-----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, UNxBeq0TD2vHVd1dRAatC9UgfQ5FLjy6OBrdBN/VeYDHmELG2eVUroQF72c1X/SN x6BZYwqK56d3n0CL7m7Weg== 0000922423-04-000002.txt : 20040102 0000922423-04-000002.hdr.sgml : 20040101 20040102134135 ACCESSION NUMBER: 0000922423-04-000002 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20040102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IVOICE COM INC /DE CENTRAL INDEX KEY: 0001105064 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 521750786 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-111695 FILM NUMBER: 04500854 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 kl12028_sb-2.txt SB-2 REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on January 2, 2004 Registration No. ________ ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
iVoice, Inc. (Name of Registrant in Our Charter) New Jersey 7373 51-0471976 (State or Other Jurisdiction (Primary Standard (I.R.S. Employer of Incorporation Industrial Identification No.) or Organization) Classification Code Number) 750 Highway 34 Matawan, New Jersey 07747 (732) 441-7700 (Address and Telephone Number of Principal Executive Offices and Principal Place of Business) Jerome R. Mahoney 750 Highway 34 Matawan, New Jersey 07747 (732) 441-7700 (Name, address and telephone number of agent for service) Copies of all communications 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: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. |X| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE ============================================================================================================================ Proposed Maximum Proposed Maximum Aggregate Amount Of Title Of Each Class Of Amount To Be Offering Price Offering Registration Securities To Be Registered Registered(1) Per Share (2) Price (2) Fee (2) - ---------------------------------------------------------------------------------------------------------------------------- Class A common stock, no par value per share 4,700,000,000 $.0029 $13,630,000 $1,102.67 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL 4,700,000,000 $.0029 $13,630,000 $1,102.67 ============================================================================================================================
(1) These shares consist of (i) 3,693,939,394 shares issuable pursuant to the terms of a standby equity distribution agreement dated December 31, 2003 between iVoice, Inc. and a certain investor, (ii) 306,060,606 shares issued to such investor and two other investors in connection with such agreement, and (iii) 700,000,000 issuable upon conversion of certain shares of our Class B common stock held by another investor. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes of this table, we have used the average of the closing bid and asked prices as of December 30, 2003. (3) iVoice, Inc.'s account with the Securities and Exchange Commission has a credit of $57.10, which should be applied against the Registration Fee. The remaining $1,045.57 is being submitted simultaneously with the filing of this Registration Statement. ------------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Subject to completion, dated January 2, 2004 iVOICE, INC. 4,700,000,000 Shares of Class A Common Stock This prospectus relates to the sale of up to 4,700,000,000 shares of Class A common stock of iVoice, Inc. by the selling stockholders named in this prospectus. Please refer to "Selling Stockholders" beginning on page 10. We are not selling any shares of Class A common stock and, therefore, will not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders. We will, however, receive proceeds from the sale of shares of our Class A common stock under a standby equity distribution agreement, also referred to as an "Equity Line of Credit Agreement," entered into with Cornell Capital Partners, L.P. on December 31, 2003. Our shares of Class A common stock are traded on the Over-the-Counter Bulletin Board under the symbol "IVOC." On December 30, 2003, the last reported sale price of our Class A common stock was $0.0028 per share. Nevertheless, the prices at which the selling stockholders may sell the shares offered hereby will be determined by the prevailing market price for the shares or in negotiated transactions. The selling stockholders are: o Cornell Capital Partners, which intends to sell up to 3,993,939,394 shares of our Class A common stock. o CapStone Investments which intends to sell up to 3,030,303 shares of our Class A common stock. o Butler Gonzalez LLP, which intends to sell up to 3,030,303 shares of our Class A common stock. o Jerome R. Mahoney, our president and chief executive officer, who intends to sell up to 700,000,000 shares of our Class A common stock. Cornell Capital Partners is an "underwriter," within the meaning of the Securities Act of 1933, in connection with its sale of shares of our Class A common stock it receives under the Equity Line of Credit Agreement. On the date of each advance under the Equity Line of Credit Agreement, we will issue to Cornell Capital Partners shares of Class A common stock at a per share purchase price equal to the lowest closing bid price of our Class A common stock on the Over-the-Counter Bulletin Board during the five consecutive trading day period immediately following our request for such advance, subject to the provisions of the Equity Line of Credit Agreement. Pursuant to the Equity Line of Credit Agreement, we (i) agreed to pay to Cornell Capital Partners a cash fee equal to 5.5% of the amount of each advance and (ii) issued to Cornell Capital Partners 300,000,000 shares of our Class A common stock as a one-time commitment fee. The 5.5% cash fee and the one-time commitment fee are underwriting discounts. We engaged CapStone Investments, a registered broker-dealer, to act as placement agent in connection with the Equity Line of Credit Agreement. As payment for its placement agent services, we issued CapStone Investments an aggregate of 3,030,303 shares of Class A common stock. Investing in these securities is speculative and involves a high degree of risk. Please refer to "Risk Factors" beginning on page 4. 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 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 ___________ . TABLE OF CONTENTS Prospectus Summary.............................................................1 Risk Factors...................................................................4 Cautionary Note Regarding Forward Looking Statements..........................10 Selling Stockholders..........................................................11 Use of Proceeds...............................................................13 Dilution......................................................................14 Description of Equity Line of Credit..........................................15 Plan of Distribution..........................................................17 Management's Discussion and Analysis or Plan of Operation.....................19 Description of Business.......................................................25 Management....................................................................32 Principal Stockholders........................................................35 Certain Relationships and Related Transactions................................36 Market Price of Common Equity and Other Stockholder Matters...................37 Description of Securities.....................................................38 Experts.......................................................................41 Legal Matters.................................................................41 Disclosure of Commission Position on Indemnification of Securities Act Liability....................................................41 How To Get More Information...................................................41 Index to Financial Statements................................................F-1 i PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before buying shares of our Class A common stock in this offering. You should read this entire prospectus carefully, especially the investment risks discussed under "Risk Factors." Overview iVoice, Inc. designs, manufactures, and markets innovative computerized telephony communications systems and software incorporating speech recognition technology that streamlines the call handling process. Our speech recognition software products enables users to communicate more effectively and efficiently through the integration of speech recognition into their traditional office telephone systems with call handling applications such as automated attendant, voice mail, unified messaging, and interactive voice response, or "IVR." Our products are designed to be "people oriented," with features that can be readily used without special training or manuals. Our principal speech recognition applications, Speech-enabled Auto Attendant, iVoiceMail, Unified Messaging, and iVoice IVR, incorporate this philosophy. Except for iVoice IVR, which is generally sold directly to end users due to required customization, we market and promote our speech enabled products through telephony reseller channels and telephone equipment manufacturer distributor networks. We believe this allows us to leverage those resellers' existing customer bases. We may, however, sell direct to end users in geographic locations where an existing dealer relationship does not exist. iVoice, Inc., formerly known as Visual Telephone International, Inc., was originally incorporated on December 2, 1995 under the laws of the State of Utah, and subsequently changed its state of incorporation to the State of Delaware. On April 25, 2003, we formed a wholly owned subsidiary in the State of New Jersey and on May 5, 2003, we changed our state of incorporation from the State of Delaware to the State of New Jersey by merging into the newly formed subsidiary. In September 2003, we announced our intention to distribute to our stockholders shares of Class A common stock of Trey Resources, Inc., one of our subsidiaries, and our Automated Reminder business, upon the effectiveness of required Securities and Exchange Commission filings and final approval by our Board of Directors of the terms and conditions of the proposed distribution, as described in the registration statement on Form SB-2 of Trey Resources, initially filed with the Securities and Exchange Commission on October 3, 2003. It is intended that Trey Resources will own and operate our Automatic Reminder software business as an independent publicly traded entity following the distribution. Our principal office is located at 750 Highway 34, Matawan, New Jersey 07747. Our telephone number is (732) 441-7700. Offering This prospectus relates to the sale of shares of our Class A common stock by the following selling stockholders: o Cornell Capital Partners, which intends to sell up to 3,993,939,394 shares of our Class A common stock. o CapStone Investments, which intends to sell up to 3,030,303 shares of our Class A common stock. o Butler Gonzalez LLP which intends to sell up to 3,030,303 shares of our Class A common stock. o Jerome R. Mahoney, our president, chief executive officer, and chief financial officer, who intends to sell up to 700,000,000 shares of our Class A common stock. On December 31, 2003, we entered into the Equity Line of Credit Agreement with Cornell Capital Partners, pursuant to which, we have the right, upon effectiveness of the registration statement to which this prospectus relates, to receive advances of up to an aggregate amount of $20.0 million from Cornell Capital Partners under an equity line of credit (the "Equity Line of Credit"), and to simultaneously issue shares of our Class A common stock in lieu of repayment of such advances. The number of shares to be issued to Cornell Capital Partners in connection with each advance will be determined by dividing the amount of each advance by the lowest closing bid price of the Class A Common stock over the five trading days after we provide Cornell Capital Partners notice requesting such advance. A minimum of seven trading days must pass between each advance notice. In addition, we have agreed to pay to Cornell Capital Partners a cash fee equal to 5.5% of the amount of each advance under the Equity Line of Credit, and issued to Cornell Capital Partners 300,000,000 shares of our Class A common stock as a one-time commitment fee. 1 We will not be able to receive more than $350,000 per advance, or more than an aggregate amount of $1,400,000 in advances in any 30-day period; however, the aggregate amount of all of the advance notices in the 30-day period immediately following the effective date of the registration statement to which this prospectus relates may equal up to a maximum of $3,000,000. Further, despite our contractual right to receive advances under the Equity Line of Credit and issue shares of our Class A common stock to Cornell Capital Partners in connection therewith, we are prohibited under the Equity Line of Credit Agreement from issuing shares to Cornell Capital Partners which would cause Cornell Capital Partners to own in excess of 9.9% of our then-outstanding shares of Class A common stock. Because the volume of trading in our stock has been volatile, there can be no assurance that Cornell Capital Partners will be able to sell a sufficient number of shares to allow us to take full advantage of the Equity Line of Credit. In connection with the Equity Line of Credit Agreement, we granted Cornell Capital Partners registration rights with respect to shares issued to it thereunder, in connection with which we are filing this prospectus and the registration statement to which this prospectus relates. We are required to use our best efforts to have the registration statement declared effective by the Securities and Exchange Commission and are unable to receive advances under the Equity Line of Credit until the registration statement to which this prospectus relates has been declared effective. The Equity Line of Credit expires on the earlier to occur of the date on which Cornell Capital Partners shall have paid an aggregate of $20.0 million for the shares under the Equity Line of Credit and the date occurring 24 months after the effective date of the registration statement to which this prospectus relates; provided, that, Cornell Capital Partners' obligation to purchase shares under the Equity Line of Credit Agreement will terminate earlier upon (1) suspension of the effectiveness of the registrations statement to which this prospectus relates for an aggregate of 50 days or (2) our failure to remedy a material breach of the Equity Line of Credit Agreement within 30 days of receipt of notice of such breach. We engaged CapStone Investments, a registered broker-dealer, to act as placement agent in connection with the Equity Line of Credit. As payment for its services, we issued CapStone Investments 3,030,303 shares of our Class A common stock, with respect to which CapStone Investments has "piggy-back" registration rights. We have also engaged the law firm of Butler Gonzalez LLP to act as escrow agent to hold shares of our Class A common stock to be purchased by Cornell Capital Partners in connection with each advance under the Equity Line of Credit. As partial payment for its services, we issued Butler Gonzalez LLP 3,030,303 shares of our Class A common stock, with respect to which Butler Gonzalez LLP has "piggy-back" registration rights. We have also agreed to pay Butler Gonzalez LLP an escrow fee of $500 per advance under the Equity Line of Credit. We are also registering 700,000,000 shares of our Class A common stock which are issuable upon conversion of certain shares of our Class B common stock issued to Jerome R. Mahoney in May 1999 in connection with our merger with International Voice Technologies, Inc. 2 SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following summary financial information should be read in connection with, and are qualified by reference to, the financial statements and related notes and "Management's Discussion and Analysis or Plan of Operations" appearing elsewhere in this prospectus. The statement of operations data for the years ended December 31, 2002 and 2001 and the balance sheet data as of December 31, 2002 are derived from our financial statements, which have been audited by Mendlowitz Weitsen LLP, independent auditors. The statement of operations information the nine-month periods ended September 30, 2003 and 2002 and the balance sheet data as of September 30, 2003 are derived from our unaudited financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring accruals, have been included to present fairly the unaudited interim results when read in conjunction with the audited financial statements and notes thereto appearing in this prospectus. Historical results are not necessarily indicative of results that may be expected for any future period.
For the Nine For the Nine Months Ended Months Ended For the Year Ended September 30, 2003 September 30, 2002 December 31, 2002 ------------------ ------------------ ----------------- Statement of Operation Data: Sales, net $ 349,403 $ 457,303 $ 646,560 Cost of sales 132,593 139,774 184,306 Gross profit 216,810 317,529 462,254 Selling, general and administrative expenses 950,638 1,604,370 2,262,627 Loss from operations (733,828) (1,302,719) (1,800,373) Net loss $(1,215,960) $(1,660,638) $(2,059,460) Loss per share - basic and diluted $ (0.00) $ (0.01) $ (0.02)
September 30, 2003 December 31, 2002 ------------------ ----------------- Balance Sheet Data: Cash and cash equivalents $ 1,469,229 $ 566,345 Accounts receivable, net 8,793 15,187 Inventory 23,096 31,878 Costs in excess of billings of uncompleted contracts 11,832 23,778 Prepaid expenses and other current assets 405,424 7,558 Total current assets 1,918,374 644,746 Property and equipment, net 48,736 70,186 Software license costs, net 68,100 163,200 Intangible assets, net 105,106 97,486 Deposits and other assets 20,500 7,000 Total assets $ 2,160,816 $ 982,618 Accounts payable and accrued expenses 205,284 360,106 Capital leases payable - current -- 13,928 Due to related parties 430,554 615,259 Convertible debentures 140,000 115,800 Notes payable -- 234,667 Net current liabilities of discontinued operations 517,636 -- Deferred maintenance contracts 29,155 24,156 Total current liabilities 1,322,629 1,363,916 Long-term debt -- -- Total liabilities 1,322,629 1,363,916 Common stock 914,618 518,277 Additional paid-in capital 15,591,520 13,619,554 Treasury stock (28,800) (28,800) Accumulated deficit (15,707,117) (14,490,329) Accumulated other comprehensive income 67,966 -- Total stockholders' equity (deficiency) 838,187 (381,298) Total liabilities and stockholders' deficiency $ 2,160,816 $ 982,618
3 RISK FACTORS Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our Class A common stock. If any of these risks or uncertainties actually occur, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our Class A common stock could decline and you could lose all or part of your investment. RISKS RELATED TO OUR BUSINESS WE HAVE HISTORICALLY LOST MONEY AND MAY CONTINUE TO LOSE MONEY IN THE FUTURE. We have historically lost money. In the nine months ended September 30, 2003 and the year ended December 31, 2002, we had net losses of $1,215,960 and $2,059,460, respectively, and $0.00 or $0.02 per share, respectively. Future losses are likely to occur. Accordingly, we may experience significant liquidity and cash flow problems because our operations are not profitable. No assurances can be given that we will be successful in reaching or maintaining profitable operations. IF WE CANNOT RAISE ADDITIONAL CAPITAL TO FINANCE FUTURE OPERATIONS, WE MAY NEED TO CURTAIL OUR OPERATIONS IN THE FUTURE. We have relied on significant external financing to fund our operations. Such financing has historically come from a combination of borrowings and sales of securities from third parties and funds provided by certain officers and directors. We cannot assure you that financing whether from external sources or related parties will be available if needed or on favorable terms. Our inability to obtain adequate financing will result in the need to curtail business operations. Any of these events would be materially harmful to our business and may result in a lower stock price. While we have recently raised sufficient working capital to fund our operations for at least the next 24 months, we expect that we will need to raise additional capital to fund our future operations. WE HAVE BEEN THE SUBJECT OF A "GOING CONCERN" OPINION FROM OUR INDEPENDENT AUDITORS, WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS. Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with the year ended December 31, 2002 financial statements, which states that iVoice had losses and negative cash flows from operations for the years ended December 31, 2002 and 2001 and as of those dates had negative working capital which raises substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. This may have an adverse effect on our ability to obtain financing for our operations and to further develop and market our products. BECAUSE OUR VOICE-RECOGNITION BUSINESS IS IN ITS EARLY STAGES, WE MAY EXPERIENCE DIFFICULTIES THAT COULD PREVENT US FROM BECOMING PROFITABLE. Because voice-recognition products have been available to the general public for a limited period of time, we may experience 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. 4 We may continue to face these and other difficulties in the future, some of which may be beyond our control. If we are unable to successfully address these problems, our business will suffer and our stock price could decline. IF OUR TECHNOLOGIES AND PRODUCTS CONTAIN DEFECTS OR OTHERWISE DO NOT WORK AS EXPECTED, WE MAY INCUR SIGNIFICANT EXPENSES IN ATTEMPTING TO CORRECT THESE DEFECTS OR IN DEFENDING LAWSUITS OVER ANY SUCH DEFECTS. Voice-recognition products are not currently accurate in every instance, and may never be. Furthermore, we could inadvertently release products and technologies that contain defects. In addition, third-party technology that we include in our products could contain defects. We may incur significant expenses to correct such defects. Clients who are not satisfied with our products or services could bring claims against us for substantial damages. Such claims could cause us to incur significant legal expenses and, if successful, could result in the plaintiffs being awarded significant damages. Our payment of any such expenses or damages could prevent us from becoming profitable. OUR SUCCESS IS HIGHLY DEPENDENT UPON OUR ABILITY TO COMPETE AGAINST COMPETITORS THAT HAVE SIGNIFICANTLY GREATER RESOURCES THAN WE HAVE. The call-processing and voice-recognition industries are highly competitive, and we believe that this competition will intensify. The segment of the voice-recognition industry that supplies call-processing systems to businesses is also extremely competitive. Many of our competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater name recognition and larger client bases than we do. Our competitors could use these resources to develop products that are more effective or less costly than any or all of our products or that could render any or all of our products obsolete. Our competitors could also use their economic strength to influence the market to continue to buy their existing products. Industry analysts recognize Nuance Communications, Inc. and SpeechWorks International, Inc., a wholly-owned subsidiary of ScanSoft, Inc., as the market leaders in our industry. Nuance sells software to a broad range of companies directly and through a channel of resellers. Nuance's five largest resellers, based on revenue in 2002, were Nortel Networks, Edify (a subsidiary of S1 Corporation), Motorola, Syntellect and Avaya. Speechworks' clients include, among others, America Online, Amtrak, AT&T, Aetna, Bell Canada, Continental Airlines, Ford Motor Company, France Telecom, GMAC Commercial Mortgage, Jaguar Cars, Microsoft, Neiman Marcus, Nortel Networks, Quantas Airlines, The Boeing Company, The Hartford Insurance, Thrifty Car Rental, Ticketmaster, United Airlines, U.S. Postal Service, Wachovia/First Union Corporation, Yahoo. PROTECTING OUR INTELLECTUAL PROPERTY IN OUR TECHNOLOGY THROUGH PATENTS MAY BE COSTLY AND INEFFECTIVE AND IF WE ARE NOT ABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AND WE MAY NOT BE PROFITABLE. Our future success depends in part on our ability to protect the intellectual property for our technology through patents. We will only be able to protect our products and methods from unauthorized use by third parties to the extent that our products and methods are covered by valid and enforceable patents or are effectively maintained as trade secrets. To date, we have filed ten patent applications for internally developed applications with the U.S Patent and Trademark Office. Of the patents applications we have filed, we received one patent for our Speech-Enabled Automatic Telephone Dialer in May 2003, and a notice of allowance for a second patent for our Speech-Enabled Automatic Telephone Dialer in July 2003. No assurances can be given that the remaining patent applications will be approved. The protection provided by our patents, and patent applications if issued, may not be broad enough to prevent competitors from introducing similar products into the market. Our patents, if challenged or if we attempt to enforce them, may not be upheld by the courts of any jurisdiction. Litigation and other proceedings relating to patent matters, whether initiated by us or a third party, can be expensive and time consuming, regardless of whether the outcome is favorable to us, and may require the diversion of substantial financial, managerial and other resources. An adverse outcome could subject us to significant liabilities to third parties or require us to cease any related development product sales or commercialization activities. In addition, if patents that contain dominating or conflicting claims have been or are subsequently issued to others and the claims of these patents are ultimately determined to be valid, we may be required to obtain licenses under patents of others in order to develop, manufacture use, import and/or sell our products. We may not be able to obtain licenses under any of these patents on terms acceptable to us, if at all. If we do not obtain these licenses, we could encounter delays in, or be prevented entirely from using, importing, 5 developing, manufacturing, offering or selling any products or practicing any methods, or delivering any services requiring such licenses. IF WE ARE NOT ABLE TO PROTECT OUR TRADE SECRETS THROUGH ENFORCEMENT OF OUR CONFIDENTIALITY AND NON-COMPETITION AGREEMENTS, THEN WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AND WE MAY NOT BE PROFITABLE. We attempt to protect our trade secrets, including the processes, concepts, ideas and documentation associated with our technologies, through the use of confidentiality agreements and non-competition agreements with our current employees and with other parties to whom we have divulged such trade secrets. If the employees or other parties breach our confidentiality agreements and non-competition agreements or if these agreements are not sufficient to protect our technology or are found to be unenforceable, our competitors could acquire and use information that we consider to be our trade secrets and we may not be able to compete effectively. Most of our competitors have substantially greater financial, marketing, technical and manufacturing resources than we have and we may not be profitable if our competitors are also able to take advantage of our trade secrets. OUR INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND FAILURE TO ADAPT OUR PRODUCT DEVELOPMENT TO THESE CHANGES MAY CAUSE OUR PRODUCTS TO BECOME OBSOLETE. We participate in a highly dynamic industry characterized by rapid change and uncertainty relating to new and emerging technologies and markets. Future technology or market changes may cause some of our products to become obsolete more quickly than expected. THE TREND TOWARD CONSOLIDATION IN OUR INDUSTRY MAY IMPEDE OUR ABILITY TO COMPETE EFFECTIVELY. As consolidation in the software industry continues, fewer companies dominate particular markets, changing the nature of the market and potentially providing consumers with fewer choices. Also, many of these companies offer a broader range of products than us, ranging from desktop to enterprise solutions. We may not be able to compete effectively against these competitors. Furthermore, we may use strategic acquisitions, as necessary, to acquire technology, people and products for our overall product strategy. The trend toward consolidation in our industry may result in increased competition in acquiring these technologies, people or products, resulting in increased acquisition costs or the inability to acquire the desired technologies, people or products. Any of these changes may have a significant adverse effect on our future revenues and operating results. WE FACE INTENSE PRICE-BASED COMPETITION FOR LICENSING OF OUR PRODUCTS WHICH COULD REDUCE PROFIT MARGINS. Price competition is often intense in the software market, especially for computerized telephony software products. Many of our competitors have significantly reduced the price of their products. Price competition may continue to increase and become even more significant in the future, resulting in reduced profit margins. PRODUCT RETURNS MAY EXCEED ESTABLISHED RESERVES AND AFFECT OUR REVENUES. Product returns can occur when we introduce upgrades and new versions of products or when distributors or retailers have excess inventories. Our return policy allows distributors, subject to various limitations, to return products in exchange for new products or for credit towards future products. End users may return our products through dealers and distributors within a reasonable period from the date of license for a full refund. In addition, retailers may return older versions of our products. We estimate and maintain reserves for product returns. However, future returns could exceed the reserves we have established, which could have a material adverse effect on our operating results. IF WE LOSE THE SERVICES OF ANY OF OUR KEY PERSONNEL, INCLUDING OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER, OUR BUSINESS MAY SUFFER. We are dependent on our key officer, Jerome R. Mahoney, our chief executive officer and president, and our key employees in our finance, technology, sales and marketing operations. The loss of any of our key personnel could materially harm our business because of the cost and time necessary to retain and train a replacement. Such a loss would also divert management attention away from operational issues. In an attempt to minimize the effects of such loss, we presently maintain a $5,000,000 key-man term life insurance policy on Mr. Mahoney. 6 IF WE DISTRIBUTE SHARES OF CLASS A COMMON STOCK OF TREY RESOURCES, INC. AND OUR AUTOMATED REMINDER BUSINESS TO OUR STOCKHOLDERS, OUR PRESIDENT, CHIEF EXECUTIVE OFFICER AND SOLE DIRECTOR MAY HAVE CONFLICTS OF INTEREST. After the distribution to our stockholders shares of Class A common stock of Trey Resources and our Automated Reminder business, as described in the registration statement on Form SB-2 of Trey Resources, Inc. initially filed with the Securities and Exchange Commission on October 3, 2003, our president, chief executive officer and sole director, Jerome R. Mahoney, will serve as Chairman of the Board of Trey Resources and will have the right to convert $250,000 of indebtedness into $250,000 shares of Class B Common Stock of Trey Resources, which will be convertible into an indeterminable number of shares of Class A Common Stock of Trey Resources. This could create, or appear to create, potential conflicts of interest when our president, chief executive officer and sole director is faced with decisions that could have different implications for Trey Resources. Examples of these types of decisions might include any of the potential business acquisitions made by us or the resolution of disputes arising out of the agreements governing the relationship between Trey Resources and us following the distribution. Also, the appearance of conflicts, even if such conflicts do not materialize, might adversely effect the public's perception of us following the distribution. OUR SOLE DIRECTOR CONTROLS A SIGNIFICANT PERCENTAGE OF OUR CAPITAL STOCK AND HAS SUFFICIENT VOTING POWER TO CONTROL THE VOTE ON SUBSTANTIALLY ALL CORPORATE MATTERS. As of December 18, 2003, Jerome R. Mahoney, our president, chief executive officer, chief financial officer and sole director, owned approximately 89.8% of our outstanding shares of shares of our Class A common stock (assuming the conversion of outstanding shares of Class B common stock and debt into shares of Class A common stock). Mr. Mahoney is able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership, which is not subject to any voting restrictions, could limit the price that investors might be willing to pay for our Class A common stock. In addition, Mr. Mahoney is in a position to impede transactions that may be desirable for other stockholders. He could, for example, make it more difficult for anyone to take control of us. RISKS RELATED TO THIS OFFERING OUR ISSUANCES OF SHARES OF CLASS A COMMON STOCK UNDER THE EQUITY LINE OF CREDIT LIKELY WILL RESULT IN OVERALL DILUTION TO MARKET VALUE AND RELATIVE VOTING POWER OF PREVIOUSLY ISSUED CLASS A COMMON STOCK, WHICH COULD RESULT IN SUBSTANTIAL DILUTION TO THE VALUE OF SHARES HELD BY STOCKHOLDERS PRIOR TO SALES UNDER THIS PROSPECTUS. The issuance of our Class A common stock in connection with advances under the Equity Line of Credit may result in substantial dilution to the equity interests of holders of our Class A common stock. Specifically, the issuance of a significant amount of additional shares of Class A common stock will result in a decrease of the relative voting control of our common stock issued and outstanding prior to the issuance of our Class A common stock in connection with the Equity Line of Credit. Furthermore, public resales of our Class A common stock by Cornell Capital Partners following the issuance of Class A common stock in connection with the Equity Line of Credit likely will depress the prevailing market price of our Class A common stock. EXISTING STOCKHOLDERS LIKELY WILL EXPERIENCE INCREASED DILUTION WITH DECREASES IN MARKET VALUE OF OUR CLASS A COMMON STOCK IN RELATION TO OUR ISSUANCES OF SHARES UNDER THE EQUITY LINE OF CREDIT, WHICH COULD HAVE A MATERIAL ADVERSE IMPACT ON THE VALUE OF THEIR SHARES. The formula for determining the number of shares of our Class A common stock to be issued under the Equity Line of Credit is based, in part, on the market price of the Class A common stock and is equal to the lowest closing bid price of our Class A common stock over the five trading days after the advance notice is provided by us to Cornell Capital Partners. As a result, the lower the market price of our Class A common stock at and around the time we sell shares under the Equity Line of Credit, the more shares of our Class A common stock Cornell Capital Partners receives. Any increase in the number of shares of our Class A common stock issued as a result of decreases in the prevailing market price would compound the risks of dilution described in the preceding risk factor. FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS. It may be more difficult for us to raise funds in subsequent stock offerings as a result of the sales of our common stock by Cornell Capital Partners in this offering. As noted above, sales by Cornell Capital Partners likely will result in 7 substantial dilution to the holdings and interest of current and new stockholders. Additionally, as noted above, the volume of shares sold by the Equity Line Investor could depress the market price of our stock. These factors could make it more difficult for us to raise additional capital through subsequent offerings of our common stock, which could have a material adverse effect on our operations. THE SELLING STOCKHOLDERS MAY SELL CLASS A COMMON STOCK AT ANY PRICE OR TIME, WHICH COULD RESULT IN A DECREASE IN THE MARKET PRICE OF OUR CLASS A COMMON STOCK AND A RESULTING DECREASE IN THE VALUE OF SHARES HELD BY EXISTING STOCKHOLDERS. Upon effectiveness of this registration statement, Cornell Capital Partners may offer and sell the shares of Class A common stock received in connection with advances under the Equity Line of Credit Agreement at a price and time determined by Cornell Capital Partners. The other selling stockholders similarly may sell the shares they received in connection with the Equity Line of Credit Agreement at prices and times determined by them. The timing of sales and the price at which the shares are sold by the selling stockholders could have an adverse effect upon the public market for our Class A common stock. Although Cornell Capital Partners is a statutory underwriter, there is no independent or third-party underwriter involved in the offering of the shares held by or to be received by Cornell Capital Partners, and there can be no assurance that the disposition of those shares will be completed in a manner that is not disruptive to the market for our Class A common stock. THE SALE OF OUR STOCK UNDER OUR EQUITY LINE OF CREDIT COULD ENCOURAGE SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FURTHER DECLINE OF OUR STOCK PRICE. There is an increased potential for short sales of our Class A common stock due to the sales of shares issued to Cornell Capital Partners in connection with the Equity Line of Credit, which could materially effect the market price of our stock. Downward pressure on the market price of our common stock that likely will result from sales of our Class A common stock by Cornell Capital Partners issued in connection with the Equity Line of Credit could encourage short sales of our Class A common stock. A "short sale" is defined as the sale of stock by an investor that the investor does not own. Typically, investors who sell short believe that the price of the stock will fall, and anticipate selling at a price higher than the price at which they will buy the stock. Significant amounts of such short selling could place further downward pressure on the market price of our common stock. BECAUSE THE TRADING MARKET FOR OUR CLASS A COMMON STOCK IS LIMITED, AND WE CANNOT PREDICT THE EXTENT TO WHICH A PUBLIC TRADING MARKET WILL DEVELOP, INVESTORS WHO PURCHASE SHARES OF OUR CLASS A COMMON STOCK MAY HAVE DIFFICULTY SELLING THEIR SHARES. Prior to this offering, there have been extended periods in our history where there has been a limited public market for our Class A common stock. There can be no assurance that an active trading market for our stock will develop or continue. An absence of an active trading market could adversely affect our stockholders' ability to sell our Class A common stock in short time periods, or possibly at all. Our Class A common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations which could adversely affect the market price of our stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our Class A common stock to fluctuate substantially. Purchasers of our shares of Class A common stock may have difficulty selling their shares should they desire to do so. OUR CLASS A COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS. Our Class A common stock is deemed to be "penny stock" as that term is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Regulations governing penny stocks require that you receive, prior to a purchase or sale, a disclosure explaining the penny stock market and associated risks. These requirements may reduce the potential market for our Class A common stock by reducing the number of potential investors. This may make it more difficult for 8 investors in our Class A common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline. Penny stocks are stock: o with a price of less than $5.00 per share; o that are not traded on a "recognized" national exchange; o whose prices are not quoted on the Nasdaq automated quotation system (Nasdaq listed stock must still have a price of not less than $5.00 per share); or o in issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $5.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years. Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER OR LOWER THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING. The price in this offering will fluctuate based on the prevailing market price of the Class A common stock on the Over-the-Counter Bulletin Board. Accordingly, the price you pay in this offering may be higher or lower than the prices paid by other people participating in this offering. WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE OF CREDIT WHEN NEEDED. We are dependent on external financing to fund our operations. Our financing needs are expected to be provided from the Equity Line of Credit, in large part. No assurances can be given that such financing will be available in sufficient amounts or at all when needed. WE MAY BE UNABLE TO CONTINUE TO RECEIVE ADVANCES OR ISSUE SHARES UNDER THE EQUITY LINE OF CREDIT IF THE TRADING VOLUME IN OUR STOCK IS NOT SUFFICIENT TO ALLOW THE EQUITY LINE INVESTOR TO SELL ITS SHARES. Despite our contractual right to receive advances under the Equity Line of Credit and sell shares of our stock to Cornell Capital Partners, we are also prohibited by the Equity Line of Credit Agreement from receiving advances under the Equity Line of Credit to the extent any issuance of shares to Cornell Capital Partners would cause it to own in excess of 9.9% of our then-outstanding shares of Class A common stock. Because the volume of trading in our stock has been volatile, there can be no assurance that Cornell Capital Partners will be able to sell a sufficient number of shares to allow us to take full advantage of the Equity Line of Credit. If Cornell Capital Partners is unable to sell all of the shares it receives in connection with advances made under the Equity Line of Credit, once the number of unsold shares retained by the Equity Line Investor reaches 9.9% of the then-outstanding shares of our Class A common stock, we would be unable to receive advances under the Equity Line of Credit until Cornell Capital Partners had sold additional shares into the market. Alternatively, our waiting to receive subsequent advances under the Equity Line of Credit until Cornell Capital Partners has sold all the shares it receives from us will result in a delay in our access to the capital available under the Equity Line of Credit Agreement. These restrictions on our access to the capital available under the Equity Line of Credit Agreement could have a material adverse effect on our operations. THE ISSUANCE OF SHARES OF CLASS A COMMON STOCK UNDER THE EQUITY LINE OF CREDIT COULD RESULT IN A CHANGE OF CONTROL. We are registering 4,700,000,000 shares of Class A common stock in this offering. Of this amount, 300,000,000 shares were issued to Cornell Capital Partners as a one-time commitment fee in connection with the Equity Line of Credit Agreement, and up to an aggregate of 3,693,939,394 shares of our Class A common stock could be purchased by Cornell Capital Partners under the Equity Line of Credit Agreement, which shares may be resold from time to time. Although we are prohibited from selling shares to Cornell Capital Partners under the Equity Line of Credit if such sale would result in Cornell Capital Partners holding more than 9.9% of the then-outstanding Class A common stock, Cornell Capital Partners is not prohibited from selling shares of Class A common stock received in connection with an advance, and then receiving additional shares of common stock in connection with a subsequent advance. In this way, Cornell Capital Partners could sell more than 9.9% of the outstanding Class A common stock to one or more investors in a relatively short time frame while never holding more than 9.9% at one time. Concentration of ownership of our capital stock could delay or prevent change of control. At December 18, 2003, the 3,993,939,394 shares of our Class A common stock offered hereby represent 84.6% of our outstanding Class A common stock. 9 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Information included or incorporated by reference in this prospectus may contain forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of these words or other variations on these words or comparable terminology. This prospectus contains forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans and (e) our anticipated needs for working capital. These statements may be found under "Management's Discussion and Analysis or Plan of Operations" and "Business," as well as in this prospectus generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in this prospectus generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this prospectus will in fact occur. 10 SELLING STOCKHOLDERS The table below sets forth information regarding ownership of our Class A common stock by the selling stockholders as of December 18, 2003, and the shares of Class A common stock to be sold by them under this prospectus. The number of shares beneficially owned is determined under rules promulgated by the Securities and Exchange Commission, 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 December 18, 2003, through the exercise or conversion of any stock option, convertible security, warrant or other right. 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. As of December 18, 2003, 4,719,208,096 shares of our Class A common stock were outstanding.
Securities Prior to Offering Securities After Offering ---------------------------------------------------------------------- -------------------------- Percentage Number of Percentage Number of of Number of Shares of of Shares of Outstanding Shares of Class Class A Common Outstanding Class A Number of Shares of A Common Stock Stock Issuable Shares of Common Stock Shares of Class A Selling Beneficially Under Equity Class A Offered Class A Common Stockholder Owned Line of Credit Common Stock Hereby Common Stock Stock ----------- -------------- -------------- ------------ ------------ -------------- ---------- Cornell Capital Partners, L.P. 300,000,000(1) 3,693,939,394(2) 45.8%(3) 3,993,939,394 0 0.0% Newbridge Securities 3,030,303(4) 0 * 3,030,303 0 0.0% Butler Gonzalez 3,030,303(5) 0 * 3,030,303 0 0.0% Jerome R. Mahoney 41,278,512,295(6)(7) 0 89.2% 700,000,000 40,578,512,295 89.0%
- ------------------------------------- * Less than 1% (1) Includes 300,000,000 shares of Class A common stock issued to Cornell Capital Partners, as a one-time commitment fee under the Equity Line of Credit Agreement, on January 2, 2004. (2) The registration statement to which this prospectus relates covers, among other shares identified herein, up to 3,693,939,394 shares of Class A common stock issuable under the Equity Line of Credit. Because the specific circumstances of the issuances under the Equity Line of Credit are unascertainable at this time, the maximum aggregate number of shares of our Class A common stock offered by Cornell Capital Partners cannot be determined at this time, but cannot exceed 3,693,939,394 unless and until we file additional registration statements registering the resale of the additional shares. (3) Cornell Capital Partners is prohibited by the terms of the Equity Line of Credit Agreement from having shares issued to it under the Equity Line of Credit to the extent that such issuance would result in Cornell Capital Partners beneficially owning more than 9.9% of the then-outstanding shares of our Class A common stock following such issuance. The percentage set forth is not determinative of Cornell Capital Partners' beneficial ownership of our Class A common stock pursuant to Rule 13d-3 or any other provision under the Securities Exchange Act of 1934. (4) Includes 3,030,030 shares of Class A common stock issued to Newbridge Securities Corporation, as payment for services as placement agent in connection with the Equity Line of Credit Agreement, on January 2, 2004. (5) Includes 3,030,030 shares of Class A common stock issued to Butler Gonzalez, as partial payment for services as escrow agent in connection with the Equity Line of Credit Agreement, on January 2, 2004. (6) Includes (i) 450,000 shares of our Class A common stock held by Mr. Mahoney's minor children, (ii) 29,506,147,541 shares of our Class A common stock issuable upon conversion of 1,799,875 shares of our Class B common stock held by Mr. Mahoney, and (iii) 11,761,114,754 shares of our Class A common stock issuable upon conversion of a promissory note dated March 20, 2001, made by us in favor of Mr. Mahoney, as amended on August 13, 2002. Pursuant to such promissory note, Mr. Mahoney may, at any time, convert amounts owed to him for monies loaned thereunder and interest thereon into (i) one share of Class B common stock for each dollar owed, (ii) the number of shares of Class A common stock calculated by dividing (x) the sum of the amount being prepaid by (y) 50% of the lowest issue price of shares of our Class A common stock since the first advance of funds under such note, or (iii) payment of the principal of the note, before any repayment of interest. At December 18, 2003, the total balance owed to Mr. Mahoney was $717,428, convertible into 717,428 shares of our Class B common stock, or 11,761,114,754 shares of our Class A common stock. (7) Since we do not have a sufficient number of authorized shares of Class A common stock to issue all of the shares of Class A common stock issuable upon the exercise or conversion of all of our outstanding options, warrants, debentures and Class B common stock, Mr. Mahoney has agreed that, until such time as our right to receive advances under the Equity Line of Credit Agreement expires and until we have increased the number of authorized shares of Class A common stock in an amount sufficient to issue all shares of our Class A common stock underlying all then-outstanding options, warrants, debentures, Class B common stock or other obligations to issue shares of our Class A common stock, Mr. Mahoney will not convert any of his shares of Class B common stock or the balance due under his convertible promissory note, if any such conversion or conversions, in the aggregate, would result in our issuance to Mr. Mahoney of more than 1,200,000,000 shares of our Class A common stock. 11 None of the selling stockholders has held a position or office, or had any other material relationship, with us, except as follows: o Cornell Capital Partners, L.P. is the investor under the Equity Line of Credit Agreement. Cornell Capital Partners is an "underwriter" within the meaning of the Securities Act of 1933, in connection with its sale of shares of Class A common stock it receives under the Equity Line of Credit Agreement. Under the Equity Line of Credit Agreement, we (i) agreed to pay to Cornell Capital Partners a cash fee equal to 5.5% of the amount of each advance and (ii) issued Cornell Capital Partners 300,000,000 shares of Class A common stock as a one-time commitment fee. The 5.5% cash fee and the one-time commitment fee are underwriting discounts. Cornell Capital Partners and we entered into an equity line of credit agreement in June 2002, which was subsequently amended in February 2003, pursuant to which we raised net proceeds in an aggregate amount of $4,609,110. The principal terms of such equity line of credit agreement were substantially similar to the principal terms of the Equity Line of Credit Agreement to which Cornell Capital Partners and we are currently parties. Cornell Capital Partners is also the investor under an equity line of credit with Trey Resources and, as of December 18, 2003, had outstanding loans to Trey Resources in the aggregate principal amount of $100,000, which is evidenced by a convertible debenture. All investment decisions of Cornell Capital Partners are made by its general partner, Yorkville Advisors, LLC. Mark Angelo, the managing member of Yorkville Advisors, makes the investment decisions on behalf of Yorkville Advisors. o CapStone Investments is an unaffiliated registered broker-dealer that has been retained by iVoice to act as placement agent in connection with the Equity Line of Credit with Cornell Capital Partners, L.P. For its services, CapStone Investments has received 3,030,303 shares of Class A common stock, which shares are being registered in this offering. Scott Capozza, principal of CapStone Investments, makes the investment decisions on behalf of CapStone Investments. o Pursuant to the Equity Line of Credit Agreement, Butler Gonzalez LLP shall act as escrow agent to hold shares of the our Class A common stock to be purchased by Cornell Capital Partners in connection with each advance under the Equity Line of Credit. For its services, we issued Butler Gonzalez LLP 3,030,303 shares of our Class A common stock and have agreed to pay Butler Gonzalez LLP escrow fees in the amount of $500 out of the proceeds from each advance made under the Equity Line of Credit Agreement. Thomas Butler and David Gonzalez, partners of the law firm of Butler Gonzalez LLP, make the investment decisions on behalf of Butler Gonzalez LLP. o The shares being registered for Jerome R. Mahoney, our president, chief executive officer and chief financial officer, are issuable upon conversion of certain shares of our Class B common stock issued to Mr. Mahoney in May 1999 in connection with our merger with International Voice Technologies, Inc. 12 USE OF PROCEEDS This prospectus relates to shares of our Class A common stock that may be offered and sold from time to time by the selling stockholders. There will be no proceeds to us from sales by the selling stockholders of shares of Class A common stock in this offering. We will receive proceeds from our sale of shares of Class A common stock to Cornell Capital Partners under the Equity Line of Credit. We could receive gross proceeds of up to $20.0 million under the Equity Line of Credit, before payment of fees and expenses. However, we cannot assure you to what extent, if at all, we will require Cornell Capital Partners to purchase any of our shares of Class A common stock pursuant to the Equity Line of Credit Agreement. The per share purchase price of the shares purchasable by Cornell Capital Partners in connection with any advance under the Equity Line of Credit Agreement will be equal to the lowest closing bid price of our common stock on the Over-the-Counter Bulletin Board over the five trading days immediately following the date we provide notice requesting such advance. For each advance under the Equity Line of Credit, we have agreed to pay to Cornell Capital Partners a cash fee equal to 5.5% of the amount of such advance and Butler Gonzalez LLP an escrow fee in the amount of $500. We intend to use net the proceeds from advances under Equity Line of Credit, if any, for general corporate purposes, provided that, in accordance with the provisions of the Equity Line of Credit Agreement, none of the net proceeds will be used to pay any liability incurred by any of our officers, directors or employees, except for any liability owed to such person for, or incurred by such person originating from, services rendered to us, or from which we have indemnified such person. 13 DILUTION The net tangible book value of iVoice as of September 30, 2003 was $651,481 or $0.00016 per share of Class A common stock. Net tangible book value per share is determined by dividing the tangible book value of iVoice (total tangible assets less total liabilities) by the number of outstanding shares of our common stock. Since this offering is being made solely by the selling stockholders and none of the proceeds will be paid to iVoice, our net tangible book value will be unaffected by this offering. Our net tangible book value, however, will be impacted by the common stock to be issued under the Equity Line of Credit. The amount of dilution will depend on the offering price and number of shares to be issued under the Equity Line of Credit. The following example shows the dilution to new investors at an offering price of $0.004 per share. If we assume that iVoice had issued 6,666,666,667 shares of Class A common stock under the Equity Line of Credit at an assumed offering price of $0.00300 per share (i.e., the maximum number of shares needed in order to raise a total of $20.0 million under the equity line of credit, less a 5.5% cash fee $1,100,000 and offering expenses of $30,000, our net tangible book value as of September 30, 2003 would have been $19,521,481 or $0.00183 per share. Such an offering would represent an immediate increase in net tangible book value to existing stockholders of $0.00167 per share and an immediate dilution to new stockholders of $0.00117 per share. The following table illustrates the per share dilution:
Assumed public offering price per share $0.00300 Net tangible book value per share before this offering $0.00016 Increase attributable to new investors $0.00167 ----------- Net tangible book value per share after this offering $0.00183 ----------- Dilution per share to new stockholders $0.00117 ===========
The offering price of our Class A common stock is based on the then-existing market price. In order to give prospective investors an idea of the dilution per share they may experience, we have prepared the following table showing the dilution per share at various assumed offering prices: Assumed No. of Shares to be Dilution Per Share to Offering Price Issued New Investors -------------- ------------------- --------------------- $0.00300 6,666,666,667(1) $0.00117 $0.00600 3,333,333,333 $0.00337 $0.00900 2,222,222,222 $0.00585 $0.01200 1,666,666,667 $0.00854 - --------------------- (1) This represents the maximum number of shares of Class A common stock needed to raise $20,000,000 under the Equity Line of Credit at an assumed offering price of $.00300 per share; however, only 3,693,939,394 shares of our Class A common stock issuable under the Equity Line of Credit are being registered in this filing and we cannot require Cornell Capital Partners to purchase additional shares unless and until such additional shares are registered under the Securities Act of 1933. 14 DESCRIPTION OF EQUITY LINE OF CREDIT Summary. On December 31, 2003, we entered into the Equity Line of Credit Agreement with Cornell Capital Partners, pursuant to which, we have the right, upon effectiveness of the registration statement to which this prospectus relates, to receive advances of up to an aggregate amount of $20.0 million from Cornell Capital Partners under the Equity Line of Credit, and to simultaneously issue shares of our Class A common stock in lieu of repayment of such advances. Cornell Capital Partners is a private limited partnership whose business operations are conducted through its general partner, Yorkville Advisors, LLC. Cornell Capital Partners is an "underwriter" within the meaning of the Securities Act of 1933, in connection with its sale of shares of Class A common stock it receives under the Equity Line of Credit Agreement. On the date of each advance of funds under the Equity Line of Credit Agreement, Cornell Capital Partners will purchase shares of Class A common stock at a per share purchase price equal to the lowest closing bid price of the Class A common stock on the Over-the-Counter Bulletin Board during the five consecutive trading day period immediately following our request for such advance, subject to the provisions of the Equity Line of Credit Agreement. We have agreed to pay to Cornell Capital Partners a cash fee equal to 5.5% of the amount of each advance on the date thereof. We also issued Cornell Capital Partners 300,000,000 shares of Class A common stock as a one-time commitment fee under the Equity Line of Credit Agreement. The 5.5% cash fee and the one-time commitment fee are underwriting discounts. In connection with the Equity Line of Credit, we engaged CapStone Investments a registered broker-dealer, to act as placement agent, and Butler Gonzalez LLP, a law firm, to act as escrow agent to hold shares of our Class A common stock to be purchased by Cornell Capital Partners in connection with each advance. We issued 3,030,303 shares of our Class A common stock to each of CapStone Investments, as payment for its services, and Butler Gonzalez LLP, as partial payment for its services. We also agreed to pay Butler Gonzalez LLP an escrow fee of $500 per advance under the Equity Line of Credit. Equity Line of Credit Explained. Pursuant to the Equity Line of Credit, we may periodically sell shares of Class A common stock to Cornell Capital Partners to raise capital for general corporate purposes. The periodic sale of shares is known as an advance. We may request in writing an advance every 7 trading days. A closing will be held no more than 6 trading days after such written notice at which time we will deliver shares of Class A common stock and Cornell Capital Partners will pay the advance amount. We may request advances under the Equity Line of Credit once the underlying shares are registered with the Securities and Exchange Commission, provided that certain conditions set forth in the Equity Line of Credit Agreement are satisfied. Thereafter, we may continue to request advances until Cornell Capital Partners has advanced $20.0 million or 24 months after the effective date of the registration statement to which this prospectus relates, whichever occurs first; provided, that, Cornell Capital Partners' obligation to purchase shares under the Equity Line of Credit Agreement will terminate earlier upon (1) suspension of the effectiveness of the registrations statement to which this prospectus relates for an aggregate of 50 days or (2) our failure to remedy a material breach of the Equity Line of Credit Agreement within 30 days of receipt of notice of such breach. The following are some of the other conditions that we must meet before Cornell Capital Partners is obligated to buy our shares: (1) once declared effective by the Securities and Exchange Commission, the registration statement to which this prospectus relates must remain effective; (2) our representations and warranties given to Cornell Capital Partners under the Equity Line of Credit Agreement must be true and correct, and we must comply with the provisions of the agreement; and (3) our Class A common stock must remain traded on the Over-the-Counter Bulletin Board or another trading market or exchange. There is no guarantee that we will be able to meet these or any other conditions under the equity line purchase agreement, or that we will be able to draw on any portion of the Equity Line of Credit. Under the terms of the Equity Line of Credit Agreement, we may not issue or sell (1) any shares of our common stock or preferred stock without consideration or for a consideration per share less than the highest reported bid price for our common stock on the date of issuance or (2) issue or sell any warrant, option, right, contract, call, or other security granting the holder thereof the right to acquire shares of our common stock without consideration or for a consideration per share less than the highest reported bid price for the common stock on the date of issuance, except for common stock issuable pursuant to our obligations on the date we signed the Equity Line of Credit Agreement, upon the conversion of stock options, convertible debt or Class B common stock. The amount of each advance shall be limited to $350,000 and is subject to an aggregate maximum advance amount of $1,400,000 in any 30-day period. However, the aggregate amount of all of the advance notices in the initial 30-day period following the effective date of the registration statement to which this prospectus relates, may equal up to a maximum of $3,000,000. The amount available under the Equity Line of Credit is not dependent on the price or volume of our Class A common stock. Cornell Capital Partners may not own more than 9.9% of our outstanding common stock at any time. Because Cornell Capital Partners can repeatedly acquire and sell shares, this limitation does not limit the potential dilutive effect or the total number of shares that Cornell Capital Partners may receive under the Equity Line of Credit. We cannot predict the actual number of shares of Class A common stock that will be issued pursuant to the Equity Line of Credit, in part, because the purchase price of the shares will fluctuate based on prevailing market conditions and we have not determined the total amount of advances we intend to draw. Nonetheless, we can estimate the number of shares of our Class A common stock that will be issued using certain assumptions. For example, we would need to issue 6,666,666,667 shares of Class A common stock in order to raise the maximum amount under the Equity Line of Credit at a purchase price of $0.003, a recent market price of our Class A common stock. Of the shares of Class A common stock issuable under the Equity Line of Credit, we are registering a total of 3,693,939,394 shares in this offering. The issuance of such shares under the Equity Line of Credit may result in a change of control. If all or a significant block of these shares are held by one or more stockholders working together, then such stockholder or stockholders would have enough shares to assume control of iVoice by electing its or their own directors. This could happen, for example, if Cornell Capital Partners sold the shares purchased under the Equity Line of Credit to the same purchaser. 15 Proceeds used under the Equity Line of Credit will be used in the manner set forth in the "Use of Proceeds" section of this prospectus. We cannot predict the total amount of proceeds to be raised in this transaction because we have not determined the total amount of the advances we intend to draw. We expect to incur expenses of approximately $30,000 consisting primarily of printing expenses, accounting fees and legal fees incurred in connection with the registration of the shares of Class A common stock offered hereby. In addition, we have agreed to pay Cornell Capital Partners a cash fee equal to 5.5% of the amount of the advance and Butler Gonzalez LLP $500, for each advance made under the Equity Line of Credit. Such fees are in addition to our issuances of 300,000,000 shares of Class A common stock to Cornell Capital Partners, as a one-time commitment fee, 3,030,303 shares of common stock to each of CapStone Investments and Butler Gonzalez LLP, as payment and partial payment, respectively, for their services in connection with the Equity Line of Credit. 16 PLAN OF DISTRIBUTION This prospectus covers the sale of shares of common stock from time to time by the selling stockholders named in the table above. The selling stockholders will act independently of us in making decisions with respect to the timing, manner and size of each sale. The sales may be made from time to time on one or more exchanges or in the over-the-counter market or otherwise, at prices and at terms then prevailing or at prices related to the then current market price, or in negotiated transactions. The selling stockholders may effect such transactions by selling the shares to or through broker-dealers. The shares may be sold by one or more of, or a combination of, the following: o a block trade in which the broker-dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resale by such broker-dealer for its account pursuant to this prospectus; o an over-the-counter distribution in accordance with the rules of the Over-the-Counter Bulletin Board; o ordinary brokerage transactions and transactions in which the broker solicits purchasers; and o in privately negotiated transactions. To the extent required, this prospectus may be amended or supplemented from time to time to describe a specific plan of distribution. In effecting sales, broker-dealers engaged by the selling stockholder may arrange for other broker-dealers to participate in the resales. The selling stockholders may enter into hedging transactions with broker-dealers in connection with distributions of the shares or otherwise. In such transactions, broker-dealers may engage in short sales of the shares in the course of hedging the positions they assume with the selling stockholders. The selling stockholders also may sell shares short and redeliver the shares to close out such short positions. The selling stockholders may enter into option or other transactions with broker-dealers which require the delivery to the broker-dealer of the shares. The broker-dealer may then resell or otherwise transfer such shares pursuant to this prospectus. A selling stockholder may also loan or pledge the shares registered hereunder to a broker-dealer and the broker-dealer may sell the shares so loaned or upon a default the broker-dealer may effect sales of the pledged shares pursuant to this prospectus. Broker-dealers or agents may receive compensation in the form of commissions, discounts or concessions from the selling stockholders in amounts to be negotiated in connection with the sale. Such broker-dealers and any other participating broker-dealers are deemed to be "underwriters" within the meaning of the Securities Act of 1933, in connection with such sales and any such commission, discount or concession may be deemed to be underwriting discounts or commissions under the Securities Act. Cornell Capital Partners is an "underwriter" within the meaning of the Securities Act of 1933, in connection with the sale of shares of Class A common stock under the Equity Line of Credit. In connection with the Equity Line of Credit, we have (i) agreed to pay to Cornell Capital Partners a cash fee equal to 5.5% of the amount of each advance on the date thereof, and (ii) issued to Cornell Capital Partners 300,000,000 shares of Class A common stock as a one-time commitment fee. The 5.5% cash fee and the one-time commitment fee are underwriting discounts. We will not receive any proceeds from the sale of any of the shares of common stock by the selling stockholders. We will, however, receive proceeds from the sale of Class A common stock under the Equity Line of Credit. Cornell Capital Partners was formed in February 2000 as a Delaware limited partnership. Cornell Capital Partners is a domestic hedge fund in the business of investing in and financing public companies. Cornell Capital Partners does not intend to make a market in our capital stock or to otherwise engage in stabilizing or other transactions intended to help support the stock price. Prospective investors should take these factors into consideration before purchasing our Class A common stock. Under the securities laws of certain states, the shares of our Class A common stock may be sold in such states only through registered or licensed brokers or dealers. The selling stockholders are advised to ensure that any underwriters, brokers, dealers or agents effecting transactions on behalf of the selling stockholders are registered to sell securities in all fifty states. In addition, in certain states the shares of Class A common stock may not be sold unless the shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. We will pay all the expenses incident to the registration, offering and sale of the shares of common stock to the public hereunder other than commissions, fees and discounts of underwriters, brokers, dealers and agents. We have agreed to 17 indemnify, to the extent permitted by law, Cornell Capital Partners and its directors, officers, partners, employees, agents, representatives and each person who controls Capital Partners within the meaning of the Securities Act of 1933, from certain liabilities, including liabilities incurred under the Securities Act. We estimate that the expenses of the offering to be borne by us will be approximately $30,000, plus the cash fees equal to 5.5% of the aggregate gross proceeds received as advances under the Equity Line of Credit. The estimated offering expenses consist of the Securities and Exchange Commission registration fee of approximately $1,103, printing expenses of approximately $3,000, accounting fees of approximately $5,000, legal fees of approximately $17,000 and miscellaneous expenses of approximately $3,897. Under applicable rules and regulations under the Exchange Act of 1934, any person engaged in the distribution of the shares may not simultaneously engage in market making activities with respect to our common stock for a period of two business days prior to the commencement of such distribution. In addition, the selling stockholders will be subject to applicable provisions of the Exchange Act of 1934 and the associated rules and regulations under the Exchange Act of 1934, including Regulation M, which provisions may limit the timing of purchases and sales of shares of our common stock by the selling stockholders. We will make copies of this prospectus available to the selling stockholders and have informed them of the need for delivery of copies of this prospectus to purchasers at or prior to the time of any sale of the shares. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following information should be read in conjunction with the consolidated financial statements of iVoice and the notes thereto appearing elsewhere in this filing. Statements in this Management's Discussion and Analysis or Plan of Operation and elsewhere in this prospectus that are not statements of historical or current fact constitute "forward-looking statements." Overview To date we have incurred substantial losses and have accumulated a deficit of $15,707,117 as of September 30, 2003. We have been able to raise sufficient working capital through advances under an equity line of credit agreement we entered into in February 2003. Under that agreement, also with Cornell Capital Partners, we raised the maximum dollar amount allowable thereunder. As of September 30, 2003, we had working capital of $595,745 and a cash balance of $1,469,229. We expect that this cash balance, as well as an additional $2,832,000 in advances that we received under the previous equity line of credit agreement in October 2003, has provided us with sufficient resources to continue operating for the foreseeable future. We have met interoperability standards with several leading PC-based Private Branch Exchange (or PBX) manufacturers for our award winning product, iVoice Speech-enabled Auto Attendant. To date, rigorous testing and compatibility studies have developed into co-marketing arrangements with 3Com, for its NBX(R) platform, Artisoft for its TeleVantage(R) Communication server, and AltiGen's AltiServ(R) for its phone systems. These recent platform integrations add to several others previously completed, including a Siemens Ready(TM) certification, NEC Fusion Strategic Alliance and Sprint North Supply. Through these co-marketing arrangements and strategic alliances, we will attempt to capture significant market share in the business communication solution market by expanding distribution through these manufacturers' authorized reseller networks. We are currently focused on developing our dealer and reseller channels. We believe we can leverage already existing equipment manufacturers reseller channels by integrating our speech recognition software directly into their established revenue producing product lines. Each manufacturer has an estimated 150-600 authorized dealers and resellers throughout North America. The recent introduction of an entirely TAPI (Telephone Application Program Interface) based Speech-enabled Auto Attendant and Name Dialer, allows integration into different PBX systems without the need for additional hardware devices. We expect these integration changes to provide for greater appeal to telephony re-sellers allowing for more economical customer installations with no change in software pricing our charges for our software. Unless special arrangements are made, we generally receive 50% of the contract as a down payment on any product purchased with the balance due upon completion of the installation. We recognize our revenue using the percentage of completion method for turnkey systems that require custom configuration by the customer. We determine the expected costs on a particular installation by estimating the hardware costs and anticipated labor hours to configure and install a system. Revenues are then recognized in proportion to the amount of costs incurred as of the reporting date over the total estimated costs anticipated. For orders comprised only of software or hardware items, we recognize revenue upon shipment of those items to the customer. We accept company checks or Visa/MasterCard. Research And Development We focus our research and development efforts on enhancing our existing product line and the developing new products that integrate with our existing products. We continually seek to improve our core speech recognition technology through ease of use, broader application and increased accuracy. We employ qualified technical personnel to strengthen our product line. For the nine months ending September 30, 2003, research and development expenditures consisted of $150,753 in salaries and wages to technical staff and $5,618 in technical hardware supplies, software tool-kits and technical publications. In 2002, we spent $165,415 in salaries and wages to technical staff and $5,013 in technical hardware supplies, software tool-kits and technical publications. In 2001, research and development expenditures consisted of $380,692 in salaries and wages to our technical staff and $6,773 for technical hardware supplies, software tool-kits and technical publications. In 2000, we spent $406,106 in technical salaries and wages and $17,361 for related supplies, tools and publications. Reductions in amounts expended were deemed necessary for the conservation of capital resources. 19 Our current research and development efforts have allowed us to recently release our item locator application that incorporates speech recognition as its means of interaction and our Speech Enabled Auto Attendant on the same platform. The "Hear I Am" Voice Item Locator enables individuals to simply say the name of an item or a product and the Hear I Am Voice Locator answers back with the location of that item. For example, were a unit installed in a large retail outlet, an individual could simply say, "beveled tile" and the Locator would respond "Aisle 7, Shelf Number 2A." The unit is also compatible with video display screens that exhibit the floor plan and item location. The Speech Enabled Auto Attendant engages callers in a natural language dialog and is ready to transfer the caller to an extension at any time. Callers can interrupt the Auto Attendant at any time by barging in on the prompts and simply saying the name of the person, or department they wish to speak to. Our products are designed to be "people oriented," with features that can be readily used without special training or manuals. In order to remain competitive, we must continue to fund research and development efforts. Plant and Equipment We do not anticipate incurring any significant expenses for the purchase of plant or equipment over the next 12 months. Employees As of September 30, 2003, the Company had 7 full-time employees, 1 part-time employee, 2 part-time consultants for a total of 10 individuals. Recent Developments In September 2003, we announced our intention to distribute to our stockholders shares of Class A common stock of Trey Resources, Inc., one of our subsidiaries, and our Automated Reminder business, upon the effectiveness of required Securities and Exchange Commission filings and final approval by our Board of Directors of the terms and conditions of the distribution, as described in the registration statement on Form SB-2 of Trey Resources, initially filed with the Securities and Exchange Commission on October 3, 2003. It is intended that Trey Resources will own and operate our Automatic Reminder software business as an independent publicly traded entity following the distribution. In connection with the proposed distribution to our stockholders of shares of Class A common stock of Trey Resources and our Automated Reminder business, we intend to allocate to Trey Resources corporate assets, liabilities and expenses related to the Automatic Reminder software business, based on an estimate of the proportion of such amounts allocable to Trey Resources, utilizing factors such as total revenues, employee headcount and other relevant factors. In February 2003, we entered into an administrative services agreement with Trey Resources, pursuant to which, upon consummation of the proposed spin-off of Trey Resources, we will provide Trey Resources services in such areas as information management and technology, sharing of office space, personnel and indirect overhead expenses, employee benefits administration, payroll, financial accounting and reporting, claims administration and reporting, and other areas where Trey Resources may need transitional assistance and support. The term of the agreement is two years, but may be terminated earlier under certain circumstances, including a default, and may be renewed for additional one-year terms. In exchange for our services under the administrative services agreement, Trey Resources has agreed to pay us an annual fee of approximately $95,000. On October 24, 2003, Trey Resources filed with the Securities and Exchange Commission a registration statement on Form SB-2 relating to the registration of shares to be issued upon conversion of Trey Resource's outstanding convertible debentures issued to The May Davis Group in March 2003 and Cornell Capital Partners in September 2003, and pursuant to an equity line of credit agreement entered between Trey Resources and Cornell Capital Partners in January 2003. In connection therewith, we agreed to provide a full and unconditional guaranty of the payment and performance obligations of Trey Resources, in accordance with the terms of securities purchase agreements between Trey Resources and the holders of the convertible debentures, which cannot be discharged, except by complete performance of the obligations under the securities purchase agreements and the related documents. Under the guaranty, if Trey Resources defaults in payment or performance of any of its obligations under the convertible debentures, we are required to pay or perform such obligations upon two days' written notice or demand by the holders of the convertible debentures and to take an advance under the Equity Line of Credit on the day of any such default, in the amount of $250,000 in order to repay to the principal amount of the convertible debentures plus $50,000 within seven days of default by Trey Resources. Notwithstanding anything to the contrary, so long as the outstanding principal amount is zero or would be made zero simultaneously with the termination, we shall have the right to terminate the guaranty at any time by providing written notice of such termination. Results Of Operations Three and Nine Months Ended September 30, 2003 Compared To September 30, 2002 Revenues are derived primarily from the sale of voice and computer technology communication systems for small-to-medium sized businesses and corporate departments. Total revenues for the three and nine months ended September 30, 2003 were $126,683 and $349,403, respectively, as compared to $140,614 and $457,303 for the three and nine months ended September 30, 2002, an decrease of $13,931 or 9.9% and $107,900 or 23.6%, respectively. The decrease in sales for the three and nine month period reflects continued sluggish demand for our speech recognition telecommunication products as well as reduced resources devoted to sales and marketing efforts. The current three-month period ending September 30, 2003 does however reflect an increase of $52,038 over the three-month period ending June 30, 2003. We continue to market and promote our speech enabled products to telephony reseller networks throughout the US and Canada in order to leverage those resellers' existing customer bases. We also sells directly to end-users, systems that require significant customization. Unless special arrangements are made, we generally receive 50% of the contract as a down payment on any product purchased with the balance due upon completion of the installation. We recognize our revenue using the percentage of completion method for turnkey systems that require custom configuration by the customer. We determine the expected costs on a particular installation by estimating the hardware costs and anticipated labor hours to configure and install a system. Revenues are then recognized in proportion to the amount of costs incurred as of the reporting date over the total estimated costs anticipated. For orders comprised only of software or hardware items, we recognize revenue upon shipment of those items to the customer. 20 Gross margin for the three and nine months ended September 30, 2003 was $76,762 and $216,810 or 60.6% and 62.1%, respectively, as compared to $102,277 and $317,529 or 72.7% and 69.4% for the three and nine months ended September 30, 2002. The gross margin is dependent, in part, on product mix, which fluctuates from time to time; complexity of a communication system installation which determines necessary hardware requirements and may not have a proportionate relationship with the system selling price; and the ability of our technology personnel to efficiently configure and install our communications products. The decreases of $25,515 or 24.9% for the three-month period and $100,719 or 31.7% for the nine-month periods ending September 30, 2003 were generally a result of an overall decrease in total sales volume. Decreases in gross profit percentages reflect a higher percentage of labor costs allocated to cost of sales. Total operating expenses decreased, from $344,116 for the three months ended September 30, 2002 to $290,064 for the three months ended September 30, 2003 a decrease of $54,052 or 15.7%. Specific line items that reflect the reduction in total operating expenses for the three months ending September 30, 2003, include reduced payroll and benefit costs of $63,092 and reduced promotion and related travel costs of $17,301, offset by an increase in professional fees of $34,262. As a result of the downturn in the telecommunications industry over the past several years, we have effectively reduced our working capital requirements to preserve our cash resources. Total operating expenses for the nine months ending September 30, 2003 have been reduced from $1,604,370 to $950,638 for the nine months ending September 30, 2002, a reduction of $653,732 or 40.7%. The loss from operations for the three and nine months ended September 30, 2003 was $213,302 and $733,828 compared to $241,839 and $1,286,841 for the three and nine months ended September 30, 2002, a decrease of $28,537 and $533,013 in the three and nine month comparative periods. Interest expense of $211,442 and $297,912 was incurred for the three and nine-month period ending September 30, 2003 as compared to $47,235 and $376,611 for the three and nine-month period ending September 30, 2002, respectively, an increase of $164,207 for the three month comparative periods and a decrease of $78,699 for the nine-month comparative periods. The current year quarterly figures reflect $178,721 in discounts on advances received under our equity line of credit agreement that we entered into with Cornell Capital Partners in February 2003, $22,795 in discounts related to the beneficial conversion feature of interest due on our 12% convertible debentures; and $9,926 in interest accrued on amounts outstanding to related parties. The prior three-month period ending September 30, 2002 reflects $19,881 in discounts on advances and beneficial conversion features of convertible debentures issued in 2002; $8,320 in interest outstanding convertible debentures; $17,452 in interest accrued on amounts outstanding to related parties; and $1,582 in finance charges on capitalized leases payable. Other income for the three and nine-month period ending September 30, 2003 reflects a realized gain on the sale of securities held for sale. Other income for the nine months ended September 30, 2002, reflects income of $28,800 for the retention of 600,000 shares of our Class A common stock previously issued to an employee and charged to compensation expense in a prior period. These shares were deemed unvested with the terminated employee and were recorded as treasury stock purchase at a value of $28,800. Net loss for the three and nine month period ending September 30, 2003 was $547,793 and $1,215,960 as compared to $302,540 and $1,660,638 for the three and nine months of 2002. The respective changes in net loss for the comparative periods were a result of the factors discussed above. Year Ended December 31, 2002 Compared To December 31, 2001 Sales for the year ended December 31, 2002 were $646,560, an increase of $220,612 or 51.8% as compared to sales of $425,948 for the year ended December 31, 2001. The increase was largely attributable to an increase in sales of its Speech Enabled Auto Attendant application. For the years ended December 31, 2002 and 2001, total turnkey and software only sales of our Speech Enabled Auto Attendant, amounted to $239,921 and $99,536 respectively, an increase of $140,385 or 141.0%. IVR sales totaled $264,282 for the year ending December 31, 2002 as compared to $205,485 for the year ending December 31, 2001 an increase of $58,795 or 28.6%. Other revenues from the sale of other software and related hardware products as well as maintenance, installation and support fees totaled $142,357 and $120,926 for the years ended December 31, 2002 and 2001 respectively, an increase of $21,431 or 17.7% 21 Our gross profit for the year ended December 31, 2002 was $462,254, an increase of $203,535 or 78.7% compared to $258,719 for the year ending December 31, 2001. Our gross margin percentage for the twelve months ended December 31, 2002 was 71.5% versus 60.7% for the prior year. This represents a 10.8% increase over the gross profit percentage recorded for the same prior year period. The gross margin is dependent, in part, on product mix, which fluctuates from time to time; complexity of a communication system installation which determines necessary hardware requirements and may not have a proportionate relationship with the system selling price; and the ability of our technology personnel to efficiently configure and install our communications products. The dollar amount of gross profit has increased as a result of increased revenues for the comparative periods. The increase in gross margin percentages year over year is a result of a more favorable product mix. Operating expenses decreased from $3,035,992 for the year ended December 31, 2001 to $2,262,627 for the year ended December 31, 2002 a decrease of $773,365 or 25.5%. Material changes in specific classifications of operating expenses include a decrease in total payroll and benefit costs of $952,558. While the current year reflects an income tax reimbursement charge of $45,605 for income tax incurred by Jerome R. Mahoney for sales of Class A common stock which he sold in order to provide working capital to us, the prior year included a similar tax reimbursement accrual amounting to $95,100 as well as accruals for reimbursement to Mr. Mahoney for a charitable donation of his personal holdings of our Class A common stock valued at $350,000. This reduction in reimbursements to our president was the most significant decrease in operating expenses year over year. Also contributing to the decrease in operating expense was a reduction in professional fees of $151,634; a reduction in rent expense of $60,900 and a reduction in advertising and promotion of $22,753. Offsetting the decreases in the specific operating expense items described above were an increase in charges for the reduction of strike prices on previously issued warrants, a charge of $175,833 related to the write-down of goodwill and an increase to bad debt expense of $45,751. The net loss from operations for the year ending December 31, 2002 was $1,800,373 compared to $2,777,273 for the year ended December 31, 2001. This decrease of $976,900 was a result of the increase in net revenues and gross profit from year to year combined with lower operating expenses in current year as described above. Other income for the year ended December 31, 2002, included amounts received for participation in the New Jersey Technology Tax Certificate Transfer Program for the sale of our unused state net-operating-loss carry forwards. After related commissions and expenses related to application submission we received cash proceeds of $152,473. Also included in other income was income from forfeited employee stock compensation totaling $28,800. None of these items were incurred in the year ending December 31, 2001. Other expense for the year ended December 31 2002 and 2001 was comprised of interest expense. Total other expense decreased $229,801 to $440,360 in the year ended December 31, 2002 compared to $670,161 in 2001. Interest expense reflects interest on our outstanding convertible debentures and promissory notes, interest on related party and capital lease obligations as well as discounts charged to expense for the beneficial conversion features related to our convertible debt obligations. Net Loss decreased $1,387,974 to $2,059,460 for the year ended December 31, 2002 compared to $3,447,434 for the year ended December 31, 2001 as a result of the factors discussed above. Liquidity and Capital Resources The primary source of financing for us has been through the issuance of common stock and debt that is convertible into shares of our common stock. An equity line of credit agreement entered into in February 2003 with Cornell Capital Partners has provided the primary source of working capital for the last 12 months. Through the date of this filing, we have received total net proceeds of $4,609,110 representing the maximum gross proceeds under the equity line of credit agreement of $5,000,000. The difference between the gross and net proceeds reflects discounts, professional fees and other costs associated with the registration and administration of the equity line. In October 1999, we had issued a series of convertible debentures consisting of ten notes payable totaling $500,000 bearing interest at 12% per annum and payable on December 1, 2000. The 12% debentures were 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 which shall equal 50% of the average bid price during the 20 trading days before the conversion date. As of September 30, 2003, all of the outstanding principal and interest was repaid through the issuance of Class A common shares in accordance with the terms described above. Additionally, we settled with an investor without penalty or additional costs arising from our default under the debenture agreement and we entered into mutual releases, which prevents either party from any claims against the other resulting from the debenture agreement. As of December 19, 2003, we owed our former chief financial officer, Kevin Whalen, an aggregate amount of $74,000 for unpaid salary. Trey Resources has agreed to assume this obligation upon consummation of our proposed spin-off of Trey Resources. During the period from June 2000 through December 2002, Mr. Mahoney sold personal holdings of shares of our Class A common stock and loaned the proceeds of these sales to us to fund our working capital requirements. A promissory note made by us in favor of Mr. Mahoney with respect to such loans was executed on March 20, 2001 and amended on August 13, 2002. At December 18, 2003, the total balance owed to Mr. Mahoney was $717,428. Trey Resources has agreed to assume $250,000 of such outstanding indebtedness upon consummation of our proposed spin-off of Trey Resources. As of September 30, 2003, we had have incurred substantial losses and had accumulated a deficit of $15,707,117. However, we have been able to raise sufficient working capital using the equity line of credit with Cornell Capital Partners. As of September 30, 2003 we had working capital of $595,745 and a cash balance of $1,469,229. This cash balance as well as an additional $2,832,000 in advances under the equity line, received in October 2003, provides us with sufficient resources to continue operating for the next 24 months. In addition to any advances we receive under the Equity Line of Credit Agreement dated as of December 31, 2003, we may seek to raise additional funds through the issuance of equity in the near future to facilitate certain transactions that 22 may require capital resources that exceed our current resources. There is no assurance that any new financing arrangement will enable us to raise the requisite capital. During the nine months ended September 30, 2003, we had a net increase in cash of $919,281. Our sources and uses of funds in such nine months were as follows: Cash used by operating activities. We had cash used by operating activities of $693,108 in the nine months ended September 30, 2003. Cash provided by operating activities consisted of non-cash expenses for depreciation and amortization of $188,887, an increase in accounts payable and accrued expenses of $268,109 and changes in other operating assets and liabilities of $65,856. These items were offset by a net loss of $1,215,960 and an increase in accounts receivable of $20,803. Cash used in financing activities. We had cash provided by financing activities of $1,675,328, consisting primarily of the issuance of common stock of $1,873,923 and the sale of convertible debentures of $140,000. These amounts were partially offset by the repayment of obligations of $338,595. During the year ended December 31, 2002, we had a net increase in cash of $480,802. Our principal sources and uses of funds in the year ended December 31, 2002, were as follows: Cash used by operating activities. We used $351,840 in cash for operating activities in the year ended December 31, 2002 a decrease of $510,641 compared to $872,481 in cash used for operating activities in the year ending December 31, 2001. This reduction was primarily due to a reduction in our overall operating budget that included substantial reductions in staff and rent. These operating cuts reduced our operating expenses in the current year by $773,367. Cash used in financing activities. Financing activities in the year ended December 31, 2002 provided a total of $838,311 in cash. This total consisted primarily of the issuance of common stock of $253,662, collections of stock subscriptions of $317,000; the sale of convertible debentures of $255,000 and advances under the equity line of credit with Cornell Capital Partners of $470,000. These amounts were partially offset by the repayment of related party obligations of $117,000, repayment of notes payable and convertible debentures of $305,333 and repayment of capital leases totaling $35,018. Other than the existing Equity Line of Credit, no other financing agreement is currently available to us. In light of this, it should be noted that there is no assurance that the Equity Line of Credit will enable us to raise the requisite capital needed to implement our long-term growth strategy or that alternative forms of financing will be available. Effect Of Recent Accounting Pronouncements In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 18, 2003. The adoption of this standard did not have a material impact on our financial position and results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." We are required to adopt this statement by the first quarter of fiscal 2004. Certain provisions of this statement relating to SFAS No. 133 implementation issues that have been effective for prior fiscal quarters will continue to be applied in accordance with their respective effective dates. We do not expect that the adoption of SFAS No. 149 will have a material impact on our financial position, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for us on September 1, 2003. Although we are authorized to issue preferred stock, to date, no shares have been issued or are outstanding however, we do 23 not expect that the adoption of SFAS No. 150 will have a material impact on our financial position, results of operations or cash flows. Critical Accounting Policies Below is a description of those accounting policies that we view as most critical in the preparation of our financial statements. Revenue Recognition. We obtain our income primarily from the sale of our voice recognition software applications and communication systems. Revenue for systems that 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. We recognize revenue from support services at the time the service is performed or over the period of the contract for maintenance/support. With respect to the sale of software license fees, we recognize revenue in accordance with Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), as amended, and generally recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists generally evidenced by a signed, written purchase order from the customer, (2) delivery of the software product on Compact Disk (CD) or other means to the customer has occurred, (3) the perpetual license fee is fixed or determinable and (4) collectibility, which is assessed on a customer-by-customer basis, is probable. With respect to customer support services, upon the completion of one year from the date of sale, considered the warranty period, we offer customers an optional annual software maintenance and support agreement for subsequent one-year periods. Sales of purchased maintenance and support agreements are recorded as deferred revenues and recognized over the respective terms of the agreements. Through the nine-month period ending September 30, 2003, approximately 86.7% of the revenues reported by us were derived from the sale of our voice recognition software applications and communication systems. 12.6% of the reported revenues have been derived from the sale of optional customer support services with the balance of 0.7% being miscellaneous receipts and reimbursements. Generally, we do not license our software in multiple element arrangements whereby the customer purchases a combination of software and maintenance. In a typical arrangement, software maintenance services are sold separately from the software product; are not considered essential to the functionality of the software and are purchased at the customer's option upon the completion of the first year licensed. Software License Cost. Software license costs are recorded at cost, which approximates fair market value as of the date of purchase. These costs represent the purchase of various exploitation rights to certain software, pre-developed codes and systems developed by a non-related third party. These costs are capitalized pursuant to Statement of Financial Accounting Standards ("SFAS") 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", and are being amortized using the straight-line method over a period of five years. We have adopted SFAS No. 121. The carrying value of software license costs are regularly reviewed by us and a loss would be recognized if the value of the estimated un-discounted cash flow benefit related to the asset falls below the unamortized cost. No impairment loss was recognized as of December 31, 2002. Purchased software and capitalized software development costs are amortized using the greater of the revenue method or the straight-line method with useful lives ranging from three to five years. Amortization expense is classified in costs of revenue on the statements of operations. Our products operate on or with other third party software and operating systems. When determining the useful life of a product we consider factors such as the current state of the technology, operating systems on which our products run, competitive products and the potential use of our products by the end user. Technological advances in software operating systems and other software technologies on which our products rely may shorten the expected life cycle of our products. We make an assessment of the useful lives of our products at each balance sheet date. If that assessment determines that a shortened product life has occurred, we amortize the remaining unamortized balances over the new estimated useful life of the product and provide disclosure regarding a change in estimate in the notes to the financial statements pursuant to Accounting Principles Board Opinion No. 20 "Accounting Changes." We evaluate the estimated net realizable value of each software product at each balance sheet date. The estimate is based on historical and forecasted net revenue for each product. Net revenue is the product revenue reduced by the estimated costs of revenue and, if in development, the estimated cost to complete the development of the product. When the net book value exceeds the estimate of net realizable value, we record a write-down to net realizable value on each product affected. Our ability to achieve our revenue forecast is subject to judgment, competitive pressures, market and economic conditions and our ability to successfully license our products to our customers. A change in one or more of these factors may influence management's estimates. Accordingly, currently estimated net realizable values are subject to being reduced resulting in corresponding charges for impairment in the future. Debt Issue Costs. Debt issue costs represent the estimated cost of the conversion discount feature relating to the issuance of our convertible debentures issued in previous periods. In previous years, these costs were amortized and charged to interest expense over the life of the debt. During the year ended December 31, 2001, we charged to expense the fair value of the beneficial conversion features of the convertible debt as measured at the date of issuance in accordance with EITF Issue 98-5. Any newly incurred debt issue or financing costs are charged to expense as incurred. The switch to this method of accounting did not have a material affect on our financial statements. Long-Lived Assets. SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We have adopted this statement and determined that an impairment loss should not be recognized for applicable assets of continuing operations as of the period ending December 31, 2002. We will review our assets again at December 31, 2003 to determine if any impairment of our long-lived assets has been sustained. 24 DESCRIPTION OF BUSINESS Backround Our current corporate configuration is the result of a number of separate transactions over the past several years. On February 26, 1996, Select Resources, Inc., a publicly held Delaware company, and three of its principal stockholders entered into a stock exchange agreement with Visual Telephone of New Jersey, Inc., a privately held New Jersey corporation, and its two stockholders pursuant to which Select Resources acquired all of the outstanding shares of Visual Telephone and spun-off Select Housing Associates, Inc., its wholly owned subsidiary. The aim of this agreement was to provide for a more profitable business direction for Select Resources. Pursuant to the agreement, Select Resources agreed to issue 5,611,000 shares of its capital stock to one of the two stockholders of Visual Telephone and to transfer one-half of the shares of Select Housing Associates to the other stockholder of Visual Telephone, namely Joel Beagelman, in return for all of the outstanding shares of Visual Telephone. In addition, Select Resources transferred the other half of the shares of Select Housing Associates to Gary W. Pomeroy and Brad W. Pomeroy, two of Select Resources' three principal stockholders, in return for the cancellation of 1,111,000 shares of common stock of Select Resources owned by them. At the time of the stock exchange agreement, Mr. Beagelman, Gary W. Pomeroy and Brad W. Pomeroy were directors of Select Resources. On February 26, 1996, the stock exchange agreement was approved by the consent of stockholders a majority of the outstanding shares of common stock of Select Resources. Visual Telephone then merged into Select Resources, which changed its name to that of the subsidiary. In July 1996, Visual Telephone acquired 100% of the outstanding common shares of Communications Research Inc., or "CRI," for $50,000 in cash, $150,000 in notes and 1,000,000 shares of Visual Telephone. CRI designs, develops, sells, and supports PC-based communication systems that transmit data, voice and full-motion video. On May 21, 1999, International Voice Technologies, Corp., a Delaware corporation, merged with and into Visual Telephone (which in the interim had changed its name to Visual Telephone International, Inc.), with Visual Telephone surviving. Simultaneous with the merger, Visual Telephone changed its name to iVoice.com, Inc., and it was planned that Visual Telephone would spin off CRI prior to the merger with International Voice Technologies. Our current business is essentially that of International Voice Technologies, and this merger was aimed at giving that business better access to the capital markets by merging it into a public company. In addition, we changed our OTC Bulletin Board trading symbol to "IVOC." In consideration for the merger with International Voice Technologies, Jerome R. Mahoney, the sole stockholder of International Voice Technologies, received 10,000,000 shares of our Class A common stock and 700,000 shares of our Class B common stock. In addition, the two controlling stockholders of Visual Telephone sold 300,000 shares of Class B common stock to Mr. Mahoney and concurrently canceled a total of 2,000,000 shares of their Class A common stock. The consulting firm of Toby Investments was awarded 2,000,000 shares of common stock for consulting services on the transaction. The agreement also provided that certain of the assets of Visual Telephone would be transferred to Visual Telephone's wholly owned subsidiary, CRI. The merger was accounted for in its financial statements as a public shell merger. In a public shell merger the stockholders of the operating company, in this case International Voice Technologies, become the majority owners of the shell company, in this case Visual Telephone, and the stockholders of Visual Telephone, the public shell company, become minority stockholders in International Voice Technologies, the operating company. As for the CRI spin-off, on September 18, 2000, CRI filed a registration statement to provide for the distribution of its shares to Visual Telephone's stockholders as of May 21, 1999. Visual Telephone's stockholders received one CRI share for every four shares owned in Visual Telephone. The principal stockholders, officers and directors of Visual Telephone were Carl Ceragno and Joel Beagelman. Mr. Ceragno remained with CRI as its President and Mr. Beagelman entered into a consulting agreement with us. On April 24, 2000, we entered into an agreement and plan of reorganization with all the stockholders and ThirdCAI, another shell company that was a reporting company under the Securities Exchange Act of 1934. In this transaction, which took place by means of a short-form merger, with ThirdCAI's name being changed to iVoice, we acquired all the issued and outstanding shares of ThirdCAI in exchange for $150,000, and a finder's fee paid to Corporate Architect, Inc., consisting of 50,000 shares of our Class A voting common stock. The purpose of this transaction was to enable our business to be conducted by a reporting company, as pursuant to the "eligibility rule" adopted by the National Association of Securities Dealers, Inc., or "NASD," as only reporting companies may continue to have stock quoted on the OTC Bulletin Board. 25 On April 25, 2003, we formed a wholly owned subsidiary in the State of New Jersey and on May 5, 2003, we changed our state of incorporation from Delaware to New Jersey by merging into the newly formed New Jersey subsidiary. In September 2003, we announced our intention to distribute to our stockholders shares of Class A common stock of Trey Resources, Inc., one of our subsidiaries, and our Automated Reminder business, upon the effectiveness of required Securities and Exchange Commission filings and final approval by our Board of Directors of the terms and conditions of the proposed distribution, as described in the registration statement on Form SB-2 of Trey Resources, initially filed with the Securities and Exchange Commission on October 3, 2003. It is intended that Trey Resources will own and operate our Automatic Reminder software business as an independent publicly traded entity following the distribution. Our principal offices and facilities are located at 750 Highway 34, Matawan, NJ 07747 and our telephone number is (732) 441-7700. Our common stock is quoted on the OTC Bulletin Board under the trading symbol "IVOC." Our Business We design, manufacture, and market innovative voice and computer telephony communications systems for businesses and corporate departments with as many as 20,000 telephones. Our speech recognition software products enable our customers to communicate more effectively by integrating their traditional office telephone systems with automated attendant, voice mail, unified messaging, and interactive voice response, or "IVR," functions. Our products are designed to be "people oriented," with features that can be readily used without special training or manuals. Our principal products, Speech-enabled Auto Attendant, iVoiceMail, Unified Messaging, and iVoice IVR, incorporate this philosophy. We also design, market, and support voice recognition products. Except for iVoice IVR, which is generally sold directly to end users due to required customization, we market and promote our speech enabled products through telephony reseller channels and telephone equipment manufacturer distributor networks. This allows us to leverage those resellers' existing customer bases. We may, however, sell directly to end users in geographic locations where an existing dealer relationship does not exist. On direct sales orders, iVoice is able to achieve greater profit margins through higher direct selling prices. Products and Services Our products use standard open-architecture personal computer platforms and Microsoft Windows 2000, NT Server and NT Workstation operating systems, thereby facilitating the rapid adoption of new PC-based technologies while reducing overall product costs. We concentrate our development efforts on software rather than hardware because we believe that the most efficient way to create product value is to emphasize software solutions that meet customers' needs. We have traditionally used standard PC-related hardware components in our products, in part, to limit our need to manufacture components. However, we have recently developed our software for use with Telephony Application Program Interface or TAPI. The use of TAPI allows us to integrate into different telephone private branch exchange systems or PBX's, eliminating the need for additional external hardware. Our manufacturing operations consist only of the installation of our proprietary software and a voiceboard, if required, into a fully assembled PC system. We obtain from suppliers components such as PCs, circuit boards, application cards, faxboards, and voiceboards. Our products include the iVoice Speech Enabled Auto Attendant allowing businesses to incorporate speech recognition into their telephone systems without duplicating their current voicemail applications. The Speech Enabled Auto Attendant uses a customized dictionary of names and extension numbers that enables callers to contact their party using their spoken voice. Also, one of our principal products is iVoice IVR (interactive voice response), described below. Except for iVoice IVR that is generally sold directly to end users due to requested customization, we market and promote our products to telephony reseller and distributor networks. This allows us to leverage those resellers' existing customer bases. Our flagship product is iVoice IVR, an application generator that allows full connectivity to many databases, including Microsoft Access, Microsoft Excel, Microsoft Fox Pro, DBase, Btrieve, and Paradox, or to standard text files. iVoice IVR can be used to read information from, and write information to, databases, as well as query databases and return information. iVoice IVR performs over 40 different customizable commands. Properties can be set up for each command, as if the commands were being executed manually. iVoice IVR links a phone system to a database to provide customers with 24-hour immediate access to account information, via telephone. With iVoice IVR, polished IVR applications are quick and easy to install. No knowledge of computer programming and minimal database knowledge is needed. iVoice IVR will execute any created application when a caller dials in. Using DTMF (touch-tone telephones) or speech activation allows callers to interact with the system. Advanced database technology permits reading, writing, appending, searching and seeking database information. A user can record product inventory, set up games, keep a record of patients or customers, and perform other applications. The advanced, innovative technology, backed by a simple, easy-to-use drag-and-drop interface, makes writing applications simple. 26 The iVoice IVR also incorporates an Internet access tool, which can be either connected to the IVR system or run as a standalone. This IVR system also has a graphical user interface and provides for Internet access to the system. Once logged onto the Internet, a user can gain access to the IVR system by clicking on a hypertext link for the user's browser. Upon entering the IVR system, the response prompts are in text form rather than voice form. The user can enter selections and get information by clicking on icons or choosing items from menus. Some of the Internet applications available are order processing and transactions, database integration, questions and queries, account status, delivery information, funds transfer, and claims information. The following is a list of Speech-enabled applications which iVoice has developed and are available for sale: iVoice IVR (Interactive Voice Response). Enables a caller to obtain requested information in voice form from a local or non-local database. Examples of IVR range from simply selecting announcements from a list of options stored in the computer (also know as Audio Text) to more complex interactive exchanges such as querying a database for information. iVoice IVR allows information in PC databases to be accessed from a standard touch-tone telephone using a telephone keypad or voice commands. iVoice IVR is sold as a customized turnkey system or as an Application Generator giving the end user the ability to develop their own customized IVR application. Speech Enabled Auto Attendant. Any business can improve and speed up service for its customers by enabling them to reach the desired contact person or department by simply saying the appropriate name. Our speech recognition system is accurate and reliable. Callers no longer need to punch in letters on a telephone keypad. Unified Messaging. With Unified Messaging, e-mail, voice mail and faxes can be handled through a desktop PC or the telephone. All messages can be viewed and acted upon in order of importance via Microsoft Outlook or a Web Browser. E-mail can also be retrieved over the phone, using text-to-speech, and responded to with a voice message including directed to a fax machine. iVoiceMail. This allows a caller to store voice messages and reply via the computer. This method allows the caller to conduct a dialogue with another person without having to be on the same line at the same time. As with most voice mail systems, the caller can record, store and delete messages and direct messages to multiple subscribers. Hear I Am Locator. This enables individuals to simply say the name of an item or a product and the Hear I Am Voice Locator answers back with the location. For example, were a unit installed in a large retail outlet, an individual could simply say, "Beveled Tile" and the Locator would respond "Aisle 7, Shelf Number 2A." The unit is also compatible with video display screens that exhibit the floor plan and item location. iVoice Name Dialer is an automatic phone dialing system. The system imports the necessary contact information for dialing (names and phone numbers) from a variety of sources including, but not limited to, Microsoft Outlook, ACT, and Gold Mine. The imported names are then transcribed, through software, into a set of phonemes to be used for voice recognition. When the end user picks up the handset, the call is automatically transferred through the PBX, to the Name Dialer software running on a server machine. The user simply says the name of the person (whose name came from the contact list) and the Name Dialer places the call. iVoice Speech Directory allows employees to pick up their phone, say the name of a co-worker they wish to speak to, and the Speech Directory will transfer the call. Just by speaking the person's name, the Speech Directory can also return an internal pager number, cell numbers and email listings through a voice activated telephony directory. Interactive Voice Response/Web Applications. Using the Internet to access the IVR system, you "DIAL" the system by clicking on a hypertext link from your browser. The system responds the same way, except in text form, and not the normal voice prompt. 27 You may enter selections and get information by clicking on icons or choosing items from menus. We are currently working on upgrading and enhancing existing products, with the aim of adding to some products, a full toolkit that would enable natural language recognition allowing the systems to understand spoken sentences rather than just single words. Automatic Reminder Business In September 2003, we announced our intention to distribute to our stockholders shares of Class A common stock of Trey Resources, Inc., one of our subsidiaries, and our Automated Reminder business, upon the effectiveness of required Securities and Exchange Commission filings and final approval by our Board of Directors of the terms and conditions of the distribution, as described in the registration statement on Form SB-2 of Trey Resources, initially filed with the Securities and Exchange Commission on October 3, 2003. It is intended that Trey Resources will own and operate our Automatic Reminder software business as an independent publicly traded entity following the distribution. The Automatic Reminder is a Microsoft Windows-based software application that automatically initiates a telephone call to a client or patient to verify a set appointment or reservation time. The information necessary to place the call is retrieved from an electronic database of information that includes the necessary information to place the call such as the client's or patient's name, phone number and previously set appointment time and a pre-recorded message or instruction that is played back to the call recipient. Using a graphical user interface, Automatic Reminder can be easily configured to call a user's clients or patients one time or multiple times, on different phones, in different languages, and at different times. Automatic Reminder also provides statistics on calls placed such as calls attempted, calls completed, intercepted, retried, and busy/no answer calls with its innovative call reporting feature. Through a series of steps that includes pre-recorded prompts, the Automatic Reminder asks call recipients to confirm his or her appointment or to cancel and request rescheduling of their appointment by pressing a key on their telephone keypad. Marketing and Distribution We are currently focused on developing our dealer and reseller channels. We believe we can leverage already existing equipment manufacturers reseller channels by integrating our speech recognition software directly into their established revenue producing product lines. We estimate that each major telephony equipment manufacturer has an estimated 150-600 authorized dealers and resellers throughout North America. The recent introduction of an entirely TAPI (Telephone Application Program Interface) based Speech-enabled Auto Attendant and Name Dialer, allows integration into different PBX systems without the need for additional hardware devices. Although concentration on resellers is the predominate and preferred sales channel, we also sell directly to end-users via our direct sales force providing management with information on market trends and customer needs. The direct channel also provides an avenue more suitable for iVoice IVR applications that often require customized development, which is usually difficult to provide through the reseller network. Our marketing strategy emphasizes our user-friendly PC-based processing applications that offer integrated access to a broad range of communication avenues with other people and information sources. Our strategy is built around the following basic elements: Emphasize software, not hardware. We concentrate our developing software that meets our clients' needs, rather than on designing or modifying hardware. This allows us to create the most value from our products. Use of standard, Microsoft Windows-based architecture, open systems and hardware. Our products use standard, open-architecture PC platforms and operating systems rather than proprietary computer hardware and operating systems. As a result, we can quickly adapt to new PC-based technologies, leveraging the substantial investments made by third parties in developing these new technologies for the PC environment. In addition, using available hardware components and software minimizes our manufacturing activity and thereby reduces the overall cost of our products. Focus on businesses and corporate departments having as many as 20,000 telephones. Our products are designed for use by businesses and corporate departments having as many 20,000 telephones in a wide range of markets, including manufacturing, retail, 28 service, healthcare, and government. Our products offer these organizations, features offered by large, proprietary call processing systems, but at a more affordable price. Develop user-friendly products. We aim to make our products as easy as possible to install, maintain, and use. We accomplish this by incorporating product features that can be used without special training or manuals. One example of this user-oriented philosophy is exhibited in our voicemail product. iVoiceMail has user prompts that encourage conversation between callers and subscriber and uses simplified screens and menus for ease of installation. Minimize distribution overhead. We are able to achieve broad market coverage in the U.S. via a nationwide network of independent telephone system dealers, and original-equipment-manufacturers, or "OEMs." This structure both minimizes our selling overhead and maximizes our product exposure, and allows us to focus our resources on product development. New Products In December 2003, we announced the release of version 3.2 of our Speech Enabled Auto Attendant using a Telephone Application Program Interface. The latest version includes recent updates and features, including the Locate, Find Me application. Telephony Application Program Interface or TAPI, allows us to integrate our applications into different telephone private branch exchange systems (or PBX's), thereby eliminating the need for additional external and expensive hardware components. Each phone system hardware provider provides a specific software driver that interfaces directly with or Speech Enabled Auto Attendant. TAPI provides a high-level interface for dialing and disconnecting. In October 2003, we announced that the Hear I Am Voice Activated Locator can include iVoice's Speech Enabled Auto Attendant on the same platform. We seek to bring a complete speech application to market by combining the power of our Speech Enabled Auto Attendant with the patent pending technology behind the Hear I Am Locator. The application allows a customer the ability to find an item in a store or to be transferred directly to the individual or department they are seeking all on the same call. Competition We operate in an industry segment having inherent risks generally associated with small technology companies. Such risks include, but are not limited to, the ability to: a) generate sales of our product at levels sufficient to cover our costs and provide a return for investors, b) attract additional capital in order to finance growth, c) further develop and successfully market and distribute commercial products and d) successfully compete with other technology companies having financial, production and marketing resources significantly greater than we have. The voice-recognition industry is highly competitive, and we believe that this competition will intensify. The segment of the industry that supplies call-processing systems to businesses is also extremely competitive. Many of our competitors have longer operating histories, significantly greater financial, technical, product development, and marketing resources, greater name recognition or larger client bases than we do. For example, industry analysts recognize Nuance Communications, Inc. and SpeechWorks International, Inc., a wholly-owned subsidiary of ScanSoft, Inc., as the market leaders in our industry. Nuance sells software to a broad range of companies directly and through a channel of resellers. Nuance's five largest resellers, based on revenue in 2002, were Nortel Networks, Edify (a subsidiary of S1 Corporation), Motorola, Syntellect and Avaya. Speechworks' clients include, among others, America Online, Amtrak, AT&T, Aetna, Bell Canada, Continental Airlines, Ford Motor Company, France Telecom, GMAC Commercial Mortgage, Jaguar Cars, Microsoft, Neiman Marcus, Nortel Networks, Quantas Airlines, The Boeing Company, The Hartford Insurance, Thrifty Car Rental, Ticketmaster, United Airlines, U.S. Postal Service, Wachovia/First Union Corporation, Yahoo. On a more directly competitive scale, other companies that produce computerized telephony systems that incorporate speech recognition into their products such as the iVoice Speech-enabled Auto Attendant include companies like Locus Dialogue, Phonetic Systems and Sound Advantage. We believe that the iVoice Speech-enabled Auto Attendant has competitive advantages based upon product features, the accuracy of the speech recognition and product pricing. 29 We believe that in order to be competitive, we need to continue develop and maintain competitive products and take and hold sufficient market share from our competitors. Our methods of competition, therefore, include (1) continuing our efforts to develop and sell products which, when compared to existing products, perform more efficiently and are available at prices that are acceptable to the market, (2) concentrating on developing software that meets our clients' needs, rather than on designing or modifying hardware, (3) using standard, Microsoft Windows-based architecture, open systems and hardware to quickly adapt to new PC-based technologies, and (4) forming co-marketing arrangements and strategic alliances with manufacturers to capture significant market share by expanding distribution through these manufacturers' authorized reseller networks. Suppliers Our suppliers include Dialogic Corporation (an Intel company) that distributes through a network of resellers for voiceboards, and iTox, Inc., and Amer.com, Inc. for computer hardware components. Since our products are based and run on standard PC architecture and as result of iVoice's recent integration with TAPI, we do not rely on any one specific supplier for its system components. We have not experienced any supply shortages with respect to the components used in systems or developed applications. Customers Direct customers are comprised of businesses, organization and corporate departments that use telephones as a principal means of communications. Specifically, the end users of our products seek to automate the call process for incoming callers in order to improve customer service and increase productivity. The iVoice Speech-enabled Auto Attendant and iVoice IVR seek to fulfill these customer needs. Customers who seek to automate the call process for outbound calling are primary targets for the iVoice Name Dialer and iVoice Patient Reminder. Wholesale customers include value added resellers and distributors of telephony equipment throughout North America. For the nine-month period ending September 30, 2003, two customers represented 10.2% and 8.6% of our total revenues for the period. For the year ended December 31, 2002, no one customer represented more than 10% of our total revenues. We do not rely on any one specific customer for any significant portion of our revenue base. We generally require customers to pay 50% down on any turnkey applications purchased, with the balance due when installation has been completed. Software only sales require cash-on-delivery or prepayment before shipping except for dealers and resellers, which subject to credit approval are given 30 day payment terms. We accept checks or Visa/MasterCard. Approximately 70% of our revenues are derived from customers located in the northeast U.S. The remaining 30% are from customers located elsewhere in the continental U.S. Patents and Trademarks We have filed ten patent applications with the United States Patent and Trademark Office for speech enabled applications that it has developed internally. Of the patents applications we have filed, we received one patent for our Speech-Enabled Automatic Telephone Dialer in May 2003, and a notice of allowance for a second patent for our Speech-Enabled Automatic Telephone Dialer in July 2003. The remaining patent applications are pending. These applications include various versions of the "iVoice Speech Enabled Name Dialer", the "Voice Activated Voice Operated Copier", the "Voice Activated Voice Operational Universal Remote Control", and the "Voice Activated, Voice Responsive Product Locator." In February 2002, we filed a Trademark application for our `iVoice' logo and approval is pending. Government Regulation We are subject to licensing and regulation by a number of authorities in our state or municipality. These may include health, safety, and fire regulations. Our operations are also subject to federal and state minimum wage laws governing such matters as working conditions and overtime. 30 We are not subject to any necessary government approval or license requirement in order to market, distribute or sell its principal or related products other than ordinary federal, state, and local laws which governs the conduct of business in general. We are unaware of any pending or probable government regulations that would have any material impact on the conduct of business. Research and Development Our research and development efforts focus on enhancing our existing product line and the development of new products that integrate with our existing products. We continually seek to improve our core speech recognition technology through ease of use, broader application and increased accuracy. We employ qualified technical personnel to strengthen its product line. For the nine months ending September 30, 2003, research and development expenditures consisted of $150,753 in salaries and wages to technical staff and $5,618 in technical hardware supplies, software tool-kits and technical publications. In 2002, we spent $165,415 in salaries and wages to technical staff and $5,013 in technical hardware supplies, software tool-kits and technical publications. In 2001, research and development expenditures consisted of $380,692 in salaries and wages to our technical staff and $6,773 for technical hardware supplies, software tool-kits and technical publications. In 2000, we spent $406,106 in technical salaries and wages and $17,361 for related supplies, tools and publications. Reductions in amounts expended were deemed necessary for the conservation of capital resources. Licenses We have a worldwide, non-exclusive, irrevocable, royalty-free, fully paid license from Entropic, Inc., a Microsoft company, to incorporate their speech engine into customized software applications for our customers. We also have non-exclusive license agreements with Fonix Corporation, which allows us to incorporate their text-to-speech software into our applications so clients can listen to e-mail messages from any telephone. Employees As of December 18, 2003, we had 7 full-time employees, 1 part-time employee, 2 part-time consultants for a total of 10 individuals. None of our employees are represented by a labor organization and we are not a party to any collective bargaining agreements. No employees are covered by collective bargaining agreements. We consider our relationship with our employees generally to be good. Property We do not own any real property for use in our operations or otherwise. Our facilities are located at 750 Highway 34, Matawan, New Jersey and consist of approximately 6,000 square feet of space. We are leasing this space on a month-to month basis with a monthly rent of $7,500. We use our facilities to house our corporate headquarters and believe our facilities are suitable for such purpose. We also believe that our insurance coverage adequately covers our interest in our leased space. We have a good relationship with our landlord and believe that our current facilities will be adequate for the foreseeable future. We currently occupy the same space as our subsidiary, Trey Resources. Under the terms of our administrative services agreement with Trey Resources, we have agreed to permit it to continue to share such space with us after consummation of our proposed spin-off of Trey Resources. Legal Proceedings We are subject to litigation from time to time arising from our normal course of operations. Currently, we are not a party to any material legal proceedings, nor to our knowledge, is any such proceeding threatened against us. 31 MANAGEMENT Our present director and executive officer is as follows: Name Age Position ------------------- -------- ---------------------------------- Jerome R. Mahoney 42 President, Chief Executive Officer, Chief Financial Officer and Director The following is a brief description of the background of our sole director and executive officer: Jerome R. Mahoney (President, Chief Executive Officer and Director) Jerome R. Mahoney has been our president, chief executive officer, and sole director since May 21, 1999. Mr. Mahoney has been serving as our chief financial officer since May 1, 203 Mr. Mahoney started at Executone Information Systems, a telephone systems manufacturer, and was Director of National Accounts from 1988 to 1989. In 1989, Mr. Mahoney founded Voice Express, Inc., a New York company that sold voicemail systems and telephone system service contracts and installed these systems. Mr. Mahoney sold Voice Express Systems in 1993. From 1993 to 1997, Mr. Mahoney was President of IVS Corp., and on December 17, 1997, he established International Voice Technologies, which we merged with on May 21, 1999. Mr. Mahoney intends to serve as Chairman of the Board of Trey Resources upon consummation of our proposed spin-off of such subsidiary. Mr. Mahoney received a B.A. in finance and marketing from Fairleigh Dickinson University, Rutherford, N.J. in 1983. Executive Compensation The following table shows all the cash compensation paid by us, as well as certain other compensation paid or accrued, during the fiscal years ended December 31, 2002, 2001 and 2000 to named executive officers. No restricted stock awards, long-term incentive plan payouts or other types of compensation, other than the compensation identified in the chart below, were paid to these executive officers during these fiscal years.
SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation ------------------------------------------- -------------------------------------------------- Awards Payouts -------------------------------------------------- Other Restricted Annual Stock Options/ LTIP All Other Name and Salary Bonus Compensation Award(s) SAR's Payouts Compensation ------ ----- ------------ -------- ----- ------- ------------ Principal Position Year ($) ($) ($) ($) (#) ($) ($) - ------------------ ---- --- --- --- --- --- --- --- Jerome R. Mahoney (1) 2002 $232,320 $0 $45,605(3) $0 0 0 $4,729(7) President, Chief Executive Officer and Chief Financial Officer 2001 $211,200 $75,000 $95,000(3) $0 0 0 $354,416(7) 2000 $192,000 $0 $34,000(4) $0 0 0 $4,416(7) Kevin Whalen(2) 2002 $100,000 $0 $0 $0 0 $0 Former Chief Financial 2001 $93,333 $34,000 $0 $115,0004(5) 1,200,000(6) 0 $0 Officer 2000 $53,333 $0 $0 $20,950(5) 200,000(6) 0 $0
- ----------------------- (1) Mr. Mahoney has been serving as our Chief Financial Officer since May 1, 2003 (2) Effective May 16, 2000, Mr. Whalen was promoted to Chief Financial Officer and is not subject to any employment contract with iVoice, Inc. Effective April 30, 2003, we terminated Mr. Whalen's employment with us. (3) Represents amounts accrued for reimbursement of income taxes of $45,605 in 2002 and $95,000 in 2001, paid by Mr. Mahoney on sales of personal holdings of iVoice shares of our Class A common stock, the proceeds of which have been loaned to iVoice. (4) Represents accrued and unpaid sales commissions due to Mr. Mahoney. (5) Represents 1,000,000 shares of our Class A common stock granted on March 20, 2001 and 50,000 shares of our Class A common stock granted on September 20, 2000 and 5,000 shares of our Class A common stock granted on June 30, 2000. All shares granted vest with Mr. Whalen three years from the date granted. Total restricted shares held by Mr. Whalen total 1,055,000 valued at $1,910 as of December 31, 2002. (6) Represents options to purchase 1,000,000 shares of our Class A common stock at $.06 granted on June 27, 2001; options to purchase 200,000 shares of our Class A common stock at $.10 granted on March 12, 2001; options to purchase 100,000 shares of our Class A common stock at $.50 granted on June 30, 2000; options to purchase 50,000 shares of our Class A common stock at $.60 granted on May 17, 2000; and options to 32 purchase 50,000 shares of our Class A common stock at $.75 granted on May 2, 2000. All options vest 25% per year and expire 5 years from the date of issue. To date, none of these options have been exercised. (7) Represents $4,729 in life insurance premiums paid on behalf of Mr. Mahoney for the year ending December 31, 2002; $350,000 as reimbursement for the donation of personal holdings of iVoice Class A Common shares donated to charity and $4,416 in life insurance premiums paid on behalf of Mr. Mahoney for the year ending December 31, 2001 and $4,416 in life insurance premiums paid on behalf of Mr. Mahoney for the year ending December 31, 2000. Options We did not grant any options to any of the named executive officers during the year ended December 31, 2002. The following table sets forth information concerning the number of unexercised options and the December 31, 2002 fiscal year-end value of unexercised options on an aggregated basis held by Kevin Whalen. As we have not granted any stock appreciation rights, there were no stock appreciation rights outstanding at the end of fiscal year ended December 31, 2002.
AGGREGATED OPTIONS EXERCISES AND FISCAL YEAR END OPTIONS VALUES Number of Securities Underlying Value of Unexercised Unexercised Options at Fiscal Year-End In-the-Money Options Shares Value (#) at Fiscal Year-End ($) (1) Acquired on Realized -------------------------------------- ----------------------------- Name Exercise (#) ($) Exercisable Unexcersisable Exercisable Unexercsisable - -------------------------- ------------ --------- ----------------- ------------------- ----------- -------------- Kevin Whalen, Former Chief Financial Officer (2) 0 0 400,000 1,000,000 0 0 - -------------------------
(1) Options are "in-the-money" if, on December 31, 2002, the fair market value of our common stock exceeded the exercise price of those options. The amount shown under the column "Value of Unexercised In-the-Money Options at Fiscal Year-End" is calculated by determining the difference between the aggregate fair market value of our common stock underlying the options on December 31, 2002 and the aggregate exercise price of the options. The value of the unexercised in-the-money options were calculated by determining the difference between the fair market value of the common stock underlying the options and the exercise price of the options as of December 31, 2002. (2) Effective April 30, 2003, we terminated Mr. Whalen's employment with us. Directors Compensation During fiscal year 2002, no fees were paid to our sole director, and the sole director was not reimbursed for expenses incurred. Employment Agreement On May 1, 1999, we entered into a five-year employment agreement with Mr. Mahoney. Mr. Mahoney will serve as our president and chief executive officer for a term of five years. As consideration, we agreed to pay Mr. Mahoney the sum of $180,000 the first year with a 10% increase every year thereafter. The employment agreement with Mr. Mahoney provides for a severance payment to him of three hundred percent (300%), less $100, of his gross income for services rendered to us in each of the five prior calendar years (or shorter period during which Mr. Mahoney shall have been employed by us) should his employment be terminated following a "Change in Control," as defined in the agreement. 33 Stock Option Plan In 1999, we adopted our Employee Stock Option Plan in order to attract and retain qualified personnel. Under the plan, our Board of Directors, in its discretion may grant stock options (either incentive or non-qualified stock options) to officers and employees to purchase shares of our Class A common stock at no less than 85% of the market price on the date the option is granted. Options generally vest over four years and have a maximum term of five years. During 1999, 20,000,000 shares of Class A common stock were reserved for future issuance under the plan. As of January 15, 2003, options to purchase 16,559,000 shares of Class A were granted. Of these granted options, options to purchase 9,000,000 shares of Class A common stock were exercised. Options to purchase 6,891,083 shares of our Class A common stock were outstanding and held by employees, of which options to purchase 2,704,415 shares of our Class A common stock are vested. At December 31, 2002, the weighted average exercise price of all outstanding options was $0.077 per share. The weighted average exercise price of all vested options is $0.369 per share. All options issued to employees vest at 25% per year and expire in 5 years.
Employee Stock Option Plan Information As of December 31, 2002 Number of Shares of Common Stock Remaining Number of Shares of Common Weighted-Average Available for Future Stock to be Issued upon Exercise Price of Issuance under Equity Exercise of Outstanding Options Outstanding Options Incentive Plan (1) Employee Stock Option Plan Information 6,891,083 $0.077 13,108,917
- ------------- (1) Excludes shares of our Class A common stock to be issued upon exercise of outstanding options. 34 PRINCIPAL STOCKHOLDERS The following tables set forth certain information regarding the beneficial ownership of our voting securities as of December 18, 2003 of (i) each person known to us to beneficially own more than 5% of the applicable class of voting securities, (ii) our sole director, (iii) and each named executive officer and (iv) all directors and executive officers as a group. As of December 18, 2003, a total of 4,719,208,096 shares of Class A common stock outstanding and a total of 1,799,875 shares of our Class B common stock were outstanding. Each share of Class A common stock and Class B common stock is entitled to one vote on matters on which holders of common stock are eligible to vote. The column entitled "Percentage of Total Voting Stock" shows the percentage of total voting stock beneficially owned by each listed party. The number of shares beneficially owned is determined under rules promulgated by the Securities and Exchange Commission, 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 December 18, 2003, through the exercise or conversion of any stock option, convertible security, warrant or other right. 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.
Ownership of Common Stock Common Stock Beneficially Owned --------------------------------- Name/Address Title of Class Number Percent - ----------------------------------------- --------------------------- ------------------ ------------ Jerome R. Mahoney Class A Common Stock 41,278,512,295(1) 89.8% c/o iVoice, Inc. Class B Common Stock 1,799,875(1) 100.0% 750 Highway 34 Matawan, New Jersey 07747 Kevin Whalen(2) Class A Common Stock 1,455,000(3) * c/o iVoice, Inc. Class B Common Stock 0 0% 750 Highway 34 Matawan, New Jersey 07747 Director and executive officer as a group Class A Common Stock 41,278,512,295 89.8% Class B Common Stock 1,799,875 100.0%
- ------------------------------- (1) Includes (i) 450,000 shares of our Class A common stock held by Mr. Mahoney's minor children, (ii) 29,506,147,541 shares of our Class A common stock issuable upon conversion of 1,799,875 shares of our Class B common stock held by Mr. Mahoney, and (iii) 11,761,114,754 shares of our Class A common stock issuable upon conversion of a promissory note dated March 20, 2001, as amended on August 13, 2002. Pursuant to such promissory note, Mr. Mahoney may, at any time, convert amounts owed to him for monies loaned thereunder and interest thereon into (i) one share of our Class B common stock for each dollar owed, (ii) the number of shares of our Class A common stock calculated by dividing (x) the sum of the amount being prepaid by (y) 50% of the lowest issue price of shares of our Class A common stock since the first advance of funds under such note, or (iii) payment of the principal of the note, before any repayment of interest. At December 18, 2003, the total balance owed to Mr. Mahoney was $717,428, convertible into 717,428 shares of our Class B common stock, or 11,761,114,754 shares of our Class A common stock. Since we do not have a sufficient number of authorized shares of Class A common stock to issue all of the shares of Class A common stock issuable upon the exercise or conversion of all of our outstanding options, warrants, debentures and Class B common stock, Mr. Mahoney has agreed that, until such time as our right to receive advances under the Equity Line of Credit Agreement expires and until we have increased the number of authorized shares of Class A common stock in an amount sufficient to issue all shares of our Class A common stock underlying all then-outstanding options, warrants, debentures, Class B common stock or other obligations to issue shares of our Class A common stock, Mr. Mahoney will not convert any of his shares of Class B common stock or the balance due under his convertible promissory note, if any such conversion or conversions, in the aggregate, would result in our issuance to Mr. Mahoney of more than 1,200,000,000 shares of our Class A common stock. (2) Effective April 30, 2003, Mr. Whalen terminated his employment with us. (3) Includes options to purchase 400,000 shares of our Class A common stock. 35 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Change of Conversion Price of Class B Common Stock On October 15, 2002, our stockholders approved a change in the conversion price of our Class B common stock held by Jerome R. Mahoney, our president, chief executive officer, chief financial officer and president. On January 13, 2003, we amended our certificate of incorporation to provide that the Class B common stock is convertible into the number of shares of Class A common stock determined by dividing the number of Class B common stock being converted by 50% of the lowest price that we had previously issued our Class A common stock. Previously, each share of Class B common stock was convertible into 100 shares of Class A common stock. Accordingly, the number of shares of Class A common stock to be received by Mr. Mahoney upon conversion of the Class B common stock will be greater as the price of the Class A common stock declines. Issuance and Amendment of Convertible Promissory Note During the period from June 2000 through December 2002, Mr. Mahoney had sold personal holdings of shares of our Class A common stock and loaned the proceeds of these sales to us to fund our working capital requirements. On March 20, 2001, we executed a promissory note and security agreement in favor of Mr. Mahoney with respect to such loans. As a result, all of our assets are subject to a security agreement with Mr. Mahoney. Trey Resources has agreed to assume $250,000 of such outstanding indebtedness upon consummation of our proposed spin-off of Trey Resources. On August 13, 2002, our board of directors approved amendments to the promissory note dated March 20, 2001, to allow for the conversion of amounts due thereunder into (i) one share of Class B common stock for each dollar owed, or (ii) the number of shares of Class A common stock calculated by dividing (x) the sum of the amount being prepaid by (y) 50% of the lowest issue price of our Class A common stock since the first advance of funds under the note, whichever the note holder chooses, or (iii) payment of the principal of the principal of note, before any repayment of interest. As of September 30, 2002, the outstanding loan balance including interest, monies loaned from the proceeds of stock sales, unpaid compensation, income taxes incurred from the sale of stock and unreimbursed expenses, totaled $2,009,822. On October 14, 2002 Mr. Mahoney converted $1,504,875 of the amounts owed to him under the promissory note into 1,504,875 shares of Class B common stock. At December 18, 2003, the total balance owed to Mr. Mahoney was $717,428, convertible into 717,428 shares of our Class B common stock, or 11,761,114,754 shares of our Class A common stock. Since we do not have a sufficient number of authorized shares of Class A common stock to issue all of the shares of Class A common stock issuable upon the exercise or conversion of all of our outstanding options, warrants, debentures and Class B common stock, Mr. Mahoney has agreed that, until such time as our right to receive advances under the Equity Line of Credit Agreement expires and until we have increased the number of authorized shares of Class A common stock in an amount sufficient to issue all shares of our Class A common stock underlying all then-outstanding options, warrants, debentures, Class B common stock or other obligations to issue shares of our Class A common stock, Mr. Mahoney will not convert any of his shares of Class B common stock or the balance due under his convertible promissory note, if any such conversion or conversions, in the aggregate, would result in our issuance to Mr. Mahoney of more than 1,200,000,000 shares of our Class A common stock. Proposed Spin-Off of Automatic Reminder Business In September 2003, we announced our intention to distribute to our stockholders shares of Class A common stock of Trey Resources, Inc., one of our subsidiaries, and our Automated Reminder business, upon the effectiveness of required Securities and Exchange Commission filings and final approval by our Board of Directors of the terms and conditions of the distribution, as described in the registration statement on Form SB-2 of Trey Resources, initially filed with the Securities and Exchange Commission on October 3, 2003. It is intended that Trey Resources will own and operate our Automatic Reminder software business as an independent publicly traded entity following the distribution. Trey Resources issued $40,000 in convertible debentures to The May Davis Group in March 2003, and $100,000 in convertible debentures to Cornell Capital Partners in September 2003. These debentures are convertible into shares of Class A common stock of Trey Resources at a price equal to either (a) an amount equal to 120% of the closing bid price of the Class A common stock of Trey Resources as of the date of the distribution to our stockholders of shares of Class A common stock of Trey Resources or (b) an amount equal to 80% of the average closing bid price of the Class A common stock of Trey Resources for the four trading days immediately preceding the conversion date. These convertible debentures accrue interest at a rate of 5% per year and are convertible at the holder's option. These convertible debentures have a term of two years with all accrued interest due and payable at the end of the term. At Trey Resources' option, these debentures may be paid in cash or redeemed at a 20% premium prior to April 2004. In January 2003, Trey Resources entered into an equity line of credit agreement. Under this agreement, Trey Resources may issue and sell to Cornell Capital Partners shares of its Class A common stock for a total purchase price of up to $10.0 million. Subject to certain conditions, Trey Resources will be entitled to commence drawing down on its equity line of credit when its Class A common stock under the equity line of credit is registered with the Securities and Exchange Commission and will continue for two years thereafter. The purchase price for the shares will be equal to 91% of the market price, which is defined as the lowest closing bid price of the Class A common stock of Trey Resources during the five trading days following the notice date. A cash fee equal to six percent (6%) of the cash proceeds of the draw down is also payable at the time of funding. To date, Trey Resources has not drawn down on the equity line of credit. On October 24, 2003, Trey Resources filed with the Securities and Exchange Commission a registration statement on Form SB-2 relating to the registration of shares to be issued upon conversion of Trey Resource's outstanding convertible debentures issued to The May Davis Group in March 2003 and Cornell Capital Partners in September 2003, and pursuant to an equity line of credit agreement entered between Trey Resources and Cornell Capital Partners in January 2003. In connection therewith, we agreed to provide a full and unconditional guaranty of the payment and performance obligations of Trey Resources, in accordance with the terms of securities purchase agreements between Trey Resources and the holders of the convertible debentures, which cannot be discharged, except by complete performance of the obligations under the securities purchase agreements and the related documents. Under the guaranty, if Trey Resources defaults in payment or performance of any of its obligations under the convertible debentures, we are required to pay or perform such obligations upon two days' written notice or demand by the holders of the convertible debentures and to take an advance under the Equity Line of Credit on the day of any such default, in the amount of $250,000 in order to repay to the principal amount of the convertible debentures plus $50,000 within seven days of default by Trey Resources. Notwithstanding anything to the contrary, so long as the outstanding principal amount is zero or would be made zero simultaneously with the termination, we shall have the right to terminate the guaranty at any time by providing written notice of such termination. 36 In January 2003, Trey Resources entered into a separate employment agreement with Mr. Mahoney, our president, chief executive officer, chief financial officer and sole director, pursuant to which Mr. Mahoney shall act as Chairman of the Board of Trey Resources upon completion of our proposed spin-off of Trey Resources. The agreement calls for annual compensation of $180,000 per annum, and the usual and customary perquisites and benefits valued at approximately $25,000. The agreement also provides for a bonus of $350,000 to be paid upon successful completion of the proposed spin-off of Trey Resources. Trey Resources has agreed to assume $250,000 of such outstanding indebtedness under the promissory note we issued to Jerome R. Mahoney on March 12, 2001, as amended on August 12, 2002 (described above), upon consummation of our proposed spin-off of Trey Resources. The debt will be subject to a promissory note having substantially the same terms the promissory note we issued to Mr. Mahoney. Mr. Mahoney may, at his sole discretion, convert such debt into Class B Common Stock of Trey Resources at the rate of one dollar per share, which stock will be convertible at any time into Class A common stock at a rate equal to 50% of the lowest price that Trey Resources issues shares of Class A common stock of Trey Resources subsequent to the date of the note. Mr. Mahoney has agreed to forego receipt of Class A common stock of Trey Resources that he otherwise would have been eligible to receive from the proposed spin-off of Trey Resources by virtue of his ownership of our Class B common stock. In February 2003, we entered into an administrative services agreement with Trey Resources, pursuant to which, upon consummation of the proposed spin-off of Trey Resources, we will provide Trey Resources services in such areas as information management and technology, sharing of office space, personnel and indirect overhead expenses, employee benefits administration, payroll, financial accounting and reporting, claims administration and reporting, and other areas where Trey Resources may need transitional assistance and support. The term of the agreement is two years, but may be terminated earlier under certain circumstances, including a default, and may be renewed for additional one-year terms. In exchange for our services under the administrative services agreement, Trey Resources has agreed to pay us an annual fee of approximately $95,000. We beleive that the fees for these services are less than the fees that Trey Resources would incur if it had obtained these services through other sources. MARKET PRICE OF COMMON EQUITY AND OTHER STOCKHOLDER MATTERS Market Information Our common stock is quoted on the OTC Bulletin Board under the symbol "IVOC." The following table shows the high and low closing prices for the periods indicated. High Low 2001 First Quarter $0.4000 $0.0950 Second Quarter $0.1700 $0.0500 Third Quarter $0.0820 $0.0430 Fourth Quarter $0.0900 $0.0400 2002 First Quarter $0.0590 $0.0270 Second Quarter $0.0380 $0.0120 Third Quarter $0.0170 $0.0013 Fourth Quarter $0.0031 $0.0009 2003 First Quarter $0.0080 $0.0003 Second Quarter $0.0090 $0.0002 Third Quarter $0.0380 $0.0004 Fourth Quarter to date $0.0110 $0.0029 Holders Of Common Equity As of December 18, 2003, the number of record holders of our common shares was approximately 656. Dividend Information As of December 18, 2003, we have not paid any dividends on any class of our common stock. 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. 37 Description of Securities Pursuant to our certificate of incorporation, as amended, we are authorized to issue 10,000,000,000 shares of Class A common stock, no par value per share, 50,000,000 shares of Class B common stock, par value $.01 per share and 1,000,000 shares of preferred stock, par value of $1.00 per share. Below is a description of iVoice's outstanding securities, including Class A common stock, Class B common stock, options, warrants and debt. We do not have a sufficient number of authorized shares of Class A common stock to issue all of the shares of Class A common stock issuable upon the exercise or conversion of all of our outstanding options, warrants, debentures and Class B common stock. Accordingly, Mr. Mahoney has agreed that, until such time as our right to receive advances under the Equity Line of Credit Agreement expires and until we have increased the number of authorized shares of Class A common stock in an amount sufficient to issue all shares of our Class A common stock underlying all then-outstanding options, warrants, debentures, Class B common stock or other obligations to issue shares of our Class A common stock, Mr. Mahoney will not convert any of his shares of Class B common stock or the balance due under his convertible promissory note dated March 20, 2001, as amended August 13, 2002, if any such conversion or conversions, in the aggregate, would result in our issuance to Mr. Mahoney of more than 1,200,000,000 shares of our Class A common stock. Class A Common Stock Each holder of our Class A common stock is entitled to one vote for each share held of record. Holders of our Class A common stock have no preemptive, subscription, conversion, or redemption rights. Upon liquidation, dissolution or winding-up, the holders of Class A common stock are entitled to receive our net assets pro rata. Each holder of Class A common stock is entitled to receive ratably any dividends declared by our board of directors out of funds legally available for the payment of dividends. We have not paid any dividends on our common stock and do not contemplate doing so in the foreseeable future. We anticipate that any earnings generated from operations will be used to finance our growth. As of December 18, 2003, we had 4,719,208,096 shares of Class A common stock outstanding. Class B Common Stock Each holder of Class B Common Stock shall have the right to convert each share of Class B Common Stock into the number of Class A Common Stock Shares calculated by dividing the number of Class B Common Stock Shares being converted by fifty percent (50%) of the lowest price that we had previously issued our Class A Common Stock since the Class B Common Stock Shares were issued. Every holder of the outstanding shares of the Class B Common Stock Shares shall be entitled on each matter to cast the number of votes equal to the number of Class A Common Stock Shares that would be issued upon the conversion of the Class B Common Stock Shares held by that holder, had all of the outstanding Class B Common Stock Shares held by that holder been converted on the record date used for purposes of determining which stockholders would vote in such an election. With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Class B Common Stock Shares shall vote together with Class A Common Stock Shares without regard to class, except as to those matters on which separate class voting is required by applicable law. There shall be no cumulative voting by stockholders. Each Class B Common Stock Share shall receive dividends or other distributions, as declared, equal to the number of Class A Common Stock Shares that would be issued upon the conversion of the Class B Common Stock Shares, had all of the outstanding Class B Common Stock Shares been converted on the record date established for the purposes distributing any dividend or other stockholder distribution. Jerome R. Mahoney is the sole owner of the Class B common stock, of which there are 50,000,000 shares authorized, 2,204,875 issued and 1,799,875 shares outstanding as of December 18, 2003. On December 18, 2003, these shares of Class B common stock were convertible into 29,506,147,541 shares of Class A common stock. Preferred Stock The Board of Directors expressly is authorized, subject to limitations prescribed by the New Jersey Business Corporations Act and the provisions of this Certificate of Incorporation, to provide, by resolution and by filing an amendment to the Certificate of Incorporation pursuant to the New Jersey Business Corporations Act, for the issuance from time to time of the 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: 38 a) the number of shares constituting that series and the distinctive designation of that series; b) the dividend rate on the shares of that series, whether dividends shall be 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; c) whether that series shall have voting rights, in addition to voting rights provided by law, and, if so, the terms of such voting rights; d) whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provisions for adjustment of the conversion rate in such events as the Board of Directors shall determine; e) whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; f) whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; g) the rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and h) any other relative powers, preferences and rights of that series, and qualifications, limitations or restrictions on that series. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Preferred Stock of each series shall be entitled to receive only such amount or amounts as shall have been fixed by the certificate of designations or by the resolution or resolutions of the Board of Directors providing for the issuance of such series. Options and Warrants As of December 18, 2003, our employees held options to purchase 826,083 shares of our Class A common stock. These options were granted to our employees under our 1999 Stock Option Plan. The exercise prices ranged from $0.06 to $3.75 per share. All options issued to employees vest at 25% per year and expire in 5 years. Of that total, 802,583 of the options were exercisable, at a weighted average exercise price of $0.387 per share. As of December 18, 2003, we had outstanding, to persons other than employees, warrants to purchase 6,558,260 shares of our Class A common stock. These warrants have exercise prices ranging from $0.047 per share to $2.00 per share, with a weighted average exercise price of $0.135 per share. These warrants will expire at various times through May 1, 2006. Debt Trey Resources issued $40,000 in convertible debentures to The May Davis Group in March 2003, and $100,000 in convertible debentures to Cornell Capital Partners in September 2003. These debentures are convertible into shares of Class A common stock of Trey Resources at a price equal to either (a) an amount equal to 120% of the closing bid price of the Class A common stock of Trey Resources as of the date of the distribution to our stockholders of Class A common stock of Trey Resources or (b) an amount equal to 80% of the average closing bid price of the Class A common stock of Trey Resources for the four trading days immediately preceding the conversion date. These convertible debentures accrue interest at a rate of 5% per year and are convertible at the holder's option. These convertible debentures have a term of two years with all accrued interest due and payable at the end of the term. At Trey Resources' option, these debentures may be paid in cash or redeemed at a 20% premium prior to April 2004. In January 2003, Trey Resources entered into an equity line of credit agreement. Under this agreement, Trey Resources may issue and sell to Cornell Capital Partners shares of its Class A common stock for a total purchase price of up to $10.0 million. Subject to certain conditions, Trey Resources will be entitled to commence drawing down on its equity line of credit when its Class A common stock under the equity line of credit is registered with the Securities and Exchange Commission and will continue for two years thereafter. The purchase price for the shares will be equal to 91% of the market price, which is defined as the lowest closing bid price of the Class A Common Stock of Trey Resources during the five trading days following the notice date. A cash fee equal to six percent (6%) of the cash proceeds of the draw down is also payable at the time of funding. To date, Trey Resources has not drawn down on the equity line of credit. Trey Resources filed a registration statement on Form SB-2 with the Securities and Exchange Commission on October 24, 2003, relating to the registration of shares to be issued upon conversion of Trey Resource's outstanding convertible debentures and pursuant to an equity line of credit agreement between Trey Resources and Cornell Capital Partners. In connection therewith, we agreed to provide a full and unconditional guaranty of the payment and performance obligations of Trey Resources, in accordance with the terms of a securities purchase agreement between Trey Resources and the holders of the convertibe debentures. Under the guaranty, if Trey Resources defaults in payment or performance of any of its obligations under the convertible debentures, we are required to pay or perform such obligations upon two days' written notice or demand by the holders of the convertible debentures and to take an advance under the Equity Line of Credit on the day of any such default, in the amount of $250,000 in order to repay to the principal amount of the convertible debentures plus $50,000 within seven days of default by Trey Resources. This guaranty cannot be discharged, except by complete performance of the obligations under the securities purchase agreements and the related documents. Notwithstanding anything to the contrary, so long as the outstanding principal amount is zero or would be made zero simultaneously with the termination, we shall have the right to terminate the guaranty at any time by providing written notice of such termination. 39 Transfer Agent Our transfer agent is Fidelity Transfer Company. Its address is 1800 South West Temple, Suite 301, Salt Lake City, Utah 84115. Its telephone number is (801) 484-7222. Limitation of Liability and Indemnification Our Bylaws include an indemnification provision under which we have agreed to indemnify our directors and officers of to fullest extent possible from and against any and all claims of any type arising from or related to future acts or omissions as a director or officer of iVoice. Anti-Takeover Effects of Provisions of Articles of Incorporation The authorized but unissued shares of our capital stock are available for future issuance without our stockholders' approval. These additional shares may be utilized for a variety of corporate purposes including but not limited to future public or direct offerings to raise additional capital, corporate acquisitions and employee incentive plans. The issuance of such shares may also be used to deter a potential takeover of iVoice that may otherwise be beneficial to stockholders by diluting the shares held by a potential suitor or issuing shares to a stockholder that will vote in accordance with our Board of Directors' desires. A takeover may be beneficial to stockholders because, among other reasons, a potential suitor may offer stockholders a premium for their shares of stock compared to the then-existing market price. 40 EXPERTS The financial statements for the year ended December 31, 2002 included in this prospectus have been audited by Mendlowitz Weitsen, LLP, independent certified public accountants to the extent and for the periods set forth in their report (which contains an explanatory paragraph regarding our ability to continue as a going concern) appearing elsewhere herein and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. On February 9, 2001, we dismissed Merdinger, Fruchter, Rosen & Corso ("MFR&C") as our independent accountants. The dismissal was approved by our Board of Directors. The reports of MFR&C on our financial statements for the fiscal years ended December 31, 2000 and December 31, 1999, contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that the reports contained an explanatory paragraph expressing substantial doubt regarding our ability to continue as a going concern. On February 9, 2001, we retained the firm of Mendlowitz Weitsen, LLP as our new independent accountants. Prior to engaging Mendlowitz Weitsen, LLP, we did not consult with Mendlowitz Weitsen, LLP, on any accounting, auditing, financial reporting or any other matters. LEGAL MATTERS Kramer Levin Naftalis & Frankel LLP, New York, New York, will pass upon the validity of the shares of common stock offered hereby for us. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION OF SECURITIES ACT LIABILITY Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by one of our directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by that director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether that indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of that issue. HOW TO GET MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form SB-2 under the Securities Act with respect to the securities offered by this prospectus. This prospectus, which forms a part of the registration statement, does not contain all the information set forth in the registration statement, as permitted by the rules and regulations of the Commission. For further information with respect to us and the securities offered by this prospectus, reference is made to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document that we have filed as an exhibit to the registration statement are qualified in their entirety by reference to the to the exhibits for a complete statement of their terms and conditions. The registration statement and other information may be read and copied at the Commission's Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains a web site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission. 41 INDEX TO FINANCIAL STATEMENTS Financial Statements as of September 30, 2003 Consolidated Balance Sheets - September 30, 2003 (Unaudited)........... F-2 Consolidated Statements of Operation - For the Three and Nine Months Ended September 30, 2003 and 2002........................ F-3 Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2003 and 2002............................. F-4 Notes to the Financial Statements...................................... F-7 Financial Statements as of December 31, 2002 and 2001 Independent Auditors' Report ..........................................F-15 Consolidated Balance Sheets - December 31, 2002 and 2001...............F-16 Consolidated Statements of Operations for the Years Ended December 31, 2002 and 2001.....................................F-18 Consolidated Statements of Stockholders' Deficiency for the Years Ended December 31, 2002 and 2001...........................F-19 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002 and 2001.....................................F-23 Notes to the Financial Statements......................................F-27 F-1 iVoice, Inc. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2003 (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,469,229 Accounts receivable, net of allowance for doubtful accounts of $2,700 8,793 Inventory 23,096 Securities available for sale 117,360 Costs in excess of billings 11,832 Net current assets of discontinued operations 71,397 Prepaid expenses and other current assets 216,667 ------------ Total current assets 1,918,374 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $155,559 48,736 OTHER ASSETS Software license costs, net of accumulated amortization of $385,900 68,100 Intangible assets 105,106 Net long-term assets of discontinued operations 13,500 Deposits and other assets 7,000 ------------ Total other assets 193,706 ------------ TOTAL ASSETS $ 2,160,816 ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES Accounts payable and accrued expenses $ 205,284 5% Convertible debentures - Note 3 140,000 Due to related parties - Note 4 430,554 Net current liabilities of discontinued operations 517,636 Deferred maintenance contracts 29,155 ------------ Total current liabilities 1,322,629 ------------ LONG-TERM DEBT -- ------------ Total liabilities 1,322,629 ------------ COMMITMENTS AND CONTINGENCIES - Note 5 -- STOCKHOLDERS' EQUITY Preferred stock, par value $1.00; authorized 1,000,000 shares, no shares issued or outstanding -- Common stock, Class A - no par value; authorized 10,00,000,00 shares, 3,983,175,753 issued and 3,982,575,753 shares outstanding 914,491 Common stock, Class B - par value $.01; authorized 50,000,000 shares; 2,204,875 shares issued; 1,799,875 shares outstanding 127 Treasury stock, 600,000 Class A shares, at cost (28,800) Additional paid in capital 15,591,520 Accumulated deficit (15,707,117) Accumulated other comprehensive income 67,966 ------------ Total stockholders' equity 838,187 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,160,816 ============ The accompanying notes are an integral part of the financial statement. F-2
iVoice, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended For the Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- SALES, net $ 126,683 $ 140,614 $ 349,403 $ 457,303 COST OF SALES 49,921 38,337 132,593 139,774 ----------- ----------- ----------- ----------- GROSS PROFIT 76,762 102,277 216,810 317,529 ----------- ----------- ----------- ----------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling expenses 23,484 35,319 77,063 93,056 General and administrative expenses 199,148 214,432 607,574 1,229,285 Research and development 30,700 57,665 156,371 170,428 Bad debt expense - -- -- 3,000 Depreciation and amortization 36,732 36,700 109,630 108,601 ----------- ----------- ----------- ----------- Total selling, general and administrative expenses 290,064 344,116 950,638 1,604,370 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (213,302) (241,839) (733,828) (1,286,841) COSTS IN CONNECTION WITH SPIN-OFF 116 -- 44,621 -- ----------- ----------- ----------- ----------- LOSS FROM DISCONTINUED OPERATIONS 124,012 4,244 140,678 16,764 ----------- ----------- ----------- ----------- OTHER INCOME\ (EXPENSE) Non-recurring expense -- (9,222) -- (9,222) Other Income 1,079 -- 1,079 28,800 Interest expense (211,442) (47,235) (297,912) (376,611) ----------- ----------- ----------- ----------- Total other income (expense) (210,363) (56,457) (296,833) (357,033) ----------- ----------- ----------- ----------- LOSS BEFORE INCOME TAXES (547,793) (302,540) (1,215,960) (1,660,638) PROVISION FOR INCOME TAXES -- -- -- -- ----------- ----------- ----------- ----------- NET LOSS $ (547,793) $ (302,540) $(1,215,960) $(1,660,638) =========== =========== =========== =========== NET LOSS PER COMMON SHARE Basic $( 0.00) $ (0.00) $( 0.00) $( 0.01) =========== =========== =========== =========== Diluted $( 0.00) $ (0.00) $( 0.00) $( 0.01) =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statement. F-3
iVoice, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, -------------- 2003 2002 ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES Net loss $(1,215,960) $(1,660,638) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 28,454 30,357 Amortization of prepaid expense 78,833 326,667 Amortization of intangibles -- 9,843 Amortization of software license 81,600 81,600 Bad debt expense -- 3,000 Forfeited employee stock compensation -- (28,800) Discounts on stock options -- 316,750 Debt issue costs -- 216,977 Gain on sale of investments (1,079) -- Common stock issued for consulting services -- 45,000 Common stock issued for interest 28,584 10,735 Changes in certain assets and liabilities: Accounts receivable 6,394 (20,803) Inventory 8,782 8,123 Accounts payable and accrued liabilities 268,109 196,760 Deferred revenue 16,945 (19,304) Other assets 6,230 686 Total cash used in operating activities (693,108) (483,047) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (7,004) (2,641) Investment in securities available for sale (50,000) -- Proceeds from investment dispositions 1,685 -- Purchase of goodwill and other intangibles (7,620) (1,560) ----------- ----------- Total cash used in investing activities (62,939) (4,201) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 1,873,923 102,696 Collections on stock subscriptions -- 317,000 Proceeds from related party loans -- 3,000 Repayment of related party loans (90,000) (90,000) Proceeds from notes payable 1,700,000 250,000 Repayment of notes payable (1,934,667) (93,453) Repayment of capital lease obligations (13,928) (25,556) Sale of convertible debentures 140,000 255,000 ----------- ----------- Total cash provided by financing activities 1,675,328 718,687 ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS 919,281 231,439
The accompanying notes are an integral part of the financial statement. F-4
iVoice, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 For the Nine Months Ended September 30, --------------------------- 2003 2002 ---------- ---------- CASH AND EQUIVALENTS - BEGINNING OF PERIOD - Continuing Operations 566,345 85,543 CASH AND EQUIVALENTS - BEGINNING OF PERIOD - Discontinued Operations -- -- ---------- ---------- CASH AND EQUIVALENTS - END OF PERIOD - Continuing Operations $1,469,229 $ 316,982 ========== ========== CASH AND EQUIVALENTS - END OF PERIOD - Discontinued Operations $ 16,397 $ -- ========== ========== CASH PAID DURING THE PERIOD FOR: Interest expense $ 700 $ 6,104 Income taxes $ -- $ -- ========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES SEPTEMBER 30, 2003 - ------------------ During the nine months ended September 30, 2003, the Company: a) issued 235,000,000 shares of Class A common stock for consulting services valued at $315,000. b) issued 466,859,715 shares of its Class A common stock for the repayment of $115,800 in principal on its 12% Convertible Debentures. c) issued 58,405,204 shares of its Class A common stock for interest on its outstanding 12% Convertible Debentures valued at $24,497. d) issued 2,093,900,745 shares of Class A common stock with a total value of $1,938,754. Of this amount, $1,849,418 was for repayment of principal and $4,087 was for the repayment of interest on notes payable, issued as advances on the equity line financing with Cornell Capital Partners, LP. The balance of $85,249 was market discount charged to expense. The accompanying notes are an integral part of the financial statement. F-5 iVoice, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES - Continued SEPTEMBER 30, 2002 - ------------------ During the nine months ended September 30, 2002, the Company: a) issued 10,000 shares as partial payment for leasehold improvements valued at $540. b) issued 2,250,000 shares of Class A common stock for legal services valued at $45,000. c) issued 6,200,000 shares of its Class A common stock for fees and services associated with the financing agreement with Cornell Capital, LP, valued at $117,800. d) retained 600,000 shares previously issued to an employee as compensation. These shares were deemed as not having been vested with the terminated employee and were recorded as treasury stock at a value of $28,800. e) issued 4,364,516 shares of its Class A common stock for interest on its outstanding Convertible Debentures valued at $95,679. Of this amount $10,735 reflects interest incurred in the current period and $84,944 represents amounts accrued in prior periods. f) issued 505,921 shares of its Class A common stock for the repayment of $15,000 in principal on its 8% Convertible Debentures. g) issued 7,229,230 shares of its Class A common stock for the repayment of $64,000 in principal on its 12% Convertible Debentures. h) issued 19,464,744 shares of its Class A common stock for the repayment of $71,483 in principal on its 5% Convertible Debentures. The accompanying notes are an integral part of the financial statement. F-6 iVoice, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements include the accounts of iVoice, Inc. (the "Company" or "iVoice"), and its wholly owned subsidiaries. iVoice, Inc. formerly known as Visual Telephone International, Inc. ("Visual") was incorporated under the laws of Utah on December 2, 1995, subsequently changed to Delaware. On April 25, 2003, iVoice formed a wholly owned subsidiary in the State of New Jersey and on May 5, 2003, iVoice changed its state of incorporation from Delaware to New Jersey by merging into the newly formed New Jersey subsidiary. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The result of operations for the three and nine-month periods ended September 30, 2003 and 2002 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements and footnotes included in Form 10-KSB for the year ended December 31, 2002 Principles of Consolidation --------------------------- The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries Trey Resources, Inc. and iVoice Acquisition 2, Inc. All significant intercompany transactions and balances have been eliminated in consolidation. The balance sheet, statements of operations and the cash flows of the Company's wholly owned subsidiary, Trey Resources Inc. are presented as discontinued operations due to the planned Distribution discussed under Trey Resources Distribution. Where appropriate, prior year amounts have been reclassified to conform to the current period presentation F-7 iVOICE, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 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 of earnings per share for basic and diluted purposes are as follows: Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 2003 2002 2003 2002 ------------- ----------- ------------- ----------- 3,291,495,029 196,507,632 1,958,056,182 172,613,099 Company Background ------------------ 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 and the name of the Company was changed to iVoice.com, Inc. 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.com, Inc. 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. On August 24, 2001, the Company amended its certificate of incorporation to change its name to iVoice, Inc. from iVoice.com, Inc. On April 25, 2003, iVoice formed a wholly owned subsidiary in the State of New Jersey and on May 5, 2003, iVoice changed its state of incorporation from Delaware to New Jersey by merging into the newly formed New Jersey subsidiary. F-8 iVOICE, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -Continued At September 30, 2003 the Company held a 100% investment in Trey Resources, Inc. In June 2003, the Company filed a registration statement with the SEC to spin off Trey as a separate public company in a pro rata dividend distribution of the common stock of Trey Resources to iVoice shareholders. (See the Trey Resources Distribution below.) Upon determination of effectiveness of the registration statement, the distribution of shares in Trey Resources will occur. While Trey has not operated its Automatic Reminder software business as a stand-alone company, the assets, liabilities, revenue and expense, previously consolidated with the financial statements of the Company are presented in these financial statements as discontinued operations at September 30, 2003 and for the three and nine months ended September 30, 2003 and 2002. The Company is publicly traded and is currently traded on the NASD Over the Counter Bulletin Board ("OTCBB") under the symbol "IVOC". NOTE 2 - DISCONTINUED OPERATIONS In June 2003, the Company announced its intention to spin-off its Automatic Reminder software business in the form of a pro-rata distribution to iVoice stockholders of approximately 65% of the outstanding shares of Class A Common Stock of Trey Resources, Inc., which is currently a wholly owned subsidiary of iVoice. Trey will own and operate the Automatic Reminder software business of iVoice as an independent publicly traded entity following the distribution. In June 2003 and subsequently amended in October 2003, iVoice filed a registration statement with the SEC related to the pro rata dividend distribution of the shares of Trey Resources, Inc. held by the Company to the shareholders of iVoice. Management anticipates that the distribution will take place on or about the effective date of the registration statement. Each iVoice stockholder as of October 13, 2003, the record date for the distribution, will receive one (1) Trey share for every twelve hundred (1,200) iVoice shares held on that date. The summarized unaudited results of operations for the nine months ended September 30, 2003 and 2002 are as follows: 2003 2002 --------- --------- Revenues $ 1,350 $ 1,050 Cost of Revenues -- -- --------- --------- Gross profit 1,350 1,050 Operating Expenses 125,875 16,928 --------- --------- Operating Loss (124,525) (15,878) Interest expense 16,153 886 Provision for income taxes -- -- --------- --------- Net Loss $(140,678) $ (16,764) ========= ========= F-9 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 NOTE 2 - DISCONTINUED OPERATIONS - Continued At September 30, 2003 and December 31, 2002 the net current liabilities and the net long-term assets of Trey Resources were as follows:
September 30, 2003 December 31, (Unaudited) 2002 ----------- ------------ Current assets: Cash $ 16,397 $ -- Prepaid expenses 55,000 -- -------- -------- Total current assets 71,397 -- Current liabilities: Accounts payable and accrued expenses $267,636 $142,333 Convertible debentures 140,000 -- Due to related party 250,000 250,000 -------- -------- Total current liabilities 657,636 342,333 -------- -------- Net current liabilities of discontinued operations $586,239 $342,333 ======== ======== Capitalized software license costs $ 13,500 $ 27,000 -------- -------- Net long-term assets of discontinued operations $ 13,500 $ 27,000 ======== ========
NOTE 3 - CONVERTIBLE DEBENTURES In January 2003, the Company, through its Trey Resources, Inc. subsidiary, entered into a subscription agreement with certain purchasers to issue $250,000 in convertible debentures, with interest payable at 5% per annum. The notes are convertible into the Company's Class A common stock at a price equal to either (a) an amount equal to one hundred twenty percent (120%) of the closing bid price for the Common Stock on the Closing Date, or (b) an amount equal to eighty percent (80%) of the average of the four (4) lowest Closing Bid Prices of the Common Stock for the five (5) trading days immediately preceding the Conversion Date. At September 30, 2003, a total of $140,000 in debenture proceeds has been received so far and is outstanding as of that date. F-10 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 NOTE 3 - CONVERTIBLE DEBENTURES - Continued In October 1999, the Company issued a series of convertible debentures consisting of ten notes payable totaling $500,000 bearing interest at 12% per annum and payable on December 1, 2000. 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. At September 30, 2003, all of the outstanding principal and interest was repaid through the issuance of Class A common shares in accordance with the terms described above. Additionally, the Company has settled with the investor without penalty or additional costs arising from the Company's default under the Debenture agreement. The parties have also entered into mutual releases, which prevents either party from any claims against the other resulting from the financing agreement. NOTE 4 - DUE TO RELATED PARTIES 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. On August 13, 2002, the board of directors approved amendments to the Promissory Note payable to Mr. Mahoney for monies loaned to the Company from the proceeds of stock sales of personal holdings of iVoice Class A common stock, unpaid compensation, income taxes incurred from the sale of Company stock and unreimbursed expenses. The change allows for the conversion of amounts due under the Promissory Note into either (i) one Class B common stock share of iVoice, Inc., no par value, for each dollar owed, or (ii) the number of Class A common stock shares of iVoice, Inc. calculated by dividing (x) the sum of the principal and interest that the Note holder has decided to prepay by (y) fifty percent (50%) of the lowest issue price of Series A common stock since the first advance of funds under this Note, whichever the Note holder chooses, or (iii) payment of the principal of this Note, before any repayment of interest. F-11 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 NOTE 4 - DUE TO RELATED PARTIES - Continued On October 14, 2002, Mr. Mahoney converted $1,504,875 of the amounts owed to him into 1,504,875 shares of Class B common stock. As of September 30, 2003, the outstanding loan balance including monies loaned from the proceeds of stock sales, unpaid compensation, income taxes incurred from the sale of stock and unreimbursed expenses, totaled $680,554. In connection with the assignment of assets and liabilities from iVoice to Trey pursuant to the anticipated spin-off transaction, iVoice will be assigning to Trey Resources, $250,000 of outstanding indebtedness from iVoice to Mr. Mahoney. As such, this amount is reflected in the net current liabilities of discontinued operations. NOTE 5 - COMMITMENTS AND CONTINGENCIES a) The Company leases its headquarters located at 750 Highway 34, Matawan, New Jersey on a month-to-month obligation of $7,500 per month. The Company maintains a good relationship with its landlord and believes that its current facilities will be adequate for the foreseeable future. b) 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. c) In February 2003, the Company entered into an Equity Line of Credit with Cornell Capital Partners, L.P. Pursuant to the Equity Line of Credit, the Company may, at its discretion, periodically sell to Cornell Capital Partners shares of Class A common stock for a total purchase price of up to $5.0 million to raise capital to fund our working capital needs. For each share of Class A common stock purchased under the Equity Line of Credit, Cornell Capital Partners will pay 91% of the 5 lowest closing bid prices on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the 5 days immediately following the notice date. Pursuant to the agreement with Cornell Capital Partners, LP, we registered for resale on Form SB-2, 5,000,000,000 shares of Class A common stock with the Securities and Exchange Commission. The offering will terminate 24 months after the Securities and Exchange Commission declares the registration statement effective. d) The Company's assets are subject to a Security Agreement with the majority stockholder. See Note 4. F-12 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 NOTE 6 - COMMON STOCK In January 2003, the Company amended its Certificate of Incorporation to change the par value of its Class A Common Stock from $.001 to $.0001 and to increase the number of shares the Company is authorized to issue of its Class A Common Stock from 600,000,000 to 10,000,000,000 and its Class B Common Stock from 3,000,000 to 50,000,000. On April 25, 2003, iVoice formed a wholly owned subsidiary in the State of New Jersey and on May 5, 2003, iVoice changed its state of incorporation from Delaware to New Jersey by merging into the newly formed New Jersey subsidiary. In doing so, the par value of its Class A common stock has changed from $.0001 to no par value and the par value of the Class B common stock has changed from no par value to $.01 per share. a) Class A Common Stock -------------------- Class A Common Stock consisted of the following as of September 30, 2003: 10,000,000,000 shares of authorized common stock with no par value, 3,983,175,753, shares were issued and 3,982,575,753 shares were outstanding. Class A Common Stock has voting rights of 1:1. 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 and does not contemplate doing so in the foreseeable future. The Company anticipates that any earnings generated from operations will be used to finance the Company's growth objectives. For the three months ended September 30, 2003, the Company had the following transactions in its Class A Common Stock: 1. The Company issued 150,000,000 shares of its Class A Common Stock for consulting services rendered valued at $260,000. 2. The Company issued 207,090,232 shares of Class A Common Stock for the conversion of $51,050 in debenture principal on its 12% convertible debentures 3. The Company issued 58,405,204 shares of its Class A common stock for interest on its outstanding 12% Convertible Debentures valued at $24,497. 4. The Company issued 919,403,023 shares of Class A common stock for repayment of $1,343,347 in principal, $4,087 in interest and $130,994 in discount on notes payable issued for advances on the equity line financing with Cornell Capital Partners, LP 5. The Company issued 295,081,967 shares of Class A common stock upon conversion of 18,000 shares of Class B common stock. F-13 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2003 NOTE 6 - COMMON STOCK - Continued b) Class B Common Stock -------------------- Class B Common Stock consists of 50,000,000 shares of authorized common stock with par value $.01 per share. Each share of Class B common stock is convertible into Class A common stock calculated by dividing the number of Class B shares being converted by fifty percent (50%) of the lowest price that the Company had previously issued its Class A common stock since the Class B shares were issued. Each holder of Class B common stock has voting rights equal to the number of Class A shares that would be issued upon the conversion of the Class B shares, had all of the outstanding Class B shares been converted on the record date used for purposes of determining which shareholders would vote. Holders of Class B common stock are entitled to receive dividends in the same proportion as the Class B common stock conversion and voting rights have to Class A common stock. Jerome R. Mahoney is the sole owner of the Class B common stock. As of September 30, 2003, there are 2,204,875 shares issued and 1,799,875 shares outstanding Pursuant to the conversion terms of the Class B Common stock, on September 30, 2003, the 1,799,875 outstanding shares of Class B common stock are convertible into 29,506,147,541 shares of Class A common stock. In the nine months ended September 30, 2003, a total of 59,000 Class B shares were converted into 610,318,926 Class A shares. c) Preferred Stock --------------- Preferred Stock consists of 1,000,000 shares of authorized preferred stock with $1.00 par value. As of September 30, 2003, no shares were issued or outstanding. F-14 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 www.mwllp.com INDEPENDENT AUDITOR'S REPORT ---------------------------- TO THE BOARD OF DIRECTORS AND STOCKHOLDERS' OF iVOICE, INC. Matawan, New Jersey We have audited the accompanying consolidated balance sheets of iVoice, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of iVoice, Inc. as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company had net losses and negative cash flows from operations for the years ended December 31, 2002 and 2001, and as of those dates had negative working capital, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. MENDLOWITZ WEITSEN, LLP East Brunswick, New Jersey February 27, 2003 F-15
iVOICE, INC. CONSOLIDATED BALANCE SHEETS ASSETS December 31, ------------ 2002 2001 ---------- ---------- CURRENT ASSETS Cash and cash equivalents $ 566,345 $ 85,543 Accounts receivable, net of allowance for doubtful accounts of $2,700 and $4,000 15,187 37,284 Inventory 31,878 20,586 Costs in excess of billings on uncompleted jobs 23,778 -- Prepaid expenses and other current assets 7,558 331,361 ---------- ---------- Total current assets 644,746 474,774 ---------- ---------- PROPERTY AND EQUIPMENT, net 70,186 106,585 ---------- ---------- OTHER ASSETS Other receivable -- 67,650 Software license costs, net of accumulated amortization of $380,800 and $272,000 163,200 272,000 Financing costs -- 35,427 Intangible assets, net of accumulated amortization of $0 and $21,041 97,486 271,299 Deposits and other assets 7,000 13,900 ---------- ---------- Total other assets 267,686 660,276 ---------- ---------- TOTAL ASSETS $ 982,618 $1,241,635 ========== ==========
The accompanying notes are an integral part of the financial statement. F-16
iVOICE, INC. CONSOLIDATED BALANCE SHEETS - (Continued) LIABILITIES AND STOCKHOLDERS' DEFICIENCY ---------------------------------------- 2002 2001 ------------ ------------ CURRENT LIABILITIES Obligations under capital leases - current $ 13,928 $ 35,018 Accounts payable and accrued expenses 360,106 391,531 Notes Payable 234,667 -- Due to related parties 615,259 1,868,943 Convertible debentures 115,800 359,800 Deferred maintenance contracts 24,156 17,214 Billings in excess of costs and estimated earnings -- 26,403 ------------ ------------ Total current liabilities 1,363,916 2,698,909 LONG-TERM DEBT Obligations under capital leases - non-current -- 13,928 ------------ ------------ Total liabilities 1,363,916 2,712,837 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIENCY Preferred stock, $1 par value; Authorized shares - 1,000,000; Issued and outstanding shares - none -- -- Common stock, Class A - par value $.001, Authorized shares - 600,000,000; 2002 - 518,691,163 shares issued, 518,091,163 shares outstanding 2001- 154,123,517 shares issued and outstanding 518,091 1,175,278 Common stock, Class B - no par value, Authorized shares - 3,000,000 2001 - 700, 000 shares issued, 354,000 shares outstanding 2002 - 2,204,875 shares issued, 1,858,875 shares outstanding, 186 36 Subscription receivable -- (783,750) Additional paid in capital 13,619,554 10,568,103 Accumulated deficit (14,490,329) (12,430,869) Treasury stock, 2002 - 600,000 Class A shares, at cost; 2001- none (28,800) -- ------------ ------------ Total stockholders' deficiency (381,298) (1,471,202) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 982,618 $ 1,241,635 ============ ============
The accompanying notes are an integral part of the financial statement. F-17
iVOICE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2002 2001 ----------- ----------- SALES, net $ 646,560 $ 425,948 COST OF SALES 184,306 167,229 ----------- ----------- GROSS PROFIT 462,254 258,719 ----------- ----------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling expenses 129,988 165,617 General and administrative expenses 1,507,681 2,297,015 Research and development 229,179 387,463 Bad debt expense 70,558 24,808 Write-off of goodwill 175,833 -- Depreciation and amortization 149,388 161,089 ----------- ----------- Total selling, general and administrative expenses 2,262,627 3,035,992 ----------- ----------- LOSS FROM OPERATIONS (1,800,373) (2,777,273) OTHER INCOME \ (EXPENSE) Other income 181,273 Interest expense (440,360) (670,161) Total other expense (259,087) (670,161) ----------- ----------- LOSS BEFORE INCOME TAXES (2,059,460) (3,447,434) PROVISION FOR INCOME TAXES -- -- ----------- ----------- NET LOSS $(2,059,460) $(3,447,434) =========== =========== NET LOSS PER COMMON SHARE Basic $ (.02) $ (.03) Diluted $ (.02) $ (.03) =========== ===========
The accompanying notes are an integral part of the financial statement. F-18
iVOICE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 Common Stock Class A Common Stock Class B Shares Amount Shares Amount ------ ------ ------ ------ Balance at January 1, 2002 154,123,517 $ 1,175,278 354,000 $ 36 Collection of stock subscriptions -- -- -- -- Issuance of common stock for services 34,460,000 34,460 -- -- Purchase of treasury stock -- -- -- -- Issuance of common stock for cash 173,362,846 173,363 -- -- Issuance of common stock for compensation -- -- -- -- Issuance of convertible debentures -- -- -- -- Issuance of stock on conversion of Class B shares -- -- 1,504,875 150 Issuance of stock on debenture conversion 148,465,066 148,465 -- -- Issuance of stock on interest conversion 8,279,734 8,280 -- -- Adjustment for change in par value -- (1,021,755) -- -- Net loss for the year ended December 31, 2002 -- -- -- -- ----------- ----------- ----------- ----------- Balance at December 31, 2002 518,091,163 $ 518,091 1,858,875 $ 186 =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statement. F-19
iVOICE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (Continued) FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 Stock Additional Total Subscriptions Treasury Paid in Accumulated Stockholders' Receivable Stock Capital Deficit Deficiency ---------- ----- ------- ------- ---------- Balance at January 1, 2002 $ (783,750) $ -- $ 10,568,103 $(12,430,869) $ (1,471,202) Collection of stock subscriptions 783,750 -- -- -- 783,750 Issuance of common stock for services -- -- 158,260 -- 192,720 Purchase of treasury stock -- -- (28,800) -- (28,800) Issuance of common stock for cash -- -- 80,302 -- 253,665 Issuance of common stock for compensation -- -- -- -- -- Issuance of convertible debentures -- -- 63,750 -- 63,750 Issuance of stock on conversion of Class B shares -- -- 1,504,725 -- 1,504,875 Issuance of stock on debenture conversion -- -- 130,535 -- 279,000 Issuance of stock on interest conversion -- -- 92,124 -- 100,404 Adjustment for change in par value -- -- 1,021,755 -- -- Net loss for the year ended December 31, 2002 -- -- -- (2,059,460) (2,059,460) ------------ ------------ ------------ ============ ============ Balance at December 31, 2002 $ -- $ (28,800) $ 13,619,554 $(14,490,329) $ (381,298) ============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statement. F-20
iVOICE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (Continued) FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 Common Stock Class A Common Stock Class B Shares Amount Shares Amount ------ ------ ------ ------ Balance at January 1, 2001 103,969,71 $1,039,69 364,000 $ 37 Issuance of common stock for settlements 2,128,000 21,280 -- -- Issuance of common stock for services 15,194,287 32,693 -- -- Issuance of common stock for exercise of stock options 18,000,000 18,000 -- -- Subscriptions received -- -- -- -- Issuance of common stock for cash 1,172,000 11,720 -- -- Issuance of common stock for compensation 2,183,834 20,371 -- -- Issuance of convertible debentures -- -- -- -- Issuance of stock on conversion of Class B shares 1,000,000 1,000 (10,000) (1) Issuance of stock for repayment of amounts due to related parties 328,951 3,290 -- -- Issuance of stock on debenture conversion 9,829,204 25,972 -- -- Issuance of stock on interest conversion 317,526 1,255 -- -- Net loss for the year ended December 31, 2001 -- -- -- -- ----------- ----------- ----------- -------- Balance at December 31, 2001 154,123,517 $ 1,175,278 354,000 $ 36 =========== =========== =========== ========
The accompanying notes are an integral part of the financial statement. F-21
iVOICE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (Continued) FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 Stock Additional Total Subscriptions Paid in Accumulated Stockholders' Receivable Capital Deficit Deficiency ---------- ------- ------- ---------- Balance at January 1, 2001 $ -- $ 7,586,182 $ (8,983,435) $ (357,519) Issuance of common stock for settlements -- 189,800 -- 211,080 Issuance of common stock for services -- 886,212 -- 918,905 Issuance of common stock for exercise of stock options (990,000) 972,000 -- -- Subscriptions received 206,250 -- 206,250 Issuance of common stock for cash -- 153,370 -- 165,090 Issuance of common stock for compensation -- 214,060 -- 234,431 Issuance of convertible debentures -- 106,250 -- 106,250 Issuance of stock on conversion of Class B shares -- (999) -- -- Issuance of stock for repayment of amounts due to related parties -- 72,369 75,659 Issuance of stock on debenture conversion -- 376,229 -- 402,201 Issuance of stock on interest conversion -- 12,630 -- 13,885 Net loss for the year ended December 31, 2001 -- -- (3,447,434) (3,447,434) ------------ ------------ ------------ ------------ Balance at December 31, 2001 $ (783,750) $ 10,568,103 $(12,430,869) $ (1,471,202) ============ ============ ============ ============
The accompanying notes are an integral part of the financial statement. F-22 iVOICE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2002 2001 ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES Net loss $(2,059,460) $(3,447,434) Adjustments to reconcile net loss to net cash (used in) provided by operating activities Depreciation and amortization 40,588 39,164 Amortization of prepaid expense 326,667 -- Amortization of intangibles -- 13,125 Amortization of software licenses 108,800 108,800 Bad debt expense 70,558 24,808 Write-off of goodwill 175,833 -- Forfeited employee stock compensation (28,800) -- Stock option discounts 316,750 56,250 Debt issue costs 216,977 259,780 Common stock issued for services 74,380 536,989 Common stock issued for compensation -- 234,431 Common stock issued for settlements -- 211,080 Common stock issued for interest 15,460 13,883 Changes in certain assets and liabilities: Accounts receivable 19,189 15,587 Inventory (11,292) (358) Other assets 4,036 124,589 Accounts payable and accrued expenses 421,713 916,220 Deferred revenue (43,239) 20,605 ----------- ----------- Total cash used in operating activities (351,840) (872,481) ----------- ----------- The accompanying notes are an integral part of the financial statement. F-23 iVOICE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) YEARS ENDED DECEMBER 31, 2002 AND 2001 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (3,649) (4,828) Purchase of intangibles (2,020) (3,090) --------- --------- Total cash used in investing activities (5,669) (7,918) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock 253,662 129,931 Proceeds from related party loans 3,000 354,000 Repayments of related party loans (120,000) (120,000) Collections of stock subscriptions 317,000 150,000 Proceeds from notes payable 470,000 -- Repayment of notes payable (235,333) -- Repayment of capital leases payable (35,018) (28,338) Repayment of convertible debentures (70,000) -- Sale of convertible debentures 255,000 425,000 --------- --------- Total cash provided by financing activities 838,311 910,593 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 480,802 30,194 CASH AND CASH EQUIVALENTS - beginning 85,543 55,349 --------- --------- CASH AND CASH EQUIVALENTS - end $ 566,345 $ 85,543 ========= ========= CASH PAID DURING THE YEAR FOR: Interest expense $ 7,196 $ 13,872 ========= ========= Income taxes $ -- $ -- ========= ========= The accompanying notes are an integral part of the financial statement. F-24 iVOICE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) YEARS ENDED DECEMBER 31, 2002 AND 2001 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES For the Year Ended December 31, 2002 ------------------------------------ a) During the year ended December 31, 2002, the Company issued 10,000 shares of Class A common stock as partial payment for leasehold improvements valued at $540. b) During the year ended December 31, 2002, the Company issued 2,250,000 shares of Class A common stock for legal services valued at $45,000. c) During the year ended December 31, 2002, the Company issued 26,000,000 shares of Class A common stock for consulting services valued at $29,380. d) During the year ended December 31, 2002, the Company issued 6,200,000 shares of its Class A common stock for fees and services associated with the financing agreement with Cornell Capital, LP, valued at $117,800. e) During the year ended December 31, 2002, the Company retained 600,000 shares of Class A common stock previously issued to an employee as compensation. These shares were deemed as not having been vested with the terminated employee and were recorded as treasury stock at a value of $28,800. f) During the year ended December 31, 2002, the Company issued 22,229,230 shares of Class A common stock for the conversion of $79,000 in debenture principal and 4,279,750 shares of Class A Common Stock for the conversion of $93,085 in accrued interest on its outstanding 12% Convertible Debentures. g) During the year ended December 31, 2002, the Company issued 505,921 shares of its Class A common stock for the repayment of $15,000 in principal and 84,766 shares of Class A Common Stock for the conversion of $2,594 in accrued interest on its 8% Convertible Debentures. h) During the year ended December 31, 2002, the Company issued 173,362,846 shares of Class A common stock with a total value of $253,665. Of this amount, $235,333 was for repayment of principal on $470,000 of notes payable, issued as advances on the equity line financing with Cornell Capital Partners, LP. The balance of $18,332 was market discount charged to expense. i) During the year ended December 31, 2002, the Company issued 129,645,133 shares of Class A common stock upon conversion of $185,000 in principal and 3,915,218 shares of Class A Common Stock for the conversion of $4,725 in accrued interest on its 5% Convertible Debentures. j) During the year ended December 31, 2002, the Company issued 1,504,875 shares of Class B common stock upon conversion of $1,504,875 in amounts due to related parties. The accompanying notes are an integral part of the financial statement. F-25 iVOICE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) YEARS ENDED DECEMBER 31, 2002 AND 2001 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES - Continued For the Year Ended December 31, 2001 - ------------------------------------ a) The Company issued 15,194,287 shares of its Class A Common Stock for services valued at $1,062,055. Of these shares, the company has registered for resale with the U.S. Securities and Exchange Commission, 10,600,000 shares during the year ended December 31, 2001. b) The Company issued 2,183,834 restricted shares of its Class A Common Stock as compensation to Company employees valued at $234,431. c) 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) 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) 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) The Company issued 2,892,628 shares of its Class A Common Stock for the repayment of $142,200 in principal on its 12% Convertible Debentures. g) The Company issued 6,936,576 shares of its Class A Common Stock for the repayment of $260,000 in principal on its 8% Convertible Debentures h) The Company issued 317,526 shares of its Class A Common Stock for interest on its 8% and 12% Convertible Debentures valued at $13,883. i) The Company issued $425,000 of its 8% Convertible Debentures exercisable at an 80% conversion price. The 20% conversion discount totaling $106,250 was recorded as interest expense. The accompanying notes are an integral part of the financial statement. F-26 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- a) Basis of Presentation --------------------- The accompanying consolidated financial statements include the accounts of iVoice, Inc. (the "Company" or "iVoice"), and its wholly owned subsidiaries. iVoice, Inc. formerly known as Visual Telephone International, Inc. ("Visual") was incorporated under the laws of Utah on December 2, 1995, subsequently changed to Delaware. 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 and the name of the Company was changed to iVoice.com, Inc. 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.com, Inc. 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. On August 24, 2001, the Company amended its certificate of incorporation to change its name to iVoice, Inc. from iVoice.com, Inc. The Company is publicly traded and is currently traded on the Over The Counter Bulletin Board ("OTCBB") under the symbol "IVOC". b) Principles of Consolidation --------------------------- The accompanying consolidated financial statements include the accounts of the Company and its inactive subsidiaries iVoice Acquisition 1, Inc. and iVoice Acquisition 2, Inc. All significant intercompany transactions and balances have been eliminated in consolidation. c) Line of Business ---------------- The Company is a communication company primarily engaged in the development, manufacturing and marketing of voice recognition and computerized telephony systems for small-to-medium sized businesses and corporate departments. The Company's technology allows businesses to communicate more efficiently and effectively by integrating speech recognition into their traditional office telephone systems with voicemail, automated attendant and Interactive Voice Response ("IVR") functions. IVR products allow information in PC databases to be accessed from a standard touch-tone telephone system. The Company sells its products directly to business customers and through Dealer and Reseller channels throughout the United States. F-27 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 d) Use of Estimates ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. e) Revenue Recognition ------------------- The Company obtains its income primarily from the sale of its voice recognition and computer technology communication systems. Revenue for systems that 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 asset, "Costs and estimated earnings in excess of billings" represents revenue recognized in excess of the amount billed. The liability, "Billings in excess of costs and estimated earnings" represents billings in excess of revenues recognized. 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 or support. f) Advertising Costs ----------------- Advertising costs are expensed as incurred and are included in selling expenses. For the years ended December 31, 2002 and 2001, advertising expense amounted to $19,254 and $42,006, respectively. g) Cash and Cash Equivalents ------------------------- The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. h) 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. i) 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-28 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 j) 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. k) Software License Cost --------------------- Software license costs are recorded at cost, which approximates fair market value as of the date of purchase. These costs represent the purchase of various exploitation rights to certain software, pre-developed codes and systems patented by Parwan Electronics, Corp. ("Parwan"), a non-related third party. These costs are capitalized pursuant to Statement of Financial Accounting Standards ("SFAS") 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", and are being amortized using the straight-line method over a period of five years. As described later in Note 1, 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, 2002. l) 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. m) Financing Costs --------------- Financing costs consist primarily of professional fees and various paid commissions relating to the issuance of the Company's convertible debentures and equity credit lines. These costs are expensed as incurred. n) Debt Issue Costs ---------------- Debt issue costs represent the estimated cost of the conversion discount feature relating to the issuance of the Company's convertible debentures. In previous years, these costs were amortized and charged to interest expense over the life of the debt. During the year ended December 31, 2001, the Company charged to expense the fair value of the beneficial conversion features of the convertible debt as measured at the date of issuance in accordance with Emerging Issues Task Force (EITF) Issue 98-5. The switch to this method of accounting did not have a material affect on the Company's financial statements. o) Fair Value of Financial Instruments ----------------------------------- The carrying value of cash and cash equivalents, accounts receivable, inventory, accounts payable, accrued expenses and deferred revenue approximates fair value due to the relatively short maturity of these instruments. F-29 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 p) 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. q) 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, ----------------- 2002 2001 ---- ---- Basic and Diluted EPS Purposes 238,826,772 125,732,776 =========== =========== r) 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, 2002 and 2001, the Company has no items that represent comprehensive income, and thus, has not included a statement of comprehensive income. s) Recent Accounting Pronouncements -------------------------------- SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information" requires that a public company report financial and descriptive information about its reportable operating segments. It also requires that an enterprise report certain information about its products and services, the geographic areas in which they operate and their major customers. In determining the requirements of this pronouncement, Management believes that there is no materially reportable segment information with respect to the Company's operations and does not provide any segment information regarding products and services, major customers, and the material countries in which the Company holds assets and reports revenue. F-30 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 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. SFAS No. 142, "Goodwill and Other Intangible Assets" requires goodwill to be tested for impairment under certain circumstances, and written off when impaired, rather than being amortized as previous standards require. In accordance with the requirements of this pronouncement, the Company has assessed the value of the intangible assets reflected as goodwill on its books and has determined that no future benefit for these assets exists. Accordingly, management has expensed a total of $175,833 in the year ending December 31, 2002, related to the carrying value of its goodwill and is separately stated in the Consolidated Statement of Operations. 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 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 pronouncement and therefore believes that adoption will not have a material effect on financial condition or operating results. SFAS No. 145 - "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Under SFAS No. 4, all gains and losses from extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. This Statement eliminates SFAS No. 4 and, thus, the exception to applying APB No. 30 to all gains and losses related to extinguishments of debt. As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in APB No. 30. Applying the provisions of APB No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for F-31 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 classification as an extraordinary item. The Company does not expect the adoption of SFAS No. 145 to have a material impact on its financial position or results of operations. SFAS No. 146 - "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between this Statement and EITF 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability was recognized at the date of an entity's commitment to an exit plan. This Statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a material impact on its financial position or results of operations. SFAS No. 147 - "Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9," which applies to the acquisition of all or part of a financial institution, except for a transaction between two or more mutual enterprises. SFAS No. 147 removes the requirement in SFAS No. 72 and Interpretation 9 thereto, to recognize and amortize any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset. This statement requires that those transactions be accounted for in accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." In addition, this statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include certain financial institution-related intangible assets. This statement is effective for acquisitions for which the date of acquisition is on or after October 1, 2002, and is not applicable to the Company. SFAS No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure." This statement was issued to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for financial statements for fiscal years ending after December 15, 2002. This statement does not have any impact on the Company because the Company does not plan to implement the fair value method. NOTE 2 - GOING CONCERN - ---------------------- The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which F-32 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 contemplates continuation of the Company as a going concern. As of December 31, 2002 and 2001, the Company had a net loss, a negative cash flow from operations as well as negative working capital. These matters raise substantial doubt about the Company's ability to continue as a going concern. Therefore, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated 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/or generate positive cash flows from operations. To date, the Company has funded its operations through the issuance of convertible debt, sales of its Class A Common Stock and loans from its principal stockholder, the proceeds of which are derived from sales of this principal stockholder's personal holdings of the Company's Class A Common Stock. The Company has incurred accumulated net losses totaling $14,490,329 through the year ended December 31, 2002, and had a cash balance of $566,345 as of that date. Considering expected cash requirements for the up coming year, there is substantial doubt as to the Company's ability to continue operations. The Company believes that its condition resulted from the inherent risks associated with small technology companies. Such risks include, but are not limited to, the ability to: a) generate sales of its product at levels sufficient to cover its costs and provide a return for investors, b) attract additional capital in order to finance growth, c) further develop and successfully market commercial products and d) successfully compete with other technology companies having financial, production and marketing resources significantly greater than those of 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. In June 2002, the Company entered into financing agreement with Cornell Capital Partners, LP that will require the issuance of additional equity as described in Note 7 of these financial statements. Management believes that appropriate funding will be generated by the financing agreement with Cornell enabling the Company to continue operations through the current fiscal year. Management is also confident that future product sales will generate necessary cash flow, reducing the Company's need for additional financing. It should be noted however, that no assurance can be given that these future sales will materialize or that additional necessary funding can be raised. In an effort to reach profitability and become less dependent on its requirement to finance continuing operations, the Company is working to increase its revenue and profit margins through the establishment of its own dealer and reseller channel. Management has determined that addressing the following areas, as they relate to innovation, reliability and marketability of the Company's products, are crucial to reaching profitability: F-33 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 o Accuracy of its core speech recognition technology. o Creating desired user features that distinguish the Company's products form the competition. o Obtaining an agreement with an Original Equipment Manufacturer (OEM) to include the Company's products in every unit the manufacturer ships. Management believes that leveraging already existing equipment manufacturers reseller channels will provide an avenue to distribute software only, providing greater profit margins than complete turnkey systems, which involve purchasing and sub-assembly of hardware components. Management has also introduced several new user features to its Speech Enabled Auto Attendant that sets this product apart from competition. The introduction of an entirely TAPI (Telephone Application Program Interface) based Speech-enabled Auto Attendant and Name Dialer, allows iVoice applications to integrate into different PBX systems without the need for additional hardware devices. These feature and integration changes should provide for greater appeal to telephony re-sellers allowing for more economical customer installations with no reduction in the prices iVoice charges for its own software. Furthermore, the Company intends to add sales personnel in the upcoming fiscal year to increase its efforts in establishing relationships with OEMs. Management considers good working relationships with manufacturers will assist in the promotion of iVoice products to the manufacturers authorized re-seller networks. NOTE 3 - PROPERTY AND EQUIPMENT - ------------------------------- Property and equipment is summarized as follows: December 31, ------------ 2002 2001 -------- -------- Equipment $ 62,443 $ 59,524 Leasehold improvements 11,454 10,184 Furniture and fixtures 123,394 123,394 -------- -------- 197,291 193,102 Less: Accumulated depreciation 127,105 86,517 -------- -------- Property and equipment, net $ 70,186 $106,585 ======== ======== Depreciation expense for the years ended December 31, 2002 and 2001 was $40,588 and $39,164, respectively. NOTE 4 - GOODWILL AND INTANGIBLES - --------------------------------- During the year ended December 31, 2002, the Company has assessed the value of the intangible assets reflected as goodwill on its books and has determined that no future benefit for these assets exists in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". Under this pronouncement, goodwill and other intangible assets are F-34 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 tested for impairment under certain circumstances, and written off when impaired, rather than being amortized as previous standards require. Accordingly for the year ended December 31, 2002, management has expensed a total of $175,833, related to goodwill recorded in connection with the merger with ThirdCAI, Inc. Total remaining intangible assets, consisting of costs associated with the Company's patent applications amounted to $97,486. At December 31, 2001, intangible assets totaled $271,299 net of accumulated amortization of $21,024. NOTE 5 - COSTS IN EXCESS OF BILLINGS/BILLINGS IN EXCESS OF COSTS - ---------------------------------------------------------------- Costs in excess of billings/(billings in excess of costs and estimated earnings) on uncompleted contracts as of December 31, 2002 and 2001 consists of the following: December 31, ------------ 2002 2001 ---------- ---------- Costs incurred on uncompleted contracts $ 40,637 $ 56,385 Estimated earnings 87,030 53,763 ---------- ---------- 127,667 110,148 Less billings to date 103,889 136,551 ---------- ---------- $ 23,778 $ (26,403) ========== ========== NOTE 6 - INCOME TAXES - --------------------- The reconciliation of the effective income tax rate to the Federal statutory rate is as follows: Federal Income Tax Rate (34.0)% Deferred Tax Charge (Credit) - Effect on Valuation Allowance 38.7 % State Income Tax, Net of Federal Benefit (4.1)% ------- Effective Income Tax Rate 0.0% ======= As of December 31, 2002 and 2001, the Company had net operating loss carry forwards of approximately $8,800,000 and $6,900,000, respectively that can be utilized to offset future taxable income for Federal income tax purposes through 2015. Utilization of these net loss carry forwards is subject to the limitations of Internal Revenue Code Section 382. Because of the current uncertainty of realizing the benefit of the tax carry forward, a valuation allowance equal to the tax benefit for deferred taxes has been established. The full realization of the tax benefit associated with the carry forward depends predominantly upon the Company's ability to generate taxable income during the carry forward period. For state income taxes, the Company's net operating loss carry forwards have been reduced by $2,972,044. During the year ended 2002, the company participated in the Technology Tax Certificate Transfer Program sponsored by the New Jersey Economic Development Authority and the State of New Jersey. Under the program, eligible businesses may sell their unused net-operating-loss carry forwards and unused research and development tax-credit F-35 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 carry forwards to any corporate taxpayer in the State of New Jersey for at least 75% of the value of the tax benefits. After related commissions and expenses related to application submission the Company received cash proceeds of $152,474. 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 ----------- 2002 2001 ----------- ----------- Net Operating Loss Carry forwards $ 3,430,000 $ 2,630,000 Less: Valuation Allowance (3,430,000) (2,630,000) ----------- ----------- Net Deferred Tax Assets $ - $ - =========== =========== Net operating loss carry forwards expire starting in 2007 through 2017. NOTE 7 - NOTE PAYABLE - --------------------- In August and November, 2002 the Company issued promissory notes payable to Cornell Capital Partners, LP totaling $470,000 for advances on the equity-line financing agreement entered into with Cornell in June, 2002. The note maturities range from 120 to 150 days from the date of issue with interest accruing at rates ranging from 8% to 12%per annum on any balance left unpaid after the maturity date. It is anticipated that the outstanding notes will be fully repaid with Class A common stock issuable under the equity-line financing agreement with Cornell Capital. At December 31, 2002, a total of $235,333 has been repaid through the issuance of 173,362,846 Class A common shares leaving an unpaid balance of $234,667. NOTE 8 - DUE TO RELATED PARTIES - ------------------------------- Due to related parties consisted of amounts due to the officers of the company as follows: 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, which accrues interest at 9.5% per year on the unpaid balance. On August 13, 2002, the board of directors approved amendments to the Promissory Note payable to Mr. Mahoney for monies loaned to the Company from the proceeds of stock sales of personal holdings of iVoice Class A common stock, unpaid compensation, income taxes incurred from the sale of Company stock and unreimbursed expenses. The F-36 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 change allows for the conversion of amounts due under the Promissory Note into either (i) one Class B common stock share of iVoice, Inc., no par value, for each dollar owed, or (ii) the number of Class A common stock shares of iVoice, Inc. calculated by dividing (x) the sum of the principal and interest that the Note holder has decided to prepay by (y) fifty percent (50%) of the lowest issue price of Series A common stock since the first advance of funds under this Note, whichever the Note holder chooses, or (iii) payment of the principal of this Note, before any repayment of interest. On October 14, 2002, Mr. Mahoney converted $1,504,875 of the amounts owed to him into 1,504,875 shares of Class B common stock. As of December 31, 2002 and 2001, the remaining outstanding balance owed to Mr. Mahoney amounted to $547,926 and $1,821,610. Also included in amounts due to related parties was unpaid compensation to Kevin Whalen, the Company's Chief Financial Officer. Effective May 1, 2001, Mr. Whalen was granted a salary increase of $20,000. To date, this annual salary increase, as well as a bonus of $34,000 for the year-end December 31, 2001, has been accrued, with the repayment terms as to be mutually agreed upon between the Company and Mr. Whalen. At December 31, 2002 and 2001, total amounts due to Mr. Whalen totaled $67,333 and $47,333 respectively. NOTE 9 - CONVERTIBLE DEBENTURES - ------------------------------- The Company has previously issued three series of convertible debentures as follows: In October 1999, the Company's issued convertible debentures totaling $500,000 bearing interest at 12% per annum and payable on December 1, 2000. The 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, 2002, $384,200 in principal and $99,644 in accrued interest had been converted into 30,463,005 shares of the Company's Class A Common Stock. Total outstanding principal balance of the 12% convertible debentures at December 31, 2002 and 2001 respectively was $115,800 and $194,800 plus accrued interest of $23,519 and $82,514. In 2001, the Company issued convertible debentures totaling $425,000 bearing interest at 8% and maturing 5 years from the date of issue. The 8% debentures are convertible into Class A common shares at the lesser of (i) 140% of the closing bid price for the Common Stock on the Closing Date, or (ii) 80% of the average of the three lowest closing bid for the 22 trading days immediately preceding the date of conversion. As of December 31, 2002, all outstanding principal of the 8% debentures and $9,918 in accrued interest had been converted into 7,740,679 shares of the Company's Class A Common Stock. Total F-37 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 outstanding principal balance of the 8% convertible debentures at December 31, 2001 was $165,000 plus accrued interest of $3,936. On June 11, 2002, the Company entered into a subscription agreement with certain purchasers to issue $255,000 in convertible debentures, with interest payable at 5% per annum. The notes are convertible into the Company's Class A common stock at a price equal to either (a) an amount equal to one hundred twenty percent (120%) of the closing bid price for the Common Stock on the Closing Date, or (b) an amount equal to eighty percent (80%) of the average of the four (4) lowest Closing Bid Prices of the Common Stock for the five (5) trading days immediately preceding the Conversion Date. As of December 31, 2002, the Company had issued 129,645,133 shares of Class A common stock for the conversion of $185,000 in debenture principal and $4,725 in accrued interest. The Company also repaid the remaining $70,000 in debenture principal with a 20% premium in cash, from proceeds of an advance on the equity line financing with Cornell Capital Partners, LP as discussed in Note 6. 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 the default, the amount of which is undeterminable at this time. NOTE 10 - 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, 2002 are follows: 2002 2001 -------- ------- Lease payable for computer equipment, payable at $1,367 per month, including interest at 22.31%. Final payment is due June 2003. $ 7,693 $20,749 F-38 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 Lease payable for furniture, payable at $2,151 per month, including interest at 20.79%. Final payment due April 2003. 6,235 28,197 -------- ------- Present value of net minimum lease payments $ 13,928 $48,946 ======== ======= The future minimum lease payments $ 14,653 $56,864 Less amount representing interest 725 7,918 Present value of net minimum lease payments 13,928 48,946 Less current portion 13,928 35,108 Long term capital lease obligations $ - $13,928 ======== ======= NOTE 11 - COMMITMENTS AND CONTINGENCIES - --------------------------------------- a) The Company leases its headquarters located at 750 Highway 34, Matawan, New Jersey. 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. On December 5, 2001, the Company renegotiated this lease into an eight-month term requiring monthly payments of $7,000 and reduced the space it occupies. Effective September 15, 2002, the lease became a month-to-month obligation of $8,000 per month. The Company maintains a good relationship with its landlord and believes that its current facilities will be adequate for the foreseeable future. Rent expense under operating leases for the year ended December 31, 2002 and 2001 was $96,868 and $176,560, respectively. 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, ----------- 2003 $ - ========== b) 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. c) The Company filed suit against PanAm Wireless, Inc., the parent company of Celpage, Inc., for the installation of a 196-port IVR System to recover the balance of a system installation contract. PanAm Wireless, Inc. subsequently filed a counterclaim against iVoice alleging iVoice's failure to supply PanAm with the required equipment and that the system did not provide the services as specified in the F-39 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 purchase order. The case has presently been dismissed in court and the parties are preparing to enter into mutual releases from any further obligations of performance under the original contract. As a result, in the year ended December 31, 2002, the Company has expensed $67,650 previously reflected in other receivables related to this transaction. d) In June 2002, the Company entered into an Equity Line of Credit with Cornell Capital Partners, L.P. Pursuant to the Equity Line of Credit, the Company may, at its discretion, periodically sell to Cornell Capital Partners shares of Class A common stock for a total purchase price of up to $5.0 million to raise capital to fund our working capital needs. For each share of Class A common stock purchased under the Equity Line of Credit, Cornell Capital Partners will pay 91% of the 5 lowest closing bid prices on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the 5 days immediately following the notice date. Pursuant to the agreement with Cornell Capital Partners, LP, we registered for resale on Form SB-2, shares of Class A common stock with the Securities and Exchange Commission which was filed on July 2, 2002 and later amended on August 8, 2002. On August 14, 2002, the Securities and Exchange Commission declared the Form SB-2 filed effective. The offering will terminate 24 months after the Securities and Exchange Commission declares the registration statement effective. Through December 31, 2002, we issued $470,000 in promissory notes for advances on the equity-line of credit with Cornell as described in Note 6 of these financial statements. e) The Company's assets are subject to a Security Agreement with the majority stockholder. See Note 7. NOTE 12 - 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 December 31, 2002: 600,000,000 shares of authorized common stock with a par value of $.001, 518,691,163, shares were issued and 518,091,163 shares were outstanding. Each holder of Class A Common stock is entitled to receive ratably dividends, if any, as may be declared by the Board of Directors out of funds legally available for the payment of dividends. The Company has never paid any dividends on its Common Stock and does not contemplate doing so in the foreseeable future. The Company F-40 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 anticipates that any earnings generated from operations will be used to finance the growth objectives. For the year ended December 31, 2002, the Company had the following transactions in its Class A Common Stock: 1. The Company issued 10,000 shares of its Class A Common Stock for partial payment of leasehold improvements valued at $540. 2. The Company issued 2,250,000 shares of Class A Common Stock for legal services valued at $45,000. 3. The Company issued 26,000,000 shares of Class A Common Stock for consulting services valued at $29,380. 4. The Company issued 505,921 shares of Class A Common Stock for the conversion of $15,000 in debenture principal and 84,766 shares for $2,594 in accrued interest on its 8% Convertible Debentures. 5. The Company issued 22,229,230 shares of Class A Common Stock for the conversion of $79,000 in debenture principal and 4,279,750 shares of Class A Common Stock for the conversion of $93,085 in accrued interest on its outstanding 12% Convertible Debentures. 6. The Company issued 6,200,000 shares of Class A common stock for fees and services associated with the financing agreement with Cornell Capital, LP, valued at $117,800. 7. The Company issued 125,729,915 shares of Class A common stock for the conversion of $185,000 in debenture principal and 3,915,218 shares of Class A Common Stock for the conversion of $4,725 in accrued interest on its 5% Convertible Debentures. 8. The Company issued 173,362,846 shares of Class A common stock for repayment of $235,333 in principal and $18,332 in discount on $470,000 of notes payable issued for advances on the equity line financing with Cornell Capital Partners, LP b) Class B Common Stock -------------------- Class B Common Stock consists of 3,000,000 shares of authorized common stock with no par value. Class B stock has voting rights of 100 to 1 with respect to Class A Common Stock. As of December 31, 2002, 2,204,875 shares were issued; and 1,858,875 shares were outstanding. Class B common stockholders are not entitled to receive dividends. F-41 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 For the year ended December 31, 2002, the Company had the following transactions in its Class B Common Stock: 1. The Company issued 1,504,875 shares of Class B common stock upon conversion of $1,504,875 in amounts due to related parties c) Preferred Stock --------------- Preferred Stock consists of 1,000,000 shares of authorized preferred stock with $1.00 par value. As of December 31, 2002, no shares were issued or outstanding. NOTE 13 - STOCK OPTIONS - ----------------------- During 2002, the Company issued various options as follows: a) On August 23, 2002, the Company issued to one of its employees, options to purchase 5,000,000 shares of iVoice Class A Common Stock at a price of $.009 per share. The options vest at 25% per year and expire five-years from the date of issue. During 2001, the Company issued various options as follows: a) The Company issued to its employees, options to purchase 1,655,000 shares of iVoice Class A Common Stock at an average price of $.076 per share. Of these options, 255,000 were cancelled due to employee terminations in 2001. The remaining options vest at 25% per year and have a five-year expiration from date of issue. b) Warrants to purchase 404,510 shares of iVoice Class A Common Stock with an average exercise price of $.1220, to Swartz Private Equity, LLC as drawdown fees under the financing agreement with them. The warrants expire five years from the date of issue. c) Warrants to purchase a total of 343,750 shares of iVoice Class A Common Stock with an exercise price of $.1323 to Owen May and Michael Jacobs of the May Davis Group as a fee for the placement of the Company's 8% convertible debentures, pursuant to a subscription agreement with them. The warrants expire five years from the date of issue. d) Warrants to purchase 18,000,000 shares of iVoice Class A Common Stock with an exercise price of $.055 to the EMCO\Hanover Group, Inc. pursuant to a consulting agreement with them. The warrants were exercised and are reflected as a subscription receivable. See Note 10 regarding shares issued for exercise of this warrant. e) On November 15, 2001, the Company issued warrants to purchase a total of 250,000 shares of iVoice Class A Common Stock at $.047 per share to Beacon Capital LLC in consideration for the placement of $150,000 of the Company's 8% convertible F-42 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 debentures pursuant to an subscription agreement with them. The warrants are exercisable at any time prior to their five (5) year expiration and carry a cash or cashless exercise at the option of the holders. a) Options outstanding, except options under employee stock option plan, are as follows as of December 31, 2002: Expiration Date Exercise Price Shares --------------- -------------- ------ December 22, 2003 .1000 10,000 January 5, 2004 .1200 10,000 January 21, 2004 .1177 10,000 February 5, 2004 .1430 10,000 March 17, 2004 .0869 15,000 April 6, 2004 .0583 15,000 August 17, 2005 .1406 5,490,000 January 9, 2006 .1045 200,000 February 27, 2006 .1406 87,310 February 28, 2006 .1458 78,000 March 13, 2006 .1221 39,200 April 30, 2006 .1323 343,750 November 14, 2006 .0470 250,000 --------- 6,558,260 Employee Stock Option Plan -------------------------- During the year ended December 31, 1999, 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 years. During 1999, 20,000,000 shares were reserved for future issuance under the plan. As of December 31, 2002, 16,559,000 options to purchase shares were granted. A total of 9,000,000 of these granted options were exercised. At December 31, 2002, a total of 6,891,083 options to purchase Class A common shares were outstanding and held by company employees. The exercise prices range from $0.009 to $3.75 per share. All options issued to employees vest at 25% per year and expire in 5 years. The following employee options have been exercised to date: 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 F-43 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 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: For The Year Ended, December 31, 2002 2001 ----------- ----------- Net Loss As Reported $(2,059,460) $(3,447,434) =========== =========== Proforma $(2,506,143) $(3,848,540) =========== =========== Basic Loss Per Share As Reported $ (.02) $ (.03) =========== =========== Proforma $ (.02) $ (.03) =========== =========== 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, 2002 and 2001: dividend yield of 0%; expected volatility of 320%; risk-free interest rates of 4.30% and 5.50% respectively; and expected life of 4.21 and 4.05 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, 2001 764,000 $ .670 5,960,000 $ 0.456 Granted 1,795,000 $ .078 18,998,260 $ 0.058 Exercised -- $ .000 (18,000,000) $ 0.040 Canceled (612,917) $ .246 (400,000) $ 1.328 ----------- --------- ----------- ---------- F-44 iVOICE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002 AND 2001 Balance, December 31, 2001 1,946,083 $ .257 6,558,260 $ 0.135 Granted 5,000,000 $ .009 -- $ 0.000 Exercised -- $ .000 -- $ 0.000 Canceled (55,000) $ .023 (--) $ 0.000 ----------- --------- ----------- ---------- Balance, December 31, 2002 6,891,083 $ .077 6,558,260 $ 0.135 =========== ========= =========== ========== Outstanding and Exercisable, December 31, 2001 265,583 $ .576 6,558,260 $ 0.135 =========== ========= =========== ========== Outstanding and Exercisable, December 31, 2002 705,333 $ .369 6,558,260 $ 0.135 =========== ========= =========== ==========
NOTE 13 - SUBSEQUENT EVENTS - --------------------------- On January 13, 2003, the Company amended its certificate of incorporation in the state of Delaware to: a) Increase the number of Authorized Class A Common Stock Shares to a total of ten billion (10,000,000,000) shares. b) Change the stated par value of the Class A Common Stock Shares from $.001 to $.0001 per share. c) Increase the number of Authorized Class B Common Stock Shares to a total of fifty million (50,000,000) shares. d) Revise the conversion ratio and voting rights of Class B Common Stock Shares whereby upon conversion, each share of Class B Common Stock is convertible into Class A Common Stock Shares calculated by dividing the number of Class B Common Stock Shares being converted by fifty percent (50%) of the lowest price that the Company had previously issued its Class A Common Stock since the Class B Common Stock Shares were issued. e) Permit Class B Common Stock Shares to receive dividends upon the declaration of a dividend to Class A Common Stock shareholders. F-45 We have not authorized any dealer, salesperson or other person to provide any information or make any representations about iVoice, Inc. except the information or representations contained in this prospectus. You should not rely on any additional information or representations if made. ----------------------- This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy any securities: --------------- o except the Class A common stock offered by this prospectus; PROSPECTUS o in any jurisdiction in which the offer --------------- or solicitation is not authorized; o in any jurisdiction where the dealer or 4,700,000,000 Shares of other salesperson is not qualified to Class A Common Stock make the offer or solicitation; o to any person to whom it is unlawful to IVOICE, INC. make the offer or solicitation; or o to any person who is not a United States resident or who is outside the jurisdiction of the United States. The delivery of this prospectus or any accompanying sale does not imply that: ---------- o there have been no changes in the affairs of iVoice, Inc. after the date of this prospectus; or o the information contained in this prospectus is correct after the date of this prospectus. ----------------------- Until __________, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS iVoice, Inc.'s bylaws provide that it has the power to indemnify any officer or director against damages if such person acted in good faith and in a manner the person reasonably believed to be in the best interests of iVoice, Inc. No indemnification may be made (i) if a person is adjudged liable unless a court determines that such person is entitled to such indemnification, (ii) with respect to amounts paid in settlement without court approval or (iii) expenses incurred in defending any action without court approval. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth estimated expenses expected to be incurred in connection with the issuance and distribution of the securities being registered. iVoice, Inc. will pay all expenses in connection with this offering. Securities and Exchange Commission Registration Fee $ 1,103 Printing and Engraving Expenses $ 3,000 Accounting Fees and Expenses $ 5,000 Legal Fees and Expenses $ 17,000 Miscellaneous $ 3,897 --------- TOTAL $ 30,000 ========= ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES iVoice, Inc. issued the unregistered securities set forth below during the past three years. iVoice, Inc. relied upon the exemption provided in Section 4(2) of the Securities Act and/or Rule 506 thereunder, which cover "transactions by an issuer not involving any public offering," to issue securities discussed above without registration under the Securities Act of 1933. iVoice made a determination in each case that the person to whom the securities were issued did not need the protections that registration would afford. The certificates representing the securities issued displayed a restrictive legend to prevent transfer except in compliance with applicable laws, and our transfer agent was instructed not to permit transfers unless directed to do so by iVoice, after approval by its legal counsel. iVoice believes that the investors to whom securities were issued had such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment. iVoice also believes that the investors had access to the same type of information as would be contained in a registration statement. On January 2, 2004, iVoice, Inc. issued 300,000,000 shares of Class A common stock to Cornell Capital Partners, L.P. as a one-time commitment fee pursuant to the equity standby distribution agreement dated December 31, 2003 between iVoice, Inc. and Cornell Capital Partners, L.P., with respect to which this registration statement relates in part. On January 2, 2004, iVoice, Inc. issued 3,030,303 shares of Class A common stock to CapStone Investments, as payment for its services as placement agent in connection with the equity standby distribution agreement dated December 31, 2003 between iVoice, Inc. and Cornell Capital Partners, L.P., with respect to which this registration statement relates in part. On January 2, 2004, iVoice, Inc. issued 3,030,303 shares of Class A common stock to the law firm of Butler Gonzalez LLP, as partial payment for its services as escrow agent in connection with the equity standby distribution agreement dated December 31, 2003 between iVoice, Inc. and Cornell Capital Partners, L.P., with respect to which this registration statement relates in part. Nine Months Ended September 30, 2003 On January 21, 2003, iVoice issued 44,000,000 shares of Class A common stock upon conversion of 22,000 shares of Class B common stock. On February 14, 2003, iVoice issued 35,000,000 shares of its Class A Common Stock to Bruce Barren for consulting services rendered valued at $35,000. On April 1, September 4 and September 29, 2003, iVoice issued 50,000,000 shares, 25,000,000 shares and 25,000,000 shares respectively, of its Class A Common Stock to Stone Street Advisors for consulting services rendered valued at $242,000. On April 22, 2003, iVoice issued 90,909,090 shares of Class A common stock upon conversion of 8,000 shares of Class B common stock. On June 9, 2003, iVoice issued 180,327,869 shares of Class A common stock upon conversion of 11,000 shares of Class B common stock. II-1 On July 30, 2003, iVoice issued 100,000,000 shares of its Class A Common Stock to Chris Benz for consulting services rendered valued at $38,000. On September 4, 2003, iVoice issued 2,724,337 shares of its Class A common stock for the repayment of $4,087 in interest on notes payable issued for advances on the equity line financing with Cornell Capital Partners, L.P. On September 4, 2003, iVoice issued 295,081,967 shares of Class A common stock upon conversion of 18,000 shares of Class B common stock. On September 8, 2003, and September 29, 2003, iVoice issued 55,343,448 shares and 3,061,756 shares, respectively, of its Class A common stock to the holders of its 12% convertible debentures for the conversion of interest valued at $24,497. On various dates from the period beginning January 1, 2003 and September 30, 2003, iVoice issued 466,859,715 shares of Class A Common Stock to the holders of its 12% convertible debentures for the conversion of $115,800 in debenture principal. On various dates from the period beginning January 1, 2003 and September 30, 2003, iVoice issued 2,091,176,408 shares of Class A common stock for repayment of $1,849,418 in advances on the equity line financing with Cornell Capital Partners, LP. Of that amount, $1,684,668 represents principal and $164,750 represents market discount on notes payable issued as advances. Year Ended December 31, 2002 In August and November 2002, we borrowed a total of $470,000 from Cornell Capital partners, which amounts are evidenced by two promissory notes. One note was issued in August 2002 in the principal amount of $250,000. This note is due 120 days after issuance. This note bears interest at 8% per year if not paid by the maturity date. The second note was issued in November 2002 in the principal amount of $220,000. This note is due 150 days after issuance. This note bears interest at 12% per year if not paid by the maturity date. As of January 15, 2003, iVoice owed Cornell Capital Partners an aggregate of $179,671 under these two promissory notes. The proceeds under these notes represent advances under the Equity Line of Credit that will be repaid through the issuance of Class A common stock pursuant the terms of the Equity Line of Credit agreement. iVoice issued 10,000 shares of its Class A common stock for partial payment of leasehold improvements valued at $540. iVoice issued 2,250,000 shares of Class A common stock for legal services valued at $45,000. iVoice issued 505,921 shares of Class A common stock for the conversion of $15,000 in debenture principal and 84,766 shares for $2,594 in accrued interest on its 8% Convertible Debentures. iVoice issued 7,229,230 shares of Class A common stock for the conversion of $64,000 in debenture principal and 4,279,750 shares of Class A Common Stock for the conversion of $93,085 in accrued interest on its outstanding 12% Convertible Debentures. iVoice issued 6,200,000 shares of its Class A common stock for fees and services associated with the financing iVoice issued 19,464,744 shares of its Class A common stock for the conversion of $71,483 in debenture principal on its 5% Convertible Debentures. iVoice issued 36,675,000 shares for repayment of $93,453 in principal on a $250,000 note payable issued for an advance on the equity line financing with Cornell Capital Partners, LP. On August 23, 2002, iVoice issued, to an employee, an option to purchase 5,000,000 shares of iVoice Class A common stock at a price of $.009 per share. The options vest at 25% per year and have a five-year expiration from date of issue. In June 2002, iVoice issued 5,500,000 shares of Class A common stock to Cornell Capital Partners, 500,000 shares of Class A common stock to Westrock Advisors and 200,000 shares of Class A common stock to Seth A Farbman, all in connection with the Equity Line of Credit. These shares were valued at $110,000, $10,000 and $4,000, respectively. II-2 In May 2002, iVoice issued 2,250,000 shares of Class A common stock to Lawrence A. Muenz for legal services rendered. These legal services were valued at $45,000. In April and May 2002, iVoice issued 2,741,331 shares of Class A common stock for the conversion of $29,823.64 of convertible debentures. In June 2002, we entered into an Equity Line of Credit with Cornell Capital Partners Pursuant to the Equity Line of Credit, we may, at our discretion, periodically sell to Cornell Capital Partners shares of Class A common stock for a total purchase price of up to $5.0 million. For each share of Class A common stock purchased under the Equity Line of Credit, Cornell Capital Partners will pay 91% of the lowest closing bid price on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the 5 days immediately following the notice date. Cornell Capital Partners is a private limited partnership whose business operations are conducted through its general partner, Yorkville Advisors, LLC. Further, Cornell Capital Partners will retain 5% of each advance under the Equity Line of Credit. In addition, iVoice engaged Westrock Advisors, Inc., a registered broker-dealer, to advise it in connection with the Equity Line of Credit. For its services, Westrock Advisors received 500,000 shares of iVoice's Class A common stock. On August 14, 2002, iVoice registered 399,500,000 shares of Class A common stock to be issued under the Equity Line of Credit. To date, iVoice has issued a total of 206,861,946 shares of Class A common stock under the Equity Line of Credit. iVoice received net proceeds of $290,329 from the sale of these shares under the Equity Line of Credit. Accordingly, iVoice has $4,709,671 available under the Equity Line of Credit. This prospectus relates to the offering of up to 5,000,000,000 additional shares of Class A commons tock under the Equity Line of Credit. The issuance of these shares is conditioned upon iVoice registering these shares with the Securities and Exchange Commission. In June 2002, iVoice raised $255,000 from the sale of convertible debentures. These debentures are convertible into shares of Class A common stock at a price equal to either (a) an amount equal to one hundred twenty percent (120%) of the closing bid price of the common stock as of the closing date or (b) an amount equal to eighty percent (80%) of the average closing bid price of the common stock for the four trading days immediately preceding the conversion date. These convertible debentures accrue interest at a rate of 5% per year and are convertible at the holder's option. These convertible debentures have a term of two years. All amounts outstanding under these convertible debentures have been redeemed. iVoice issued 129,645,133 shares of Class A common stock upon conversion of $189,725, the outstanding balance due under the debentures. Year Ended December 31, 2001. In the year ending December 31, 2001, iVoice issued the following unregistered securities pursuant to various exemptions from registration under the Securities Act of 1933: iVoice, Inc. issued 15,194,287 shares of Class A common stock for services valued at $918,905. iVoice, Inc. issued 9,829,204 shares of Class A common stock for the conversion of $402,201 in debenture principal and 317,576 shares of Class A common stock for $13,885 in accrued interest. iVoice, Inc. issued 2,128,000 shares of Class A common stock valued at $211,080 to settle disputes arising from financing agreements. iVoice, Inc. issued 1,172,000 shares of Class A common stock to Swartz Private Equity, LLC under the terms of a financing agreement for net proceeds of $129,931. iVoice, Inc. issued $425,000 of 8% Convertible Debentures exercisable at an 80% conversion price. The 20% conversion discount totaling $106,250 was recorded as interest expense. iVoice, Inc. issued 2,183,834 shares of our Class A common stock at various times during the year as compensation to employees valued at $234,432. On January 30, 2001, iVoice, Inc. issued 328,951 shares of our Class A common stock as repayment of amounts owed to related parties valued at $75,659. On November 20, 2001, iVoice, Inc. issued 1,000,000 shares of our Class A common stock for the conversion of 10,000 shares of our Class B common stock. During 2001, we issued the following options and warrants: II-3 o Options to purchase 1,655,000 shares of Class A common stock to employees at an average price of $0.076 per share. Of these options, 255,000 were cancelled due to employee terminations in 2001. The remaining options vest at 25% per year and have a five-year expiration from date of issue. o Warrants to purchase 404,510 shares of Class A common stock with an average exercise price of $0.1220, to Swartz Private Equity, LLC as draw-down fees under a financing agreement. The warrants expire five years from the date of issue. o Warrants to purchase a total of 343,750 shares of Class A common stock with an exercise price of $0.1323 to Owen May and Michael Jacobs of the May Davis Group as a fee for the placement of 8% convertible debentures, pursuant to a subscription agreement. The warrants expire five years from the date of issue. o Warrants to purchase 18,000,000 shares of Class A common stock with an exercise price of $0.055 to the EMCO\Hanover Group, Inc. pursuant to a consulting agreement with them. We issued 18,000,000 shares of Class A common stock for the exercise of this warrant. o Warrants to purchase a total of 250,000 shares of Class A common stock at $0.047 per share to Beacon Capital LLC in consideration for the placement of $150,000 of 8% convertible debentures pursuant to an subscription agreement. The warrants are exercisable at any time prior to their five year expiration and carry a cash or cashless exercise at the option of the holders. Year Ended December 31, 2000. On February 10, 2000, iVoice settled a $4,500,000 lawsuit by issuing 2,000,000 shares of Class A common stock. These shares were valued at $300,000 on the date of issuance. On January 10 and February 2, 2000, we issued $100,000 and $50,000, respectively, of 12% Convertible Debentures exercisable at a 50% conversion price. The 50% conversion discount totaling $150,000 was recorded as a prepaid debt issue cost and was amortized over the life of the debt. Debt issue costs represent the estimated cost of the conversion discount feature relating to the issuance of iVoice's convertible debentures. In previous years, these costs were amortized and charged to interest expense over the life of the debt. During the year ended December 31, 2001, iVoice charged to expense the fair value of the beneficial conversion features of the convertible debt as measured at the date of issuance in accordance with EITF Issue 98-5. The switch to this method of accounting did not have a material affect on iVoice's financial statements. During the year ended December 31, 2000, iVoice issued 848,718 shares of Class A common stock for services valued at $518,155. On April 24, 2000, iVoice issued 50,000 shares of Class A common stock to Corporate Architects, Inc. with a value of $46,875 as a referral fee for the purchase of ThirdCAI, Inc. During the year ended December 31, 2000, iVoice issued 80,000 shares of Class A common stock as compensation to employees valued at $69,938. During the year ended December 31, 2000, iVoice issued 9,000,000 shares of Class A common stock upon the exercise of options at $0.033 per share for a total of $297,000. During the year ended December 31, 2000, iVoice issued 33,600,000 shares of Class A common stock for the conversion of 336,000 shares of Class B common stock. During the year ended December 31, 2000, iVoice issued 1,007,287 shares of Class A common stock for the conversion of $163,000 in principal on its outstanding 12% convertible debentures. During the year ended December 31, 2000, iVoice issued 1,240,047 shares of Class A common stock for cash totaling $746,000. On August 17, 2000, in connection with a financing agreement with Swartz Private Equity, LLC, we issued a warrant to purchase 5,490,000 shares of Class A common stock at $0.484 per share. The warrant expires on August 16, 2005 and contains strike price reset provisions. II-4 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). 3.7 Certificate of Incorporation of iVoice, Inc., a New Jersey corporation (incorporated herein by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, filed with the SEC on May 12, 2003). 3.8 By-laws of iVoice, Inc., a New Jersey corporation (incorporated herein by reference to Exhibit 3.2 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, filed with the SEC on May 12, 2003). 4.1 Debenture No issued by iVoice.com, Inc. for $50,000 in 12% Secured Convertible Debenture Due December 1, 2000 to AJW Partners, LLC on October 29, 1999 (incorporated herein by reference to Exhibit 4.1 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 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). II-5 No. Description - --- ----------- 4.7 Debenture No. 7 issued by iVoice.com, Inc. for $50,000 in 12% Secured Convertible Debenture Due December 1, 2000 to New Millenium Capital Partners II, LLC on October 29, 1999 (incorporated herein by reference to Exhibit 4.7 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.8 Debenture No. 8 issued by iVoice.com, Inc. for $50,000 in 12% Secured Convertible Debenture Due December 1, 2000 to AJW Partners, LLC on October 29, 1999 (incorporated herein by reference to Exhibit 4.8 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.9 Debenture No. 9 issued by iVoice.com, Inc. for $25,000 in 12% Secured Convertible Debenture Due December 1, 2000 to New Millenium Capital Partners II, LLC on October 29, 1999 (incorporated herein by reference to Exhibit 4.9 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.10 Debenture No. 10 issued by iVoice.com, Inc. for $25,000 in 12% Secured Convertible Debenture Due December 1, 2000 to AJW Partners, LLC, on October 29, 1999 (incorporated herein by reference to Exhibit 4.10 of the registration statement on Form SB-2, filed with the SEC on November 17, 2000). 4.11 Form 8% Convertible Debentures issued by iVoice.com, Inc. for $150,000 due April 30, 2006 to the purchasers thereof on April 30, 2001(incorporated herein by reference to Exhibit 4.11 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 4.12 Form 8% Convertible Debentures issued by iVoice.com, Inc. to certain purchasers thereof for an aggregate of $125,000 (incorporated herein by reference to Exhibit 4.12 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 4.13 Form 8% Convertible Debentures to be issued by iVoice.com, Inc. to Beacon Capital, LLC in the amount of $150,000. (incorporated herein by reference to Exhibit 4.12 of the registration statement on Form SB-2, filed with the SEC on December 21, 2001). 5.1* Opinion 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. (incorporated herein by reference to Exhibit 4.12 of the registration statement on Form SB-2, filed with the SEC on December 21, 2001). II-6 No. Description - --- ----------- 10.7 Registration rights agreement between iVoice.com, Inc. and Beacon Capital, LLC, dated as of November 20, 2001. (incorporated herein by reference to Exhibit 4.12 of the registration statement on Form SB-2, filed with the SEC on December 21, 2001). 10.8 Form of warrant to purchase 250,000 shares of iVoice.com, Inc. to be issued to Beacon Capital, LLC (incorporated herein by reference to Exhibit 4.12 of the registration statement on Form SB-2, filed with the SEC on December 21, 2001). 10.9 Subscription agreement between iVoice.com, Inc. and the purchaser signatories thereof, dated April 30, 2001, for the purchase of an aggregate of $275,000 of 8% Convertible Debentures due April 30, 2001 (incorporated herein by reference to Exhibit 10.9 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 10.10 Registration rights agreement by and among iVoice.com, Inc. and the investor signatories thereto dated as of April 30, 2001 (incorporated herein by reference to Exhibit 10.10 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 10.11 Warrant to purchase 171,875 shares of iVoice.com, Inc. issued to Michael Jacobs of The May Davis Group, Inc., dated April 30, 2001 (incorporated herein by reference to Exhibit 10.11 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 10.12 Warrant to purchase 171,875 shares of iVoice.com, Inc. issued to Owen May of The May Davis Group, Inc., dated April 30, 2001 (incorporated herein by reference to Exhibit 10.12 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 10.13 Consulting agreement entered into on March 15, 2001 by and between iVoice.com, Inc. and Finnigan USA (incorporated herein by reference to Exhibit 10.13 of the registration statement on Form SB-2, filed with the SEC on September 7, 2001). 10.14 Real Property Lease Agreement dated December 5, 2001 between iVoice.com, Inc. and B&R Holding Company (incorporated herein by reference to Exhibit 10.14 to the Form 10-KSB for the year ended December 31, 2001 filed with the SEC on March 27, 2002). 10.15 Equity Line of Credit Agreement dated as of June 2002 between iVoice, Inc. and Cornell Capital Partners (incorporated herein by reference to Exhibit 10.15 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.16 Registration Rights Agreement dated as of June 2002 between iVoice, Inc. and Cornell Capital Partners (incorporated herein by reference to Exhibit 10.16 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.17 Escrow Agreement dated as of June 2002 among iVoice, Inc., Cornell Capital Partners, Butler Gonzalez LLP and Wachovia, N.A. (incorporated herein by reference to Exhibit 10.17 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.18 Placement Agent Agreement dated June 2002 between iVoice, Inc. and Westrock Advisors, Inc. (incorporated herein by reference to Exhibit 10.18 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.19 Securities Purchase Agreement dated June 2002 between iVoice, Inc. and the buyers identified therein (incorporated herein by reference to Exhibit 10.19 to the Registration Statement on Form SB-2 filed on July 2, 2002). II-7 No. Description - --- ----------- 10.20 Registration Rights Agreement dated June 2002 between iVoice, Inc. and the buyers identified therein (incorporated herein by reference to Exhibit 10.20 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.21 Form of Debenture (incorporated herein by reference to Exhibit 10.21 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.22 Escrow Agreement dated June 2002 between iVoice, Inc., the buyers identified therein and Wachovia, N.A. (incorporated herein by reference to Exhibit 10.22 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.23 Transfer Agent Instructions dated June 2002 between iVoice, Inc., Cornell Capital Partners and Fidelity Transfer Co. (incorporated herein by reference to Exhibit 10.23 to the Registration Statement on Form SB-2 filed on July 2, 2002). 10.24 Letter Agreement dated June 28, 2002 (incorporated herein by reference to Exhibit 10.24 to the Registration Statement on Form SB-2 filed on February 11, 2003). 10.25 Promissory Note dated as of August 16, 2002 given by iVoice, Inc. to Cornell Capital Partners (incorporated herein by reference to Exhibit 10.25 to the Registration Statement on Form SB-2 filed on February 11, 2003). 10.26 Promissory Note dated as of November 27, 2002 given by iVoice, Inc. to Cornell Capital Partners (incorporated herein by reference to Exhibit 10.26 to the Registration Statement on Form SB-2 filed on February 11, 2003). II-8 No. Description - --- ----------- 10.27 Letter Agreement dated January 24, 2003 between iVoice, Inc. and Mr. Jerome Mahoney (incorporated herein by reference to Exhibit 10.27 to the Registration Statement on Form SB-2 filed February 11, 2003). 10.28** Standy Equity Distribution Agreement dated December 31, 2003 between iVoice, Inc. and Cornell Capital Partners, L.P. 10.29** Registration Rights Agreement dated December 31, 2003 between iVoice, Inc. and Cornell Capital Partners, L.P. 10.30** Placement Agent Agreement dated December 31, 2003 between iVoice, Inc. and CapStone Investments 10.31** Escrow Agreement dated December 31, 2003 among iVoice, Inc., Cornell Capital Partners, L.P. and Butler Gonzalez LLP 10.32** Letter Agreement dated December 19, 2003 between iVoice, Inc. and Jerome Mahoney 10.33** Form of Guaranty by iVoice, Inc. in favor of holders of Convertible Debt of Trey Resources, Inc. 10.34** Administrative Services Agreement dated February 22, 2003 between iVoice, Inc. and Trey Resources, Inc. 10.35 Equity Line of Credit Agreement dated January 24, 2003 between Cornell Capital Partners, LP, and iVoice Acquisition 1, Inc. (incorporated herein by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, filed with the SEC on May 12, 2003) 10.36 Registration Rights Agreement dated January 24, 2003 between Cornell Capital Partners, LP, and iVoice Acquisition 1, Inc. (incorporated herein by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, filed with the SEC on May 12, 2003). 10.37 Stock Purchase Agreement dated January 24, 2003 between iVoice Acquisition 1, Inc. and listed Buyers (incorporated herein by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, filed with the SEC on May 12, 2003). 10.38 Form of 5% Convertible Debenture issued by iVoice Acquisition 1, Inc. (incorporated herein by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, filed with the SEC on May 12, 2003). 10.39 Placement Agreement dated January 24, 2003 between iVoice Acquisition 1, Inc. and Cornell Capital Partners LP. (incorporated herein by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, filed with the SEC on May 12, 2003). 10.40 Consulting Services Agreement dated July 27, 2003 between iVoice, Inc. and Stone Street Advisors, LLC (incorporated herein by reference to Exhibit 10.6 of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the SEC on November 14, 2003). 21** List of Subsidiaries of iVoice, Inc. 23.1** Consent of Mendlowitz Weitsen LLP. 23.2 Consent of Kramer, Levin, Naftalis & Frankel, LLP (incorporated by reference to Exhibit 5.1). - --------------- * To be filed. ** Filed herewith. II-9 ITEM 28. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) to file, during any period in which offers or sale; 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 of 1933; (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. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective 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 paragraphs (1)(i) and (1)(ii) above do not apply if the registration statement is on Form S-3, and the information required to be, included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 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 of 1933, 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 the 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. Insofar as indemnification for liabilities arising under the Securities Act of 1933 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 Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than 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 the final adjudication of such issue. II-10 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on our behalf by the undersigned, on January 2, 2004. IVOICE, INC. By: /s/ Jerome R. Mahoney ------------------------------------ Name: Jerome R. Mahoney Title: President, Chief Executive Officer and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated. SIGNATURE TITLE DATE - --------- ----- ---- /s/ Jerome R. Mahoney President, Chief Executive January 2, 2004 - --------------------------- Officer, Chief Financial Jerome R. Mahoney Officer and Sole Director II-11 EX-10 3 kl12028_ex10-28.txt EXHIBIT 10.28 STANDY EQUITY DISTRIBUTION AGR EXHIBIT 10.28 ------------- STANDBY EQUITY DISTRIBUTION AGREEMENT ------------------------------------- AGREEMENT dated as of the 31st day of December 2003 (the "Agreement") between CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor"), and iVOICE INC., a corporation organized and existing under the laws of the State of New Jersey (the "Company"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investor, from time to time as provided herein, and the Investor shall purchase from the Company up to Twenty Million Dollars ($20,000,000) of the Company's common stock, no par value per share (the "Common Stock"); and WHEREAS, such investments will be made in reliance upon the provisions of Regulation D ("Regulation D") of the Securities Act of 1933, as amended, and the regulations promulgated thereunder (the "Securities Act"), and or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments to be made hereunder. WHEREAS, the Company has engaged CapStone Investments, to act as the Company's exclusive placement agent in connection with the sale of the Company's Common Stock to the Investor hereunder pursuant to the Placement Agent Agreement dated the date hereof by and among the Company, the Placement Agent and the Investor (the "Placement Agent Agreement"). NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I. Certain Definitions Section 1.1. "Advance" shall mean the portion of the Commitment Amount requested by the Company in the Advance Notice. Section 1.2. "Advance Date" shall mean the date Butler Gonzalez LLP Escrow Account is in receipt of the funds from the Investor and Butler Gonzalez LLP, as the Investor's Counsel, is in possession of free trading shares from the Company and therefore an Advance by the Investor to the Company can be made and Butler Gonzalez LLP can release the free trading shares to the Investor. No Advance Date shall be less than six (6) Trading Days after an Advance Notice Date. Section 1.3. "Advance Notice" shall mean a written notice to the Investor setting forth the Advance amount that the Company requests from the Investor and the Advance Date. Section 1.4. "Advance Notice Date" shall mean each date the Company delivers to the Investor an Advance Notice requiring the Investor to advance funds to the Company, subject to the terms of this Agreement. No Advance Notice Date shall be less than seven (7) Trading Days after the prior Advance Notice Date. Section 1.5. "Bid Price" shall mean, on any date, the closing bid price (as reported by Bloomberg L.P.) of the Common Stock on the Principal Market or if the Common Stock is not traded on a Principal Market, the highest reported bid price for the Common Stock, as furnished by the National Association of Securities Dealers, Inc. Section 1.6. "Closing" shall mean one of the closings of a purchase and sale of Common Stock pursuant to Section 2.3. Section 1.7. "Commitment Amount" shall mean the aggregate amount of up to Twenty Million Dollars ($20,000,000) which the Investor has agreed to provide to the Company in order to purchase the Company's Common Stock pursuant to the terms and conditions of this Agreement. Section 1.8. "Commitment Period" shall mean the period commencing on the earlier to occur of (i) the Effective Date, or (ii) such earlier date as the Company and the Investor may mutually agree in writing, and expiring on the earliest to occur of (x) the date on which the Investor shall have made payment of Advances pursuant to this Agreement in the aggregate amount of Twenty Million Dollars ($20,000,000), (y) the date this Agreement is terminated pursuant to Section 2.5, or (z) the date occurring twenty-four (24) months after the Effective Date. Section 1.9. "Common Stock" shall mean the Company's common stock, no par value per share. Section 1.10. "Condition Satisfaction Date" shall have the meaning set forth in Section 7.2. Section 1.11. "Damages" shall mean any loss, claim, damage, liability, costs and expenses (including, without limitation, reasonable attorney's fees and disbursements and costs and expenses of expert witnesses and investigation). Section 1.12. "Effective Date" shall mean the date on which the SEC first declares effective a Registration Statement registering the resale of the Registrable Securities as set forth in Section 7.2(a). Section 1.13. "Escrow Agreement" shall mean the escrow agreement among the Company, the Investor, and Butler Gonzalez LLP dated the date hereof. Section 1.14. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Section 1.15. "Material Adverse Effect" shall mean any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement or the Registration Rights Agreement in any material respect. 2 Section 1.16. "Market Price" shall mean the lowest closing Bid Price of the Common Stock during the Pricing Period. Section 1.17. "Maximum Advance Amount" shall be Three Hundred Fifty Thousand Dollars ($350,000) per Advance Notice up to a maximum of One Million Four Hundred Thousand Dollars ($1,400,000), in the aggregate, in any thirty-day (30) calendar period. Notwithstanding the foregoing, the aggregate amount of all of the Advance Notices in the initial thirty-day (30) calendar period, from the date hereof, may equal up to a maximum of Three Million Dollars ($3,000,000). Section 1.18 "NASD" shall mean the National Association of Securities Dealers, Inc. Section 1.19 "Person" shall mean an individual, a corporation, a partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. Section 1.20 "Placement Agent" shall mean CapStone Investments a registered broker-dealer. Section 1.21 "Pricing Period" shall mean the five (5) consecutive Trading Days after the Advance Notice Date. Section 1.22 "Principal Market" shall mean the Nasdaq National Market, the Nasdaq SmallCap Market, the American Stock Exchange, the OTC Bulletin Board or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock. Section 1.23 "Purchase Price" shall be set at one hundred percent (100%) of the Market Price during the Pricing Period. Section 1.24 "Registrable Securities" shall mean the shares of Common Stock to be issued hereunder (i) in respect of which the Registration Statement has not been declared effective by the SEC, (ii) which have not been sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act ("Rule 144") or (iii) which have not been otherwise transferred to a holder who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend. Section 1.25 "Registration Rights Agreement" shall mean the Registration Rights Agreement dated the date hereof, regarding the filing of the Registration Statement for the resale of the Registrable Securities, entered into between the Company and the Investor. Section 1.26 "Registration Statement" shall mean a registration statement on Form S-1 or SB-2 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate, and which form shall be available for the resale of the Registrable Securities to be registered there under in accordance with the provisions of this Agreement and the Registration Rights Agreement, and in accordance with the 3 intended method of distribution of such securities), for the registration of the resale by the Investor of the Registrable Securities under the Securities Act. Section 1.27 "Regulation D" shall have the meaning set forth in the recitals of this Agreement. Section 1.28 "SEC" shall mean the Securities and Exchange Commission. Section 1.29 "Securities Act" shall have the meaning set forth in the recitals of this Agreement. Section 1.30 "SEC Documents" shall mean Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K and Proxy Statements of the Company as supplemented to the date hereof, filed by the Company for a period of at least twelve (12) months immediately preceding the date hereof or the Advance Date, as the case may be, until such time as the Company no longer has an obligation to maintain the effectiveness of a Registration Statement as set forth in the Registration Rights Agreement. Section 1.31 "Trading Day" shall mean any day during which the New York Stock Exchange shall be open for business. ARTICLE II. Advances Section 2.1. Investments. ------------ (a) Advances. Upon the terms and conditions set forth herein (including, without limitation, the provisions of Article VII hereof), on any Advance Notice Date the Company may request an Advance by the Investor by the delivery of an Advance Notice. The number of shares of Common Stock that the Investor shall receive for each Advance shall be determined by dividing the amount of the Advance by the Purchase Price. No fractional shares shall be issued. Fractional shares shall be rounded to the next higher whole number of shares. The aggregate maximum amount of all Advances that the Investor shall be obligated to make under this Agreement shall not exceed the Commitment Amount. Section 2.2. Mechanics. ---------- (a) Advance Notice. At any time during the Commitment Period, the Company may deliver an Advance Notice to the Investor, subject to the conditions set forth in Section 7.2; provided, however, the amount for each Advance as designated by the Company in the applicable Advance Notice, shall not be more than the Maximum Advance Amount. The aggregate amount of the Advances pursuant to this Agreement shall not exceed the Commitment Amount. The Company acknowledges that the Investor may sell shares of the Company's Common Stock corresponding with a particular Advance Notice on the day the Advance Notice is received by the Investor. There will be a minimum of seven (7) Trading Days between each Advance Notice Date. 4 (b) Date of Delivery of Advance Notice. An Advance Notice shall be deemed delivered on (i) the Trading Day it is received by facsimile or otherwise by the Investor if such notice is received prior to 12:00 noon Eastern Time, or (ii) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 12:00 noon Eastern Time on a Trading Day or at any time on a day which is not a Trading Day. No Advance Notice may be deemed delivered, on a day that is not a Trading Day. (c) Pre-Closing Share Credit. Within two (2) business days after the Advance Notice Date, the Company shall credit shares of the Company's Common Stock to the Investor's balance account with The Depository Trust Company through its Deposit Withdrawal At Custodian system, in an amount equal to the amount of the requested Advance divided by the closing Bid Price of the Company's Common Stock as of the Advance Notice Date multiplied by one point one (1.1). Any adjustments to the number of shares to be delivered to the Investor at the Closing as a result of fluctuations in the closing Bid Price of the Company's Common Stock shall be made as of the date of the Closing. Any excess shares shall be credited to the next Advance. In no event shall the number of shares issuable to the Investor pursuant to an Advance cause the Investor to own in excess of nine and 9/10 percent (9.9%) of the then outstanding Common Stock of the Company. (d) Hardship. In the event the Investor sells the Company's Common Stock pursuant to subsection (c) above and the Company fails to perform its obligations as mandated in Section 2.5 and 2.2 (c), and specifically fails to provide the Investor with the shares of Common Stock for the applicable Advance, the Company acknowledges that the Investor shall suffer financial hardship and therefore shall be liable for any and all losses, commissions, fees, or financial hardship caused to the Investor. Section 2.3. Closings. On each Advance Date, which shall be no more than six (6) Trading Days after an Advance Notice Date, (i) the Company shall deliver to the Investor's Counsel, as defined pursuant to the Escrow Agreement, shares of the Company's Common Stock, representing the amount of the Advance by the Investor pursuant to Section 2.1 herein, registered in the name of the Investor which shall be delivered to the Investor, or otherwise in accordance with the Escrow Agreement and (ii) the Investor shall deliver to Butler Gonzalez LLP (the "Escrow Agent") the amount of the Advance specified in the Advance Notice by wire transfer of immediately available funds which shall be delivered to the Company, or otherwise in accordance with the Escrow Agreement. In addition, on or prior to the Advance Date, each of the Company and the Investor shall deliver to the other through the Investor's Counsel all documents, instruments and writings required to be delivered by either of them pursuant to this Agreement in order to implement and effect the transactions contemplated herein. Payment of funds to the Company and delivery of the Company's Common Stock to the Investor shall occur in accordance with the conditions set forth above and those contained in the Escrow Agreement; provided, however, that to the extent the Company has not paid the fees, expenses, and disbursements of the Investor or the Investor's counsel in accordance with Section 12.4, the amount of such fees, expenses, and disbursements may be deducted by the Investor (and shall be paid to the relevant party) from the amount of the Advance with no reduction in the amount of shares of the Company's Common Stock to be delivered on such Advance Date. 5 Section 2.4. Termination of Investment. The obligation of the Investor to make an Advance to the Company pursuant to this Agreement shall terminate permanently (including with respect to an Advance Date that has not yet occurred) in the event that (i) there shall occur any stop order or suspension of the effectiveness of the Registration Statement for an aggregate of fifty (50) Trading Days, other than due to the acts of the Investor, during the Commitment Period, and (ii) the Company shall at any time fail materially to comply with the requirements of Article VI and such failure is not cured within thirty (30) days after receipt of written notice from the Investor, provided, however, that this termination provision shall not apply to any period commencing upon the filing of a post-effective amendment to such Registration Statement and ending upon the date on which such post effective amendment is declared effective by the SEC.. Section 2.5. Agreement to Advance Funds. --------------------------- (a) The Investor agrees to advance the amount specified in the Advance Notice to the Company after the completion of each of the following conditions and the other conditions set forth in this Agreement: (i) the execution and delivery by the Company, and the Investor, of this Agreement, and the Exhibits hereto; (ii) Investor's Counsel shall have received the shares of Common Stock applicable to the Advance in accordance with Section 2.2(c) hereof; (iii) the Company's Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement shall have been declared effective by the SEC; (iv) the Company shall have obtained all material permits and qualifications required by any applicable state for the offer and sale of the Registrable Securities, or shall have the availability of exemptions therefrom. The sale and issuance of the Registrable Securities shall be legally permitted by all laws and regulations to which the Company is subject; (v) the Company shall have filed with the Commission in a timely manner all reports, notices and other documents required of a "reporting company" under the Exchange Act and applicable Commission regulations; (vi) the fees as set forth in Section 12.4 below shall have been paid or can be withheld as provided in Section 2.3; and (vii) the conditions set forth in Section 7.2 shall have been satisfied. (viii) The Company shall have provided to the Investor an acknowledgement, from Mendlowitz Weitsen LLP as to its ability to provide all consents required in order to file a registration statement in connection with this transaction; (ix) The Company's transfer agent shall be DWAC eligible. Section 2.6. Lock Up Period. --------------- 6 (i) During the Commitment Period, the Company shall not, issue or sell (i) any Common Stock or Preferred Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance or (ii) issue or sell any warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance, except for Common Stock issuable pursuant to the Company's obligations on the date hereof upon the conversion of stock options, convertible debt or Class B Common Stock . (ii) On the date hereof, the Company shall obtain from each officer and director a lock-up agreement, as defined below, in the form annexed hereto as Schedule 2.6(b) agreeing to only sell in compliance with the volume limitation of Rule 144. ARTICLE III. Representations and Warranties of Investor Investor hereby represents and warrants to, and agrees with, the Company that the following are true and as of the date hereof and as of each Advance Date: Section 3.1. Organization and Authorization. The Investor is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority to purchase and hold the securities issuable hereunder. The decision to invest and the execution and delivery of this Agreement by such Investor, the performance by such Investor of its obligations hereunder and the consummation by such Investor of the transactions contemplated hereby have been duly authorized and requires no other proceedings on the part of the Investor. The undersigned has the right, power and authority to execute and deliver this Agreement and all other instruments (including, without limitations, the Registration Rights Agreement), on behalf of the Investor. This Agreement has been duly executed and delivered by the Investor and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligations of the Investor, enforceable against the Investor in accordance with its terms. Section 3.2. Evaluation of Risks. The Investor has such knowledge and experience in financial tax and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. It recognizes that its investment in the Company involves a high degree of risk. Section 3.3. No Legal Advice From the Company. The Investor acknowledges that it had the opportunity to review this Agreement and the transactions contemplated by this Agreement with his or its own legal counsel and investment and tax advisors. The Investor is relying solely on such counsel and advisors and not on any statements or representations of the Company or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction. 7 Section 3.4. Investment Purpose. The securities are being purchased by the Investor for its own account, for investment and without any view to the distribution, assignment or resale to others or fractionalization in whole or in part. The Investor agrees not to assign or in any way transfer the Investor's rights to the securities or any interest therein and acknowledges that the Company will not recognize any purported assignment or transfer except in accordance with applicable Federal and state securities laws. No other person has or will have a direct or indirect beneficial interest in the securities. The Investor agrees not to sell, hypothecate or otherwise transfer the Investor's securities unless the securities are registered under Federal and applicable state securities laws or unless, in the opinion of counsel satisfactory to the Company, an exemption from such laws is available. Section 3.5. Accredited Investor. The Investor is an "Accredited Investor" as that term is defined in Rule 501(a)(3) of Regulation D of the Securities Act. Section 3.6. Information. The Investor and its advisors (and its counsel), if any, have been furnished with all materials relating to the business, finances and operations of the Company and information it deemed material to making an informed investment decision. The Investor and its advisors, if any, have been afforded the opportunity to ask questions of the Company and its management. Neither such inquiries nor any other due diligence investigations conducted by such Investor or its advisors, if any, or its representatives shall modify, amend or affect the Investor's right to rely on the Company's representations and warranties contained in this Agreement. The Investor understands that its investment involves a high degree of risk. The Investor is in a position regarding the Company, which, based upon employment, family relationship or economic bargaining power, enabled and enables such Investor to obtain information from the Company in order to evaluate the merits and risks of this investment. The Investor has sought such accounting, legal and tax advice, as it has considered necessary to make an informed investment decision with respect to this transaction. Section 3.7. Receipt of Documents. The Investor and its counsel has received and read in their entirety: (i) this Agreement and the Exhibits annexed hereto; (ii) all due diligence and other information necessary to verify the accuracy and completeness of such representations, warranties and covenants; (iii) the Company's Form 10-KSB for the year ended year ended December 31, 2002 and Form 10-QSB for the periods ended March 31, 2003, June 30, 2003, and September 30, 2003; and (iv) answers to all questions the Investor submitted to the Company regarding an investment in the Company; and the Investor has relied on the information contained therein and has not been furnished any other documents, literature, memorandum or prospectus. Section 3.8. Registration Rights Agreement and Escrow Agreement. The parties have entered into the Registration Rights Agreement and the Escrow Agreement, each dated the date hereof. Section 3.9. No General Solicitation. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the shares of Common Stock offered hereby. 8 Section 3.10. Not an Affiliate. The Investor is not an officer, director or a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with the Company or any "Affiliate" of the Company (as that term is defined in Rule 405 of the Securities Act). Neither the Investor nor its Affiliates has an open short position in the Common Stock of the Company, and the Investor agrees that it will not, and that it will cause its Affiliates not to, engage in any short sales of or hedging transactions with respect to the Common Stock, provided that the Company acknowledges and agrees that upon receipt of an Advance Notice the Investor will sell the Shares to be issued to the Investor pursuant to the Advance Notice, even if the Shares have not been delivered to the Investor. ARTICLE IV. Representations and Warranties of the Company Except as stated below, on the disclosure schedules attached hereto or in the SEC Documents (as defined herein), the Company hereby represents and warrants to, and covenants with, the Investor that the following are true and correct as of the date hereof: Section 4.1. Organization and Qualification. The Company is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority corporate power to own its properties and to carry on its business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect on the Company and its subsidiaries taken as a whole. Section 4.2. Authorization, Enforcement, Compliance with Other Instruments. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and any related agreements, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and any related agreements by the Company and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and any related agreements have been duly executed and delivered by the Company, (iv) this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and assuming the execution and delivery thereof and acceptance by the Investor and any related agreements constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies. 9 Section 4.3. Capitalization. As of the date hereof, the authorized capital stock of the Company consists of 10,000,000,000 shares of Common Stock, no par value per share and 1,000,000 shares of Preferred Stock of which 5,045,000,000shares of Common Stock and no shares of Preferred Stock were issued and outstanding. All of such outstanding shares have been validly issued and are fully paid and nonassessable. Except as disclosed in the SEC Documents, no shares of Common Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company. Except as disclosed in the SEC Documents, as of the date hereof, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities (iii) there are no outstanding registration statements other than on Form S-8 and (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 Securities Act (except pursuant to the Registration Rights Agreement). There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by this Agreement or any related agreement or the consummation of the transactions described herein or therein. The Company has furnished to the Investor true and correct copies of the Company's Certificate of Incorporation, as amended and as in effect on the date hereof (the "Certificate of Incorporation"), and the Company's By-laws, as in effect on the date hereof (the "By-laws"), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto. 10 Section 4.4. No Conflict. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Certificate of Incorporation, any certificate of designations of any outstanding series of preferred stock of the Company or By-laws or (ii) conflict with or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the Principal Market on which the Common Stock is quoted) applicable to the Company or any of its subsidiaries or by which any material property or asset of the Company or any of its subsidiaries is bound or affected and which would cause a Material Adverse Effect. Except as disclosed in the SEC Documents, neither the Company nor its subsidiaries is in violation of any term of or in default under its Certificate of Incorporation or By-laws or their organizational charter or by-laws, respectively, or any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its subsidiaries. The business of the Company and its subsidiaries is not being conducted in violation of any material law, ordinance, regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or the Registration Rights Agreement in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company and its subsidiaries are unaware of any fact or circumstance which might give rise to any of the foregoing. Section 4.5. SEC Documents; Financial Statements. Since October 1, 2000, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC under of the Exchange Act. The Company has delivered to the Investor or its representatives, or made available through the SEC's website at http://www.sec.gov, true and complete copies of the SEC Documents. As of their respective dates, the financial statements of the Company disclosed in the SEC Documents (the "Financial Statements") complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and, fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 11 Section 4.6. 10b-5. The SEC Documents do not include any untrue statements of material fact, nor do they omit to state any material fact required to be stated therein necessary to make the statements made, in light of the circumstances under which they were made, not misleading. Section 4.7. No Default. Except as disclosed in the SEC Documents, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement or any of the exhibits or attachments hereto will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under its Certificate of Incorporation, By-Laws, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound, or any statute, or any decree, judgment, order, rules or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, in each case which default, lien or charge is likely to cause a Material Adverse Effect on the Company's business or financial condition. Section 4.8. Absence of Events of Default. Except for matters described in the SEC Documents and/or this Agreement, no Event of Default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become an Event of Default (as so defined), has occurred and is continuing, which would have a Material Adverse Effect on the Company's business, properties, prospects, financial condition or results of operations. Section 4.9. Intellectual Property Rights. The Company and its subsidiaries own or possess adequate rights or licenses to use all material trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. The Company and its subsidiaries do not have any knowledge of any infringement by the Company or its subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, and, to the knowledge of the Company, there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. Section 4.10. Employee Relations. Neither the Company nor any of its subsidiaries is involved in any labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such dispute threatened. None of the Company's or its subsidiaries' employees is a member of a union and the Company and its subsidiaries believe that their relations with their employees are good. 12 Section 4.11. Environmental Laws. The Company and its subsidiaries are (i) in compliance with any and all applicable material foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval. Section 4.12. Title. Except as set forth in the SEC Documents, the Company has good and marketable title to its properties and material assets owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. Any real property and facilities held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries. Section 4.13. Insurance. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its subsidiaries are engaged. Neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole. Section 4.14. Regulatory Permits. The Company and its subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. Section 4.15. Internal Accounting Controls. The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 13 Section 4.16. No Material Adverse Breaches, etc. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is in breach of any contract or agreement which breach, in the judgment of the Company's officers, has or is expected to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Section 4.17. Absence of Litigation. Except as set forth in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending against or affecting the Company, the Common Stock or any of the Company's subsidiaries, wherein an unfavorable decision, ruling or finding would (i) have a Material Adverse Effect on the transactions contemplated hereby (ii) adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein, or (iii) except as expressly disclosed in the SEC Documents, have a Material Adverse Effect on the business, operations, properties, financial condition or results of operation of the Company and its subsidiaries taken as a whole. Section 4.18. Subsidiaries. Except as disclosed in the SEC Documents, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. Section 4.19. Tax Status. The Company and each of its subsidiaries has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject and (unless and only to the extent that the Company and each of its subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. Section 4.20. Certain Transactions. Except as set forth in the SEC Documents none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. 14 Section 4.21. Fees and Rights of First Refusal. Except as set forth in the SEC Documents, the Company is not obligated to offer the securities offered hereunder on a right of first refusal basis or otherwise to any third parties including, but not limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties. Section 4.22. Use of Proceeds. The Company represents that the net proceeds from this offering will be used for general corporate purposes. However, in no event shall the net proceeds from this offering be used by the Company for the payment (or loaned to any such person for the payment) of any judgment, or other liability, incurred by any executive officer, officer, director or employee of the Company, except for any liability owed to such person for services rendered, or if any judgment or other liability is incurred by such person originating from services rendered to the Company, or the Company has indemnified such person from liability. Section 4.23. Further Representation and Warranties of the Company. For so long as any securities issuable hereunder held by the Investor remain outstanding, the Company acknowledges, represents, warrants and agrees that it will maintain the listing of its Common Stock on the Principal Market Section 4.24. Opinion of Counsel. Investor shall receive an opinion letter from Kramer, Levin, Naftalis & Frankel LLP, counsel to the Company on the date hereof. Section 4.25. Opinion of Counsel. The Company will obtain for the Investor, at the Company's expense, any and all opinions of counsel which may be reasonably required in order to sell the securities issuable hereunder without restriction. Section 4.26. Dilution. The Company is aware and acknowledges that issuance of shares of the Company's Common Stock could cause dilution to existing shareholders and could significantly increase the outstanding number of shares of Common Stock. ARTICLE V. Indemnification The Investor and the Company represent to the other the following with respect to itself: Section 5.1. Indemnification. ---------------- (a) In consideration of the Investor's execution and delivery of this Agreement, and in addition to all of the Company's other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless the Investor, and all of its officers, directors, partners, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Investor Indemnitees") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Investor Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by the Investor Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty 15 made by the Company in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made against such Investor Indemnitee not arising out of any action or inaction of an Investor Indemnitee, and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Investor Indemnitees. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. (b) In consideration of the Company's execution and delivery of this Agreement, and in addition to all of the Investor's other obligations under this Agreement, the Investor shall defend, protect, indemnify and hold harmless the Company and all of its officers, directors, shareholders, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Company Indemnitees") from and against any and all Indemnified Liabilities incurred by the Company Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Investor in this Agreement, the Registration Rights Agreement, or any instrument or document contemplated hereby or thereby executed by the Investor, (b) any breach of any covenant, agreement or obligation of the Investor(s) contained in this Agreement, the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby executed by the Investor, or (c) any cause of action, suit or claim brought or made against such Company Indemnitee based on misrepresentations or due to a breach by the Investor and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Company Indemnitees. To the extent that the foregoing undertaking by the Investor may be unenforceable for any reason, the Investor shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. ARTICLE VI. Covenants of the Company Section 6.1. Registration Rights. The Company shall cause the Registration Rights Agreement to remain in full force and effect and the Company shall comply in all material respects with the terms thereof. Section 6.2. Listing of Common Stock. The Company shall maintain the Common Stock's authorization for quotation on the National Association of Securities Dealers Inc's Over the Counter Bulletin Board. Section 6.3. Exchange Act Registration. The Company will cause its Common Stock to continue to be registered under Section 12(g) of the Exchange Act, will file in a timely manner 16 all reports and other documents required of it as a reporting company under the Exchange Act and will not take any action or file any document (whether or not permitted by Exchange Act or the rules thereunder to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Exchange Act. Section 6.4. Transfer Agent Instructions. Not later than two (2) business days after each Advance Notice Date and prior to each Closing and the effectiveness of the Registration Statement and resale of the Common Stock by the Investor, the Company will deliver instructions to its transfer agent to issue shares of Common Stock free of restrictive legends. Section 6.5. Corporate Existence. The Company will take all steps necessary to preserve and continue the corporate existence of the Company. Section 6.6. Notice of Certain Events Affecting Registration; Suspension of Right to Make an Advance. The Company will immediately notify the Investor upon its becoming aware of the occurrence of any of the following events in respect of a registration statement or related prospectus relating to an offering of Registrable Securities: (i) receipt of any request for additional information by the SEC or any other Federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the registration statement or related prospectus; (ii) the issuance by the SEC or any other Federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in the Registration Statement or related prospectus of any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; and the Company will promptly make available to the Investor any such supplement or amendment to the related prospectus. The Company shall not deliver to the Investor any Advance Notice during the continuation of any of the foregoing events. Section 6.7. Expectations Regarding Advance Notices. Within ten (10) days after the commencement of each calendar quarter occurring subsequent to the commencement of the Commitment Period, the Company must notify the Investor, in writing, as to its reasonable expectations as to the dollar amount it intends to raise during such calendar quarter, if any, through the issuance of Advance Notices. Such notification shall constitute only the Company's good faith estimate and shall in no way obligate the Company to raise such amount, or any amount, or otherwise limit its ability to deliver Advance Notices. The failure by the Company to 17 comply with this provision can be cured by the Company's notifying the Investor, in writing, at any time as to its reasonable expectations with respect to the current calendar quarter. Section 6.8. Restriction on Sale of Capital Stock. During the Commitment Period, the Company shall not issue or sell (i) any Common Stock or Preferred Stock without consideration or for a consideration per share less than the bid price of the Common Stock determined immediately prior to its issuance, (ii) issue or sell any Preferred Stock warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration per share less than such Common Stock's Bid Price determined immediately prior to its issuance, or (iii) file any registration statement on Form S-8. Section 6.9. Consolidation; Merger. The Company shall not, at any time after the date hereof, effect any merger or consolidation of the Company with or into, or a transfer of all or substantially all the assets of the Company to another entity (a "Consolidation Event") unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Investor such shares of stock and/or securities as the Investor is entitled to receive pursuant to this Agreement. Section 6.10. Issuance of the Company's Common Stock. The sale of the shares of Common Stock shall be made in accordance with the provisions and requirements of Regulation D and any applicable state securities law. ARTICLE VII. Conditions for Advance and Conditions to Closing Section 7.1. Conditions Precedent to the Obligations of the Company. The obligation hereunder of the Company to issue and sell the shares of Common Stock to the Investor incident to each Closing is subject to the satisfaction, or waiver by the Company, at or before each such Closing, of each of the conditions set forth below. (a) Accuracy of the Investor's Representations and Warranties. The representations and warranties of the Investor shall be true and correct in all material respects. (b) Performance by the Investor. The Investor shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by the Investor at or prior to such Closing. Section 7.2. Conditions Precedent to the Right of the Company to Deliver an Advance Notice and the Obligation of the Investor to Purchase Shares of Common Stock. The right of the Company to deliver an Advance Notice and the obligation of the Investor hereunder to acquire and pay for shares of the Company's Common Stock incident to a Closing is subject to the fulfillment by the Company, on (i) the date of delivery of such Advance Notice and (ii) the applicable Advance Date (each a "Condition Satisfaction Date"), of each of the following conditions: 18 (a) Registration of the Common Stock with the SEC. The Company shall have filed with the SEC a Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement. As set forth in the Registration Rights Agreement, the Registration Statement shall have previously become effective and shall remain effective on each Condition Satisfaction Date and (i) neither the Company nor the Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to the Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, or intends or has threatened to do so (unless the SEC's concerns have been addressed and the Investor is reasonably satisfied that the SEC no longer is considering or intends to take such action), and (ii) no other suspension of the use or withdrawal of the effectiveness of the Registration Statement or related prospectus shall exist. The Registration Statement must have been declared effective by the SEC prior to the first Advance Notice Date. (b) Authority. The Company shall have obtained all permits and qualifications required by any applicable state in accordance with the Registration Rights Agreement for the offer and sale of the shares of Common Stock, or shall have the availability of exemptions therefrom. The sale and issuance of the shares of Common Stock shall be legally permitted by all laws and regulations to which the Company is subject. (c) Fundamental Changes. There shall not exist any fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post-effective amendment to the Registration Statement. (d) Performance by the Company. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement (including, without limitation, the conditions specified in Section 2.5 hereof) and the Registration Rights Agreement to be performed, satisfied or complied with by the Company at or prior to each Condition Satisfaction Date. (e) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits or directly and adversely affects any of the transactions contemplated by this Agreement, and no proceeding shall have been commenced that may have the effect of prohibiting or adversely affecting any of the transactions contemplated by this Agreement. (f) No Suspension of Trading in or Delisting of Common Stock. The trading of the Common Stock is not suspended by the SEC or the Principal Market (if the Common Stock is traded on a Principal Market). The issuance of shares of Common Stock with respect to the applicable Closing, if any, shall not violate the shareholder approval requirements of the Principal Market (if the Common Stock is traded on a Principal Market). The Company shall not have received any notice threatening the continued listing of the Common Stock on the Principal Market (if the Common Stock is traded on a Principal Market). (g) Maximum Advance Amount. The amount of the Advances requested by the Company in any thirty (30) day period shall not exceed the Maximum Advance Amount. In 19 addition, in no event shall the number of shares issuable to the Investor pursuant to an Advance cause the Investor to own in excess of nine and 9/10 percent (9.9%) of the then outstanding Common Stock of the Company. (h) No Knowledge. The Company has no knowledge of any event which would be more likely than not to have the effect of causing such Registration Statement to be suspended or otherwise ineffective. (i) Other. On each Condition Satisfaction Date, the Investor shall have received the certificate executed by an officer of the Company in the form of Exhibit A attached hereto. ARTICLE VIII. Due Diligence Review; Non-Disclosure of Non-Public Information Section 8.1. Due Diligence Review. Prior to the filing of the Registration Statement the Company shall make available for inspection and review by the Investor, advisors to and representatives of the Investor, any underwriter participating in any disposition of the Registrable Securities on behalf of the Investor pursuant to the Registration Statement, any such registration statement or amendment or supplement thereto or any blue sky, NASD or other filing, all financial and other records, all SEC Documents and other filings with the SEC, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such information reasonably requested by the Investor or any such representative, advisor or underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Investor and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of the Registration Statement. Section 8.2. Non-Disclosure of Non-Public Information. ----------------------------------------- (a) The Company shall not disclose non-public information to the Investor, advisors to or representatives of the Investor unless prior to disclosure of such information the Company identifies such information as being non-public information and provides the Investor, such advisors and representatives with the opportunity to accept or refuse to accept such non-public information for review. The Company may, as a condition to disclosing any non-public information hereunder, require the Investor's advisors and representatives to enter into a confidentiality agreement in form reasonably satisfactory to the Company and the Investor. (b) Nothing herein shall require the Company to disclose non-public information to the Investor or its advisors or representatives, and the Company represents that it does not disseminate non-public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts, provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, immediately notify the advisors and representatives of the Investor and, if any, underwriters, of 20 any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 8.2 shall be construed to mean that such persons or entities other than the Investor (without the written consent of the Investor prior to disclosure of such information) may not obtain non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. ARTICLE IX. Choice of Law/Jurisdiction Section 9.1. Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New Jersey without regard to the principles of conflict of laws. The parties further agree that any action between them shall be heard in Hudson County, New Jersey, and expressly consent to the jurisdiction and venue of the Superior Court of New Jersey, sitting in Hudson County, New Jersey and the United States District Court of New Jersey, sitting in Newark, New Jersey, for the adjudication of any civil action asserted pursuant to this paragraph. ARTICLE X. Assignment; Termination Section 10.1. Assignment. Neither this Agreement nor any rights of the Company hereunder may be assigned to any other Person. Section 10.2. Termination. The obligations of the Investor to make Advances under Article II hereof shall terminate twenty-four (24) months after the Effective Date. ARTICLE XI. Notices Section 11.1. Notices. Any notices, consents, waivers, or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each 21 case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company, to: iVoice Inc. 750 Highway 34 210 South Fourth Avenue Matawan, NJ 07747 Attention: Jerome R. Mahoney Telephone: (732) 441-7700 Facsimile: (732) 441-9895 With a copy to: Meritz & Muenz, LLP Three Hughes Place Dix Hills, NY 11746 Attention: Lawrence A. Muenz, Esq Telephone: (631) 242-7384 Facsimile: (631) 242-6715 If to the Investor(s): Cornell Capital Partners, LP 101 Hudson Street -Suite 3606 Jersey City, NJ 07302 Attention: Mark Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 With a Copy to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, NJ 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 Facsimile: (908) 810-0973 Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. ARTICLE XII. Miscellaneous Section 12.1. Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall cause four (4) additional original executed signature pages to be physically delivered to the other party within five (5) days of the execution and delivery hereof, though failure to deliver such copies shall not affect the validity of this Agreement. 22 Section 12.2. Entire Agreement; Amendments. This Agreement supersedes all other prior oral or written agreements between the Investor, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. Section 12.3. Reporting Entity for the Common Stock. The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of the Investor and the Company shall be required to employ any other reporting entity. Section 12.4. Fees and Expenses. The Company hereby agrees to pay the following fees: (a) Legal Fees. Each of the parties shall pay its own fees and expenses (including the fees of any attorneys, accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby, except that upon the execution of this Agreement the Company will issue to to Butler Gonzalez LLP shares of the Company's Common Stock in an amount equal to Ten Thousand Dollars ($10,000) divided by the Closing Bid Price of the Company's Common Stock on the date hereof (the "Butler Gonzalez Shares") for legal, administrative, and escrow fees. Subsequently on each advance date, the Company will pay Butler Gonzalez LLP, the sum of Five Hundred Dollars ($500) for legal, administrative and escrow fees directly out the proceeds of any Advances hereunder. (b) Commitment Fees. ---------------- (i) On each Advance Date the Company shall pay to the Investor, directly from the gross proceeds held in escrow, an amount equal to five and one half percent (5.5%) of the amount of each Advance. The Company hereby agrees that if such payment, as is described above, is not made by the Company on the Advance Date, such payment will be made at the direction of the Investor as outlined and mandated by Section 2.3 of this Agreement. (ii) Upon the execution of this Agreement the Company shall issue to the Investor shares of the Company's Common Stock in an amount equal to Nine Hundred Ninety Thousand Dollars ($990,000) divided by the Closing Bid Price on the Closing Date (the "Investor's Shares"). (iii) Fully Earned. The Investor's Shares and the Butler Gonzalez Shares shall be deemed fully earned as of the date hereof. (iv) Registration Rights. The Investor's Shares, the Butler Gonzalez Shares, the Common Stock issuable pursuant to a convertible promissory note payable to Jerome R. Mahoney for the sum of $680,554 and the Common Stock issuable pursuant to the conversion 23 of 1,799,875 shares of Class B Common Stock of the Company held by Jerome R. Mahoney, will have "piggy-back" registration rights. Section 12.5. Brokerage. Each of the parties hereto represents that it has had no dealings in connection with this transaction with any finder or broker who will demand payment of any fee or commission from the other party. The Company on the one hand, and the Investor, on the other hand, agree to indemnify the other against and hold the other harmless from any and all liabilities to any person claiming brokerage commissions or finder's fees on account of services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby. Section 12.6. Confidentiality. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party (except information publicly available or in such party's domain prior to the date hereof, and except as required by court order) and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 24 IN WITNESS WHEREOF, the parties hereto have caused this Standby Equity Distribution Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. COMPANY: iVOICE INC. By: /s/ Jerome R. Mahoney Name: Jerome R. Mahoney Title: President and Chief Executive Officer INVESTOR: CORNELL CAPITAL PARTNERS, LP By: Yorkville Advisors, LLC Its: General Partner By: /s/ Mark Angelo Name: Mark Angelo Title: Portfolio Manager 25 EXHIBIT A --------- ADVANCE NOTICE/COMPLIANCE CERTIFICATE ------------------------------------- iVOICE INC. ----------- The undersigned, Jerome R. Mahoney hereby certifies, with respect to the sale of shares of Common Stock of iVOICE INC., (the "Company"), issuable in connection with this Advance Notice and Compliance Certificate dated ___________________ (the "Notice"), delivered pursuant to the Standby Equity Distribution Agreement (the "Agreement"), as follows: 1. The undersigned is the duly elected President and Chief Executive Officer of the Company. 2. There are no fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post effective amendment to the Registration Statement. 3. The Company has performed in all material respects all covenants and agreements to be performed by the Company on or prior to the Advance Date related to the Notice and has complied in all material respects with all obligations and conditions contained in the Agreement. 4. The Advance requested is _____________________. The undersigned has executed this Certificate this ____ day of _______. iVOICE INC. By: _____________________________ Name: Jerome R. Mahoney Title: President and Chief Executive Officer SCHEDULED 2.6(b) ---------------- iVOICE INC. ----------- The undersigned hereby agrees that for a period commencing on the date hereof and expiring on the termination of the Agreement dated ________________ between iVOICE INC. (the "Company"), and Cornell Capital Partners, LP, (the "Investor") (the "Lock-up Period"), he, she or it will not, directly or indirectly, without the prior written consent of the Investor, issue, offer, agree or offer to sell, sell, grant an option for the purchase or sale of, transfer, pledge, assign, hypothecate, distribute or otherwise encumber or dispose of except pursuant to Rule 144 of the General Rules and Regulations under the Securities Act of 1933, any securities of the Company, including common stock or options, rights, warrants or other securities underlying, convertible into, exchangeable or exercisable for or evidencing any right to purchase or subscribe for any common stock (whether or not beneficially owned by the undersigned), or any beneficial interest therein (collectively, the "Securities"). In order to enable the aforesaid covenants to be enforced, the undersigned hereby consents to the placing of legends and/or stop-transfer orders with the transfer agent of the Company's securities with respect to any of the Securities registered in the name of the undersigned or beneficially owned by the undersigned, and the undersigned hereby confirms the undersigned's investment in the Company. Dated: _______________, 2003 Signature _________________________________ Address: _________________________________ City, State, Zip Code:___________ _________________________________ Print Social Security Number or Taxpayer I.D. Number EX-10 4 kl12028_ex10-29.txt EXHIBIT 10.29 REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.29 ------------- REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of December 31, 2003 by and between iVOICE INC., a New Jersey corporation, with its principal office located at 750 Highway 34 210 South Fourth Avenue Matawan, New Jersey 07747 (the "Company"), and CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor"). WHEREAS: A. In connection with the Standby Equity Distribution Agreement by and between the parties hereto of even date herewith (the "Standby Equity Distribution Agreement"), the Company has agreed, upon the terms and subject to the conditions of the Standby Equity Distribution Agreement, to issue and sell to the Investor that number of shares of the Company's common stock, no par value per share (the "Common Stock"), which can be purchased pursuant to the terms of the Equity Line Credit Agreement for an aggregate purchase price of up to Twenty Million Dollars ($20,000,000) . Capitalized terms not defined herein shall have the meaning ascribed to them in the Standby Equity Distribution Agreement. B. To induce the Investor to execute and deliver the Standby Equity Distribution 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. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: a. "Person" means a corporation, a limited liability company, an association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency. b. "Register," "registered," and "registration" refer to a registration effected by preparing and filing one or more Registration Statements (as defined below) in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous or delayed basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement(s) by the United States Securities and Exchange Commission (the "SEC"). c. "Registrable Securities" means the Investor's Shares and the Butler Gonzalez Shares, as defined in the Standby Equity Distribution Agreement,the shares of Common Stock issuable to Investors pursuant to the Standby Equity Distribution Agreement the Common Stock issuable pursuant to a convertible promissory note payable to Jerome R. Mahoney for the sum of $680,554 and the Common Stock issuable pursuant to the conversion of 1,799,875 shares of Class B Common Stock of the Company held by Jerome R. Mahoney.. d. "Registration Statement" means a registration statement under the 1933 Act which covers the Registrable Securities. 2. REGISTRATION. ------------- a. Mandatory Registration. The Company shall prepare and file with the SEC a Registration Statement on Form S-1, SB-2 or on such other form as is available. The Company shall cause such Registration Statement to be declared effective by the SEC prior to the first sale to the Investor of the Company's Common Stock pursuant to the Standby Equity Distribution Agreement. b. Sufficient Number of Shares Registered. In the event the number of shares available under a Registration Statement filed pursuant to Section 2(a) is insufficient to cover all of the Registrable Securities which the Investor has purchased pursuant to the Standby Equity Distribution Agreement, the Company shall amend the Registration Statement, or file a new Registration Statement (on the short form available therefore, if applicable), or both, so as to cover all of such Registrable Securities which the Investor has purchased pursuant to the Standby Equity Distribution Agreement as soon as practicable, but in any event not later than fifteen (15) days after the necessity therefore arises. The Company shall use it best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. For purposes of the foregoing provision, the number of shares available under a Registration Statement shall be deemed "insufficient to cover all of the Registrable Securities" if at any time the number of Registrable Securities issuable on an Advance Notice Date is greater than the number of shares available for resale under such Registration Statement. 3. RELATED OBLIGATIONS. -------------------- a. The Company shall keep the Registration Statement effective pursuant to Rule 415 at all times until the date on which the Investor shall have sold all the Registrable Securities covered by such Registration Statement (the "Registration Period"), which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such 2 Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement. In the case of amendments and supplements to a Registration Statement which are required to be filed pursuant to this Agreement (including pursuant to this Section 3(b)) by reason of the Company's filing a report on Form 10-KSB, Form 10-QSB or Form 8-K or any analogous report under the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Company shall have incorporated such report by reference into the Registration Statement, if applicable, or shall file such amendments or supplements with the SEC on the same day on which the 1934 Act report is filed which created the requirement for the Company to amend or supplement the Registration Statement. c. The Company shall furnish to the Investor without charge, (i) at least one copy of such Registration Statement as declared effective by the SEC and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, all exhibits and each preliminary prospectus, (ii) ten (10) copies of the final prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as such Investor may reasonably request) and (iii) such other documents as such Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by such Investor. d. The Company shall use its best efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under such other securities or "blue sky" laws of such jurisdictions in the United States as the Investor reasonably requests, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (w) make any change to its certificate of incorporation or by-laws, (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify the Investor of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or "blue sky" laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. e. As promptly as practicable after becoming aware of such event or development, the Company shall notify the Investor in writing of the happening of any event as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which 3 they were made, not misleading (provided that in no event shall such notice contain any material, nonpublic information), and promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to each Investor. The Company shall also promptly notify the Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to the Investor by facsimile on the same day of such effectiveness), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate. f. The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction within the United States of America and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify the Investor of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. g. At the reasonable request of the Investor, the Company shall furnish to the Investor, on the date of the effectiveness of the Registration Statement and thereafter from time to time on such dates as the Investor may reasonably request (i) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the Investor. h. The Company shall make available for inspection by (i) the Investor and (ii) one firm of accountants or other agents retained by the Investor (collectively, the "Inspectors") all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably deemed necessary by each Inspector, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, that each Inspector shall agree, and the Investor hereby agrees, to hold in strict confidence and shall not make any disclosure (except to an Investor) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement of which the Inspector and the Investor has knowledge. The Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake 4 appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. i. The Company shall hold in confidence and not make any disclosure of information concerning the Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning the Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to the Investor and allow the Investor, at the Investor's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. j. The Company shall use its best efforts either to cause all the Registrable Securities covered by a Registration Statement (i) to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange or to secure the inclusion for quotation on the National Association of Securities Dealers, Inc. OTC Bulletin Board for such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(j). k. The Company shall cooperate with the Investor to the extent applicable, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Investor may reasonably request and registered in such names as the Investor may request. l. The Company shall use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities. m. The Company shall make generally available to its security holders as soon as practical, but not later than one hundred five (105) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement. n. The Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder. o. Within two (2) business days after a Registration Statement which covers Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable 5 Securities (with copies to the Investor) confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as Exhibit A. p. The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investor of Registrable Securities pursuant to a Registration Statement. 4. OBLIGATIONS OF THE INVESTOR. ---------------------------- The Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e), the Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until the Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(e) or receipt of notice that no supplement or amendment is required. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended certificates for shares of Common Stock to a transferee of the Investor in accordance with the terms of the Standby Equity Distribution Agreement in connection with any sale of Registrable Securities with respect to which the Investor has entered into a contract for sale prior to the Investor's receipt of a notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e) and for which the Investor has not yet settled. 5. EXPENSES OF REGISTRATION. ------------------------- All expenses incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers, legal and accounting fees shall be paid by the Company. 6. INDEMNIFICATION. ---------------- With respect to Registrable Securities which are included in a Registration Statement under this Agreement: a. To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend the Investor, the directors, officers, partners, employees, agents, representatives of, and each Person, if any, who controls the Investor within the meaning of the 1933 Act or the 1934 Act (each, an "Indemnified Person"), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts paid in settlement or expenses, joint or several (collectively, "Claims") incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("Indemnified Damages"), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered 6 ("Blue Sky Filing"), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading; or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation there under relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). The Company shall reimburse the Investor and each such controlling person promptly as such expenses are incurred and are due and payable, for any legal fees or disbursements or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (x) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto; (y) shall not be available to the extent such Claim is based on a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company, if such prospectus was timely made available by the Company pursuant to Section 3(e); and (z) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person. b. In connection with a Registration Statement, the Investor agrees to indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement and each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (each an "Indemnified Party"), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or is based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by the Investor expressly for use in connection with such Registration Statement; and, subject to Section 6(d), the Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to the Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with 7 respect to any prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the prospectus was corrected and such new prospectus was delivered to the Investor prior to the Investor's use of the prospectus to which the Claim relates. c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses of not more than one counsel for such Indemnified Person or Indemnified Party to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its prior written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the prior written consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such claim or litigation. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. d. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred. 8 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 seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (ii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS UNDER THE 1934 ACT. --------------------------- With a view to making available to the Investor the benefits of Rule 144 promulgated under the 1933 Act or any similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144") the Company agrees to: a. make and keep public information available, as those terms are understood and defined in Rule 144; b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 6.3 of the Standby Equity Distribution Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and c. furnish to the Investor so long as the Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration. 9. AMENDMENT OF REGISTRATION RIGHTS. --------------------------------- Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only by a written agreement. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon the Investor and the Company. No consideration shall be offered or paid 9 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. 10. MISCELLANEOUS. -------------- a. A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. b. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one business day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company, to: iVoice Inc. 750 Highway 34 210 South Fourth Avenue Matawan, New Jersey 07747 Attention: Jerome R. Mahoney Telephone: (732) 441-7700 Facsimile: (732) 441-9895 With a copy to: Meritz & Muenz, LLP Three Hughes Place Dix Hills, NY 11746 Attention: Lawrence A. Muenz, Esq Telephone: (631) 242-7384 Facsimile: (631) 242-6715 If to the Investor, to: Cornell Capital Partners, LP 101 Hudson Street - Suite 3606 Jersey City, New Jersey 07302 Attention: Mark Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 With copy to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, New Jersey 07083 Attention: David Gonzalez, Esq. Telephone: (908) 810-8588 10 Facsimile: (908) 810-0973 Any party may change its address by providing written notice to the other parties hereto at least five days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. d. The corporate laws of the State of New Jersey shall govern all issues concerning the relative rights of the Company and the Investor. All other questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New Jersey, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New Jersey or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New Jersey. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the Superior Courts of the State of New Jersey, sitting in Hudson County, New Jersey and the Federal District Court for the District of New Jersey sitting in Newark, New Jersey, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. e. This Agreement, the Standby Equity Distribution Agreement, the Escrow Agreement and the Placement Agent Agreement constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the Standby Equity Distribution Agreement, the Escrow Agreement and the 11 Placement Agent Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. f. This Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto. g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. h. This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. j. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party. k. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 12 IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of day and year first above written. COMPANY: iVOICE INC. By: /s/Jerome R. Mahoney Name: Jerome R. Mahoney Title: President and Chief Executive Officer INVESTOR: CORNELL CAPITAL PARTNERS, LP By: Yorkville Advisors, LLC Its: General Partner By: /s/ Mark Angelo Name: Mark Angelo Title: Portfolio Manager 13 EXHIBIT A FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT INSERT Re: iVOICE INC. ----------- Ladies and Gentlemen: We are counsel to iVOICE INC., a New Jersey corporation (the "Company"), and have represented the Company in connection with that certain Standby Equity Distribution Agreement (the "Standby Equity Distribution Agreement") entered into by and between the Company and Cornell Capital Partners, LP (the "Investor") pursuant to which the Company issued to the Investor shares of its Common Stock, no par value per share (the "Common Stock"). Pursuant to the Standby Equity Distribution Agreement, the Company also has entered into a Registration Rights Agreement with the Investor (the "Registration Rights Agreement") pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement) under the Securities Act of 1933, as amended (the "1933 Act"). In connection with the Company's obligations under the Registration Rights Agreement, on ____________ ____, the Company filed a Registration Statement on Form ________ (File No. 333-_____________) (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") relating to the Registrable Securities which names the Investor as a selling stockholder thereunder. In connection with the foregoing, we advise you that a member of the SEC's staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after telephonic inquiry of a member of the SEC's staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the 1933 Act pursuant to the Registration Statement. Very truly yours, By: ----------------------- cc: Cornell Capital Partners, LP EX-10 5 kl12028_ex10-30.txt EXHIBIT 10.30 PLACEMENT AGENT AGREEMENT EXHIBIT 10.30 ------------- iVOICE INC. PLACEMENT AGENT AGREEMENT Dated as of: December 31, 2003 CapStone Investments 4660 LaJolla Village Drive, Suite 1040 San Diego, California 92122 Ladies and Gentlemen: The undersigned, iVoice Inc., a New Jersey corporation (the "Company"), hereby agrees with CapStone Investments (the "Placement Agent") and Cornell Capital Partners, LP, a Delaware Limited Partnership (the "Investor"), as follows: 1. Offering. The Company hereby engages the Placement Agent to act as its exclusive placement agent in connection with the Standby Equity Distribution Agreement dated the date hereof (the "Standby Equity Distribution Agreement"), pursuant to which the Company shall issue and sell to the Investor, from time to time, and the Investor shall purchase from the Company (the "Offering") up to Twenty Million Dollars ($20,000,000) of the Company's common stock (the "Commitment Amount"), no par value per share (the "Common Stock"), at price per share equal to the Purchase Price, as that term is defined in the Standby Equity Distribution Agreement. All capitalized terms used herein and not otherwise defined herein shall have the same meaning ascribed to them as in the Standby Equity Distribution Agreement. The Investor will be granted certain registration rights with respect to the Common Stock as more fully set forth in the Registration Rights Agreement between the Company and the Investor dated the date hereof (the "Registration Rights Agreement"). The documents to be executed and delivered in connection with the Offering, including, but not limited, to the Company's latest Quarterly Report on Form 10-QSB as filed with the United States Securities and Exchange Commission, this Agreement, the Standby Equity Distribution Agreement, the Registration Rights Agreement, and the Escrow Agreement dated the date hereof (the "Escrow Agreement"), are referred to sometimes hereinafter collectively as the "Offering Materials." The Company's Common Stock purchased by the Investor hereunder is sometimes referred to hereinafter as the "Securities." The Placement Agent shall not be obligated to sell any Securities. 2. Compensation. ------------- A. Upon the execution of this Agreement, the Company shall issue to the Placement Agent or its designee shares of the Company's Common Stock in an amount equal to Ten Thousand Dollars ($10,000) divided by the Closing Bid Price of the Company's Common Stock on the date hereof (the "Placement Agent's Shares"). The Placement Agent shall be entitled to "piggy-back" registration rights, which shall be triggered upon registration of any shares of Common Stock by the Investor with respect to the Placement Agent's Shares pursuant to the Registration Rights Agreement dated the date hereof. 3. Representations, Warranties and Covenants of the Placement Agent. ----------------------------------------------------------------- A. The Placement Agent represents, warrants and covenants as follows: (i) The Placement Agent has the necessary power to enter into this Agreement and to consummate the transactions contemplated hereby. (ii) The execution and delivery by the Placement Agent of this Agreement and the consummation of the transactions contemplated herein will not result in any violation of, or be in conflict with, or constitute a default under, any agreement or instrument to which the Placement Agent is a party or by which the Placement Agent or its properties are bound, or any judgment, decree, order or, to the Placement Agent's knowledge, any statute, rule or regulation applicable to the Placement Agent. This Agreement when executed and delivered by the Placement Agent, will constitute the legal, valid and binding obligations of the Placement Agent, enforceable in accordance with their respective terms, except to the extent that (a) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, (b) the enforceability hereof or thereof is subject to general principles of equity, or (c) the indemnification provisions hereof or thereof may be held to be in violation of public policy. (iii) Upon receipt and execution of this Agreement, the Placement Agent will promptly forward copies of this Agreement to the Company or its counsel and the Investor or its counsel. (iv) The Placement Agent will not intentionally take any action that it reasonably believes would cause the Offering to violate the provisions of the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934 (the "1934 Act"), the respective rules and regulations promulgated thereunder (the "Rules and Regulations") or applicable "Blue Sky" laws of any state or jurisdiction. (v) The Placement Agent is a member of the National Association of Securities Dealers, Inc., and is a broker-dealer registered as such under the 1934 Act and under the securities laws of the states in which the Securities will be offered or sold by the Placement Agent unless an exemption for such state registration is available to the Placement Agent. The Placement Agent is in material compliance with the rules and regulations applicable to the Placement Agent generally and applicable to the Placement Agent's participation in the Offering. 4. Representations and Warranties of the Company. ---------------------------------------------- A. The Company represents and warrants as follows: (i) The execution, delivery and performance of each of this Agreement, the Standby Equity Distribution Agreement, the Escrow Agreement, and the 2 Registration Rights Agreement has been or will be duly and validly authorized by the Company and is, or with respect to this Agreement, the Standby Equity Distribution Agreement, the Escrow Agreement, and the Registration Rights Agreement will be, a valid and binding agreement of the Company, enforceable in accordance with its respective terms, except to the extent that (a) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, (b) the enforceability hereof or thereof is subject to general principles of equity or (c) the indemnification provisions hereof or thereof may be held to be in violation of public policy. The Securities to be issued pursuant to the transactions contemplated by this Agreement and the Standby Equity Distribution Agreement have been duly authorized and, when issued and paid for in accordance with this Agreement, the Equity Line of Agreement and the certificates/instruments representing such Securities, will be valid and binding obligations of the Company, enforceable in accordance with their respective terms, except to the extent that (1) the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, and (2) the enforceability thereof is subject to general principles of equity. All corporate action required to be taken for the authorization, issuance and sale of the Securities has been duly and validly taken by the Company. (ii) The Company has a duly authorized, issued and outstanding capitalization as set forth herein and in the Standby Equity Distribution Agreement. The Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the agreements described herein and as described in the Standby Equity Distribution Agreement, dated the date hereof and the agreements described therein. All issued and outstanding securities of the Company, have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission or preemptive rights with respect thereto and are not subject to personal liability solely by reason of being security holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company. As of the date hereof, the authorized capital stock of the Company consists of 10,000,000,000 shares of Common Stock, no par value per share and 1,000,000 shares of Preferred Stock of which 5,045,000,000 shares of Common Stock and no shares of Preferred Stock were issued and outstanding as of the date thereof. (iii) The Common Stock to be issued in accordance with this Agreement and the Standby Equity Distribution Agreement has been duly authorized and, when issued and paid for in accordance with this Agreement and the Standby Equity Distribution Agreement, the certificates/instruments representing such Common Stock will be validly issued, fully-paid and non-assessable; the holders thereof will not be subject to personal liability solely by reason of being such holders; such Securities are not and will not be subject to the preemptive rights of any holder of any security of the Company. (iv) The Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property necessary to conduct its business (including, without limitation, any real or personal property stated in the Offering Materials to be owned or leased by the Company), free and clear of all liens, encumbrances, 3 claims, security interests and defects of any material nature whatsoever, other than those set forth in the Offering Materials and liens for taxes not yet due and payable. (v) There is no litigation or governmental proceeding pending or, to the best of the Company's knowledge, threatened against, or involving the properties or business of the Company, except as set forth in the Offering Materials. (vi) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of New Jersey. Except as set forth in the Offering Materials, the Company does not own or control, directly or indirectly, an interest in any other corporation, partnership, trust, joint venture or other business entity. The Company is duly qualified or licensed and in good standing as a foreign corporation in each jurisdiction in which the character of its operations requires such qualification or licensing and where failure to so qualify would have a material adverse effect on the Company. The Company has all requisite corporate power and authority, and all material and necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies (domestic and foreign) to conduct its businesses (and proposed business) as described in the Offering Materials. Any disclosures in the Offering Materials concerning the effects of foreign, federal, state and local regulation on the Company's businesses as currently conducted and as contemplated are correct in all material respects and do not omit to state a material fact. The Company has all corporate power and authority to enter into this Agreement, the Standby Equity Distribution Agreement, the Registration Rights Agreement, and the Escrow Agreement, to carry out the provisions and conditions hereof and thereof, and all consents, authorizations, approvals and orders required in connection herewith and therewith have been obtained. No consent, authorization or order of, and no filing with, any court, government agency or other body is required by the Company for the issuance of the Securities or execution and delivery of the Offering Materials except for applicable federal and state securities laws. The Company, since its inception, has not incurred any liability arising under or as a result of the application of any of the provisions of the 1933 Act, the 1934 Act or the Rules and Regulations. (vii) There has been no material adverse change in the condition or prospects of the Company, financial or otherwise, from the latest dates as of which such condition or prospects, respectively, are set forth in the Offering Materials, and the outstanding debt, the property and the business of the Company conform in all material respects to the descriptions thereof contained in the Offering Materials. (viii) Except as set forth in the Offering Materials, the Company is not in breach of, or in default under, any term or provision of any material indenture, mortgage, deed of trust, lease, note, loan or Standby Equity Distribution Agreement or any other material agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which it is a party or by which it or any of its properties may be bound or affected. The Company is not in violation of any provision of its charter or by-laws or in violation of any franchise, license, permit, judgment, decree or order, or in violation of any material statute, rule or regulation. Neither the execution and delivery of the Offering Materials nor the issuance and sale or delivery of the Securities, nor the consummation of any of the transactions contemplated in the Offering Materials nor the compliance by the Company with the terms and provisions hereof or thereof, has conflicted with or will conflict with, or has resulted in 4 or will result in a breach of, any of the terms and provisions of, or has constituted or will constitute a default under, or has resulted in or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or pursuant to the terms of any indenture, mortgage, deed of trust, note, loan or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company may be bound or to which any of the property or assets of the Company is subject except (a) where such default, lien, charge or encumbrance would not have a material adverse effect on the Company and (b) as described in the Offering Materials; nor will such action result in any violation of the provisions of the charter or the by-laws of the Company or, assuming the due performance by the Placement Agent of its obligations hereunder, any material statute or any material order, rule or regulation applicable to the Company of any court or of any foreign, federal, state or other regulatory authority or other government body having jurisdiction over the Company. (ix) Subsequent to the dates as of which information is given in the Offering Materials, and except as may otherwise be indicated or contemplated herein or therein and the securities offered pursuant to the Standby Equity Distribution Agreementdated the date hereof, the Company has not (a) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, or (b) entered into any transaction other than in the ordinary course of business, or (c) declared or paid any dividend or made any other distribution on or in respect of its capital stock. Except as described in the Offering Materials, the Company has no outstanding obligations to any officer or director of the Company. (x) There are no claims for services in the nature of a finder's or origination fee with respect to the sale of the Common Stock or any other arrangements, agreements or understandings that may affect the Placement Agent's compensation, as determined by the National Association of Securities Dealers, Inc. (xi) The Company owns or possesses, free and clear of all liens or encumbrances and rights thereto or therein by third parties, the requisite licenses or other rights to use all trademarks, service marks, copyrights, service names, trade names, patents, patent applications and licenses necessary to conduct its business (including, without limitation, any such licenses or rights described in the Offering Materials as being owned or possessed by the Company) and, except as set forth in the Offering Materials, there is no claim or action by any person pertaining to, or proceeding, pending or threatened, which challenges the exclusive rights of the Company with respect to any trademarks, service marks, copyrights, service names, trade names, patents, patent applications and licenses used in the conduct of the Company's businesses (including, without limitation, any such licenses or rights described in the Offering Materials as being owned or possessed by the Company) except any claim or action that would not have a material adverse effect on the Company; the Company's current products, services or processes do not infringe or will not infringe on the patents currently held by any third party. (xii) Except as described in the Offering Materials, the Company is not under any obligation to pay royalties or fees of any kind whatsoever to any third party with respect to any trademarks, service marks, copyrights, service names, trade names, patents, patent applications, licenses or technology it has developed, uses, employs or intends to use or employ, other than to their respective licensors. 5 (xiii) Subject to the performance by the Placement Agent of its obligations hereunder the offer and sale of the Securities complies, and will continue to comply, in all material respects with the requirements of Rule 506 of Regulation D promulgated by the SEC pursuant to the 1933 Act and any other applicable federal and state laws, rules, regulations and executive orders. Neither the Offering Materials nor any amendment or supplement thereto nor any documents prepared by the Company in connection with the Offering will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. All statements of material facts in the Offering Materials are true and correct as of the date of the Offering Materials. (xiv) All material taxes which are due and payable from the Company have been paid in full or adequate provision has been made for such taxes on the books of the Company, except for those taxes disputed in good faith by the Company (xv) None of the Company nor any of its officers, directors, employees or agents, nor any other person acting on behalf of the Company, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who is or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) which (A) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, or (B) if not given in the past, might have had a materially adverse effect on the assets, business or operations of the Company as reflected in any of the financial statements contained in the Offering Materials, or (C) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company in the future. 5. Representations, Warranties and Covenants of the Investor. ---------------------------------------------------------- A. The Investor represents, warrants and covenants as follows: (i) The Investor has the necessary power to enter into this Agreement and to consummate the transactions contemplated hereby. (ii) The execution and delivery by the Investor of this Agreement and the consummation of the transactions contemplated herein will not result in any violation of, or be in conflict with, or constitute a default under, any agreement or instrument to which the Investor is a party or by which the Investor or its properties are bound, or any judgment, decree, order or, to the Investor's knowledge, any statute, rule or regulation applicable to the Investor. This Agreement when executed and delivered by the Investor, will constitute the legal, valid and binding obligations of the Investor, enforceable in accordance with their respective terms, except to the extent that (a) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, (b) the enforceability hereof or thereof is 6 subject to general principles of equity, or (c) the indemnification provisions hereof or thereof may be held to be in violation of public policy. (iii) The Investor will promptly forward copies of any and all due diligence questionnaires compiled by the Investor to the Placement Agent. (iv) The Investor is an Accredited Investor (as defined under the 1933 Act). (v) The Investor is acquiring the Securities for the Inventor's own account as principal, not as a nominee or agent, for investment purposes only, and not with a view to, or for, resale, distribution or fractionalization thereof in whole or in part and no other person has a direct or indirect beneficial interest in such Securities. Further, the Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. (vi) The Investor acknowledges the Investor's understanding that the offering and sale of the Securities is intended to be exempt from registration under the 1933 Act by virtue of Section 3(b) of the 1933 Act and the provisions of Regulation D promulgated thereunder ("Regulation D"). In furtherance thereof, the Investor represents and warrants as follows: (a) The Investor has the financial ability to bear the economic risk of the Investor's investment, has adequate means for providing for the Inventor's current needs and personal contingencies and has no need for liquidity with respect to the Investor's investment in the Company; and (b) The Investor has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment. The Inventor also represents it has not been organized for the purpose of acquiring the Securities. (vii) The Investor has been given the opportunity for a reasonable time prior to the date hereof to ask questions of, and receive answers from, the Company or its representatives concerning the terms and conditions of the Offering, and other matters pertaining to this investment, and has been given the opportunity for a reasonable time prior to the date hereof to obtain such additional information in connection with the Company in order for the Investor to evaluate the merits and risks of purchase of the Securities, to the extent the Company possesses such information or can acquire it without unreasonable effort or expense. The Investor is not relying on the Placement Agent or any of its affiliates with respect to the accuracy or completeness of the Offering Materials or for any economic considerations involved in this investment. 6. Certain Covenants and Agreements of the Company. ------------------------------------------------ The Company covenants and agrees at its expense and without any expense to the Placement Agent as follows: 7 A. To advise the Placement Agent and the Investor of any material adverse change in the Company's financial condition, prospects or business or of any development materially affecting the Company or rendering untrue or misleading any material statement in the Offering Materials occurring at any time as soon as the Company is either informed or becomes aware thereof. B. To use its commercially reasonable efforts to cause the Common Stock issuable in connection with the Equity Line of Credit to be qualified or registered for sale on terms consistent with those stated in the Registration Rights Agreement and under the securities laws of such jurisdictions as the Placement Agent and the Investor shall reasonably request. Qualification, registration and exemption charges and fees shall be at the sole cost and expense of the Company. C. Upon written request, to provide and continue to provide the Placement Agent and the Investor copies of all quarterly financial statements and audited annual financial statements prepared by or on behalf of the Company, other reports prepared by or on behalf of the Company for public disclosure and all documents delivered to the Company's stockholders. D. To deliver, during the registration period of the Standby Equity Distribution Agreement, to the Investor upon the Investor's request, within fifty (50) days, a statement of its income for each such quarterly period, and its balance sheet and a statement of changes in stockholders' equity as of the end of such quarterly period, all in reasonable detail, certified by its principal financial or accounting officer; (ii) within one hundred five (105) days after the close of each fiscal year, its balance sheet as of the close of such fiscal year, together with a statement of income, a statement of changes in stockholders' equity and a statement of cash flow for such fiscal year, such balance sheet, statement of income, statement of changes in stockholders' equity and statement of cash flow to be in reasonable detail and accompanied by a copy of the certificate or report thereon of independent auditors if audited financial statements are prepared; and (iii) a copy of all documents, reports and information furnished to its stockholders at the time that such documents, reports and information are furnished to its stockholders. E. To comply with the terms of the Offering Materials. F. To ensure that any transactions between or among the Company, or any of its officers, directors and affiliates be on terms and conditions that are no less favorable to the Company, than the terms and conditions that would be available in an "arm's length" transaction with an independent third party. 7. Indemnification and Limitation of Liability. -------------------------------------------- A. The Company hereby agrees that it will indemnify and hold the Placement Agent and each officer, director, shareholder, employee or representative of the Placement Agent and each person controlling, controlled by or under common control with the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the SEC's Rules and Regulations promulgated thereunder (the "Rules and Regulations"), harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but 8 not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Placement Agent or such indemnified person of the Placement Agent may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in (a) Section 4 of this Agreement, (b) the Offering Materials (except those written statements relating to the Placement Agent given by the Placement Agent for inclusion therein), (c) any application or other document or written communication executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Common Stock under the securities laws thereof, or any state securities commission or agency; (ii) the omission or alleged omission from documents described in clauses (a), (b) or (c) above of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iii) the breach of any representation, warranty, covenant or agreement made by the Company in this Agreement. The Company further agrees that upon demand by an indemnified person, at any time or from time to time, it will promptly reimburse such indemnified person for any loss, claim, damage, liability, cost or expense actually and reasonably paid by the indemnified person as to which the Company has indemnified such person pursuant hereto. Notwithstanding the foregoing provisions of this Paragraph 7(A), any such payment or reimbursement by the Company of fees, expenses or disbursements incurred by an indemnified person in any proceeding in which a final judgment by a court of competent jurisdiction (after all appeals or the expiration of time to appeal) is entered against the Placement Agent or such indemnified person based upon specific finding of fact that the Placement Agent or such indemnified person's gross negligence or willful misfeasance will be promptly repaid to the Company. B. The Placement Agent hereby agrees that it will indemnify and hold the Company and each officer, director, shareholder, employee or representative of the Company, and each person controlling, controlled by or under common control with the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations, harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Company or such indemnified person of the Company may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon (i) the material breach of any representation, warranty, covenant or agreement made by the Placement Agent in this Agreement, or (ii) any false or misleading information provided to the Company in writing by one of the Placement Agent's indemnified persons specifically for inclusion in the Offering Materials. 9 C. The Investor hereby waives, to the fullest extent permitted by law, any right to or claim of any punitive, exemplary, incidental, indirect, special, consequential or other damages (including, without limitation, loss of profits) against the Placement Agent and each officer, director, shareholder, employee or representative of the placement agent and each person controlling, controlled by or under common control with the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations arising out of any cause whatsoever (whether such cause be based in contract, negligence, strict liability, other tort or otherwise). Notwithstanding anything to the contrary contained herein, the aggregate liability of the Placement Agent and each officer, director, shareholder, employee or representative of the Placement Agent and each person controlling, controlled by or under common control with the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations shall not exceed the compensation received by the Placement Agent pursuant to Section 2 hereof. This limitation of liability shall apply regardless of the cause of action, whether contract, tort (including, without limitation, negligence) or breach of statute or any other legal or equitable obligation. D. The Placement Agent hereby agrees that it will indemnify and hold the Investor and each officer, director, shareholder, employee or representative of the Investor, and each person controlling, controlled by or under common control with the Investor within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations, harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Investor or such indemnified person of the Investor may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon the material breach of any representation, warranty, covenant or agreement made by the Placement Agent in this Agreement. E. Promptly after receipt by an indemnified party of notice of commencement of any action covered by Section 7(A), (B), (C) or (D), the party to be indemnified shall, within five (5) business days, notify the indemnifying party of the commencement thereof; the omission by one (1) indemnified party to so notify the indemnifying party shall not relieve the indemnifying party of its obligation to indemnify any other indemnified party that has given such notice and shall not relieve the indemnifying party of any liability outside of this indemnification if not materially prejudiced thereby. In the event that any action is brought against the indemnified party, the indemnifying party will be entitled to participate therein and, to the extent it may desire, to assume and control the defense thereof with counsel chosen by it which is reasonably acceptable to the indemnified party. After notice from the indemnifying party to such indemnified party of its election to so assume the defense thereof, the indemnifying party will not be liable to such indemnified party under such Section 7(A), (B), (C), or (D) for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense 10 thereof, but the indemnified party may, at its own expense, participate in such defense by counsel chosen by it, without, however, impairing the indemnifying party's control of the defense. Subject to the proviso of this sentence and notwithstanding any other statement to the contrary contained herein, the indemnified party or parties shall have the right to choose its or their own counsel and control the defense of any action, all at the expense of the indemnifying party if (i) the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action at the expense of the indemnifying party, or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to such indemnified party to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses of one additional counsel shall be borne by the indemnifying party; provided, however, that the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstance, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all such indemnified parties. No settlement of any action or proceeding against an indemnified party shall be made without the consent of the indemnifying party. F. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 7(A) or 7(B) is due in accordance with its terms but is for any reason held by a court to be unavailable on grounds of policy or otherwise, the Company and the Placement Agent shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with the investigation or defense of same) which the other may incur in such proportion so that the Placement Agent shall be responsible for such percent of the aggregate of such losses, claims, damages and liabilities as shall equal the percentage of the gross proceeds paid to the Placement Agent and the Company shall be responsible for the balance; provided, however, that no person guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the 1933 Act shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7(F), any person controlling, controlled by or under common control with the Placement Agent, or any partner, director, officer, employee, representative or any agent of any thereof, shall have the same rights to contribution as the Placement Agent and each person controlling, controlled by or under common control with the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and each officer of the Company and each director of the Company shall have the same rights to contribution as the Company. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against the other party under this Section 7(D), notify such party from whom contribution may be sought, but the omission to so notify such party shall not relieve the party from whom contribution may be sought from any obligation they may have hereunder or otherwise if the party from whom contribution may be sought is not materially prejudiced thereby. 11 G. The indemnity and contribution agreements contained in this Section 7 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified person or any termination of this Agreement. H. The Company hereby waives, to the fullest extent permitted by law, any right to or claim of any punitive, exemplary, incidental, indirect, special, consequential or other damages (including, without limitation, loss of profits) against the Placement Agent and each officer, director, shareholder, employee or representative of the placement agent and each person controlling, controlled by or under common control with the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations arising out of any cause whatsoever (whether such cause be based in contract, negligence, strict liability, other tort or otherwise). Notwithstanding anything to the contrary contained herein, the aggregate liability of the Placement Agent and each officer, director, shareholder, employee or representative of the Placement Agent and each person controlling, controlled by or under common control with the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations shall not exceed the compensation received by the Placement Agent pursuant to Section 2 hereof. This limitation of liability shall apply regardless of the cause of action, whether contract, tort (including, without limitation, negligence) or breach of statute or any other legal or equitable obligation. 8. Payment of Expenses. -------------------- The Company hereby agrees to bear all of the expenses in connection with the Offering, including, but not limited to the following: filing fees, printing and duplicating costs, advertisements, postage and mailing expenses with respect to the transmission of Offering Materials, registrar and transfer agent fees, escrow agent fees and expenses, fees of the Company's counsel and accountants, issue and transfer taxes, if any. 9. Conditions of Closing. ---------------------- The Closing shall be held at the offices of the Investor or its counsel. The obligations of the Placement Agent hereunder shall be subject to the continuing accuracy of the representations and warranties of the Company and the Investor herein as of the date hereof and as of the Date of Closing (the "Closing Date") with respect to the Company or the Investor, as the case may be, as if it had been made on and as of such Closing Date; the accuracy on and as of the Closing Date of the statements of the officers of the Company made pursuant to the provisions hereof; and the performance by the Company and the Investor on and as of the Closing Date of its covenants and obligations hereunder and to the following further conditions: A. Upon the effectiveness of a registration statement covering the Standby Equity Distribution Agreement, the Investor and the Placement Agent shall receive the opinion of Counsel to the Company, dated as of the date thereof, which opinion shall be in form and substance reasonably satisfactory to the Investor, their counsel and the Placement Agent. B. At or prior to the Closing, the Investor and the Placement Agent shall have been furnished such documents, certificates and opinions as it may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Agreement and the Offering Materials, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained. 12 C. At and prior to the Closing, (i) there shall have been no material adverse change nor development involving a prospective change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Offering Materials; (ii) there shall have been no transaction, not in the ordinary course of business except the transactions pursuant to the Securities Purchase Agreement entered into by the Company on the date hereof which has not been disclosed in the Offering Materials or to the Placement Agent in writing; (iii) except as set forth in the Offering Materials, the Company shall not be in default under any provision of any instrument relating to any outstanding indebtedness for which a waiver or extension has not been otherwise received; (iv) except as set forth in the Offering Materials, the Company shall not have issued any securities (other than those to be issued as provided in the Offering Materials) or declared or paid any dividend or made any distribution of its capital stock of any class and there shall not have been any change in the indebtedness (long or short term) or liabilities or obligations of the Company (contingent or otherwise) and trade payable debt; (v) no material amount of the assets of the Company shall have been pledged or mortgaged, except as indicated in the Offering Materials; and (v) no action, suit or proceeding, at law or in equity, against the Company or affecting any of its properties or businesses shall be pending or threatened before or by any court or federal or state commission, board or other administrative agency, domestic or foreign, wherein an unfavorable decision, ruling or finding could materially adversely affect the businesses, prospects or financial condition or income of the Company, except as set forth in the Offering Materials. D. If requested at Closing the Investor and the Placement Agent shall receive a certificate of the Company signed by an executive officer and chief financial officer, dated as of the applicable Closing, to the effect that the conditions set forth in subparagraph (C) above have been satisfied and that, as of the applicable closing, the representations and warranties of the Company set forth herein are true and correct. E. The Placement Agent shall have no obligation to insure that (x) any check, note, draft or other means of payment for the Common Stock will be honored, paid or enforceable against the Investor in accordance with its terms, or (y) subject to the performance of the Placement Agent's obligations and the accuracy of the Placement Agent's representations and warranties hereunder, (1) the Offering is exempt from the registration requirements of the 1933 Act or any applicable state "Blue Sky" law or (2) the Investor is an Accredited Investor. 10. Termination. ------------ This Agreement shall be co-terminus with, and terminate upon the same terms and conditions as those set forth in, the Standby Equity Distribution Agreement. The rights of the Investor and the obligations of the Company under the Registration Rights Agreement, and the rights of the Placement Agent and the obligations of the Company shall survive the termination of this Agreement unabridged. 13 11. Miscellaneous. -------------- A. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all which shall be deemed to be one and the same instrument. B. Any notice required or permitted to be given hereunder shall be given in writing and shall be deemed effective when deposited in the United States mail, postage prepaid, or when received if personally delivered or faxed (upon confirmation of receipt received by the sending party), addressed as follows to such other address of which written notice is given to the others): If to Placement Agent, to: CapStone Investments 4660 La Jolla Village Drive, Suite 1040 San Diego, California 92122 Attention: Steven P. Capozza, President Telephone: (858) 875-4500 Facsimile: (858) 455-5133 If to the Company, to: iVoice Inc. 750 Highway 34 210 South Fourth Avenue Matawan, New Jersey 07747 Attention: Jerome R. Mahoney Telephone: (732) 441-7700 Facsimile: (732) 441-9895 With a copy to: Meritz & Muenz, LLP Three Hughes Place Dix Hills, New York 11746 Attention: Lawrence A. Muenz, Esq Telephone: (631) 242-7384 Facsimile: (631) 242-6715 If to the Investor: Cornell Capital Partners, LP 101 Hudson Street - Suite 3606 Jersey City, New Jersey 07302 Attention: Mark A. Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 With Copies to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, New Jersey 07083 Attention: David Gonzalez, Esq. Facsimile: (908) 810-0973 14 Butler Gonzalez LLP C. This Agreement shall be governed by and construed in all respects under the laws of the State of New Jersey , without reference to its conflict of laws rules or principles. Any suit, action, proceeding or litigation arising out of or relating to this Agreement shall be brought and prosecuted in such federal or state court or courts located within the State of New Jersey as provided by law. The parties hereby irrevocably and unconditionally consent to the jurisdiction of each such court or courts located within the State of New Jersey and to service of process by registered or certified mail, return receipt requested, or by any other manner provided by applicable law, and hereby irrevocably and unconditionally waive any right to claim that any suit, action, proceeding or litigation so commenced has been commenced in an inconvenient forum. D. This Agreement and the other agreements referenced herein contain the entire understanding between the parties hereto and may not be modified or amended except by a writing duly signed by the party against whom enforcement of the modification or amendment is sought. E. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMPANY: iVOICE INC. By: /s/ Jerome R. Mahoney Name: Jerome R. Mahoney Title: President and Chief Executive Officer PLACEMENT AGENT: CAPSTONE INVESTMENTS By: /s/ Anthony Capozza Name: Anthony Capozza Title: President INVESTOR: CORNELL CAPITAL PARTNERS, LP By: Yorkville Advisors, LLC Its: General Partner By:/s/ Mark A. Angelo Name: Mark A. Angelo Title: Portfolio Manager 16 EX-10 6 kl12028_ex10-31.txt EXHIBIT 10.31 ESCROW AGREEMENT EXHIBIT 10.31 ------------- ESCROW AGREEMENT ---------------- THIS ESCROW AGREEMENT (this "Agreement") is made and entered into as of December 31, 2003 by iVOICE INC., a New Jersey corporation (the "Company"); CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor"); and BUTLER GONZALEZ LLP ( "Escrow Agent"). BACKGROUND ---------- WHEREAS, the Company and the Investor have entered into an Standby Equity Distribution Agreement (the "Standby Equity Distribution Agreement") dated as of the date hereof, pursuant to which the Investor will purchase the Company's Common Stock, no par value per share (the "Common Stock"), at a price per share equal to the Purchase Price, as that term is defined in the Standby Equity Distribution Agreement, for an aggregate price of up to Twenty Million Dollars ($20,000,000). The Standby Equity Distribution Agreement provides that on each Advance Date the Investor, as that term is defined in the Standby Equity Distribution Agreement, shall deposit the Advance pursuant to the Advance Notice in a segregated escrow account to be held by Escrow Agent and the Company shall deposit shares of the Company's Common Stock, which shall be purchased by the Investor as set forth in the Standby Equity Distribution Agreement, with the Escrow Agent, in order to effectuate a disbursement to the Company of the Advance by the Escrow Agent and a disbursement to the Investor of the shares of the Company's Common Stock by Escrow Agent at a closing to be held as set forth in the Standby Equity Distribution Agreement (the "Closing"). WHEREAS, Escrow Agent has agreed to accept, hold, and disburse the funds and the shares of the Company's Common Stock deposited with it in accordance with the terms of this Agreement. WHEREAS, in order to establish the escrow of funds and shares to effect the provisions of the Standby Equity Distribution Agreement, the parties hereto have entered into this Agreement. NOW THEREFORE, in consideration of the foregoing, it is hereby agreed as follows: 1. Definitions. The following terms shall have the following meanings when used herein: a. "Escrow Funds" shall mean the Advance funds deposited with the Escrow Agent pursuant to this Agreement. b. "Joint Written Direction" shall mean a written direction executed by the Investor and the Company directing Escrow Agent to disburse all or a portion of the Escrow Funds or to take or refrain from taking any action pursuant to this Agreement. c. "Common Stock Joint Written Direction" shall mean a written direction executed by the Investor and the Company directing Investor's Counsel to disburse all or a portion of the shares of the Company's Common Stock or to refrain from taking any action pursuant to this Agreement. 2. Appointment of and Acceptance by Escrow Agent. ---------------------------------------------- a. The Investor and the Company hereby appoint Escrow Agent to serve as Escrow Agent hereunder. Escrow Agent hereby accepts such appointment and, upon receipt by wire transfer of the Escrow Funds in accordance with Section 3 below, agrees to hold, invest and disburse the Escrow Funds in accordance with this Agreement. b. The Investor and the Company hereby appoint the Escrow Agent to serve as the holder of the shares of the Company's Common Stock which shall be purchased by the Investor. The Escrow Agent hereby accepts such appointment and, upon receipt via D.W.A.C or the certificates representing of the shares of the Company's Common Stock in accordance with Section 3 below, agrees to hold and disburse the shares of the Company's Common Stock in accordance with this Agreement. c. The Company hereby acknowledges that the Escrow Agent is counsel to the Investor in connection with the transactions contemplated and referenced herein. The Company agrees that in the event of any dispute arising in connection with this Escrow Agreement or otherwise in connection with any transaction or agreement contemplated and referenced herein, the Escrow Agent shall be permitted to continue to represent the Investor and the Company will not seek to disqualify such counsel. 3. Creation of Escrow Account/Common Stock Account. ------------------------------------------------ a. On or prior to the date of this Agreement the Escrow Agent shall establish an escrow account for the deposit of the Escrow Funds entitled as follows: iVoice Inc/Cornell Capital Partners, LP. The Investor will wire funds to the account of the Escrow Agent as follows: Bank: Wachovia, N.A. of New Jersey Routing #: 031201467 Account #: 2020000659170 Name on Account: Butler Gonzalez LLP as Escrow Agent Name on Sub-Account: iVoice Inc /Cornell Capital Partners, LP Escrow account b. On or prior to the date of this Agreement the Escrow Agent shall establish an account for the D.W.A.C. of the shares of Common Stock. The Company will D.W.A.C. shares of the Company's Common Stock to the account of the Escrow Agent as follows: 2 Brokerage Firm: Jessup & Lamont Account #: LES 023557 DTC #: 0030 Name on Account: Butler Gonzalez LLP Escrow Account 4. Deposits into the Escrow Account. The Investor agrees that it shall promptly deliver all monies for the payment of the Common Stock to the Escrow Agent for deposit in the Escrow Account. 5. Disbursements from the Escrow Account. -------------------------------------- a. At such time as Escrow Agent has collected and deposited instruments of payment in the total amount of the Advance and has received such Common Stock via D.W.A.C from the Company which are to be issued to the Investor pursuant to the Standby Equity Distribution Agreement, the Escrow Agent shall notify the Company and the Investor. The Escrow Agent will continue to hold such funds until the Investor and Company execute and deliver a Joint Written Direction directing the Escrow Agent to disburse the Escrow Funds pursuant to Joint Written Direction at which time the Escrow Agent shall wire the Escrow Funds to the Company. In disbursing such funds, Escrow Agent is authorized to rely upon such Joint Written Direction from Company and may accept any signatory from the Company listed on the signature page to this Agreement and any signature from the Investor that Escrow Agent already has on file. Simultaneous with delivery of the executed Joint Written Direction to the Escrow Agent the Investor and Company shall execute and deliver a Common Stock Joint Written Direction to the Escrow Agent directing the Escrow Agent to release via D.W.A.C to the Investor the shares of the Company's Common Stock. In releasing such shares of Common Stock the Escrow Agent is authorized to rely upon such Common Stock Joint Written Direction from Company and may accept any signatory from the Company listed on the signature page to this Agreement and any signature from the Escrow Agent has on file. In the event the Escrow Agent does not receive the amount of the Advance from the Investor or the shares of Common Stock to be purchased by the Investor from the Company, the Escrow Agent shall notify the Company and the Investor. In the event that the Escrow Agent has not received the Common Stock to be purchased by the Investor from the Company, in no event will the Escrow Funds be released to the Company until such shares are received by the Escrow Agreement. For purposes of this Agreement, the term "Common Stock certificates" shall mean Common Stock certificates to be purchased pursuant to the respective Advance Notice pursuant to the Standby Equity Distribution Agreement. 6. Deposit of Funds. The Escrow Agent is hereby authorized to deposit the wire transfer proceeds in the Escrow Account. 7. Suspension of Performance: Disbursement Into Court. --------------------------------------------------- a. Escrow Agent. If at any time, there shall exist any dispute between the Company and the Investor with respect to holding or disposition of any portion of the Escrow 3 Funds or the Common Stock or any other obligations of Escrow Agent hereunder, or if at any time Escrow Agent is unable to determine, to Escrow Agent's sole satisfaction, the proper disposition of any portion of the Escrow Funds or Escrow Agent's proper actions with respect to its obligations hereunder, or if the parties have not within thirty (30) days of the furnishing by Escrow Agent of a notice of resignation pursuant to Section 9 hereof, appointed a successor Escrow Agent to act hereunder, then Escrow Agent may, in its sole discretion, take either or both of the following actions: i. Suspend the performance of any of its obligations (including without limitation any disbursement obligations) under this Escrow Agreement until such dispute or uncertainty shall be resolved to the sole satisfaction of Escrow Agent or until a successor Escrow Agent shall be appointed (as the case may be); provided however, Escrow Agent shall continue to invest the Escrow Funds in accordance with Section 8 hereof; and/or ii. petition (by means of an interpleader action or any other appropriate method) any court of competent jurisdiction in any venue convenient to Escrow Agent, for instructions with respect to such dispute or uncertainty, and to the extent required by law, pay into such court, for holding and disposition in accordance with the instructions of such court, all funds held by it in the Escrow Funds, after deduction and payment to Escrow Agent of all fees and expenses (including court costs and attorneys' fees) payable to, incurred by, or expected to be incurred by Escrow Agent in connection with performance of its duties and the exercise of its rights hereunder. iii. Escrow Agent shall have no liability to the Company, the Investor, or any person with respect to any such suspension of performance or disbursement into court, specifically including any liability or claimed liability that may arise, or be alleged to have arisen, out of or as a result of any delay in the disbursement of funds held in the Escrow Funds or any delay in with respect to any other action required or requested of Escrow Agent. 8. Investment of Escrow Funds. The Escrow Agent shall deposit the Escrow Funds in a non-interest bearing money market account. If Escrow Agent has not received a Joint Written Direction at any time that an investment decision must be made, Escrow Agent may retain the Escrow Fund, or such portion thereof, as to which no Joint Written Direction has been received, in a non-interest bearing money market account. 9. Resignation and Removal of Escrow Agent. Escrow Agent may resign from the performance of its duties hereunder at any time by giving thirty (30) days' prior written notice to the parties or may be removed, with or without cause, by the parties, acting jointly, by furnishing a Joint Written Direction to Escrow Agent, at any time by the giving of ten (10) days' prior written notice to Escrow Agent as provided herein below. Upon any such notice of resignation or removal, the representatives of the Investor and the Company identified in Sections 13a.(iv) and 13b.(iv), below, jointly shall appoint a successor Escrow Agent hereunder, which shall be a commercial bank, trust company or other financial institution with a combined capital and surplus in excess of $10,000,000.00. Upon the acceptance in writing of any appointment of Escrow Agent hereunder by a successor Escrow Agent, such successor Escrow 4 Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Escrow Agent, and the retiring Escrow Agent shall be discharged from its duties and obligations under this Escrow Agreement, but shall not be discharged from any liability for actions taken as Escrow Agent hereunder prior to such succession. After any retiring Escrow Agent's resignation or removal, the provisions of this Escrow Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Escrow Agent under this Escrow Agreement. The retiring Escrow Agent shall transmit all records pertaining to the Escrow Funds and shall pay all funds held by it in the Escrow Funds to the successor Escrow Agent, after making copies of such records as the retiring Escrow Agent deems advisable and after deduction and payment to the retiring Escrow Agent of all fees and expenses (including court costs and attorneys' fees) payable to, incurred by, or expected to be incurred by the retiring Escrow Agent in connection with the performance of its duties and the exercise of its rights hereunder. 10. Liability of Escrow Agent. -------------------------- a. Escrow Agent shall have no liability or obligation with respect to the Escrow Funds except for Escrow Agent's willful misconduct or gross negligence. Escrow Agent's sole responsibility shall be for the safekeeping, investment, and disbursement of the Escrow Funds in accordance with the terms of this Agreement. Escrow Agent shall have no implied duties or obligations and shall not be charged with knowledge or notice or any fact or circumstance not specifically set forth herein. Escrow Agent may rely upon any instrument, not only as to its due execution, validity and effectiveness, but also as to the truth and accuracy of any information contained therein, which Escrow Agent shall in good faith believe to be genuine, to have been signed or presented by the person or parties purporting to sign the same and conform to the provisions of this Agreement. In no event shall Escrow Agent be liable for incidental, indirect, special, and consequential or punitive damages. Escrow Agent shall not be obligated to take any legal action or commence any proceeding in connection with the Escrow Funds, any account in which Escrow Funds are deposited, this Agreement or the Standby Equity Distribution Agreement, or to appear in, prosecute or defend any such legal action or proceeding. Escrow Agent may consult legal counsel selected by it in the event of any dispute or question as to construction of any of the provisions hereof or of any other agreement or its duties hereunder, or relating to any dispute involving any party hereto, and shall incur no liability and shall be fully indemnified from any liability whatsoever in acting in accordance with the opinion or instructions of such counsel. The Company and the Investor jointly and severally shall promptly pay, upon demand, the reasonable fees and expenses of any such counsel and Escrow Agent is hereby authorized to pay such fees and expenses from funds held in escrow. b. The Escrow Agent is hereby authorized, in its sole discretion, to comply with orders issued or process entered by any court with respect to the Escrow Funds, without determination by the Escrow Agent of such court's jurisdiction in the matter. If any portion of the Escrow Funds is at any time attached, garnished or levied upon under any court order, or in case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in any case any order judgment or decree shall be made or entered by any court affecting such property or any part thereof, then and in any such event, the Escrow Agent is authorized, in its sole discretion, to rely upon and comply with any such order, writ judgment or decree which it is advised by legal counsel selected by it, binding 5 upon it, without the need for appeal or other action; and if the Escrow Agent complies with any such order, writ, judgment or decree, it shall not be liable to any of the parties hereto or to any other person or entity by reason of such compliance even though such order, writ judgment or decree may be subsequently reversed, modified, annulled, set aside or vacated. 11. Indemnification of Escrow Agent. From and at all times after the date of this Agreement, the parties jointly and severally, shall, to the fullest extent permitted by law and to the extent provided herein, indemnify and hold harmless Escrow Agent and each director, officer, employee, attorney, agent and affiliate of Escrow Agent (collectively, the "Indemnified Parties") against any and all actions, claims (whether or not valid), losses, damages, liabilities, costs and expenses of any kind or nature whatsoever (including without limitation reasonable attorney's fees, costs and expenses) incurred by or asserted against any of the Indemnified Parties from and after the date hereof, whether direct, indirect or consequential, as a result of or arising from or in any way relating to any claim, demand, suit, action, or proceeding (including any inquiry or investigation) by any person, including without limitation the parties to this Agreement, whether threatened or initiated, asserting a claim for any legal or equitable remedy against any person under any statute or regulation, including, but not limited to, any federal or state securities laws, or under any common law or equitable cause or otherwise, arising from or in connection with the negotiation, preparation, execution, performance or failure of performance of this Agreement or any transaction contemplated herein, whether or not any such Indemnified Party is a party to any such action or proceeding, suit or the target of any such inquiry or investigation; provided, however, that no Indemnified Party shall have the right to be indemnified hereunder for liability finally determined by a court of competent jurisdiction, subject to no further appeal, to have resulted solely from the gross negligence or willful misconduct of such Indemnified Party. If any such action or claim shall be brought or asserted against any Indemnified Party, such Indemnified Party shall promptly notify the Company and the Investor hereunder in writing, and the and the Company shall assume the defense thereof, including the employment of counsel and the payment of all expenses. Such Indemnified Party shall, in its sole discretion, have the right to employ separate counsel (who may be selected by such Indemnified Party in its sole discretion) in any such action and to participate and to participate in the defense thereof, and the fees and expenses of such counsel shall be paid by such Indemnified Party, except that the Investor and/or the Company shall be required to pay such fees and expense if (a) the Investor or the Company agree to pay such fees and expenses, or (b) the Investor and/or the Company shall fail to assume the defense of such action or proceeding or shall fail, in the sole discretion of such Indemnified Party, to employ counsel reasonably satisfactory to the Indemnified Party in any such action or proceeding, (c) the Investor and the Company are the plaintiff in any such action or proceeding or (d) the named or potential parties to any such action or proceeding (including any potentially impleaded parties) include both Indemnified Party the Company and/or the Investor and Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company or the Investor. The Investor and the Company shall be jointly and severally liable to pay fees and expenses of counsel pursuant to the preceding sentence, except that any obligation to pay under clause (a) shall apply only to the party so agreeing. All such fees and expenses payable by the Company and/or the Investor pursuant to the foregoing sentence shall be paid from time to time as incurred, both in advance of and after the final disposition of such action or claim. The obligations of the parties under this 6 section shall survive any termination of this Agreement, and resignation or removal of the Escrow Agent shall be independent of any obligation of Escrow Agent. 12. Expenses of Escrow Agent. Except as set forth in Section 11 the Company shall reimburse Escrow Agent for all of its reasonable out-of-pocket expenses, including telephone and facsimile transmission costs, postage (including express mail and overnight delivery charges), copying charges and the like as outlined in Section 12.4 of the Standby Equity Distribution Agreement dated the date hereof. All of the compensation and reimbursement obligations set forth in this Section shall be payable by the Company, upon demand by Escrow Agent. The obligations of the Company under this Section shall survive any termination of this Agreement and the resignation or removal of Escrow Agent. 13. Warranties. ----------- a. The Investor makes the following representations and warranties to the Escrow Agent and Investor's Counsel: i. The Investor has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. ii. This Agreement has been duly approved by all necessary action of the Investor, including any necessary approval of the limited partner of the Investor, has been executed by duly authorized officers of the Investor's general partner, enforceable in accordance with its terms. iii. The execution, delivery, and performance of the Investor of this Agreement will not violate, conflict with, or cause a default under the agreement of limited partnership of the Investor, any applicable law or regulation, any court order or administrative ruling or degree to which the Investor is a party or any of its property is subject, or any agreement, contract, indenture, or other binding arrangement. iv. Mark A. Angelo has been duly appointed to act as the representative of Investor hereunder and has full power and authority to execute, deliver, and perform this Agreement, to execute and deliver any Joint Written Direction, to amend, modify, or waive any provision of this Agreement, and to take any and all other actions as the Investor's representative under this Agreement, all without further consent or direction form, or notice to, the Investor or any other party. v. No party other than the parties hereto have, or shall have, any lien, claim or security interest in the Escrow Funds or any part thereof. No financing statement under the Uniform Commercial Code is on file in any jurisdiction claiming a security interest in or describing (whether specifically or generally) the Escrow Funds or any part thereof. vi. All of the representations and warranties of the Investor contained herein are true and complete as of the date hereof and will be true and complete at the time of any disbursement from the Escrow Funds. 7 b. The Company makes the following representations and warranties to Escrow Agent and, the Investor: i. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of New Jersey , and has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. ii. This Agreement has been duly approved by all necessary corporate action of the Company, including any necessary shareholder approval, has been executed by duly authorized officers of the Company, enforceable in accordance with its terms. iii. The execution, delivery, and performance by the Company of this Escrow Agreement is in accordance with the Standby Equity Distribution Agreement and will not violate, conflict with, or cause a default under the certificate of incorporation or bylaws of the Company, any applicable law or regulation, any court order or administrative ruling or decree to which the Company is a party or any of its property is subject, or any agreement, contract, indenture, or other binding arrangement. iv. Jerome R. Mahoney has been duly appointed to act as the representative of the Company hereunder and has full power and authority to execute, deliver, and perform this Agreement, to execute and deliver any Joint Written Direction, to amend, modify or waive any provision of this Agreement and to take all other actions as the Company's Representative under this Agreement, all without further consent or direction from, or notice to, the Company or any other party. v. No party other than the parties hereto shall have, any lien, claim or security interest in the Escrow Funds or any part thereof. No financing statement under the Uniform Commercial Code is on file in any jurisdiction claiming a security interest in or describing (whether specifically or generally) the Escrow Funds or any part thereof. vi. All of the representations and warranties of the Company contained herein are true and complete as of the date hereof and will be true and complete at the time of any disbursement from the Escrow Funds. 14. Consent to Jurisdiction and Venue. In the event that any party hereto commences a lawsuit or other proceeding relating to or arising from this Agreement, the parties hereto agree that the United States District Court for the District of New Jersey shall have the sole and exclusive jurisdiction over any such proceeding. If all such courts lack federal subject matter jurisdiction, the parties agree that the Superior Court Division of New Jersey, Chancery Division of Hudson County shall have sole and exclusive jurisdiction. Any of these courts shall be proper venue for any such lawsuit or judicial proceeding and the parties hereto waive any objection to such venue. The parties hereto consent to and agree to submit to the jurisdiction of any of the courts specified herein and agree to accept the service of process to vest personal jurisdiction over them in any of these courts. 15. Notice. All notices and other communications hereunder shall be in writing and shall be deemed to have been validly served, given or delivered five (5) days after deposit in the United States mail, by certified mail with return receipt requested and postage prepaid, when 8 delivered personally, one (1) day delivery to any overnight courier, or when transmitted by facsimile transmission and addressed to the party to be notified as follows: If to Investor, to: Cornell Capital Partners, LP 101 Hudson Street - Suite 3606 Jersey City, New Jersey 07302 Attention: Mark Angelo Facsimile: (201) 985-8266 If to Escrow Agent, to: Butler Gonzalez LLP 1000 Stuyvesant Avenue - Suite 6 Union, New Jersey 07083 Attention: David Gonzalez, Esq. Facsimile: (908) 810-0973 If to Company, to: iVoice Inc. 750 Highway 34 210 South Fourth Avenue Matawan, New Jersey 07747 Attention: Jerome R. Mahoney Telephone: (732) 441-7700 Facsimile: (732) 441-9895 With a Copy to: Meritz & Muenz, LLP Three Hughes Place Dix Hills, NY 11746 Attention: Lawrence A. Muenz, Esq Telephone: (631) 242-7384 Facsimile: (631) 242-6715 Or to such other address as each party may designate for itself by like notice. 16. Amendments or Waiver. This Agreement may be changed, waived, discharged or terminated only by a writing signed by the parties of the Escrow Agent. No delay or omission by any party in exercising any right with respect hereto shall operate as waiver. A waiver on any one occasion shall not be construed as a bar to, or waiver of, any right or remedy on any future occasion. 17. Severability. To the extent any provision of this Agreement is prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition, or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 18. Governing Law. This Agreement shall be construed and interpreted in accordance with the internal laws of the State of New Jersey without giving effect to the conflict of laws principles thereof. 9 19. Entire Agreement. This Agreement constitutes the entire Agreement between the parties relating to the holding, investment, and disbursement of the Escrow Funds and sets forth in their entirety the obligations and duties of the Escrow Agent with respect to the Escrow Funds. 20. Binding Effect. All of the terms of this Agreement, as amended from time to time, shall be binding upon, inure to the benefit of and be enforceable by the respective heirs, successors and assigns of the Investor, the Company, or the Escrow Agent. 21. Execution of Counterparts. This Agreement and any Joint Written Direction may be executed in counter parts, which when so executed shall constitute one and same agreement or direction. 22. Termination. Upon the first to occur of the termination of the Standby Equity Distribution Agreement dated the date hereof or the disbursement of all amounts in the Escrow Funds and Common Stock into court pursuant to Section 7 hereof, this Agreement shall terminate and Escrow Agent shall have no further obligation or liability whatsoever with respect to this Agreement or the Escrow Funds or Common Stock. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 10 IN WITNESS WHEREOF the parties have hereunto set their hands and seals the day and year above set forth. iVOICE INC. By: /s/ Jerome R. Mahoney Name: Jerome R. Mahoney Title: President and Chief Executive Officer CORNELL CAPITAL PARTNERS, LP By: Yorkville Advisors, LLC Its: General Partner By: /s/ Mark A. Angelo Name: Mark A. Angelo Title: Portfolio Manager BUTLER GONZALEZ LLP By: /s/ David Gonzalez, Esq. Name: David Gonzalez, Esq. Title: Partner 11 EX-10 7 kl12028_ex10-32.txt EXHIBIT 10.32 LETTER EXHIBIT 10.32 December 19, 2003 iVoice, Inc. 750 Highway 34 Matawan, New Jersey 07747 Ladies and Gentlemen: This letter agreement (the "Letter Agreement") between Jerome R. Mahoney (the "Stockholder") and iVoice, Inc., a New Jersey corporation (the "Corporation"), confirms such parties' understanding with respect to the shares of Class A common stock, no par value per share, of the Corporation (the "Class A Common Stock") underlying (i) the Stockholder's shares of Class B common stock, par value $.01 per share, of the Corporation ("Class B Common Stock"), (ii) the promissory note dated March 20, 2001 made by the Corporation in favor of the Stockholder, as amended on August 13, 2002 (as amended, amended and restated, supplemented or otherwise modified from time to time in accordance with its terms, the "Convertible Note"), and (iii) any other securities held by the Stockholder convertible into or exercisable for shares of Class A Common Stock (together with the Class B Common Stock and the Convertible Note, the "Convertible Securities"). The parties hereto hereby acknowledge and agree that, as of the date hereof, (i) the Corporation is authorized to issue 10,000,000,000 shares of Class A Common Stock, (ii) 5,025,268,702 shares of Class A Common Stock are issued and outstanding, (iii) warrants and options to purchase up to an aggregate of 7,384,343 shares of Class A Common Stock are outstanding and (iv) the Corporation intends to file with the Securities and Exchange Commission a registration statement on Form SB-2 relating to, among other things, the registration of up to 3,693,939,394 shares of Class A common stock in connection with the Standby Equity Distribution Agreement dated November 25, 2003, between the Corporation and Cornell Capital Partners, L.P. (the "Equity Line of Credit Agreement"). The parties hereto further acknowledge and agree that the Corporation does not have a sufficient number of authorized shares of Class A Common Stock to issue all of the shares of Class A Common Stock issuable upon the conversion or exercise of all of its outstanding options, warrants, debentures and Class B Common Stock. The Stockholder agrees that, until such time as the Equity Line of Credit Agreement expires or otherwise terminates in accordance with the terms thereof and the number of shares of Class A Common Stock authorized for issuance by the Corporation is sufficient for the Corporation to issue all of the shares of Class A Common Stock underlying all of the Corporation's then-outstanding options, warrants, debentures, Class B Common Stock or other obligations to issue shares of Class A Common Stock, the Stockholder will not convert or exercise any of the Convertible Securities if any of such conversions or exercises, in the aggregate, would result in the Corporation's issuance to the Stockholder of more than 1,200,000,000 shares of Class A Common Stock. Facsimile transmission of any signed original document and/or retransmission of any signed facsimile transmission will be deemed the same as delivery of an original. At the request of any party, the parties will confirm facsimile transmission by signing a duplicate original document. This letter agreement may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same instrument. This letter agreement and all matters related hereto shall be governed by, and construed and enforced in accordance with, the laws of the State of New Jersey, without regard to its choice-of-law principles. Very truly yours, /s/ Jerome R. Mahoney --------------------- Jerome R. Mahoney ACKNOWLEDGED AND AGREED TO: iVOIce, inc. By: /s/ Jerome R. Mahoney ------------------------------- Jerome R. Mahoney Chief Executive Officer and President 2 EX-10 8 kl12028_ex10-33.txt EXHIBIT 10.33 GUARANTY EXHIBIT 10.33 GUARANTY This GUARANTY dated as of January __ 2003 (the "Guaranty"), is given by iVOICE INC., a Delaware corporation ("Guarantor") in favor of the Buyer(s) (as this term is defined in the Securities Purchase Agreement dated the date hereof ). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Securities Purchase Agreement by and between iVOICE ACQUISITION 1, Inc., a Delaware corporation, (the "Company"), and the Buyer(s) dated as of the date hereof (as amended, restated, supplemented or otherwise modified from time to time, the "Securities Purchase Agreement"). WHEREAS: A. The Company and the Buyer(s) wish to provide for the funding contemplated under the Securities Purchase Agreement in the amount up to Two Hundred Fifty Thousand Dollars ($250,000). B. To induce the Buyer(s) to enter into the Securities Purchase Agreement, the Guarantor has agreed to provide a full and unconditional guaranty of the payment and performance obligations of the Company under the Securities Purchase Agreement, Convertible Debenture, Registration Rights Agreement, Escrow Agreement, and the Irrevocable Transfer Agent Instructions (the "Transaction Documents"). C. The Guarantor is a Delaware of the Company and the Guarantor acknowledges that without this Guaranty, the Buyer(s) would not be willing to enter into the Securities Purchase Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth herein, and for other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Guarantor hereby agrees as follows: 1. Guaranty. 1.1 Guaranty. The Guarantor, as direct obligor and not merely as a surety, hereby unconditionally, absolutely, and irrevocably guarantees to the Buyer(s) (i) the full and prompt performance and payment of all of the Company's obligations under the Securities Purchase Agreement and the other Transaction Documents, (collectively, the "Obligations") and (ii) if the Company should default in the payment or performance of any of the Obligations, the Guarantor, as direct obligor and not merely as a surety, shall forthwith pay or perform such Obligations upon two (2) days written notice or demand by the Buyer(S) in the manner and on the day required by this Guaranty and specifically the Guarantor shall take an Advance, from the Equity Line of Credit with Cornell Capital Partners, LP, on the day the Company defaults on its Obligations, in the amount of Two Hundred Fifty Thousand Dollars ($250,000) in order to repay to the Buyer(s) the Principal Amount plus Fifty Thousand Dollars ($50,000) within seven (7) days from default by the Company. An Advance Notice and an estimate of the shares of Common Stock which shall be issued there under has been issued to Cornell Capital Partners, LP and held in escrow pending a default by the Company. In the event of a default the Advance Notice and the shares of Common Stock will be release from escrow by Cornell Capital Partners, LP. 1.2 Continuing Guaranty. The Guarantor agrees that the obligations pursuant to this Section 1 are unconditional, absolute, and irrevocable and shall not be released, discharged or affected in any way by any circumstances or condition, including without limitation: (a) any amendment or modification or other change to any of the Transaction Documents; (b) any failure, omission or delay on the part of the Company to conform or comply with any term of any of the Transaction Documents; (c) any release or discharge by operation of law of the Company or any Guarantor from any obligation or agreement contained in any of the Transaction Documents or this Guaranty; and (d) any other occurrence, circumstance, happening or event, whether similar or dissimilar to the foregoing and whether foreseen or unforeseen, which otherwise might constitute a legal or equitable defense or discharge of the liabilities of a guarantor or surety or which otherwise might limit recourse against the Company or the Guarantor. 1.3 Discharge. The Guarantor covenants and agrees that this Guaranty will not be discharged, except by complete performance of the obligations contained herein. Notwithstanding anything to the contrary herein, so long as the outstanding Principal Amount is zero or would be made zero simultaneously with the termination hereof, the Guarantor shall have the right to terminate this Guaranty at any time by providing written notice of such termination to the Buyer(s). 1.4 Representations and Warranties. The Guarantor hereby represents and warrants to the Buyer(s) as follows: (a) the Guarantor has full power, right and authority to enter into and perform his obligations under this Guaranty, and this Guaranty has been duly executed and delivered by the Guarantor and constitutes the valid and binding obligation of the Guarantor and is enforceable against the Guarantor in accordance with its terms. No permits, approvals or consents of or notifications to (a) any governmental entities, or (b) any other persons or entities are necessary in connection with the execution, delivery and performance by the Guarantor of this Guaranty and the consummation by the Guarantor of the transactions contemplated hereby. Neither the execution and delivery of this Guaranty by the Guarantor nor the performance by it of the transactions contemplated hereby will: (i) violate or conflict with or result in a breach of any provision of any law, statute, rule, regulation, order, permit, judgment, ruling, injunction, decree or other decision (collectively, "Rules") of any court or other tribunal or any governmental entity or agency binding on the Guarantor or his properties, or conflict with or cause an event of default under any contract or agreement of the Guarantor; or (ii) require any authorization, consent, approval, exemption or other action by or notice to any court, administrative or governmental body, person, entity or any other third party. 1.5 Full Rights of Subrogation. The Guarantor shall be entitled to full rights of subrogation under this Guaranty. 2. Miscellaneous. 2.1 Notices, Consents, etc. Any notices, consents, waivers or other communications required or permitted to be given under the terms hereof must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one (1) trading 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: 2 If to Guarantor: iVoice, Inc. 750 Highway 34 Matawan, NJ 07747 Attention: Jerome R. Mahoney President and Chief Executive Officer Telephone: (732) 441-7700 Facsimile: (732) 441-9895 With Copy to: McCarter & English, LLP 100 Mulberry Street Newark, NJ 07102 Attention: Jerome R. Mahoney Attention: Jeffery Baumel, Esq. Telephone: (305) 358-3355 Facsimile: (305) 358-7095 If to the Investor: C/O The May Davis Group Inc. C/O National Security 120 Broadway - 28th Floor New York, NY 10271 Attention: Michael Jacobs Telephone: (212) 417-8118 Facsimile: (212) 791-8992 or at such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party three (3) trading days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. 2.2 Severability. The unenforceability or invalidity of any provision of this Guaranty shall not affect the enforceability or validity of any other provision. 2.3 Indulgence. Failure of party to exercise any right or remedy under this Guaranty or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. 2.4 Modification. The terms of this Guaranty may be changed, waived, discharged or terminated only by a written instrument executed by the party against which enforcement of the change, waiver, discharge or termination is sought. 2.5 Headings. The subject headings of Articles and Sections of this Guaranty are included for purposes of convenience only and shall not affect the construction or interpretation of any of its provisions. 3 2.6 Assignment. This Guaranty will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but will not be assignable or delegable by either the Guarantor or the Buyer(s). 2.7 Entire Agreement. This Guaranty (including the recitals hereto), and the Transaction Documents set forth the entire understanding of the parties with respect to the subject matter hereof, and shall not be modified or affected by any offer, proposal, statement or representation, oral or written, made by or for any party in connection with the negotiation of the terms hereof, and may be modified only by instruments signed by all of the parties hereto. 2.8 Third Parties. Nothing herein expressed or implied is intended or shall be construed to confer upon or give to any person or entity, other than the stated beneficiaries of this Guaranty and their respective permitted successors and assigns, any rights or remedies under or by reason of this Guaranty. 2.9 No Strict Construction. The language used in this Guaranty will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto. 2.10 Event of Default. For purposes of this Guaranty, an event of default shall be deemed to have occurred hereunder: (a) If the Company should default in the payment or performance of any of the Obligations, the Guarantor shall fail for any reason or for no reason, to forthwith pay or perform such Obligations after notice or demand by the Buyer(s) in the manner and on the day requested by the Buyer(s); or (b) if the Guarantor makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due; or an order, judgment or decree is entered adjudicating the Guarantor bankrupt or insolvent; or any order for relief with respect to the Guarantor is entered under any bankruptcy or insolvency laws; or the Guarantor petitions or applies to any tribunal for the appointment of a custodian, trustee, receiver or liquidator of the Guarantor of any substantial part of the assets of the Guarantor, or commences any proceeding relating to the Guarantor under any bankruptcy reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; or any such petition or application is filed, or any such proceeding is commenced, against the Guarantor. 2.11 Governing Law; Jurisdiction; Jury Trial. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware without regard to the principles of conflict of laws. The parties further agree that any action between them shall be heard in Hudson County, New Jersey, and expressly consent to the jurisdiction and venue of the Superior Court of New Jersey, sitting in Hudson County and the United States District Court for the District of New Jersey sitting in Newark, New Jersey for the adjudication of any civil action asserted pursuant to this Paragraph. 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 Guaranty 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. 4 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 5 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be signed as of the date first written above. GUARANTOR: iVOICE INC. By: _________________________________ Name: Jerome R. Mahoney Title: President and Chief Executive Officer 6 EX-10 9 kl12028_ex10-34.txt EXHIBIT 10.34 AMINISTRATIVE SERVICES AGREEMENT EXHIBIT 10.34 ADMINISTRATIVE SERVICES AGREEMENT This Administrative Services Agreement is entered into this 22 day of February, 2003 by and between iVoice, Inc., a Delaware corporation ("iVoice"), and iVoice Acquisition 1, Inc., a Delaware corporation (the "Company"). The Company is a wholly owned subsidiary of iVoice and has relied since its inception upon various administrative services provided by iVoice. The Company and iVoice have filed a draft Information Statement and Form 10-SB (collectively, the "Information Statement"), under the Securities Exchange Act of 1934 relating to the distribution by iVoice of all of the capital stock of the Company. Upon the effectiveness of the Information Statement and the consummation of the transactions contemplated thereby, iVoice will own none of the outstanding capital stock of the Company. The Company desires to engage iVoice to continue after the closing to provide certain administrative services hereinafter described (the "Services"), and iVoice desires to provide the Services, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein set forth, the parties hereto agree as follows: 1. Services 1.1 During the term of this Agreement, iVoice shall provide the following Services to the Company, for the Reminder Software only : (a) Inventory purchasing services comprised of processing purchase orders submitted by the Company for components and supplies in the manner heretofore ordered through iVoice's purchasing department and, in connection therewith, negotiating prices, expediting deliveries and administering subcontracts; (b) Material and inventory control, including incoming inspection, segregated storage, issuance of inventory items upon request from Company personnel, maintenance of the Company's inventory in an orderly fashion and issuance of itemized inventory status reports on a weekly basis; (c) Building rent (sublease of space) and maintenance, including janitorial services forr the premises leased by the Company from iVoice; (d) Personnel administrative services, including referral services and background investigations for employment candidates upon request from the Company, payroll processing and benefit plan administration; (e) Electronic data processing services, including billing and collection services and management and financial reporting services comprised of monthly cash flow statements, profit and loss statements, profit reports by shop order, inventory analysis reports and analysis reports for corporate overhead and general and administrative expenses on a monthly and cumulative basis, to be furnished within 20 days after the close of each month during the term of this Agreement; and (f) Contract administration and assistance at the request of the Company in contract negotiations. (g) Source code management for of product, including, technical support, build code for installation, training of new clients, installation of new clients, and ongoing telephone and remote support of clients. 1.2 iVoice shall perform the Services in a timely and efficient manner, in accordance with all applicable laws, regulations and ordinances, and shall assign to each of the Services substantially the same priority as assigned to services of like category performed in its own operations. 2. Term ---- 2.1 The term of this Agreement shall commence at the date of the closing, the consummation of which shall be a condition precedent to the effectiveness hereof, and shall continue until the first anniversary thereof, unless earlier terminated or extended in accordance with the provisions of this Section 2. 2.2 The term of this Agreement may be extended for up to two additional one-year periods upon written notice from the Company at least 30 days prior to the scheduled expiration thereof. 2.3 This Agreement may be terminated, and any one or more of the Services may be reduced in scope or eliminated in its entirety, at any time during the term hereof upon 90 days' prior written notice from the Company. 3. Fees ---- 3.1 In consideration for the Services, the Company shall pay to iVoice during the term of this Agreement an administrative services fee (the "Service Fee") at the rate of $95,000.00 per annum during the initial year of the term, $95,000.00 per annum during the second year of the term and $95,000.00 per annum during the third year of the term, if extended, payable in equal monthly installments within 10 days after the end of each month during the term. iVoice represents and warrants to the Company that the Services Fee reflects actual historical expenditures for like services properly allocated by iVoice to the conduct of the business and operations of the Company during the two most recent fiscal years of the Company and iVoice (the "Expense Allocation"), adjusted for the second and third years of the term, if extended, to reflect historical increased in the cost of such services. 2 3.2 In the event that the Company elects to reduce the scope of one or more Services or eliminates one or more Services in its entirety, the Services Fees shall be reduced to reflect the reduction or elimination of those Services, based upon the corresponding portion or portions of the Expense Allocation attributable thereto, from and after the effective date thereof. 4. Obligations and Relationship ---------------------------- Both parties to this Agreement shall at all times act as independent contractors and, notwithstanding anything contained herein, the relationship established hereunder between the parties shall not be construed as a partnership, joint venture or other form of joint enterprise. Except as expressly authorized by a party hereto, no party shall be authorized to make any representations or to create or assume any obligation or liability in respect of or on behalf of the other party, and this Agreement shall not be construed or constituting either party or the agent of the other party. 5. Limited Liability; Indemnification ---------------------------------- 5.1 iVoice shall not be liable to the Company for any loss, claim, expense or damage, including indirect, special, consequential or exemplary damages, for any act or omission performed or omitted by it hereunder so long as its act or omission does not constitute fraud, bad faith or gross negligence. iVoice shall not be liable to the Company for the consequences of any failure or delay in performing any Services if the failure shall be caused by labor disputes, strikes or other events or circumstances beyond its control and it shall have provided prompt notice to the Company of its inability to perform Services and the reason therefor. 5.2 In any action, suit or proceeding (other than an action by or in the right of the Company) to which iVoice or any agent or employee of iVoice performing Services hereunder (an "Indemnitee") was or is a party by reason of his or its performance or non-performance of Services, the Company shall indemnify the Indemnitee and hold the Indemnitee harmless from and against expenses, judgments, fines and amounts paid (with the consent of the Company) in settlement actually and reasonably incurred by the Indemnity in connection therewith if the Indemnity acted in good faith and provided that the Indemnitee's conduct does not constitute negligence or misconduct. 6. Confidentiality --------------- Any and all information obtained by iVoice in connection with the Services contemplated by this Agreement shall be held in the strictest confidence and not disclosed to any other person without the prior written consent of the Company. 7. Notices ------- All notices and other communications permitted or required hereunder shall be in writing and shall be deemed given when delivered by hand to an officer of either party. 3 8. Binding Effect -------------- This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors. 9. No Third Party Beneficiaries ---------------------------- This Agreement is solely for the benefit of the parties hereto and shall not confer upon third parties and remedy, claim, cause of action or other right in addition to those existing without reference to this Agreement. 10. Entire Agreement ---------------- This Agreement constitutes the entire agreement between the parties with respect to the subject matters covered hereby and supersedes any prior agreement or understanding between the parties with respect to those matters. 11. Assignment; Amendment; Waiver ----------------------------- This Agreement is not assignable. Neither the rights nor the duties arising hereunder may be assigned or delegated. This Agreement may not be amended nor may any rights hereunder be waived except by an instrument in writing signed by the party sought to be charged with the amendment or waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 12. Governing Law ------------- This Agreement shall be construed in accordance with and governed by the laws of the State of New Jersey, without giving effect to the provisions, policies or principles thereof relating to choice or conflict of laws. 13. Headings -------- The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. {the remainder of this page has been intentionally left blank} 4 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. IVOICE, INC. By: /s/ Jerry Mahone ----------------------- Jerry Mahoney President IVOICE ACQUISITION 1, INC. By: /s/ Jerry Mahoney ----------------------- Jerry Mahoney Chairman 5 EX-21 10 kl12028_ex21.txt EXHIBIT 21 SUBSIDIARY EXHIBIT 21 SUBSIDIARIES ------------ Name State of Incorporation - ---- ---------------------- Trey Resources, Inc. Delaware iVoice Acquisition 2, Inc. Delaware EX-23 11 kl12028_ex23-1.txt EXHIBIT 23.1 CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the use in this Registration Statement of iVoice, Inc. on Form SB-2 dated January 2, 2004, of our report dated February 27, 2003 (which expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's ability to continue as a going concern) as of December 31, 2002 and 2001 and the reference to our firm as experts in the Registration Statement. /s/ Mendlowitz Weitsen, LLP Mendlowitz Weitsen, LLP East Brunswick, New Jersey January 2, 2004 -----END PRIVACY-ENHANCED MESSAGE-----