, and its between IVOICE, INC. ("iVoice") and BEACON CAPITAL, LLC ("Beacon"). iVoice and Beacon are party to (1) a subscription agreement dated as of November 20, 2001, under which Beacon subscribed for $150,000 of iVoice's 8% convertible debentures (the "Initial Debentures"; that agreement, the "Subscription Agreement") and (2) a registration rights agreement dated as of November 20, 2001, in which iVoice agreed to register for resale under the Securities Act of 1933, as amended (the "Securities Act"), the shares of iVoice's Class A common stock into which the Initial Debentures are convertible (that agreement, the "Registration Rights Agreement"). Beacon now wishes to subscribe for an additional $150,000 of iVoice's 8% convertible debentures. The parties therefore agree as follows: 1. Beacon hereby subscribes for an additional $150,000 of iVoice's 8% convertible debentures (those additional debentures, the "Additional Debentures"). Beacon shall pay to iVoice the $150,000 subscription price upon satisfaction of the conditions stated in Section 1(b) of the Subscription Agreement (omitting for this purpose the words "and release from escrow"). 2. Beacon and iVoice intend that Beacon's purchase of the Additional Debentures be exempt from registration under the Securities Act, by virtue of Section 4(2) of the Securities Act and the provisions of Rule 506 of Regulation D thereunder. The questionnaire completed and submitted to iVoice by Beacon in connection with Beacon's purchase of the Initial Debentures remains accurate as of the date of this agreement. 3. The Additional Debentures constitute "Debentures," and the Additional Debentures and the shares of iVoice Class A common stock that underlie the Additional Debentures constitute "Securities," as each of those terms is defined in the Subscription Agreement. 4. In consideration of Beacon's purchase of the Additional Debentures, iVoice shall issue to Beacon warrants to purchase 250,000 shares of Class A common stock, and those warrants will constitute "Warrants," as that term is defined in the Subscription Agreement. 5. The Additional Debentures constitute "Debentures" as that term is defined in the Registration Rights Agreement. Section 2 of the Registration Rights Agreement is hereby amended to increase from 35,000,000 to 50,000,000 the number of shares of its Class A Common Stock that iVoice is required to register thereunder. 6. This agreement is governed by the laws of the State of New York, without giving effect to principles of conflict of laws. iVoice and Beacon are executing this agreement as of the date stated in the introductory clause. IVOICE, INC. By: ---------------------------------------- Name: Title: BEACON CAPITAL, LLC By: --------------------------------------- Name: Title: EX-11 10 kl12003_ex11.txt EXHIBIT 11 STATEMENT Exhibit 11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Net loss per common share of $0.03 for the year ended December 31, 2000 was calculated by dividing net loss of $2,891,379 for the year ended December 31, 2000 by the weighted average number of common shares outstanding of 87,034,303. Net loss per common share of $0.20 for the year ended December 31, 1999 was calculated by dividing net loss of $6,054,364 for the year ended December 31, 1999 by the weighted average number of common shares outstanding of 30,500,000. EX-23 11 kl12003_ex23-1.txt EXHIBIT 23.1 CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this registration statement on Form SB-2 and related prospectus of iVoice, Inc. (the "Company") of our report dated April 24, 2000, with respect to the balance sheets of the Company as of December 31, 1999 and 1998, and the related statements of operations, stockholders' deficiency and cash flows for the years then ended, included in the Company's Form 8-K/A, as filed with the Securities and Exchange Commission on May 25, 2000. We also consent to the reference to our firm under the captions "Experts" in this registration statement on Form SB-2 and related prospectus. /s/ Medinger, Fruchter, Rosen & Corso, P.C. MEDINGER, FRUCHTER, ROSEN & CORSO, P.C. December 18, 2001 New York, New York EX-23 12 kl12003_ex23-3.txt EXHIBIT 23.3 CONSENT EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this registration statement on Form SB-2 and related prospectus of iVoice, Inc. (the "Company") of our report dated March 2, 2001, with respect to the balance sheets of the Company as of December 31, 2000, and the related statements of operations, stockholders' deficiency and cash flows for the year then ended, included in the Company's Form 10-KSB/A, as filed with the Securities and Exchange Commission on May 1, 2001. We also consent to the reference to our firm under the captions "Experts" in this registration statement on Form SB-2 and related prospectus. /s/ Mendlowitz Weitsen, LLP MENDLOWITZ WEITSEN, LLP East Brunswick, New Jersey December 18, 2001 -----END PRIVACY-ENHANCED MESSAGE-----