SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report under Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the year ended December 31, 2002
COMMISSION FILE NUMBER 0-27589
------------------------------
ONE VOICE TECHNOLOGIES, INC.
----------------------------
(Name of Small Business Issuer in its Charter)
NEVADA 95-4714338
------ ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6333 Greenwich Drive, Ste 240, San Diego CA 92122
------------------------------------------- -----
(Address of principal Executive Offices) (Zip Code)
(858) 552-4466 (858) 552-4474
-------------- --------------
(Issuer's Telephone Number) (Issuer's Facsimile Number)
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK-$.001 PAR VALUE
----------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter periods that the registrant was required to file such reports), and (2)
had been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10 KSB or any
amendment to this Form 10-KSB.
The issuer's revenues for the year ended December 31, 2002 were $387,771.
The approximate aggregate market value of the voting stock held by non-
affiliates of the registrant as of March 1, 2003, based on the average of the
closing bid and asked prices of one share of the Common Stock of the Company, as
reported on March 28, 2003 was $2,806,045.
ITEM 1. DESCRIPTION OF BUSINESS
One Voice Technologies is a voice recognition technology company with over $26
Million invested in Research and Development and more than 20 Million products
distributed worldwide in seven languages. To date, our customers include
T-Mobile and Warner Brothers with strong technology and business partnerships
with Philips Electronics and IBM. Based on our patented technology, One Voice
offers voice solutions for the Telecom, Motion Picture DVD Entertainment and PC
markets. Our solutions allow mobile and residential phone users to Voice Dial,
Group Conference Call, Read and Send E-Mail and Instant Messages all by voice.
We offer these solutions through both domestic and international wireless and
wireline carriers. We also offer the motion picture industry's only voice
interactive DVD movies included in over 20 million copies distributed worldwide
in seven languages. We offer PC manufacturers the ability to bundle a complete
voice interactive computer assistant allowing PC users to talk to their
computers to quickly launch applications, websites, read and send E-mails and
dictate letters. We are strongly positioned across the Telecom and PC markets
with our patented technology.
Located in San Diego, California, the Company has 12 full-time employees and is
traded on the NASD OTC Electronic Bulletin Board ("OTCBB") under the symbol
ONEV.OB. One Voice commenced operations as Conversational Systems, Inc. on
January 1, 1999 as a privately held California corporation, and on July 14,
1999, merged into Dead On, Inc., a publicly traded company incorporated in
Nevada in 1995. On September 9, 1999, the company officially changed its name to
One Voice Technologies, Inc.
MARKET OPPORTUNITY
------------------
The presence of voice technology as an interface in mobile communications is of
paramount importance. Voice interface technology makes portable communications
products mobile, more effective and safer to use. One Voice's development
efforts currently are focused on the Telecom market and more specifically on
mobile communications and mobile messaging. The Messaging market, which has both
business and consumer market applications including: E-mail, Instant Messages,
SMS (Short Message Service), and Paging, is extremely large and is growing at an
astonishing rate. Over six trillion text messages are sent globally every year,
and messaging has also shown the consistent ability to generate significant
revenue. One Voice solutions enable users to send, intelligently route and
receive text messages using voice from any type of phone (wired or wireless)
anywhere in the world.
One Voice's solutions address the entire phone market including analog, digital,
CDMA, TDMA, GSM, iDEN and wired phones, allowing telephony carriers and users to
deploy solutions quickly with little additional effort. Given the growing
competition in the wireless markets and the opportunities presented by the
Mobile Internet, One Voice's 4th Generation Voice Technology is well positioned
for commercialization.
One Voice is focused on communications solutions that are mobile, not just
portable. Devices like PDA's, Laptops and Cell Phones are highly portable
because they are easily transported from location to location, but they are not
necessarily mobile (i.e. easy to use while one is moving). Mobile solutions are
not only portable, but they are easy and safe to operate while moving. Portable
solutions such as cell phones, PDA's and laptops are not easy to operate safely
while operating motor vehicles, especially in crowded and intense traffic. Case
in point, New York has passed legislation requiring hands-free use of cell
phones and any other communication device during the operation of an automobile
citing safety concerns. Currently 42 other states are considering similar
legislation. Additional legislation could significantly increase the immediate
demand for a completely integrated and voice activated mobile communication
solution. One Voice's technology supports hands-free operation and will bring
mobile phones and other devices into compliance with the newly adopted
legislation.
ONE VOICE SERVICES
------------------
The MobileVoice Platform was designed based on patented voice technology and
years of research and development. The platform is server-based, so it is easy
to deploy and maintain and because it does not require a mobile device upgrade,
it works with 100% of a carrier's subscriber base. Optimized for mobile
environments, the system uses a modular architecture that is highly reliable,
scalable and redundant and delivers unparalleled performance in terms of
accuracy and functionality.
MOBILEVOICE ACTIVATED DIALING(TM)
Designed from the ground up to meet the unique needs of wireless carriers,
MobileVoice Activated Dialing is server-based and delivers higher levels of
2
accuracy and reliability than any solution on the market today. It has higher
capacity for contact lists, more functionality such as synchronization and
import tools that interface with Microsoft Outlook and Lotus Notes, and requires
less setup time than other solutions. It is designed to meet the challenges of
mobile environments with high accuracy for native and non-native speaking
individuals.
MOBILECONFERENCE(TM)
On-the-fly group conferencing is a powerful new addition to One Voice's
MobileVoice solution. MobileConference allows users to quickly connect up to 64
people on a single conference call just by speaking their name, group name or
phone number.
MOBILEVOICE EMAIL(TM)
The Telecom industry's only Voice-to-Text Email solution let's subscribers send
free-form email messages while on the road. Designed for high levels of accuracy
in a mobile environment, MobileVoice Email sets the standard for mobile
communications.
MOBILEVOICE SMS(TM)
Short Message Service (SMS) has gained wide popularity in Europe and is now
hitting the streets in North America. MobileVoice SMS is the Telecom industry's
only Voice-to-Text SMS solution that let's subscribers send free-form messages
from phone-to-phone with only their voice. No need to Tap or WAP, MobileVoice
SMS truly enables mobility and communications to a 100% addressable phone
market. With MobileVoice SMS subscribers can send messages within network or
even to subscribers on other networks. Now, voice based inter-carrier SMS is
available today with MobileVoice SMS.
MOBILEVOICE INSTANT MESSAGING(TM)
Instant Messaging has long been a popular way for friends and colleagues to
communicate on their computers. MobileVoice Instant Messaging now takes Instant
Messaging mobile, letting people chat and send quick messages with only their
voice. Targeted at subscribers and enterprise customers, MobileVoice Instant
Messaging sets the standard for voice based instant communications, anytime,
anywhere.
MOBILEVOICE VOICE MAIL(TM)
A popular way to leave messages, MobileVoice Voice Mail let's subscribers record
and send messages in their own voice. The voice recording of your message will
be sent as an Email attachment to the recipient or group of recipients for quick
retrieval from any computer or any phone.
MOBILEVOICE EMAIL READER(TM)
We have designed MobileVoice Email Reader to be the most powerful and versatile
solution on the market. With MobileVoice Email Reader, subscribers take full
control of their Email accounts from any phone. Subscribers can easily find
important messages and respond to one person or many in seconds. Need to forward
a message on to others? No problem! MobileVoice Email Reader offers full Reply
and Forward capabilities. Need access to your home and work Email accounts?
MobileVoice Email Reader delivers - giving users access to personal and
corporate Email accounts from any phone.
TECHNOLOGY OVERVIEW
-------------------
To date, widespread applications of voice technology for use in mobile
communication have been very basic, recognizing a limited number of words and
using rigid menu systems delivering a constrained amount of content. One Voice's
technology positions itself uniquely in the Voice Market. The Company's
Intelligent Voice Platform(TM) (IVP) uses patented Artificial Intelligence and
Natural Language Processing, which is highly intelligent, with the ability to
identify individual users, tap into a database of user specific information, and
dynamically learn and leverage a vocabulary of over 300,000 words. The
technology employs a flexible architecture, allowing it to reside and operate on
a device itself, in a server-based architecture or a mix of both, making it
extremely adaptable to different usage models. The IVP also provides
anytime/anywhere access to information, reduces training time and lowers costs
for both consumers and businesses. The technology is functionally superior and
extremely easy to use. Users can simply download information into the One Voice
server from e-mail applications directly, and the Voice Activated Dialing (VAD)
system is operational with no voice training needed.
One Voice has also developed several other technologies that enhance the
offerings of the IVP. MultiSite(TM) is a proprietary context-based searching
3
technology that finds multiple websites for any category and retrieves them
simultaneously. It is particularly helpful when performing Internet searching on
devices such as mobile phones. VoiceSite(TM) is a proprietary technology that
makes websites voice interactive. It allows companies to voice enable their
sites quickly and easily, as well as suggestively create a customized experience
for visitors.
COMPETITIVE LANDSCAPE
---------------------
One Voice is the industry's first and only provider of 4th Generation voice
technology. The evolution of speech technology can be broken into four
generations as follows:
GENERATION 1 systems require minimal processing power and storage and are often
used in embedded devices. These solutions can typically recognize 20-30 words or
less and are usually founded embedded in electronic devices such as phones,
toys, etc. Due to its limitations, this technology is typically used for limited
command & control functions or applications. Companies focused in this space
include Conversay and IBM among others.
GENERATION 2 systems expand the recognition capabilities seen in Generation 1
increasing the vocabulary to potentially hundreds of words. These systems
frequently use menus to support the delivery of content as seen in Interactive
Voice Response (IVR) systems for airline reservations, banking and Voice
Portals. Due to the use of menus, these systems can typically deliver a maximum
of 6-8 areas of content horizontally and 3-4 layers down in the menu trees
before running the risk of "user overload." Companies focused in this space
include Speechworks International, Nuance Communications, Preferred Voice,
HeyAnita, Bevocal and TellMe among others.
GENERATION 3 systems expand the recognition capabilities significantly to
hundreds of thousands of words. The systems can support continuous, free-form
transcription of voice into text. These systems are typically used for desktop
dictation applications running on PC's in the sectors of word processing,
medical and legal transcription. Companies focused in this space include IBM,
ScanSoft and Philips.
GENERATION 4 systems take the capabilities of all the previous generations and
adds powerful expert systems and Artificial Intelligence capabilities to allow
the solutions to not only recognize words, but also understand their meaning.
This opens the doors to higher degrees of personalization, more robust system
interaction and more advanced applications such as Voice-to-Text Messaging on a
phone and full Internet searching. One Voice is currently the only company in
the voice technology sector that offers 4th Generation voice technology.
MAJOR MARKET ADVANTAGES
-----------------------
WIRELESS CARRIERS looking to drive incremental revenue could utilize One Voice's
technology to expand mobile messaging offerings. One Voice services apply to
100% of the addressable market, where extensive research clearly indicates
strong demand. One Voice can add significant fundamental value by creating
revenue opportunities through: 1) mobile use minutes, 2) recurring fees for
subscription services, 3) m-commerce transactions and 4) license fees for
voice-enabling content. One Voice's solutions can also play a key role in
helping wireless carriers differentiate their brand and service offerings,
attracting new users and reducing churn. Additionally, the interoperability of
One Voice's technology gives it the ability to link multiple wireless carrier
networks, creating greater flexibility and driving consumer demand.
INSTANT AND UNIFIED MESSAGING: OPERATORS of Instant Messaging and Unified
Messaging systems could significantly expand market share and drive revenues
through integration of the Company's technology with its messaging capabilities.
With One Voice, a mobile phone can be used to send instant messages, similar to
a PC or PDA. This ability provides a differentiation for the service and thus
drives additional revenue from other channels, such as Internet and e-mail
services.
INFRASTRUCTURE PROVIDERS: Many of the leading mobile device hardware
manufacturers also provide infrastructure services to wireless carriers. One
Voice's technology provides a point of differentiation which could be bundled
with infrastructure. Wireless carriers could then offer the technology to their
subscribers, driving mobile phone minutes and increasing revenues.
VOICE TECHNOLOGY THROUGH PLATFORM INDEPENDENCE: A key advantage of the One Voice
technology is that it is platform independent. The technology is adaptable and
highly intelligent allowing it to operate on a device itself, in a server
environment or a combination of the two. This creates expansive market
opportunities including usage in mobile phones, PC's, wired and wireless
handheld devices and other consumer electronics products.
4
EMPLOYEES
---------
At December 31, 2002, we employed 12 full-time employees and 6
consultant/part-time employees. None of these employees is subject to a
collective bargaining agreement, and there is no union representation within our
company. We maintain various employee benefit plans and believe our employee
relations are good.
RISK FACTORS
------------
This section summarizes certain risks regarding our business and industry. The
following information should be considered in conjunction with the other
information included and incorporated by reference in this report on Form 10-KSB
before purchasing shares of our stock.
WE HAVE A HISTORY OF LOSSES. WE EXPECT TO CONTINUE TO INCUR LOSSES, AND WE MAY
NEVER ACHIEVE AND SUSTAIN PROFITABILITY.
Since inception, we have incurred significant losses and have negative cash
flows from operations. These factors, among others discussed in Note 1 to the
financial statements, raise substantial doubt about the ability to continue as a
going concern. We expect to continue to incur net losses until sales generate
sufficient revenues to fund our continuing operations. We may fail to achieve
significant revenues from sales or achieve or sustain profitability. There can
be no assurance of when, if ever, we will be profitable or be able to maintain
profitability.
OUR LIMITED FUNDING MAY RESTRICT OUR OPERATIONS AND OUR ABILITY TO EXECUTE OUR
BUSINESS STRATEGY, AND THE AVAILABILITY OF ADDITIONAL FINANCING IS UNCERTAIN.
We believe that our available short-term assets and investment income will be
sufficient to meet our operating expenses and capital expenditures until June
2003. We do not know if additional financing will be available when needed, or
if it is available, if it will be available on acceptable terms. Insufficient
funds may prevent us from implementing our business strategy or may require us
to delay, scale back or eliminate certain contracts for the provision of voice
recognition Internet search software.
ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGY COULD HARM OUR
ABILITY TO COMPETE.
Our pending patent applications may never result in any intellectual property
protection. The patents granted may not result in providing any competitive
advantages to us. In addition, our patents may be challenged, invalidated or
circumvented, and we cannot guarantee that the patent laws will provide
effective legal or injunctive remedies to stop any infringements against our
technologies. Our competitors may develop or patent technologies that are
equivalent or superior to our proprietary technologies.
WE HAVE A LIMITED OPERATING HISTORY WHICH MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS.
Our current corporate entity commenced operations in 1999 and has a limited
operating history upon which an evaluation of our business and prospects could
be based. We have limited financial results which may not be indicative of our
future performance. Our prospects have to be considered in light of the risks,
expenses and difficulties frequently encountered by growing companies in new and
rapidly developing markets, such as voice recognition software, media delivery
systems and electronic commerce. We have recently re-focused our business model
from a consumer-focused direct sales model to a business to business licensing
and revenue-sharing base.
As a result of our limited operating history and the rapidly changing nature of
the markets in which we compete, our quarterly and annual results are likely to
fluctuate from period to period. These fluctuations may be caused by a number of
factors, many of which are beyond our control. These factors include, but are
not limited to, the following:
- Timing and manner of introduction of new products and services and ability to
enhance existing products and services;
5
- Ability to attract and retain new customers and satisfy existing customers'
demands;
- Demand for voice recognition Internet search software applications;
- Emergence and success of new and existing competition;
- Varying operating costs and capital expenditures related to the expansion of
our business operations and infrastructure, domestically and internationally,
including the hiring of new employees;
- Technical difficulties with our products and/or technology, system downtime,
system failures and/or power or Internet access interruptions;
- Changes in the mix of products and services that we sell or license to our
customers;
- Costs and effects related to the acquisition of businesses or technology and
related integration;
- Potential reduction in wireless carriers, which could lead to significant
delays in consummating revenue-bearing contracts;
- Limited financial resources and the potential inability to raise additional
capital to sustain our operations;
- Costs of litigation and intellectual property protection.
IF WE DO NOT SUCCESSFULLY DEVELOP NEW PRODUCTS AND SERVICES IT WILL HARM OUR
BUSINESS.
Our business and operating results would be harmed if we fail to develop
products and services that achieve market acceptance or that fail to generate
significant revenues to offset operating costs. Our management may not timely
and successfully identify, develop and market new product and service
opportunities. When we introduce our new products and services, they may not
attain market acceptance or contribute meaningfully to our revenues or
profitability.
Delays and cost overruns in developing our products could affect our ability to
respond to technological changes, evolving industry standards, competitive
developments or customer requirements. Our products may also contain undetected
errors that could cause increased development costs, loss of revenues, adverse
publicity, reduced market acceptance of the products or lawsuits by customers.
PATENT PROTECTION
-----------------
We own exclusive rights to three United States patents on our software. We have
filed for international patent protection as well. These patents define the
primary features and unique procedures that comprise our products and solutions.
Our future success and ability to compete depends in part upon the proprietary
technology and trademarks, which we attempt to protect with a combination of
patent, copyright, trademark and trade secret laws, as well as with our
confidentiality procedures and contractual provisions. These legal protections
afford only limited protection and are time-consuming and expensive to obtain
and/or maintain. Further, despite our efforts, we may be unable to prevent third
parties from infringing upon or misappropriating our intellectual property.
Additionally, there can be no assurances that others will not develop, market
and sell products substantially equivalent to our products or utilize
technologies similar to those used by us. Although we believe that our products
do not infringe on any third-party patents and our patents offer sufficient
protection, there can be no assurance that we will not become involved in
litigation involving patents or proprietary rights. Patent and proprietary
rights litigation entails substantial legal and other costs, and there can be no
assurance that we will have the necessary financial resources to defend or
prosecute our rights in connection with any litigation. Responding to, defending
or bringing claims related to our rights to our intellectual property may
require our management to redirect its resources to address these claims, which
could have a material adverse effect on our business, financial condition and
results of operations.
6
FUTURE CAPITAL REQUIREMENTS
---------------------------
We will require and are in the process of negotiating additional funds to
finance our operations. The precise amount and timing of our funding needs
cannot be determined at this time and will largely depend upon a number of
factors, including the market demand for our products and our management of our
cash, accounts payable, inventory and other working capital items. There can be
no assurance that those funds will be available or on terms satisfactory to us.
Any inability to obtain needed funding on satisfactory terms may require us to
reduce planned capital expenditures, to scale back our product offerings or
other operations or to enter into financing agreements on terms which we would
not otherwise accept, and could have a material adverse effect on our business,
financial condition and results of operations.
7
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
----------
The Company's headquarters are located at 6333 Greenwich drive, suite 240 in San
Diego, California.
The Company leases its facilities under leases that expire at various times
through October 2005. The following is a schedule by years of future minimum
rental payments required under operating leases that have noncancellable lease
terms in excess of one year as of December 31, 2001:
Year ending December 31,
2003 $ 304,615
2004 313,291
2005 266,053
----------
883,959
Less sublease income 280,000
----------
$ 603,959
==========
Rent expense, net of sublease income, amounted to $162,169 and $233,974 for the
years ended December 31, 2002 and 2001, respectively.
8
ITEM 3. LEGAL PROCEEDINGS
There have been no bankruptcy, receivership or similar proceedings.
There have been no material reclassifications, mergers, consolidations, or
purchase or sale of a significant amount of assets not in the ordinary course of
business.
During 2000, the financial consulting firm of Dominick & Dominick LLC, filed a
complaint against us, alleging that we entered into an exclusive financing
agreement in which they agreed to assist us in the placement of common stock
financing. The complaint also alleged that we subsequently consummated a
financing with a third party, which the plaintiff alleged created a duty for us
to compensate them to the extent provided in the financing agreement.
On August 3, 2001, we entered into a settlement agreement with Dominick &
Dominick LLC, to be effective September 1, 2001, pursuant to which we issued
110,000 shares of common stock and 300,000 common stock purchase warrants. We
relied on Section 4(2) of the Act as a basis of exemption from registration. The
Settlement Agreement was entered into in order to settle a dispute regarding a
financial consulting agreement which we had entered into with Dominick &
Dominick LLC as of May 30, 2000. Such shares and warrants were subsequently
transferred to Dominick & Dominick Financial Corp., a Delaware corporation.
During 2002, the Company has been notified of potential claims aggregating
$160,000. Management believes that it has adequate defense for such
unsubstantiated claims.
9
ITEM 4. SUBMISSION FOR MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our common stock began trading on the NASDAQ SmallCap Market on October 24,
2000, under the symbol ONEV. Our common stock previously traded on the OTC
Electronic Bulletin Board under the same symbol. The OTC Electronic Bulletin
Board is sponsored by the National Association of Securities Dealers (NASD) and
is a network of security dealers who buy and sell stocks. Our common stock is
currently traded on NASD OTC Electronic Bulletin Board under the symbol ONEV.OB.
We plan to apply for listing on the NASD BBX board in 2003.
For the periods indicated, the following table sets forth the high and low bid
prices per share of common stock. These prices represent inter-dealer quotations
without retail markup, markdown, or commission and may not necessarily represent
actual transactions.
Low High
------ -------
2000
----
First Quarter 8.00 27.75
Second Quarter 9.00 24.00
Third Quarter 6.56 17.25
Fourth Quarter 1.13 9.75
2001
----
First Quarter .9375 2.4844
Second Quarter .34 2.75
Third Quarter .45 1.20
Fourth Quarter .20 .82
2002
----
First Quarter .37 1.03
Second Quarter .23 .79
Third Quarter .13 .36
Fourth Quarter .18 .29
2003
----
First Quarter (as of 3/18/03) .07 .17
-----------------------------
As of March 1, 2003, our common stock shares were held by 162 stockholders of
record. We believe that the number of beneficial owners is substantially greater
than the number of record holders because a significant portion of our
outstanding common stock is held of record in broker street names for the
benefit of individual investors. The transfer agent of our common stock is
Corporate Stock Transfer, Inc., 3200 Cherry Creek Drive South, Suite 430,
Denver, Colorado 80209.
DIVIDEND POLICY
Our Board of Directors determines any payment of dividends. We do not expect to
authorize the payment of cash dividends in the foreseeable future. Any future
decision with respect to dividends will depend on future earnings, operations,
capital requirements and availability, restrictions in future financing
agreements, and other business and financial considerations.
11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED HEREIN ARE
FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FORWARD LOOKING
STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO STATEMENTS CONCERNING ANTICIPATED
TRENDS IN REVENUES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS
DISCUSSED IN SUCH FORWARD LOOKING STATEMENTS. THERE IS ABSOLUTELY NO ASSURANCE
THAT WE WILL ACHIEVE THE RESULTS EXPRESSED OR IMPLIED IN FORWARD LOOKING
STATEMENTS.
One Voice Technologies is a voice recognition technology company with over $26
Million invested in Research and Development and more than 20 Million products
distributed worldwide in seven languages. To date, our customers include
T-Mobile and Warner Brothers with strong technology and business partnerships
with Philips Electronics and IBM. Based on our patented technology, One Voice
offers voice solutions for the Telecom, Motion Picture DVD Entertainment and PC
markets. Our solutions allow mobile and residential phone users to Voice Dial,
Group Conference Call, Read and Send E-Mail and Instant Messages all by voice.
We offer these solutions through both domestic and international wireless and
wireline carriers. We also offer the motion picture industry's only voice
interactive DVD movies included in over 20 million copies distributed worldwide
in seven languages. We offer PC manufacturers the ability to bundle a complete
voice interactive computer assistant allowing PC users to talk to their
computers to quickly launch applications, websites, read and send E-mails and
dictate letters. We are strongly positioned across the Telecom and PC markets
with our patented technology.
In the Telecom sector, major efforts have been underway with both wireless and
wireline carriers. We are making significant progress with both domestic and
international carriers. To date, we have three proposals to carriers, two of
these proposals are for trials and one is for a full launch. We are confident we
will enter into a contract with at least one of these carriers with an
anticipated subscriber trial or full launch to commence thereafter. We have also
signed a contract with T-Mobile in Austria and completed installation of
MobileVoice(TM) in their FutureHouse facility. The T-Mobile FutureHouse is a
product center showcasing upcoming T-Mobile subscriber services. We are in talks
with T-Mobile regarding offering the MobileVoice service to their subscribers in
Austria. The feedback from executives within T-Mobile regarding the MobileVoice
solution has been very positive. We are working very closely with T-Mobile and
our partner Philips Electronics to make this a successful subscriber service.
In the Enterprise sector, we have just completed installation of our MobileVoice
Assistant for pre-purchase, trial use at the corporate headquarters of a Fortune
50 company. The MobileVoice Assistant(TM) is being used by their CEO and
executive team with exceptionally positive feedback. The MobileVoice Assistant
is a telco-grade hardware and software solution offering Voice Dialing,
On-the-fly Group Conference Calling, Voice-to-Text SMS Messaging and secure
E-Mail access. The MobileVoice Assistant offers access to mission critical
corporate information anytime, anywhere, from any phone, all by voice. To insure
the highest level of data security the MobileVoice Assistant was installed
behind the firewall within the company's corporate data center. We are working
very closely with this customer to ensure a successful test and subsequent
purchase. The goal is to have MobileVoice used by their executive team along
with their mobile sales force. We are also working with other large enterprise
customers to offer the MobileVoice Assistant within their organization.
In the PC sector, we are actively pursuing several computer manufacturers to
offer a voice-assistant for their desktop, laptop and tablet computers. We see
great opportunity for our voice solutions in this market. Our upcoming product,
called One Voice Assistant(TM), is greatly enhanced from our prior IVAN(TM)
product and extends the usage from desktop to Internet features including:
Application Launching, Desktop Navigation, Website Launching, Internet
Searching, E-Mail Reading and Sending along with Document Dictation. Unlike
IVAN, which required initial training, the One Voice Assistant requires no
upfront training and is as easy to use as its MobileVoice counterpart. In April
we will deliver evaluation copies of the One Voice Assistant to several computer
manufacturers for potential bundling opportunities on their PC's. We initially
targeted delivery of the One Voice Assistant in February but chose to delay this
until April due to deliverables to carrier and enterprise customers with more
immediate revenue opportunities. If selected for bundling by a computer
manufacturer, this could generate significant revenue for our company. We should
have additional feedback within the coming months.
In the DVD sector, One Voice is actively working with Warner Home Video and
several other studios to offer our One Voice DVD(TM) technology on their
12
upcoming titles. To date, we have been included on three DVD titles in 2002 with
global distribution of over 20 million copies in seven languages. We have been
included on every Harry Potter DVD sold worldwide on both the "Sorcerer's Stone"
and "Chamber of Secrets" DVD movies. Our goal is to have a general offering that
can easily be included by studios on every title they offer. We continue to work
closely with InterActual on titles and potential sales referrals. Additionally,
we are actively working with a large entertainment studio to add voice
capabilities to their Internet properties including online games and activities.
Jointly, this studio and One Voice are developing an online, voice-driven game,
as a prototype, for high-level management approval to begin utilizing our
technology. We should have additional feedback shortly.
Regarding our patented technology, over the past twelve months One Voice has
been issued three U.S. patents covering our 4th Generation Voice Technology.
These patents include U.S. Patent Numbers 6,434,524 and 6,499,013 and most
recently 6,532,444 issued on March 11, 2003.
In March 2002, we announced the launch and general availability of our
MobileVoice Platform for Wireless Carriers. The MobileVoice Platform consists of
a suite of carrier-grade voice subscriber services including; MobileVoice
Activated Dialing, MobileVoice Email, MobileVoice SMS, MobileVoice Instant
Messaging, MobileVoice Voice Mail, MobileVoice Email Reader and subsequently
added MobileConference Calling in March 2003.
In April 2002, we announced that we were selected by Warner Home Video ("WHV")
to incorporate our industry leading voice technology on the Harry Potter and the
Sorcerer's Stone DVD. Our technology was distributed on every Harry Potter and
the Sorcerer's Stone DVD globally in seven languages. We estimate the
distribution of this title alone now exceeds over 20 million copies. Under this
agreement, WHV agrees to exclusively utilize One Voice as its preferred
developer of voice technology and to grant us a right of first negotiation for
additional titles. This agreement puts One Voice in a very strong position in
the industry since we currently believe that we have no competitors.
In May 2002, we announced that we had signed a sales agreement for our voice
solutions in the Interactive Home Entertainment market with InterActual
Technologies, Inc., a leading developer of digital video entertainment for major
motion picture studios. Under the terms of the agreement, InterActual will
actively sell One Voice's technology in upcoming DVD titles that contain
InterActual's technology. One Voice worked jointly with InterActual to bring
voice technology to the blockbuster DVD Harry Potter and the Sorcerer's Stone
produced by Warner Home Video. InterActual has a very impressive track record
with the major studios and will be a valuable partner in targeting this
fast-growing market.
In June 2002, we announced the introduction of MobileVoice Assistant - a
complete communications and messaging solution designed for small to large
corporate use. This scalable solution includes One Voice's advanced voice
technology for Voice-Activated Dialing, E-Mail, SMS, Instant Messaging and
Paging.
In July, 2002 we were selected by The Kelsey Group, a leading research firm
focused on wireless and next-generation communications networks, to demonstrate
our MobileVoice solutions at the Cool Demo Lounge portion of the VOX2002
conference. We were selected as one of a small number of industry leaders to
demonstrate breakthrough wireless applications. During our presentation, we sent
a Voice-to-Text E-Mail, SMS and Paging message consisting of "The Pledge of
Allegiance" spoken into a mobile phone and sent as a text message to multiple
wireless devices. This demonstration was significant as it showcased our
outstanding technology to the voice industry and highlighted the fact that we
are the first and only company with Voice-to-Text mobile capabilities that
addresses real-world solutions for mobile text messaging by voice.
In August, 2002 we announced that we received a Nasdaq Staff Determination on
August 14, 2002 that we failed to comply with the Minimum Bid Price requirement
for continued listing as set forth in Marketplace Rule 4310(c)(4). As a result,
the common stock of One Voice was removed from The Nasdaq SmallCap Market and
listed on the Over-the-Counter Bulletin Board on August 22, 2002.
In September, 2002 we announced that One Voice and Philips Electronics' Speech
Processing business unit, a leading provider of speech recognition technology,
that both companies will work closely to offer speech-enabled telephony
solutions to the European carrier markets. These solutions will combine
technology from both companies to create European language versions of One
Voice's MobileVoice E-mail, MobileVoice SMS and MobileVoice InstantMessenger,
allowing wireless phone users the ability to send free-format voice-to-text
messages from any phone, make or model, by using only their voice.
In September, 2002 we announced a partnership with IBM to deliver
high-performance, telco-grade solutions for carriers and enterprise customers
13
around the world. The terms of the partnership include extensive support from
IBM for One Voice's MobileVoice Platform. This support was funded by IBM and
included rigorous IBM in-house testing of One Voice's MobileVoice Platform and
optimization of the architecture for large-scale deployment in telco and
enterprise environments. IBM will also offer hosting services, integration
support and provide technical assistance as a core part of One Voice's services.
These efforts will provide carriers and enterprise customers with One Voice's
telco-ready solutions, running on IBM's latest xSeries Servers, and will help
accelerate the penetration of these solutions in the carrier and enterprise
markets. Additionally, the two companies will develop joint sales and marketing
plans to maximize MobileVoice's impact in the market.
In September, 2002 we announced the completion of the second voice interactive
DVD title for the Warner Home Video box office hit Scooby-Doo: The Movie. The
street date for the DVD was October 11, 2002.
In October, 2002 we announced that we have completed the development of our
MobileVoice platform in Spanish. The project was started in conjunction with
testing to begin with several carriers in Latin America.
In November, 2002 we announced that we will work closely with Philips
Electronics to offer voice-enabled solutions for the Tablet PC market. These
solutions will be targeted at Tablet PC manufacturers as a core component of
their Tablet PC's and will add features including voice navigation, application
launching, Internet browsing, Outlook integration along with e-mail and letter
dictation.
In December 2002 we announced that Microsoft Corporation would showcase our One
Voice DVD product on its upcoming Windows XP Press Tour. Microsoft began a
nationwide press tour on December 9, 2002, highlighting leading edge multimedia
applications.
In January 2003, we announced that we were awarded a contract with T-Mobile in
Austria for our MobileVoice solution.
In January 2003, we announced that the upcoming Warner Home Video box office hit
"Harry Potter and the Chamber of Secrets" DVD will contain One Voice DVD voice
technology. One Voice DVD is a DVD-ROM based technology that allows people of
all ages to magically control their computers and interact with today's latest
digital experience of DVD. The street release date for this DVD is scheduled for
April 11, 2003.
In February 2003, we announced that Todd Brinker joined the company as Vice
President of Sales. With 15 years experience in sales and sales management, Mr.
Brinker comes to One Voice most recently from the Scientific Business Unit of
Kimberly-Clark, where he was responsible for sales throughout North America
generating annual revenue of more than $50 Million.
In February 2003, we issued a joint press release with Royal Philips
Electronics' (NYSE: PHG) business unit Speech Processing, a leading provider of
speech recognition technology, that T-Mobile Austria signed an exclusive
agreement to utilize MobileVoice in the T-Mobile Future House, a product center,
showcasing T-Mobile's upcoming wireless subscriber services located in Vienna,
Austria.
The losses through the twelve months ended December 31, 2002 were due to minimal
revenue and our operating expenses, with the majority of expenses in the areas
of: debt issue costs, salaries, legal fees, consulting fees, insurance,
licensing cost, as well as amortization expense relating to capitalized software
costs. We face considerable risk in completing each of our business plan steps,
including, but not limited to: a lack of funding or available credit to continue
development and undertake product rollout; potential cost overruns; a lack of
interest in our solutions in the market on the part of wireless carriers or
other customers; potential reduction in wireless carriers which could lead to
significant delays in consummating revenue bearing contracts; and/or a shortfall
of funding due to an inability to raise capital in the securities market. Since
further funding is required, and if none is received, we would be forced to rely
on our existing cash in the bank or secure short-term loans. This may hinder our
ability to complete our product development until such time as necessary funds
could be raised. In such a restricted cash flow scenario, we would delay all
cash intensive activities including certain product development and strategic
initiatives described above.
14
Selected Statement Of Operations Information
--------------------------------------------
12 Months Ended 12 Months Ended
December 31, 2002 December 31, 2001
---------------- ---------------
Net Revenues $ 387,771 $ 185,934
Operating expenses $ 6,896,208 $ 8,938,203
Net loss $ (6,568,922) $ (8,778,279)
Discussion of the twelve months ended December 31, 2002 compared with the twelve
months ended December 31, 2001.
Net revenues totaled $388,000 for the twelve months ended December 31, 2002. Net
revenues of $186,000 were earned for the twelve months ended December 31, 2001.
The recognition of revenues for the year ended 2002 resulted primarily from work
performed in the DVD/Multimedia sector.
Operating expenses decreased to $6,896,000 for the twelve months ended December
31, 2002 from $8,938,000 for the same period in 2001. The decrease in operating
expenses over the same year in 2001 was a direct result of a decrease of all
major expense categories for the period as compared to the year prior. Salary
and wage expense was $1,445,000 for the twelve months ended December 31, 2002 as
compared to $2,109,000 for the same period in 2001. The decrease in 2002 as
compared to 2001 arose primarily from the decreased labor force, which we have
restructured to accommodate our new direction into the telecom, telematics and
TV/Internet appliance initiatives. Advertising and promotion expense totaled
$25,000 for the twelve months ended December 31, 2002 as compared to $388,000
for the same period in 2001. Advertising and promotion expense reduction
resulted from the company discontinuing all direct to consumer marketing
campaigns and focusing on other distribution channels. Legal and consulting
expenses decreased to $470,000 for the twelve months ended December 31, 2002
from $806,000 for the same period in 2001. Depreciation and amortization
expenses decreased to $848,000 for the twelve months ended December 31, 2002
from $1,275,000 for the same period in the prior year, primarily due to the IBM
License having been fully amortized in the prior period. Amortization and
Depreciation expenses consisted of patent and trademarks, computer equipment,
consultant fees, and tradeshow booth. Interest expense increased to $2,074,000,
in 2002, as compared to $1,156,000 in 2001, primarily due to non-cash debt issue
cost from warrants granted, shares issued and beneficial conversion feature.
We had a net loss of $6,569,000 or basic and diluted net loss per share of
$0.21for the twelve months ended December 31, 2002 compared to $8,778,279 or
basic and diluted net loss per share of $0.59 for the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had working capital of $409,000 as compared with
$226,000 at December 31, 2001.
Net cash used for operating activities was $3,621,000 for the year ended
December 31, 2002 compared to $5,080,000 for the year ended December 31, 2001.
From inception on January 1, 1999 to December 31, 2002, net cash used for
operating activities was $18,977,000.
Net cash used for investing activities was $45,000 for the year ended December
31, 2002 compared to net cash provided of $168,000 for the year ended December
31, 2001. From inception on January 1, 1999 to December 31, 2002, net cash used
for investing activities was $4,637,000.
15
Net cash provided by financing activities was $3,675,000 for the year ended
December 31, 2002 compared to $1,596,000 for the year ended December 31, 2001.
From inception on January 1, 1999 to September 30, 2002 net cash provided by
financing activities was $24,359,000.
We incurred a net loss of $6,568,922 during the year ended December 31, 2002,
and had an accumulated deficit of $26,527,036. Our losses through December 2002
included interest expense, amortization of software licensing agreements and
development costs and operational and promotional expenses. Sales of our equity
securities have allowed us to maintain a positive cash flow balance from
financing activities.
Cash flow from sales began in the first quarter 2002.
In January 2002, we entered into a securities purchase agreement with the Laurus
Master Fund, Ltd. and Stonestreet Limited Partnership for the issuance of an
aggregate of $1,452,500 principal amount of 4% convertible notes and an
aggregate of 500,000 common stock purchase warrants in reliance on Section 4(2)
of the Act and Rule 506. Each warrant entitles the holder to purchase one share
of common stock at an exercise price of $.96. The commission for the transaction
was $87,500 and a 4% convertible note in the amount of $52,500.
In May 2002, the Company entered into an equity financing agreement of up to
$5.8 million, with an initial put demand by the Company for approximately
$800,000 in exchange for 2,666,667 shares of the Company's common stock at a
price of $0.30 per share. Subsequently, on August 8, 2002, $500,000 of the
$800,000 investment was repriced and 833,334 shares of common stock was issued
to the investors so that the average cost of the initial put was $.22857 per
share. Pursuant to this agreement, the Company can exercise its right to require
the Investor to purchase a discretionary amount of the Company's Common Stock as
determined by the Company, subject to the terms of the agreement. The minimum
put amount is $150,000 and the offering price of the Company's common stock is
determined on a formula, as set forth in the agreement. In addition, the Company
also issued 300,000 warrants to purchase shares of the Company's common stock at
an exercise price of $0.43 per share. Subsequently, on August 8, 2002, the
Company adjusted the exercise price on these warrants to $.20 per share due to a
subsequent financing. The Company paid a finders fee of $48,000 and issued
75,000 warrants with an exercise price of $0.43, the value of which has been
netted against the gross proceeds.
In August 2002, we entered into securities purchase agreement with two
accredited investor, Stonestreet Limited Partnership and Alpha Capital
Aktiengesellschaft for the issuance of 4% convertible debentures in the
aggregate amount of $650,000. The debentures are convertible into common stock
at a conversion price of the lower of $.242 or 80% of the average of the five
lowest closing bid prices for the common stock thirty days prior to conversion.
In addition, an aggregate of 491,400 common stock purchase warrants were issued
to the investors. Each common stock purchase warrant has an exercise price of
$.252. The commission for the transaction was 8%. The offering of convertible
debentures was exempt from registration under Rule 506 of Regulation D and under
Section 4(2) of the Securities Act. No advertising or general solicitation was
employed in offering the securities. All persons were accredited investors,
represented that they were capable of analyzing the merits and risks of their
investment.
In August 2002, we repriced Stonestreet's May 2002 investment and issued them
833,334 shares of common stock. In addition, we repriced Stonestreet's common
stock purchase warrants exercise price to $.20 per share.
In November 2002, we entered into a securities purchase agreement with three
accredited investors, Alpha Capital Aktiengesellschaft, Ellis Enterprises Ltd.
and Bristol Investment Fund, Ltd. for the issuance of 4% convertible debentures
in the aggregate amount of $1,150,000. This amount was broken out into two equal
closings of $575,000. The dates for each closing were November 14, 2002 and
December 30, 2002. The debentures are convertible into common stock at a
conversion price of the lower of $ .24 or eighty percent (80%) of the average of
the five lowest closing bid prices for the thirty (30) trading days prior to
conversion. In addition, an aggregate of 670,842 common stock purchase warrants
were issued to the investors, broken out evenly by closing date at 335,421. Each
common stock purchase warrant has an exercise price of $.252 and $.204 for the
respective closing dates of November 14, 2002 and December 31, 2002. Net
proceeds for the closing dates November 14, 2002 and December 31,2002 amounted
to $496,000 and $549,000 respectively. Net value of the warrants amounted to
$92,009 and the beneficial conversion feature amounted to $758,724. Total debt
issue cost of $955,732is being amortized over the life of the debt using the
interest method. Upon conversion of the debt, any unamortized debt issue costs
will be charged to expense.
16
Notes payable had a face value of $1,235,000 at December 31, 2002. Notes payable
had a face value of $550,000 at December 31, 2001.
Stonestreet Limited Partnership has converted all (principal balance of $1.4
million) of its convertible debt securities and related interest into
approximately 7.2 million shares of One Voice Technologies, Inc.'s common stock.
We maintain a cash balance that we believe will sustain operations up to June
2003. We continue to rely heavily on our current funding sources, which have
financed us since 2001, until we are operationally breakeven. The losses through
the year ended December 31, 2002 were due to minimal revenue and our operating
expenses, with the majority of expenses in the areas of: salaries, legal fees,
consulting fees, as well as amortization expense relating to software
development, debt issue costs and licensing costs. We face considerable risk in
completing each of our business plan steps, including, but not limited to: a
lack of funding or available credit to continue development and undertake
product rollout; potential cost overruns; a lack of interest in its solutions in
the market on the part of wireless carriers or other customers; potential
reduction in wireless carriers which could lead to significant delays in
consummating revenue bearing contracts; and/or a shortfall of funding due to an
inability to raise capital in the securities market. Since further funding is
required, and if none is received, we would be forced to rely on our existing
cash in the bank or secure short-term loans. This may hinder our ability to
complete our product development until such time as necessary funds could be
raised. In such a restricted cash flow scenario, we would delay all cash
intensive activities including certain product development and strategic
initiatives described above.
SUBSEQUENT EVENTS
There are no current plans to purchase or sell any significant amount of fixed
assets.
17
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS:
Balance Sheet F-2
Statements of Operations F-3
Statement of Stockholders' Equity F-4 - F-6
Statements of Cash Flows F-7 - F-8
Notes to Financial Statements F-9 - F-31
INDEPENDENT AUDITORS' REPORT
Board of Directors
One Voice Technologies, Inc.
San Diego, California
We have audited the accompanying balance sheet of One Voice Technologies, Inc.,
a Nevada Corporation (a development stage enterprise) as of December 31, 2002,
and the related statements of operations, stockholders' equity and cash flows
for the years ended December 31, 2002 and 2001, and for the period since
inception on January 1, 1999 to December 31, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of One Voice Technologies, Inc. as
of December 31, 2002, and the results of its operations and its cash flows for
the years ended December 31, 2002 and 2001 and for the period since inception on
January 1, 1999 to December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
The Company's financial statements have been presented on the basis that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company incurred a net loss of $6,568,922 during 2002 and had an accumulated
deficit of $26,527,036. The Company had working capital of $408,921 at December
31, 2002. Cash flows used for operations amounted to $3,620,807 for the year
ended December 31, 2002. These factors raise substantial doubt about the
Company's ability to continue as a going concern unless the Company enters into
a significant revenue-bearing contract. Management is currently seeking
additional equity or debt financing. Additionally, management is currently
pursuing revenue-bearing contracts utilizing various applications of its
technology including wireless technology. The financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
February 24, 2003
F-1
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET - DECEMBER 31, 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 745,155
Accounts receivable 29,888
Prepaid expenses 63,524
-------------
Total current assets 838,567
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization 359,358
OTHER ASSETS:
Software development costs, net of accumulated amortization 730,365
Deposits 46,897
Trademarks, net of accumulated amortization 106,422
Patents 61,845
-------------
Total other assets 945,529
-------------
$ 2,143,454
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES -
accounts payable and accrued expenses $ 429,646
4% CONVERTIBLE NOTES PAYABLE, 1,235,000
Less unamortized discount (934,100)
-------------
300,900
STOCKHOLDERS' EQUITY:
Preferred stock; $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding --
Common stock; $.001 par value, 100,000,000 shares
authorized, 38,934,533 shares issued and outstanding 38,934
Additional paid-in capital 27,901,010
Deficit accumulated during development stage (26,527,036)
-------------
Total stockholders' equity 1,412,908
-------------
$ 2,143,454
=============
The accompanying notes form an integral part of these financial statements.
F-2
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
From inception
on January 1,
Year ended Year ended 1999 to
December 31, December 31, December 31,
2002 2001 2002
------------- ------------- -------------
NET REVENUE $ 387,771 $ 185,934 $ 650,321
COST OF REVENUE 60,485 26,010 199,675
------------- ------------- -------------
GROSS PROFIT 327,286 159,924 450,646
GENERAL AND ADMINISTRATIVE EXPENSES 6,896,208 8,938,203 26,977,682
------------- ------------- -------------
NET LOSS $ (6,568,922) $ (8,778,279) $(26,527,036)
============= ============= =============
NET LOSS PER SHARE, basic and diluted $ (0.21) $ (0.59)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING,
basic and diluted 31,635,000 14,824,000
============= =============
The accompanying notes form an integral part of these financial statements.
F-3
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY
Deficit
accumulated
Common stock Additional during Total
----------------------------- paid-in development stockholders'
Shares Amount capital stage equity
------------- ------------- ------------- ------------- -------------
Balance at January 1, 1999 12,720,000 $ 12,720 $ $ $ 12,720
Net proceeds from issuance of
common stock in connection
with merger 7,000,000 7,000 106,236 113,236
Net proceeds from issuance of
common stock 1,500,000 1,500 2,544,422 2,545,922
Net issuance of common stock in
exchange for services 150,000 150 299,850 300,000
Redemption of common stock (10,000,000) (10,000) (10,000)
Net loss for the year ended
December 31, 1999 (1,782,215) (1,782,215)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1999 11,370,000 11,370 2,950,508 (1,782,215) 1,179,663
Net proceeds from issuance of
common stock and warrants 312,500 313 1,779,523 1,779,836
Net proceeds from issuance of
common stock and warrants 988,560 988 12,145,193 12,146,181
Issuance of warrants in exchange
for services 55,000 55,000
Issuance of options in exchange
for services 199,311 199,311
Issuance of warrants in connection
with financing 1,576,309 1,576,309
Net loss for the year ended
December 31, 2000 (9,397,620) (9,397,620)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2000 12,671,060 12,671 18,705,844 (11,179,835) 7,538,680
------------- ------------- ------------- ------------- -------------
(Continued)
The accompanying notes form an integral part of these financial statements.
F-4
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
Deficit
accumulated
Common stock Additional during Total
----------------------------- paid-in development stockholders'
Shares Amount capital stage equity
------------- ------------- ------------- ------------- -------------
Conversion of debt to equity, net
of unamortized debt discount 3,220,765 3,220 571,867 575,087
Issuance of options in
exchange for services 58,864 58,864
Issuance of stock and warrants
in connection with settlement 110,000 110 247,940 248,050
Proceeds from sale of common stock
and warrants, net of offering costs 702,350 702 839,318 840,020
Issuance of warrants in connection
with debt financing 92,400 92,400
Beneficial conversion feature
embedded in debt securities 417,450 417,450
Conversion of debt to equity -
Laurus Master Fund 3,402,600 3,403 595,399 598,802
Conversion of debt to equity -
Stonestreet Capital 2,973,780 2,974 506,137 509,111
Net loss for the year ended
December 31, 2001 (8,778,279) (8,778,279)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2001 23,080,555 23,080 22,035,219 (19,958,114) 2,100,185
Conversion of debt to equity 2,624,447 2,624 309,714 312,338
Issuance of warrants in connection
with debt financing 577,879 577,879
Beneficial conversion feature
embedded in debt securities 1,948,765 1,948,765
Issuance of options in exchange
for services 107,276 107,276
(Continued)
The accompanying notes form an integral part of these financial statements.
F-5
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(UNAUDITED)
Deficit
accumulated
Common stock Additional during Total
----------------------------- paid-in development stockholders'
Shares Amount capital stage equity
------------- ------------- ------------- ------------- -------------
Issuance of common stock for cash 2,666,667 2,667 721,166 723,833
Cashless exercise of warrants 10,512 11 (11) --
Exercise of warrants for cash 20,000 20 3,380 3,400
Re-pricing adjustment for
warrants outstanding -- -- 9,000 9,000
Shares issued in re-pricing-
Stonestreet Capital 833,334 833 174,167 175,000
Conversion of debt to equity -
Laurus Master Fund 2,110,129 2,110 703,345 705,455
Conversion of debt to equity -
Stonestreet Capital 4,294,596 4,294 899,405 903,699
Conversion of debt to
equity - Alpha Capital 2,767,752 2,768 342,232 345,000
Conversion of debt to
equity - Ellis Enterprise 300,842 301 39,699 40,000
Conversion of debt to
equity - Bristol Investments 225,699 226 29,774 30,000
Net loss for the year ended
December 31, 2002 (6,568,922) (6,568,922)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2002 38,934,533 $ 38,934 $ 27,901,010 $(26,527,036) $ 1,412,908
============= ============= ============= ============= =============
The accompanying notes form an integral part of these financial statements.
F-6
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
From inception
on January 1,
Year ended Year ended 1999 to
December 31, December 31, December 31,
2002 2001 2002
------------- ------------- -------------
Cash flows provided by (used for)
operating activities:
Net loss $ (6,568,922) $ (8,778,279) $(26,527,036)
------------- ------------- -------------
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 848,165 1,168,084 3,172,495
Loss on disposal of assets 23,340 500,000 523,340
Amortization of discount and finance cost 2,141,505 1,191,442 3,396,530
Options issued in exchange for services 107,276 140,263 446,850
Warrants issued in exchange for services -- 166,650 221,650
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Licensing revenue receivable (29,343) -- (279,343)
Advertising revenue receivable -- 324,455 249,455
Inventory 109,451 6,424 --
Prepaid advertising -- 183,331 --
Prepaid mailing lists -- -- (750,000)
Prepaid expenses 3,115 186,617 (63,525)
Deposits 1,405 (315) (46,897)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (256,799) (112,229) 429,646
Deferred revenue -- (56,250) 250,000
------------- ------------- -------------
Total adjustments 2,948,115 3,698,472 7,550,201
------------- ------------- -------------
Net cash used for operating activities (3,620,807) (5,079,807) (18,976,835)
------------- ------------- -------------
Cash flows used for investing activities:
Sale (Purchase) of property and equipment,
net 847 (75,205) (1,397,819)
Software licensing (6,013) -- (1,145,322)
Software development costs (16,859) (262,278) (1,577,083)
Trademarks (7,288) (27,195) (242,469)
Patents (15,447) (3,668) (74,465)
Loan fees -- -- (200,000)
Increase in escrow account -- 200,000 --
------------- ------------- -------------
Net cash used for investing activities (44,760) (168,346) (4,637,158)
------------- ------------- -------------
(Continued)
The accompanying notes form an integral part of these financial statements.
F-7
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
From inception
on January 1,
Year ended Year ended 1999 to
December 31, December 31, December 31,
2002 2001 2002
------------- ------------- -------------
Cash flows provided by (used for) financing
activities:
Proceeds from issuance of common stock, net 727,233 840,020 18,465,148
Proceeds from loans payable -- -- 200,000
Proceeds from convertible note payable, net 2,948,000 956,000 5,904,000
Payments on loan payable officer stockholder -- (200,000) (200,000)
Retirement of common stock, net -- -- (10,000)
------------- ------------- -------------
Net cash provided by financing activities 3,675,233 1,596,020 24,359,148
------------- ------------- -------------
Net increase (decrease) in cash 9,666 (3,652,133) 745,155
Cash and cash equivalents, beginning of year 735,489 4,387,622 --
------------- ------------- -------------
Cash and cash equivalents, end of year $ 745,155 $ 735,489 $ 745,155
============= ============= =============
Supplemental disclosure of cash flow information:
Interest paid $ -- $ 1,270 $ 19,047
============= ============= =============
Income taxes paid $ 800 $ 800 $ 5,023
============= ============= =============
Supplemental disclosure of non-cash financing
activities:
Options issued in exchange for services $ 107,276 $ 58,863 $ 365,450
============= ============= =============
Shares issued for re-pricing of conversion rate $ 175,000 $ -- $ 175,000
============= ============= =============
Common shares and warrants issued for settlement $ -- $ 166,650 $ 303,050
============= ============= =============
Warrants issued in connection with financing $ 577,879 $ 92,400 $ 3,905,898
============= ============= =============
Common Stock issued in exchange for debt $ 2,336,492 $ 1,683,000 $ 4,019,492
============= ============= =============
Beneficial conversion feature of debt to equity $ 1,948,765 $ 325,000 $ 2,366,215
============= ============= =============
The accompanying notes form an integral part of these financial statements.
F-8
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
(1) ORGANIZATION:
Conversational Systems, Inc. was incorporated under the laws
of the State of California on April 8, 1991. The Company
commenced operations in 1999.
Effective June 22, 1999, pursuant to a Merger Agreement and
Plan of Reorganization between Dead On, Inc. ("acquiree") and
Conversational Systems, Inc. a California corporation
("acquiror" or the "Company"), Dead On, Inc. has been reversed
merged into Conversational Systems, Inc. The Company accounted
for the acquisition of Dead On, Inc. using the purchase method
of accounting. The shares of Conversational Systems were
exchanged for 7,000,000 newly issued shares of Dead On, Inc.
Because the former shareholders of Conversational Systems,
Inc. then became the majority shareholders of Dead On, Inc.,
Conversational Systems was treated as the acquiror under APB
Opinion No. 16, "Business Combinations."
In July 1999, the Company repurchased and retired 10,000,000
shares of its common stock, $.001 par value per share. Due to
the retirement of shares, the former shareholders of
Conversational Systems, Inc. have significant control in Dead
On, Inc.
Due to the contemplation and timing of the merger between Dead
On, Inc. and Conversational Systems, Inc. and the retirement
of 10,000,000 shares of the Company's common stock, these
events were accounted for as a single transaction.
Conversational Systems, Inc. was liquidated with and into Dead
On, Inc., which then changed its legal name to One Voice
Technologies, Inc., a Nevada Corporation.
GOING CONCERN:
The Company's financial statements have been presented on the
basis that the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company
incurred a net loss of $6,568,922 during 2002 and had an
accumulated deficit of $26,527,036. The Company had working
capital of $408,921 at December 31, 2002. Cash flows used for
operations amounted to $3,620,807 for the year ended December
31, 2002. These factors raise substantial doubt about the
Company's ability to continue as a going concern unless the
Company enters into a significant revenue-bearing contract.
Management is currently seeking additional equity or debt
financing. Additionally, management is currently pursuing
revenue-bearing contracts utilizing various applications of
its technology including wireless technology. The financial
statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going
concern.
F-9
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY:
The Company develops and markets computer software using
Intelligent Voice Interactive Technology (IVIT(TM)) to website
owners in the United States and other countries.
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 certain 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 revenues and expenses during the reporting
period. Actual results could differ from those estimates.
DEVELOPMENT STAGE ENTERPRISE:
The Company is a development stage company as defined by
Statement of Financial Accounting Standards No. 7, "Accounting
and Reporting by Development Stage Enterprises." The Company
is devoting substantially all of its present efforts to
establish a new business, which is unrelated to the business
of Dead On, and its planned principal operations have not yet
commenced. All losses accumulated since inception of One Voice
Technologies, Inc. have been considered as part of the
Company's development stage activities. Revenues of $387,771
during the year ended December 31, 2002 is not substantial to
the plan of the Company. These revenues were derived from one
project with one customer and currently no revenue stream
exists. The Company is continuing to focus on its development
activities.
FAIR VALUE:
The Company's financial instruments consist principally of
accounts payable and notes payable and accounts receivable as
defined by Statement of Financial Accounting Standards No.
107, "Disclosures About Fair Value of Financial Instruments."
The carrying value of the financial instruments accounts
payable approximate their fair value due to the short-term
nature of these instruments and for convertible debentures,
the instruments are valued at the Company's effective
borrowing rate.
CASH:
Equivalents
-----------
For purposes of the statement of cash flows, cash equivalents
include all highly liquid debt instruments with original
maturities of three months or less which are not securing any
corporate obligations.
F-10
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CASH, CONTINUED:
Concentration
-------------
The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts.
REVENUE RECOGNITION:
The Company recognizes revenues when earned in the period in
which the service is provided. The Company's revenue
recognition policies are in compliance with all applicable
accounting regulations, including American Institute of
Certified Public Accountants ("AICPA") Statement of Position
("SOP") 97-2, Software Revenue Recognition, as amended by SOP
98-4 and SOP 98-9. Any revenues from software arrangements
with multiple elements are allocated to each element of the
arrangement based on the relative fair values using specific
objective evidence as defined in the SOPs. If no such
objective evidence exists, revenues from the arrangements are
not recognized until the entire arrangement is completed and
accepted by the customer. Once the amount of the revenue for
each element is determined, the Company recognizes revenues as
each element is completed and accepted by the customer. For
arrangements that require significant production, modification
or customization of software, the entire arrangement is
accounted for by the percentage of completion method, in
conformity with Accounting Research Bulletin ("ARB") No. 45
and SOP 81-1.
Service and license fees are deferred and recognized over the
life of the agreement. Revenues from the sale of products are
recognized upon shipment of the product.
NONMONETARY TRANSACTIONS:
The Company accounts for nonmonetary transactions based on the
fair values of the assets or services involved in accordance
with APB No. 29, "Accounting for Nonmonetary Transactions."
The cost of a nonmonetary asset acquired in exchange for
another nonmonetary asset is the fair value of the asset
surrendered to obtain it.
ADVERTISING AND PROMOTION COSTS:
Advertising and promotion costs are expensed as incurred. For
the years ended December 31, 2002 and 2001, advertising and
promotion costs approximated $25,000 and $388,000,
respectively.
F-11
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
ADVERTISING AND PROMOTION COSTS, CONTINUED:
The Company also engages in barter advertising, which they
account for in accordance with EITF 99-17, determining the
fair market value of the barter advertising based on the fair
value of non-barter advertising. The Company books the revenue
and related expenses from barter advertising up to the extent
of the non-barter advertising during the same period. During
the year ended December 31, 2002, the Company did not
recognize any revenues and expenses for barter transactions as
it did not enter into such transactions. During the year ended
December 31, 2001, the Company recognized $180,000 in revenues
and expenses from barter transactions. Advertising which did
not qualify for recognition under EITF 99-17, and therefore,
is not reflected in these statements, totaled $87,500 for the
year ended December 31, 2001.
PROPERTY AND EQUIPMENT:
Property and equipment are valued at cost. Depreciation is
being provided by use of the straight-line method over the
estimated useful lives of the assets, ranging from three to
seven years.
DEBT WITH STOCK PURCHASE WARRANTS:
The proceeds received from debt issued with stock purchase
warrants is allocated between the debt and the warrants, based
upon the relative fair values of the two securities, and the
balance of the proceeds is accounted for as additional paid-in
capital. The resulting debt discount is amortized to expense
over the term of the debt instrument, using the interest
method. In the event of settlement of such debt in advance of
the maturity date, an expense is recognized based upon the
difference between the then carrying amount (i.e., face amount
less unamortized discount) and amount of payment.
DEBT WITH BENEFICIAL CONVERSION FEATURE:
In January 2001, the Financial Accounting Standards Board
Emerging Issues Task Force issued EITF 00-27 effective for
convertible debt instruments issued after November 16, 2000.
This pronouncement requires the use of the intrinsic value
method for recognition of the detachable and embedded equity
features included with indebtedness be valued using the
relative fair value approach, and requires amortization of the
amount associated with the convertibility feature over the
life of the debt instrument rather than the period for which
the instrument first becomes convertible. The Company has
entered into several transactions involving debt with
beneficial conversion feature, all of which are discussed in
Note 5.
F-12
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
SOFTWARE DEVELOPMENT COSTS:
The Company accounts for their software development costs in
accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," ("SFAS No. 86"). SFAS No.
86 requires the Company to capitalize the direct costs and
allocate overhead associated with the development of software
products. Initial costs are charged to operations as research
prior to the development of a detailed program design or a
working model. Costs incurred subsequent to the product
release, and research and development performed under contract
are charged to operations. Capitalized costs are amortized
over the estimated product life of four years on the
straight-line basis. Unamortized costs are carried at the
lower of book value or net realizable value.
Amortization expense totaled $390,967 and $383,115 for the
years ended December 31, 2002 and 2001, respectively.
Accumulated amortization as of December 31, 2002 amounted to
$852,183.
COMPREHENSIVE LOSS:
Comprehensive loss consists of net loss only, and accordingly,
a Statement of Comprehensive Loss is not presented.
TRADEMARKS AND PATENTS:
The Company's trademark costs consist of legal fees paid in
connection with trademarks. The Company amortizes trademarks
using the straight-line method over the period of estimated
benefit, generally four years. Amortization expense charged
for the years ended December 31, 2002 and 2001 totaled $57,977
and $53,226, respectively. Accumulated amortization as of
December 31, 2002 amounted to $148,667.
The Company's patent costs consist of legal fees paid in
connection with patents pending. The Company will amortize
patents using the straight-line method over the period of
estimated benefit, generally five years. Amortization expense
charged for the year ended December 31, 2002 totaled $12,620.
There was no amortization expense charged for the year ended
December 31, 2001.
F-13
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
TRADEMARKS AND PATENTS:
The Company periodically evaluates whether events or
circumstances have occurred that may affect the estimated
useful life or the recoverability of the remaining balance of
the patent and trademarks. Impairment of the assets is
triggered when the estimated future undiscounted cash flows do
not exceed the carrying amount of the intangible asset. If the
events or circumstances indicate that the remaining balance of
the assets may be permanently impaired, such potential
impairment will be measured based upon the difference between
the carrying amount of the assets and the fair value of such
assets, determined using the estimated future discounted cash
flows generated.
NET LOSS PER SHARE:
For the years ended December 31, 2002 and 2001, the per share
data is based on the weighted average number of common (basic)
and common equivalent shares outstanding (diluted), and are
calculated in accordance with Common stock equivalents,
consisting of 3,173,625 and 2,078,625 stock options, 3,464,297
and 1,457,567 stock warrants, and convertible debentures
estimated at 6,175,000 shares (2002) and 2,700,000 (2001),
using assumed conversion rate of $0.20 have not been included
in the computation of diluted weighted average number of
common shares outstanding, as their effect would be
anti-dilutive for December 31, 2002 and 2001, respectively.
INCOME TAXES:
Deferred income taxes are reported using the liability method.
Deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
F-14
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS:
In July 2001, the FASB issued SFAS No. 141 "Business
Combinations." SFAS No. 141 supersedes Accounting Principles
Board ("APB") No. 16 and requires that any business
combinations initiated after June 30, 2001 be accounted for as
a purchase; therefore, eliminating the pooling-of-interest
method defined in APB 16. The statement is effective for any
business combination initiated after June 30, 2001 and shall
apply to all business combinations accounted for by the
purchase method for which the date of acquisition is July 1,
2001 or later. The adoption did not have a material impact to
the Company's financial position or results of operations,
since the Company has not participated in such activities
covered under this pronouncement after the effective date.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and
Other Intangibles." SFAS No. 142 addresses the initial
recognition, measurement and amortization of intangible assets
acquired individually or with a group of other assets (but not
those acquired in a business combination) and addresses the
amortization provisions for excess cost over fair value of net
assets acquired or intangibles acquired in a business
combination. The statement is effective for fiscal years
beginning after December 15, 2001, and is effective July 1,
2001 for any intangibles acquired in a business combination
initiated after June 30, 2001. As of January 1, 2002, the
Company implemented the guidance of SFAS 142. There was no
reclassification necessary of intangible assets related to the
adoption of SFAS 142 since all balances were previously
classified as intangible assets. The Company did not have a
material impact to the Company's financial position or results
of operations from the adoption of this pronouncement.
In October 2001, the FASB recently issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which requires
companies to record the fair value of a liability for asset
retirement obligations in the period in which they are
incurred. The statement applies to a company's legal
obligations associated with the retirement of a tangible
long-lived asset that results from the acquisition,
construction, and development or through the normal operation
of a long-lived asset. When a liability is initially recorded,
the company would capitalize the cost, thereby increasing the
carrying amount of the related asset. The capitalized asset
retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value.
Upon settlement of the liability, the obligation is settled at
its recorded amount or the company incurs a gain or loss. The
statement is effective for fiscal years beginning after June
30, 2002. The Company does not expect the adoption to have a
material impact to the Company's financial position or results
of operations.
F-15
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED:
In October 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". Statement
144 addresses the accounting and reporting for the impairment
or disposal of long-lived assets. The statement provides a
single accounting model for long-lived assets to be disposed
of. New criteria must be met to classify the asset as an asset
held-for-sale. This statement also focuses on reporting the
effects of a disposal of a segment of a business. This
statement is effective for fiscal years beginning after
December 15, 2001. The Company did not have a material impact
to the Company's financial position or results of operations
from the adoption of this pronouncement.
In April 2002, the FASB issued Statement No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This Statement
rescinds FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt", and an amendment of that
Statement, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements" and FASB Statement
No. 44, "Accounting for Intangible Assets of Motor Carriers".
This Statement amends FASB Statement No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The
adoption of SFAS No. 145 did not have a material impact on the
Company's financial position or results of operations.
In June 2002, the FASB issued Statement 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 Emerging Issues Task Force ("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 provisions of
this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early
application encouraged. The Company does not expect the
adoption to have a material impact to the Company's financial
position or results of operations.
F-16
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED:
In October 2002, the FASB issued Statement No. 147,
"Acquisitions of Certain Financial Institutions-an amendment
of FASB Statements No. 72 and 144 and FASB Interpretation No.
9", which removes acquisitions of financial institutions from
the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in
accordance with Statements No. 141, Business Combinations, and
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 in its
scope long-term customer-relationship intangible assets of
financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder
intangible assets. The requirements relating to acquisitions
of financial institutions is effective for acquisitions for
which the date of acquisition is on or after October 1, 2002.
The provisions related to accounting for the impairment or
disposal of certain long-term customer-relationship intangible
assets are effective on October 1, 2002. The adoption of this
Statement did not have a material impact to the Company's
financial position or results of operations as the Company has
not engaged in either of these activities.
In December 2002, the FASB issued Statement No. 148,
"Accounting for Stock-Based Compensation-Transition and
Disclosure", which amends FASB Statement No. 123, Accounting
for Stock-Based Compensation, 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. The transition
guidance and annual disclosure provisions of Statement 148 are
effective for fiscal years ending after December 15, 2002,
with earlier application permitted in certain circumstances.
The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods
beginning after December 15, 2002. The adoption of this
statement did not have a material impact on the Company's
financial position or results of operations as the Company has
not elected to change to the fair value based method of
accounting for stock-based employee compensation.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities." Interpretation
46 changes the criteria by which one company includes another
entity in its consolidated financial statements. Previously,
the criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a
majority of the entity's residual returns or both. A company
that consolidates a variable interest entity is called the
primary beneficiary of that entity. The consolidation
requirements of Interpretation 46 apply immediately to
variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the
first fiscal year or interim period beginning after June 15,
2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless
of when the variable interest entity was established. The
Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
F-17
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(3) PROPERTY AND EQUIPMENT:
A summary is as follows:
Computer equipment $ 463,885
Website development 420,993
Equipment 296,998
Furniture and fixtures 120,243
Web host computer equipment 35,974
Leasehold improvements 15,222
-------------
1,353,315
Less accumulated depreciation and amortization 993,957
-------------
$ 359,358
=============
Depreciation expense totaled $377,051 and $390,092 for the years ended
December 31, 2002 and 2001, respectively.
(4) SOFTWARE LICENSING AGREEMENTS:
In March 2000, the Company entered into a 36-month software licensing
agreement with a software developer. The agreement can be cancelled by
mutual agreement of the parties at any time. The asset balance of
$5,465, net of accumulated amortization is being amortized using the
straight-line method over the life of the agreement and is included in
software development cost.
Amortization expense related to software licensing agreements totaled
$9,550 and $352,973 for the years ended December 31, 2002 and 2001,
respectively.
F-18
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(5) CONVERTIBLE NOTES PAYABLE:
A summary of convertible notes payable at stated interest rate of 4% is
as follows:
Due Principal Unamortized Net
Date Amount Discount Balance
----------------- ------------ ----------- ----------
Alpha Capital Akteingesellschaft August 6, 2004 $ 155,000 $ (79,977) $ 75,023
Alpha Capital Akteingesellschaft November 14, 2004 300,000 (281,547) 18,453
Alpha Capital Akteingesellschaft December 30, 2004 300,000 (198,830) 101,170
Ellis Enterprise Limited November 14, 2004 85,000 (79,670) 5,330
Ellis Enterprise Limited December 30, 2004 125,000 (82,905) 42,095
Bristol Investments Fund, Limited November 14, 2004 120,000 (112,417) 7,583
Bristol Investments Fund, Limited December 30, 2004 150,000 (98,754) 51,246
------------ ----------- ----------
$ 1,235,000 $ (934,100) $ 300,900
============ =========== ==========
4% Convertible Note Payable, Alpha Capital Akteingesellschaft
-------------------------------------------------------------
During the year ended December 31, 2002, the Company entered into three
subscription agreements with Alpha Capital Akteingesellschaft, for the
sale of (i) an aggregate of $1,100,000 in convertible notes and (ii)
warrants to purchase 728,004 shares of the Company's common stock. The
Company recorded net proceeds of $989,000.
The note bears interest at 4% and is convertible into common stock at
the lesser of:
a) $0.252; or
b) 80% of the average of the three lowest closing prices of
the common stock for the thirty trading days immediately
prior to the conversion date.
c) Conversion of debt to common shares is limited to 9.99%
of the current outstanding common shares.
The unconverted portion of the note is due at various times through
December 30, 2004, which as of December 31, 2002 amounted to $755,000.
F-19
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(5) CONVERTIBLE NOTES PAYABLE, CONTINUED:
The warrants have an exercise price of:
a) Prices ranging from $0.204 to $0.90
b) 120% of the three lowest closing price of the common
stock for the ten trading days prior to the exercise of
the warrant.
Using the Black Scholes Option Pricing Model, the average fair value of
the warrants amounted to $0.16 per share or total allocation of
$118,000. This amount was recorded as a discount against the face value
of the notes payable. In addition, since these debts were convertible
into equity at the option of the note holder at conversion rates
mentioned above, a beneficial conversion feature of $596,000 has been
recorded as a debt discount and is being amortized using the effective
interest rate (45%) over the life of the debt in accordance with EITF
00-27. Unamortized debt discount and beneficial conversion is
recognized as interest expense upon conversion.
During the year ended December 31, 2002, $345,000 was converted at an
average conversion price of $0.125 into 2,767,752 common shares.
4% Convertible Note Payable, Ellis Enterprise Limited
-----------------------------------------------------
During the year ended December 31, 2002, the Company entered into two
subscription agreements with Ellis Enterprise Limited, for the sale of
(i) an aggregate of $250,000 in convertible notes and (ii) warrants to
purchase 145,836 shares of the Company's common stock. The Company
recorded net proceeds of $227,000.
The note bears interest at 4% and is convertible into common stock at
the lesser of:
a) $0.242; or
b) 80% of the average of the three lowest closing prices of
the common stock for the thirty trading days immediately
prior to the conversion date.
c) Conversion of debt to common shares is limited to 4.99%
of the current outstanding common shares
The unconverted portion of the note is due at various times through
December 30, 2004, which as of December 31, 2002 amounted to $210,000.
The warrants have an exercise price of:
a) Prices ranging from $0.204 to $0.252
b) 120% of the three lowest closing price of the common
stock for the ten trading days prior to the exercise of
the warrant.
F-20
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(5) CONVERTIBLE NOTES PAYABLE, CONTINUED:
4% Convertible Note Payable, Ellis Enterprise Limited
-----------------------------------------------------
Using the Black Scholes Option Pricing Model, the fair value of the
warrants amounted to $0.14 per share or total allocation of $20,000.
This amount was recorded as a discount against the face value of the
note payable. In addition, since this debt is convertible into equity
at the option of the note holder at conversion rates mentioned above, a
beneficial conversion feature of $165,000 has been recorded as a debt
discount and is being amortized using the effective interest rate (45%)
over the life of the debt in accordance with EITF 00-27. Unamortized
debt discount and beneficial conversion is recognized as interest
expense upon conversion.
During the year ended December 31, 2002, $40,000 was converted at an
average conversion price of $0.133 into 300,842 common shares.
4% Convertible Note Payable, Bristol Investments Fund, Limited
--------------------------------------------------------------
During the year ended December 31, 2002, the Company entered into two
subscription agreements with Bristol Investments Fund, Limited, for the
sale of (i) an aggregate of $300,000 convertible notes and (ii)
warrants to purchase 175,002 shares of the Company's common stock. The
Company recorded net proceeds of $273,000.
The note bears interest at 4% and is convertible into common stock at
the lesser of:
1. $0.242
2. 80% of the average of the three lowest closing prices of
the common stock for the thirty trading days immediately
prior to the conversion date.
3. Conversion of debt to common shares is limited to 4.99%
of the current outstanding common shares.
The unconverted portion of the note is due at various times through
December 30, 2004, which as of December 31, 2002 amounted to $270,000.
The warrants have an exercise price of:
1. Prices ranging from $0.204 to $0.252
2. 120% of the three lowest closing price of the common
stock for the ten trading days prior to the exercise of
the warrant.
Using the Black Scholes Option Pricing Model, the fair value of the
warrant amounted to $0.14 per share or total allocation of $24,000.
This amount was recorded as a discount against the face value of the
note payable. In addition, since this debt is convertible into equity
at the option of the note holder at conversion rates mentioned above, a
beneficial conversion feature of $199,000 has been recorded as a debt
discount and is being amortized using the effective interest rate (54%)
over the life of the debt in accordance with EITF 00-27. Unamortized
debt discount and beneficial conversion is recognized as interest
expense upon conversion.
F-21
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(5) CONVERTIBLE NOTES PAYABLE, CONTINUED:
4% Convertible Note Payable, Bristol Investments Fund, Limited,
---------------------------------------------------------------
Continued
---------
During the year ended December 31, 2002, $30,000 were converted at an
average conversion price of $0.133 into 225,699 common shares.
5% Convertible Note Payable
---------------------------
In October 2000, the Company entered into a purchase agreement with an
investment company to issue a total of $10,000,000 convertible notes
payable with interest at 5% per annum and 231,884 common stock purchase
warrants. Each warrant entitled the holder to purchase one share of the
Company's common stock at an exercise price of $9.76 per share. In
October 2000, the Company issued $2,000,000 of convertible notes and
the warrants. The remaining principal balance of the note was payable
in full in October 2003. The fair value of the associated warrant was
determined based on the Black-Scholes pricing method at the date of
grant. The value of the warrants totaled $1,576,309 and is included in
paid-in capital. The discount is being amortized to interest expense
over the life of the note using the interest rate method (effective
interest of 48%). Amortization of the debt discount included in
interest expense approximated $13,000 and $463,000 for the years ended
December 31, 2002 and 2001, respectively.
In 2001, $1,450,000 of the original note balance and accrued interest
($575,087 or $0.18 per share, net of unamortized debt discount) was
converted to 3,220,765 shares of the Company's common stock at an
average conversion rate of $0.45 per share.
In 2002, $550,000 of the original note balance and accrued interest
($312,338 or $0.12 per share, net of unamortized debt discount) was
converted to 2,624,447 shares of the Company's common stock at an
average conversion rate of $0.21 per share.
8% Convertible Note Payable
---------------------------
On September 7, 2001, the Company entered into a subscription agreement
with Laurus Master Fund, Ltd., a Cayman Island corporation, for the
sale of (i) a $600,000 convertible note and (ii) warrants to purchase
100,000 shares of the Company's common stock. The Company recorded net
proceeds of $511,750.
The note bears interest at 8% and is convertible into common stock at
the lesser of:
a) $0.51; or
b) 80% of the average of the three lowest closing prices of
the common stock for the thirty trading days immediately
prior to the conversion date.
F-22
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(5) CONVERTIBLE NOTES PAYABLE, CONTINUED:
The warrants have an exercise price of:
c) $0.82; or
d) 120% of the three lowest closing price of the common
stock for the ten trading days prior to the exercise
of the warrant.
Using the Black Scholes Option Pricing Model, the fair value of the
warrant amounted to $0.58 per share or total consideration of $57,800.
This amount was recorded as a discount against the face value of the
note payable. In addition, since this debt is convertible into equity
at the option of the note holder at conversion rates mentioned above, a
beneficial conversion feature of $207,800 has been recorded as a debt
discount and is being amortized using the effective interest rate (54%)
over the life of the debt in accordance with EITF 00-27. Unamortized
debt discount and beneficial conversion was recognized as interest
expense upon conversion.
In 2002 and 2001, $1,198 and $598,802 of the original note and related
accrued interest was converted to 6,600 and 3,402,600 shares of the
Company's common stock at an average conversion rate of $0.18 and $0.18
per share, respectively.
8% Convertible Note Payable
---------------------------
On September 28, 2001, the Company entered into a subscription
agreement with Stonestreet Limited Partnership, an Ontario limited
partnership, for the sale of (i) a $500,000 convertible note and (ii)
warrants to purchase 83,333 shares of the Company's common stock. The
Company recorded net proceeds of $444,250.
The note bears interest at 8% and is convertible into common stock at
the lesser of:
a) $0.34; or
b) 80% of the average of the three lowest closing prices of
the common stock for the thirty trading days immediately
prior to the conversion date.
The warrants have an exercise price of:
c) $0.515; or
d) 120% of the three lowest closing prices of the common
stock for the ten trading days prior to the exercise of
the warrant.
Using the Black Scholes Option Pricing Model, the fair value of the
warrant amounted to $0.42 per share or total consideration of $34,600.
This amount was recorded as debt discount against the face value of the
note payable. In addition, since this debt was convertible into equity
at the option of the note holder at conversion rates mentioned above, a
beneficial conversion feature of $209,650 had been recorded as a debt
discount and was being amortized using the effective interest rate
(60%) over the life of the debt in accordance with EITF 00-27.
Unamortized debt discount and beneficial conversion was recognized as
interest expense upon conversion.
In 2001, the note balance of $500,000 and related accrued interest was
converted to 2,973,780 shares of the Company's common stock at an
average conversion rate of $0.17 per share.
F-23
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(5) CONVERTIBLE NOTES PAYABLE, CONTINUED:
During January 2002, the Company entered into a new convertible debt
financing agreement for $1,452,500 with Stonestreet Limited Partnership
and Laurus Master Fund, Ltd.. The stated interest rate was 4% per annum
(effective interest rate of 52%) and the unpaid principal and interest
balance was due in full by January 7, 2004. Net proceeds to the Company
amounted to approximately $1,326,000, which was net of debt issue
costs. The Company issued 500,000 warrants to acquire 500,000 shares of
the Company's common stock at an exercise price of $0.96. Subsequently,
in May 2002, due to an additional financing, these warrants were
repriced at $0.90 per share pursuant to the terms of this financing
agreement. In addition, since this debt is convertible into equity at
the option of the note holder at beneficial conversion rates, an
embedded beneficial conversion feature was recorded as a debt discount
and amortized using the effective interest rate over the life of the
debt in accordance with EITF 00-27. Total cost of beneficial conversion
feature ($931,000), debt discount ($127,000), and cost of warrants
issued ($395,000) exceeded the face value of the notes payable,
therefore, only $1,452,500, the face amount of the note, was recognized
as debt discount, and was amortized over the life of the notes payable.
Any unamortized debt discount and beneficial conversion feature was
charged to expense upon conversion, as interest expense.
As of December 31, 2002, Laurus Master Fund had converted all of its
notes aggregating $700,000 plus interest into 2,103,529 common shares
at an average conversion price of $0.33 per share.
In August 2002, the Company entered into securities purchase agreement
with an accredited investor, Stonestreet Limited Partnership for the
issuance of 4% convertible debentures (effective interest rate of 45%)
in the aggregate amount of $150,000. The debentures are convertible
into common stock at a conversion price of the lower of $.242 or 80% of
the average of the five lowest closing bid prices for the common stock
thirty days prior to conversion. In addition, an aggregate of 113,400
common stock purchase warrants were issued to the investor. Each common
stock purchase warrant has an exercise price of $.252. Net proceeds
amounted to $133,000, net of debt issue cash cost of $17,000. In
addition, the value of the warrants ($21,000) and the beneficial
conversion feature pursuant to EITF 00-27 of $60,000 was also
recognized. Total debt issue cost of $98,000 was amortized over the
life of the debt using the interest method. As of December 31, 2002,
there was no outstanding principal balance.
As of December 31, 2002, Stonestreet Limited Partnership had converted
all of its notes aggregating $902,500 (comprised of $150,000 from
August 2002 and $752,500 from January 2002 financing) plus interest
into 4,294,596 common shares at an average conversion price of $0.21
per share.
F-24
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(6) COMMON STOCK
On June 22, 1999, in connection with a Merger Agreement and Plan of
Reorganization with Dead On, Inc., the Company exchanged all of its
outstanding shares of common stock for 7,000,000 newly issued shares of
the common stock of Dead On, Inc. (Note 1).
Pursuant to a plan approved by One Voice Technologies' Board of
Directors in July 1999, the
Company repurchased and retired 10,000,000 shares of its common stock,
$.001 par value per share.
During December 2001, the shareholders approved the increase of
authorized number of common stock shares to 100,000,000.
Private Placements
------------------
In May 1999, the Company commenced a private placement of 1,500,000
shares of the Company's common stock at a purchase price of $2.00 per
share. The Private Placement was exempt from the registration
provisions of the Act by virtue of Section 4(2) of the Act, as
transactions by an issuer not involving any public offering. The
securities issued pursuant to the Private Placement were restricted
securities as defined in Rule 144. The offering generated proceeds of
approximately $2,846,000, net of offering costs of approximately
$154,000. An additional 150,000 shares of the Company's common stock
was issued for services rendered in connection with this private
placement, which was valued at $2.00 per share.
In January 2000, the Company entered into a Subscription Agreement with
an unrelated foreign party providing for the sale of 312,500 shares of
the Company's common stock at $6.40 per share and 156,250 common stock
purchase warrants. Each warrant entitles the holder to purchase one
share of common stock at an exercise price of $8.00. The warrants
expired on January 5, 2001. Proceeds raised from the shares and
warrants total approximately $1,800,000, net of offering costs of
approximately $200,000.
In March 2000, the Company commenced a private placement of
approximately 1,000,000 units consisting of 1 share of the Company's
common stock and 1/2 common stock purchase warrant for each unit
purchased. The Company raised proceeds totaling approximately
$12,146,000, net of offering costs of approximately $902,000, from the
issuance of 988,560 shares of common stock and 494,280 common stock
purchase warrants. Each warrant entitles the holder to purchase one
share of common stock at an exercise price of $18.00. The warrants
expire at various times through April 2001.
In June 2001, the Company raised proceeds of approximately $840,020,
which is net of offering costs of approximately $73,000, from the
issuance of 702,350 shares through a private placement offering of its
restricted stock. The offering price was $1.30 per share. The Company
also issued 702,350 warrants (valued using the Black-Scholes method at
the date of grant) to the investors, which have an exercise price of
$0.86 per share and expire on June 30, 2002.
F-25
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(6) COMMON STOCK, CONTINUED:
Private Placements, Continued
-----------------------------
During May 2002, the Company entered into an equity financing agreement
of up to $5 million, with an initial put demand by the Company for
approximately $800,000 in exchange for 2,666,667 shares of the
Company's common stock at a price of $0.30 per share. The minimum put
amount is $150,000 and the offering price of the Company's common stock
is determined on a formula, as set forth in the agreement. The Company
paid a finders fee of $48,000 and issued 75,000 warrants with an
exercise price of $0.43, the value of which has been netted against the
gross proceeds. Subsequently, on August 8, 2002, $500,000 of the
$800,000 investment was repriced and 833,334 additional shares (valued
at $175,000) of common stock was issued to the investors so that the
average cost of the initial put was $0.22857 per share. Pursuant to
this agreement, the Company can exercise its right to require the
Investor to purchase a discretionary amount of the Company's common
stock as determined by the Company, subject to the terms of the
agreement.
In connection with the May 2002 transaction, the Company also issued
300,000 warrants in May 2002, to purchase shares of the Company's
common stock at an exercise price of $0.43 per share. Subsequently, on
August 8, 2002, the Company adjusted the exercise price on these
warrants to $.20 per share due to a subsequent financing. During 2002,
the Company accounted for the change in exercise under variable
accounting and recognized an expense of $9,000 during the period. In
addition, the Company also recognized an expense of $175,000 from the
issuance of an additional 833,334 common shares referred to above.
Settlement
----------
During September 2001, the Company entered into an agreement with an
investment banking group to settle a dispute regarding a financial
consulting agreement dated May 30, 2000. While the management did not
believe that the claims were meritorious, the Company entered into the
Settlement Agreement, to among other reasons, avoid distracting
management's focus from operations and to minimize legal expenses.
Pursuant to the settlement, the Company issued 110,000 shares of common
stock and 300,000 warrants exercisable into 300,000 shares of common
stock, of which, 150,000 warrants are exercisable at $2.00 per share
and 150,000 warrants are exercisable at $1.50 per share. Total
consideration given amounted to $298,050, comprised of $50,000 paid in
cash, 110,000 in common stock shares with a fair value of $81,400 and
300,000 in warrants with a fair value using Black Scholes model of
$166,650, which was recognized into expense during 2001.
F-26
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(7) INCOME TAXES:
For federal income tax return purposes, the Company has available net
operating loss carryforwards of approximately $23,600,000, which
includes approximately $323,000 acquired from Dead On, Inc. The net
operating loss carryforwards expire through 2022 and are available to
offset future income tax liabilities.
A reconciliation of the provision for income taxes at statutory rates
to the provision reported in the consolidated financial statements is
as follows:
Since
Year ended inception to
December 31, December 31,
2002 2001
------------- -------------
Federal income tax (benefit) at statutory rates 34% 34%
State income taxes (benefit), less federal
income tax benefit 6 6
------------- -------------
Total provision/(benefit) 40 40
Permanent differences (warrant cost and
beneficial conversion feature amortization) (15) (5)
NOL utilized (25) (35)
------------- -------------
Total provision -% -%
============= =============
Temporary differences which give rise to deferred tax assets and
liabilities at December 31, 2002 are as follows:
Net operating loss carryforwards $ 23,600,000
Valuation allowance (23,600,000)
---------------
Net deferred taxes $ --
===============
(8) EMPLOYMENT AGREEMENT:
The Company entered into an employment agreement with an officer
stockholder of the Company to pay an annual base salary of $252,000
through July 2002. No formal extensions exist as of December 31, 2002.
Increases are determined annually by the Board of Directors. Under this
agreement, salaries approximated $250,000 and $240,000 for the years
ended December 31, 2002 and 2001, respectively.
(9) CONSULTING AGREEMENT:
The Company entered into a consulting agreement with a personal service
corporation owned by an officer of the Company to pay an annual
consulting fee of $143,000 through July 2002. No formal extensions
exist as of December 31, 2002. Increases are determined annually by the
Board of Directors. Consulting fees approximated $141,000 and $135,000
for the years ended December 31, 2002 and 2001, respectively.
F-27
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(10) COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities under leases that expire at various
times through October 2005. The following is a schedule by years of
future minimum rental payments required under operating leases that
have noncancellable lease terms in excess of one year as of December
31, 2002:
Year ending December 31,
2003 $ 304,615
2004 313,291
2005 266,053
----------
883,959
Less sublease income 280,000
----------
$ 603,959
==========
Rent expense, net of sublease income of $90,000 amounted to $162,169
and $233,974 for the years ended December 31, 2002 and 2001,
respectively.
Legal Maters
------------
During 2002, the Company was notified of potential claims aggregating
$160,000. Management believes that it has adequate defense for such
unsubstantiated claims and accordingly, since the amounts are estimable
but highly unprobable, these amounts have not been recorded in these
financial statements.
(11) INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN:
On July 14, 1999, the Company enacted an Incentive and Nonqualified
Stock Option Plan (the "Plan") for its employees and consultants under
which a maximum of 3,000,000 options (Amendment to increase the
available shares from 1,500,000 to 3,000,000 approved by the
shareholders in December 2001) and approved by the shareholders may be
granted to purchase common stock of the Company.
Two types of options may be granted under the Plan: (1) Incentive Stock
Options (also known as Qualified Stock Options) which may only be
issued to employees of the Company and whereby the exercise price of
the option is not less than the fair market value of the common stock
on the date it was reserved for issuance under the Plan; and (2)
Nonstatutory Stock Options which may be issued to either employees or
consultants of the Company and whereby the exercise price of the option
is greater than 85% of the fair market value of the common stock on the
date it was reserved for issuance under the plan. Grants of options may
be made to employees and consultants without regard to any performance
measures. All options issued pursuant to the Plan vest at a rate of at
least 20% per year over a 5-year period from the date of the grant or
sooner if approved by the Board of Directors. All options issued
pursuant to the Plan are nontransferable and subject to forfeiture.
F-28
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(5) INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN, CONTINUED:
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because
the alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation," requires use of option
valuation models. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized. The Company follows SFAS No. 123 for stock options granted
to non-employees and records a consulting expense equal to the fair
value of the options at the date of grant.
During 2000, the Company granted 53,725 stock options exercisable at an
average exercise price of $10.22 to consultants for professional
services provided to the Company. The options expire at various times
through 2003. The options were valued using the Black-Scholes method at
the date of grant.
During 2001, the Company granted 250,000 stock options exercisable at
an exercise price of $0.65 to a consultant for professional services
provided and to be provided to the Company. The options expire at
various times through 2004. The options were valued using the
Black-Scholes method at the date of grant. Compensation expense,
recognized over the vesting period, to consultants pursuant to SFAS No.
123 amounted to $107,276 and $140,263 for the years ended December 31,
2002 and 2001, respectively.
During 2002, the Company granted 1,095,000 stock options exercisable at
an average exercise price of $0.14 to employees of the Company. The
options expire at various times through 2005.
The number and weighted average exercise prices of options granted
under the plan for the years ended December 31, 2002 and 2001 are as
follows:
2002 2001
------------------- -------------------
Average Average
Exercise Exercise
Number Price Number Price
---------- ------- ---------- -------
Outstanding at beginning of the year 2,078,625 $ 2.33 916,325 $ 6.51
Granted during the year 1,095,000 .15 1,667,920 .99
Terminated during the year -- -- 505,620 5.47
Exercised during the year -- -- -- --
Outstanding at end of the year 3,173,625 1.58 2,078,625 2.33
Exercisable at end of the year 1,528,625 2.84 645,525 3.94
Pro forma information regarding the effect on operations is required by
SFAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that
statement. Pro forma information using the Black-Scholes method at the
date of grant based on the following assumptions:
F-29
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(11) INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN, CONTINUED:
Expected life 3 Years
Risk-free interest rate 5.0%
Dividend yield -
Volatility 100%
This option valuation model requires input of highly subjective
assumptions. 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
model does not necessarily provide a reliable single measure of fair
value of its employee stock options.
For purposes of SFAS 123 pro forma disclosures, the estimated fair
value of the options is amortized to expense over the option's vesting
period. The Company's proforma information is as follows:
December 31, 2002
-----------------
Net loss, as reported $ (6,568,922)
Pro forma net loss $ (7,570,000)
Basic and diluted historical loss per share $ (0.17)
Pro forma basic and diluted loss per share $ (0.24)
(12) WARRANTS:
At December 31, 2002, the Company had warrants outstanding that allow
the holders to purchase up to 3,464,297 shares of common stock, of
which, 231,884 warrants had an exercise price of $9.76 expiring through
October 2005, 1,300,683 warrants had an exercise price ranging from
$0.40 to $2.00 per share, and 1,931,730 have an exercise price ranging
from $0.20 to $0.35 expiring through December 2007.
The number and weighted average exercise prices of the warrants for the
years ended December 31, 2002 and 2001 are as follows:
2002 2001
-------------------- --------------------
Average Average
Exercise Exercise
Number Price Number Price
--------- -------- --------- --------
Outstanding at beginning of the year 1,457,567 $ 2.42 882,414 $ 14.06
Granted during the year 2,037,242 .42 1,225,683 1.04
Exercised during the year 30,512 .11 -- --
Terminated during the year -- -- 650,530 15.60
Outstanding at end of the year 3,464,297 1.26 1,457,567 2.42
Exercisable at end of the year 3,464,297 1.26 1,457,567 2.42
F-30
ONE VOICE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(13) SUBSEQUENT EVENT:
Subsequent to December 31, 2002, note holders converted additional note
principal into common shares as follows:
Average
Amount Converted Exercise
Converted Shares Into Price
----------- ----------- --------
Alpha Capital Akteingesellschaft $ 95,000 1,078,154 $ 0.09
Bristol Investments 120,000 1,114,655 $ 0.11
Ellis Enterprise Limited 105,000 1,083,255 $ 0.10
----------- ----------- --------
$ 320,000 3,276,064 $ 0.10
=========== =========== ========
F-31
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINACIAL
DISCLOSURE
There have been no changes in or disagreements with accountants on accounting
and financial disclosure.
18
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
Dean Weber 40 Chairman of the Board, President, Chief
Executive Officer, Director
Rahoul Sharan 41 Chief Financial Officer, Secretary, Treasurer
and Director
Bradley J. Ammon 39 Director
Directors serve until the next annual meeting and until their
successors are elected and qualified. Officers are appointed to serve for one
year until the meeting of the board of directors following the annual meeting of
stockholders and until their successors have been elected and qualified,
although Dean Weber has an employment agreement and Rahoul Sharan's company has
a personal service agreement with us. There are no family relationships between
any of our directors or officers.
Dean Weber brings an extensive background to One Voice with over 20
years of technology and management experience. He is responsible for developing
the company's strategic vision and pioneering its products, patented technology
and business strategies. He was elected to our Board of Directors in July of
1999 as Chairman.
Before founding One Voice in 1998, Mr. Weber played key roles in many high
profile technology companies including the B2 Stealth Bomber project at
Northrop, Space Station contracts at United Technologies and advanced user
interfaces at Xerox. Throughout his career, Mr. Weber has developed a
comprehensive knowledge of Human Computer Interaction, Cognitive Science,
Artificial Intelligence and Natural Language Processing. Mr. Weber currently has
numerous patents in Artificial Intelligence, Natural Language Processing and
other related technologies.
As CEO of One Voice, Mr. Weber has been instrumental in the growth and
development of the company, successfully raising over $26 million of
institutional funding, taking One Voice public, winning the Deloitte and Touche
Technology Fast 50 award, and has been featured in Forbes, Time, and on CNN. Mr.
Weber holds a Bachelor of Science degree in Computer Science from Central
Connecticut State University.
RAHOUL SHARAN brings over 18 years of finance and accounting experience
to One Voice. He is responsible for managing all of One Voice's accounting and
financial matters. He was elected to our Board of Directors in July of 1999.
Prior to joining the One Voice team, Mr. Sharan was a partner of the S&P Group,
which specializes in investment financing for venture capital projects, real
estate development and construction. At S&P Group, Mr. Sharan led the successful
financing efforts for over 15 companies in several industries.
Mr. Sharan was also the President of KJN Management Ltd., which provides a broad
range of administrative, management and financial services. He also worked in
public accounting for six years with Coopers & Lybrand. At C&L, Mr. Sharan
worked in both the tax and audit groups for a wide variety of large and small
clients.
Mr. Sharan holds a Bachelor of Commerce degree from the University of British
Columbia and is a member of the Institute of Chartered Accountants of British
Columbia.
BRADLEY J. AMMON is a tax attorney in the San Diego law firm of Ernest
S. Ryder & Associates, Inc. Mr. Ammon specializes in international tax planning,
including restructuring of international operations, domestic mergers and
acquisitions, and developing business plans to minimize worldwide taxation.
Prior to joining the firm, Mr. Ammon was with SAIC as an International Tax
Manager. He previously was with KPMG, LLP in the International Corporate
Services department since 1998 where his principal practice consisted of clients
in the information, communications and entertainment ("ICE") industry. Prior to
joining KPMG, Mr. Ammon worked from 1995 to 1998 at Deloitte & Touche, LLP in
their tax services department where he provided corporate, partnership, and
personal tax and business planning services to clients. Mr. Ammon also worked
several years as a staff accountant where his responsibilities included the
compilation and consolidation of monthly financial statements for multiple
subsidiaries. Mr. Ammon has a Juris Doctor and a Master's of Law in taxation
(LL.M.) from the University of San Diego, and received his undergraduate degree
from the University of California, San Diego. He is admitted to the California
Bar. Mr. Ammon is a member of our Audit Committee and Compensation Committee and
was appointed to our Board on June 9, 2000.
19
CODE OF ETHICS
The Company has adopted its Code of Ethics and Business Conduct for Officers,
Directors and Employees that applies to all of the officers, directors and
employees of the Company.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
During the year ended December 31, 2002, no director, officer or beneficial
owner of more than 10 percent of any class of equity securities of the Company
registered pursuant to Section 12 of the Exchange Act failed to file on a timely
basis, as disclosed in Form 3 filings, reports required by Section 16(a) of the
Exchange Act during the year ended December 31, 2002. The foregoing is based
solely upon a review of Form 3, Form 4 and Form 5 filings furnished to the
Company during the year ended December 31, 2002, certain written representations
and shareholders who, to the best of our knowledge, hold 10 percent or more of
our shares.
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth certain information regarding our CEO
and each of our executive officers whose total annual salary and bonus for the
fiscal year ending December 31, 2002, 2001 and 2000 exceeded $100,000:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Other
Annual Restricted Options LTIP All Other
Name & Principal Salary Bonus Compen- Stock SARs Payouts Compen-
Position Year ($) ($) sation ($) awards (#)(1) ($) sation
--------------------- ------ -------- ----------- ---------- ------------ --------- --------- ---------
Dean Weber, 2002 252,000 0 0 0 0 0
CEO 2001 246,098 0 0 0 0 0 0
2000 252,000 75,000 0 0 0 0 0
Rahoul Sharan, 2002 142,500 0 0 0 0 0
CFO 2001 137,654 0 0 0 0 0 0
2000 180,000 75,000(1) 0 0 0 0 0
(1) This payment was made through KJN Management Ltd.
EMPLOYMENT AGREEMENT
We entered into a three-year employment agreement (the Weber Employment
Agreement) with Dean Weber, our Chairman, Chief Executive Officer and President,
commencing in July 1999. The Weber Employment Agreement provides that, in
consideration for Mr. Weber's services, he is to be paid an annual salary of
$180,000. The salary was changed to $252,000 annually in April 2000. The last
bonus earned was paid in 2000.
20
PERSONAL SERVICE AGREEMENT
We entered into a three-year personal service agreement with KJN Management
Ltd., commencing in July 1999 for the services of its CFO, Rahoul Sharan, which
provided for the payment of a fee by the Company to KJN Management Ltd. of
$120,000 per year. The service fee was increased to $180,000 per year in 2000
and subsequently been reduced in 2001 and 2002. The last bonus earned was paid
in 2000.
COMPENSATION OF DIRECTORS
Non-employee directors receive $1,000 for each Board of Directors meeting
attended. The Company pays all out-of-pocket expenses of attendance.
AMENDED AND RESTATED 1999 STOCK OPTION PLAN
Our Amended and Restated 1999 Stock Option Plan (the 1999 Plan) authorizes us to
grant to our directors, employees, consultants and advisors both incentive and
non-qualified stock options to purchase shares of our Common Stock. As of
December 31, 2001, our Board of Directors had reserved 3,000,000 shares for
issuance under the 1999 Plan, of which 2,078,625 shares were subject to
outstanding options and 921,375 shares remained available for future grants. Our
Board of Directors or a committee appointed by the Board (the Plan
Administrator) administers the 1999 Plan. The Plan Administrator selects the
recipients to whom options are granted and determines the number of shares to be
awarded. Options granted under the 1999 Plan are exercisable at a price
determined by the Plan Administrator at the time of the grant, but in no event
will the option price for any incentive stock option be lower than the fair
market value for our Common Stock on the date of the grant. Options become
exercisable at such times and in such installments as the Plan Administrator
provides in the terms of each individual option agreement. In general, the Plan
Administrator is given broad discretion to issue options and to accept a wide
variety of consideration (including shares of our Common Stock and promissory
notes) in payment for the exercise price of options. The 1999 Plan was
authorized by the Board of Directors and stockholders.
21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of March 18, 2003 (i) by each person who is
known by us to beneficially own more than 5% of our common stock; (ii) by each
of our officers and directors; and (iii) by all of our officers and directors as
a group. Each person's address is c/o One Voice Technologies, Inc., 6333
Greenwich Drive, Suite 240, San Diego, California 92122.
Shares Beneficially Owned(1)
----------------------------
Name and Address of Beneficial Owner Number Percent
---------------------------------------------------------------------- --------------- ------------
Dean Weber, CEO, President and Chairman of the Board(2) 5,558,000(3) 14.69%
IVantage, Inc. (2) 1,600,200 4.23%
Rahoul Sharan, CFO, Secretary, Treasurer and Director 60,000(4) *
Bradley J. Ammon, Director 75,000(5) *
Alpha Capital Atiengesellschaft 4,198,550(6) 9.99%
Ellis Enterprises Ltd. 2,131,130(7) 5.63%
Bristol Investment Fund, Ltd. 2,667,310(8) 7.05%
Total securities held by officers and directors as a group (4 people): 5,693,000(9) 15.05%
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options or warrants currently exercisable or convertible, or exercisable
or convertible within 60 days of March 18, 2003 are deemed outstanding for
computing the percentage of the person holding such option or warrant but
are not deemed outstanding for computing the percentage of any other person.
(2) iVantage, Inc. is wholly owned by Dean Weber, Chairman of the Board, CEO,
and President of One Voice Technologies, Inc. Mr. Weber is the beneficial
owner of the 1,600,200 shares in the name of iVantage, Inc. and those shares
are also included in the amount presented in this table for Mr. Weber.
(3) Includes 1,600,200 shares owned indirectly through iVantage, Inc.
(4) Represents options to purchase (i) 50,000 shares at an exercise price of
$6.080 per share; and (ii) 10,000 shares at an exercise price of $2.00 per
share. These options are currently exercisable.
(5) Includes options to purchase (i) 50,000 shares at an exercise price of
$8.750 per share; and (ii) 25,000 shares at an exercise price of $2.00 per
share. These options are currently exercisable.
(6) Includes 350,004 shares underlying warrants that are currently exercisable
at an exercise price of $0.27 per share. In accordance with rule 13d-3 under
the securities exchange act of 1934, Konrad Ackerman may be deemed a control
person of the shares owned by such entity.
(7) Includes 145,836 shares underlying warrants that are currently exercisable
at an exercise price of $0.27 per share. Dr. Julian Ungar, an unaffiliated
third party, has investment power over the shares owned by such entity.
(8) Includes 175,002 shares underlying warrants that are currently exercisable
at an exercise price of $0.27 per share. Paul Kessler and Diana Kessler,
unaffiliated third parties, have investment power over the shares owned by
such entity.
(9) Includes options to purchase 210,000 shares as they are currently
exercisable.
* Less than 1%
22
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no material related transactions during the year.
23
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Description
------- -----------
No.
---
PLANS OF ACQUISITION
2.1 Merger Agreement and Plan of Reorganization with Conversational
Systems, Inc. dated June 22, 1999 (filed herewith).
ARTICLES OF INCORPORATION AND BYLAWS
3.1 Articles of Incorporation of Belridge Holdings Corp. filed with
the Nevada Secretary of State on August 23, 1995 (incorporated
by reference to Exhibit 3(i) to our Form 10-SB filed October 7,
1999).
3.2 Certificate of Amendment of Articles of Incorporation of
Belridge Holdings Corp. changing its name to Dead On, Inc.
(incorporated by reference to Exhibit 3(i) to our Form 10-SB
filed October 7, 1999). The Certificate originally filed on
September 25, 1998, was canceled and re-filed with the Nevada
Secretary of State on June 10, 1999.
3.3 Articles of Merger for the merger of Conversational Systems,
Inc. into Dead On, Inc. filed with the Nevada Secretary of State
on July 14, 1999 with supporting documents (incorporated by
reference to Exhibit 2 to our Form 10-SB, filed October 7,
1999). This document changed the name of the surviving entity,
Dead On, Inc., to ConversIt.com, Inc.
3.4 Certificate of Amendment of Articles of Incorporation of
ConversIt.com, Inc. changing its name to One Voice Technologies,
Inc. (incorporated by reference to Exhibit 2 to our Form 10-SB
filed October 7, 1999).
3.5 Bylaws of Belridge Holdings Corp. (incorporated by reference to
Exhibit 3(ii) of our Form 10-SB, filed October 7, 1999).
3.6 Amendment to Bylaws dated July 11, 2000 (excerpted)
(incorporated by reference to Exhibit 4.3 of our Form S-8, filed
October 3, 2000).
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
4.1 Common Stock Purchase Warrant with Veritas SG Investments from
the January 2000 offering (incorporated by reference to Exhibit
4.1 of our Form SB-2, filed November 11, 2000).
4.2 Form of Common Stock Purchase Warrant from the March 2000
offering (incorporated by reference to Exhibit 4.1 of our Form
SB-2, filed November 11, 2000).
24
4.3 Securities Purchase Agreement ("SPA") with Nevelle Investors LLC
dated October 3, 2000, and Form of Debenture (Exhibit A to the
SPA), Form of Warrant (Exhibit B to the SPA), Conditional
Warrant dated October 3, 2000 (Exhibit C to the SPA) and
Registration Rights Agreement dated October 3, 2000 (Exhibit E
to the SPA), each with Nevelle Investors LLC (incorporated by
reference to Exhibit 4 to our Form 10-QSB, filed November 14,
2000).
OPINION REGARDING LEGALITY
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (filed
herewith).
MATERIAL CONTRACTS
10.1 Employment Agreement with Dean Weber dated July 14, 1999
(incorporated by reference to Exhibit 10 to our Form 10-SB,
filed October 7, 1999). This agreement was amended on April 10,
2000, to increase Mr. Weber's annual salary to $252,000.
10.2 Consulting Agreement with KJN Management Ltd. For the services
of Rahoul Sharan dated July 14, 1999 (incorporated by reference
to Exhibit 10 to our Form 10-SB, filed October 7, 1999). This
agreement was amended on April 10, 2000, to increase the annual
consulting fee to $180,000.
10.3 Software Agreement with IBM/OEM dated September 21, 1999
(incorporated by reference to Exhibit 4.4 to our Form SB-2 filed
November 20, 2000).
10.4 Software License Agreement with Philips Spech Processing dated
March 3, 2000 (incorporated by reference to Exhibit 4.4 to our
Form SB-2 filed November 20, 2000) .
10.5 Amended and Restated 1999 Stock Option Plan (incorporated by
reference to Exhibit 4.4 to our Form S-8, Amendment No. 1, filed
October 4, 2000).
10.6 Subscription Agreement dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2 filed
September 12, 2002)
10.7 Alpha Capital Note dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2 filed
September 12, 2002)
10.8 Alpha Capital Warrant dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2 filed
September 12, 2002)
25
10.9 Stonestreet Note dated August 8, 2002 (incorporated by reference
to our registration statement on Form SB-2 filed September 12,
2002)
10.10 Stonestreet Warrant dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2 filed
September 12, 2002)
10.11 Subscription Agreement dated November 14, 2002 (incorporated by
reference to our registration statement on Form SB-2 filed
September 12, 2002)
10.12 Alpha Capital Note dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2 filed
September 12, 2002)
10.13 Alpha Capital Warrant dated August 8, 2002 (incorporated by
reference to our registration statement on Form SB-2 filed
September 12, 2002)
10.14 Ellis Note dated August 8, 2002 (incorporated by reference to
our registration statement on Form SB-2 filed September 12,
2002)
10.15 Ellis Warrant dated August 8, 2002 (incorporated by reference to
our registration statement on Form SB-2 filed September 12,
2002)
10.16 Bristol Note dated August 8, 2002 (incorporated by reference to
our registration statement on Form SB-2 filed September 12,
2002)
10.17 Bristol Warrant dated August 8, 2002 (incorporated by reference
to our registration statement on Form SB-2 filed September 12,
2002)
CONSENTS OF EXPERTS AND COUNSEL
99.1 Certification of the Chief Executive Officer of One Voice
Technologies, Inc. Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of the Chief Financial Officer of One Voice
Technologies, Inc. Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.3 Code of Ethics and Business Conduct of Officers, Directors and
Employees
Reports filed on Form 8-K: None
ITEM 14. CONTROLS AND PROCEDURES
As of December 31, 2002, an evaluation was performed by our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on that
evaluation, Our Chief Executive Officer and Chief Accounting Officer, concluded
that our disclosure controls and procedures were effective as of December 31,
2002. There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
December 31, 2002.
26
SIGNATURES
Pursuant to the requirements of Section 13 and 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ONE VOICE TECHNOLOGIES, INC.
DATE: MARCH 31, 2003 BY: /S/ DEAN WEBER
-------------------------------------
DEAN WEBER, PRESIDENT & DIRECTOR
DATE: MARCH 31, 2003 BY: /S/ RAHOUL SHARAN
-------------------------------------
RAHOUL SHARAN, CHIEF FINANCIAL
OFFICER, SECRETARY, TREASURER & DIRECTOR
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
/S/ DEAN WEBER CHIEF EXECUTIVE OFFICER MARCH 31, 2003
------------------------- AND DIRECTOR
DEAN WEBER
/S/ RAHOUL SHARAN CHIEF FINANCIAL OFFICER MARCH 31, 2003
------------------------- AND DIRECTOR
RAHOUL SHARAN
/S/ BRADLEY J. AMMON DIRECTOR MARCH 31, 2003
-------------------------
BRADLEY J. AMMON
27
CERTIFICATION
I, Dean Weber, CEO, certify that:
1. I have reviewed this quarterly report on Form 10-KSB of One Voice
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
March 31, 2003
/s/ Dean Weber
Chief Executive Officer
28
CERTIFICATION
I, Rahoul Sharan, CFO, certify that:
1. I have reviewed this quarterly report on Form 10-KSB of One Voice
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
March 31, 2003
/s/ Rahoul Sharan
Chief Financial Officer
29