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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
(Amendment No. 2)
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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TTR INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 0-22055 11-3223672
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION)
1841 BROADWAY, NEW YORK, NY 10023
(Address of Principal Executive Offices)
212-333-3355
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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[MARK ONE]
[x] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 1997
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
Securities registered under Section 12(b) of the Exchange Act:
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TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
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SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: None
Common Stock, par value $0.001
(Title of Class)
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Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has 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. [x]
Issuer's revenues for the Fiscal year ended December 31, 1997: None
The aggregate market value of the Registrant's Common Stock at March 30,
1998 held by persons deemed to be non-affiliates was approximately $13,620,255.
As of March 30, 1998, the Registrant had outstanding 4,052,548 shares of
$0.001 par value Common Stock.
________________________________________________________________________________
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ITEM 1. BUSINESS
INTRODUCTION
TTR Inc. ('TTR' or the 'Company') is engaged in the design, development and
commercialization of proprietary software security products designed to combat
the unauthorized reproduction and use of computer software programs and other
electronic content. TTR's core anti-copying technologies are designed to be used
by software or other electronic content publishers for purposes of protecting
software applications or other electronic content from unauthorized
reproduction. DiscGuard'tm', the Company's proprietary technology designed to
combat unauthorized reproduction of CD-ROM and DVD based software and other
electronic content, first became commercially available in February 1998.
DiscGuard is designed to provide a comprehensive anti-copying solution for
optical media (e.g., CD-ROM, CD-R, DVD-ROM, DVD-R) based software and other
electronic content. The underlying technology utilizes an indelible
identification code or 'signature' which is integrated into the CD-ROM and DVD
mastering and replication process and through which DiscGuard enhanced CD-ROM
and DVD discs are mass produced using standard replication procedures. The
software or other electronic content to be protected is imprinted on DiscGuard
enhanced CD-ROM and DVD discs containing the indelible 'signature', without
which the software or other electronic content cannot be used as intended. The
'signature' is designed to be non-reproducible. Thus, any software pirate who is
attempting to reproduce illicit copies of the software or other content
contained on the DiscGuard protected optical media would be able to reproduce
the content but not the embedded signature. The content resides on the disc in
encrypted form. The 'signature' is necessary for decrypting the content so that
it can be used as intended. As an unauthorized copy does not contain the
signature, it cannot run as intended.
The Company and Doug Carson & Associates ('DCA'), one of the world's
leading suppliers of mastering interface or other signal processing systems
which are used to create compact discs (CD) and digital versatile discs (DVD)
recording (or glass) masters ('Signal Processors'), entered into an agreement to
integrate the DiscGuard technology into DCA's Signal Processor. DCA's Signal
Processor has, to the Company's best knowledge, an installed base in over 75% of
the world's mastering machines used to mass produce CD-ROMs and DVDs. The
DiscGuard enhanced Signal Processor was installed into the mastering machines of
Nimbus CD International Inc. ('Nimbus'), a leading independent manufacturer of
CDs distributed throughout North America, the United Kingdom and continental
Europe and one of the world's first authorized manufacturers of the DVD format,
to produce sample runs of DiscGuard enhanced optical media. Pending the
Company's license of DiscGuard to other optical media replicators, DiscGuard
protected media will initially be available to software and other content
publishers through Nimbus. Additional DiscGuard components which are designed to
be integrated into the software program or other application to be protected are
obtained directly from the Company.
DiscGuard is completely transparent to the end-user and, unlike standard
commercially available anti-copying solutions, does not necessitate the use of
any hardware component such as a key or 'dongle'. With the advent of the DVD
market, the Company believes that DiscGuard will be particularly attractive to
the music and recording, video and motion picture industries. While the
development of DVD as a medium of distribution has been delayed for reasons
including technical problems relating to playback systems, the Company believes
that the availability of the anti-copying protection afforded by DiscGuard may
in fact advance the adoption of the DVD format by the entertainment industry.
The Company has also developed DiscAudit, a unique product for audio CDs that
permits the identification of illegal counterfeit copies.
The Company has completed development of SoftGuard'tm', its non-optical
media based software protection for use on Windows 3.x and MS-DOS based systems.
The company has leveraged a substantial part of SoftGuard's encryption and
protection technology into DiscGuard. DiscGuard can now protect software and
content running either from the CD-ROM or from the hard disk. The Company has
not released SoftGuard since, in management view, the software distribution
market is increasingly characterized by the use of optical media, such as
CD-ROMs and, in the foreseeable future,
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DVDs. Accordingly, management determined that it was in the Company's best
interests to devote its research and development efforts on completing the
design and development of DiscGuard and to bring to market as soon as
practicable effective optical media anti-copying protection. The Company does
not intend on currently releasing SoftGuard to the public unless prevailing
market conditions dictate otherwise.
BUSINESS STRATEGY
The company's primary objective is to make DiscGuard the `market standard'
in optical media authenticity verification and software piracy prevention.
Toward that end, the Company is pursuing a business strategy that targets these
principal markets:
Mastering Machines Market: The Company's core business strategy has
been to introduce DiscGuard to providers of mastering interface or other
signal processing systems. Thus, in October 1997, the Company licensed
DiscGuard to DCA to integrate the DiscGuard technology with DCA's widely
distributed signal processing system.
Replication Services Market: In November 1997, TTR licensed DiscGuard
to Nimbus (NASDAQ: NMBS), Charlottesville, Va., for use in the replication
of CD-ROMs, DVDs and audio discs. Nimbus is a leading independent
manufacturer of CD-ROMs and DVDs. TTR is working to sign on additional
large replicators.
Software and Content Providers Market: A third strategic area is the
software publisher and content provider community. TTR plans to reach this
audience through replicators who have an economic incentive to sell
DiscGuard. There are a few things replicators can do to gain market share;
DiscGuard provides replicators with important added value to differentiate
the services they offer in the marketplace.
TTR is also directly approaching publishers regionally in the following
ways:
United States: The Company expects to market directly and anticipates
forging strategic relationships with companies well-established in the
software and content publishing and video entertainment markets.
Europe, Middle East and Africa: TTR expects to market directly from
Israel.
Far East: TTR expects market through locally based distributors.
No assurance can however be given that the Company will succeed in
finalizing such or other types of collaborative arrangements or that such
collaborative or other arrangements, if entered into, will be successful.
CD-ROM replicators will be authorized by the Company to replicate DiscGuard
enhanced CD-ROMs for publishers who have obtained directly from the Company or
an authorized distributor the right to use DiscGuard. Only a replicator who has
purchased the DiscGuard option from DCA for its mastering machines can offer
DiscGuard protection to its customers. As is the case with Nimbus, the Company
anticipates that all DiscGuard enhanced replicators will be required to report
sales volumes of DiscGuard enhanced CD-ROMs to the Company. The DiscGuard
enhanced mastering machine is designed to contain a journalling feature enabling
the Company to audit the replicator's production of DiscGuard protected discs.
The Company anticipates that it will charge publishers on a per-disc basis for
the right to use the DiscGuard technology. Publishers will also be required to
report sales volumes to the Company, to enable verification.
To stay competitive in the tide of rapid technological advancements, the
Company's research staff includes 10 personnel (including two PhDs) who are
conducting research on optical media and enhancing the Company's technology. The
Company has developed, in management's belief, the world's only optical media
simulator and is researching the application of DiscGuard technology to DVDs.
The Company is a member of various industry standard groups and is seeking ways
to leverage its expanding expertise and technology into other products.
The Company is also focusing its research and development activities toward
the design and development of new and complementary products and the enhancement
of existing products. In
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addition to growing internally, the Company does not rule out the possibility of
growing through strategic acquisitions. Although the Company may seek to acquire
new products or complementary product lines for integration into the Company's
product offerings and its business, the Company at the present time has no
plans, agreements, understandings or arrangements for any acquisition.
PRODUCTS
DiscGuard
TTR's unique and proprietary technology underlying DiscGuard places an
indelible digital identification code or 'signature', at the manufacturing
stage, on the glass masters used to mass produce CD-ROMs and DVDs. The DiscGuard
technology is integrated into the signal processing system which is used to
create compact discs (CD) and digital versatile discs (DVD) recording (or glass)
masters. DiscGuard enhanced CDs are mass-produced from DiscGuard enhanced glass
masters using standard replication procedures. The software or other electronic
content to be protected can then be imprinted onto the DiscGuard enhanced
optical media. The 'signature' is designed to be non-reproducible. Thus, any
software pirate who attempts to reproduce illicit copies of the software or
other content contained on the DiscGuard protected optical media will be able to
reproduce the content but not the embedded signature. An illicit pirated copy
not containing the DiscGuard signature cannot run as intended.
In order to disable the counterfeit disc from running as intended, the
optical media content is encrypted in the pre-mastering process. DiscGuard
utilizes published encryption algorithms and its own unique technology to
develop encryption keys. The encryption process is performed on a proprietary
DiscGuard workstation unit (hereinafter, the 'Workstation Software'). The key
used to decrypt the content is derived directly from the DiscGuard enhanced
disc. If the disc does not contain the DiscGuard 'signature', the content cannot
be decrypted, as there is then no way to derive the decryption key. The content
cannot be viewed or run in an encrypted form. DiscGuard detecting software is
placed on the disc to enable the optical disc retrieval (playback) system to
ascertain the presence of the 'signature' (and thus run as intended) (the
'Detection Software'). The Detection Software, whose purpose is to detect the
presence (or absence of the digital signature) on the optical media disc,
enables the identification of counterfeit disc copies, thus assisting in efforts
aimed at the removal from the general market of counterfeit products and
identifying purported counterfeiters.
The Detection Software is leased directly to the software or other content
publisher. Currently, the Company has at its premises in Israel one workstation
unit which operates in conjunction with the Workstation Software. An additional
unit is currently installed at Nimbus' premises.
The Company believes that DiscGuard will be particularly attractive to the
music and recording, video and motion picture industries. The DVD format is
widely hailed by industry experts to be superior to CD-ROM, as the DVD format is
believed to provide a very accurate representation of the original digital
format recording. Additionally, one DVD can contain the same amount of data as
7-8 CDs currently contain. Experts believe that in the future one DVD disc will
be able to hold the same amount of data currently contained on 30-40 CDs.
Accordingly, the DVD format is especially attractive to the motion picture and
video publishers. Nonetheless, the adoption of the DVD format has been delayed
for a number of reasons, including the absence of a wide selection of
appropriate DVD playback units. An additional reason for the delay in the
adoption of the DVD format is the increasing fear by software and other
publishers, especially music and video publishers, that without appropriate
anti-copying protection, the anticipated losses due to software piracy would be
great. It is the Company's view that DiscGuard may be instrumental in
contributing to the further adoption of the DVD format.
A DiscGuard version to be used in conjunction with CD-R recorders is
currently in the design and development stage. CD-Recorders may be used to copy
onto recordable CDs (CD-Rs) the desired software or other content. CD-R
recorders are typically used to produce small runs. The Company expects to
complete a DiscGuard version to be used with CD-R recorders by the third quarter
of 1998.
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DiscAudit
The technology underlying DiscGuard was utilized to develop DiscAudit, a
unique proprietary product intended for audio CD content. As with DiscGuard, an
indelible digital signature is applied to the audio CD. The signature cannot be
copied and can therefore be used to differentiate between an authentic CD and an
unauthorized copy. DiscAudit enables the traceability and detection of
unauthorized copies of audio CDs. Audio CDs are verified using the Company's
DiscAudit portable work station, which provides immediate verification of the
authenticity of the audio CDs. The system is user friendly and can be used at
any location and at any time. Results are stored for subsequent comparisons to
aid in identifying counterfeiters. DiscAudit provides a highly effective means
of assisting the safeguarding of music publishers' intellectual property at
minimal cost.
DiscAudit became commercially available to the recording industry in
October, 1997. DiscAudit portable workstations can be bought directly from TTR.
DiscAudit enhanced audio CDs will be replicated initially by Nimbus.
PRODUCT DISTRIBUTION & MARKETING
As part of the collaborative arrangement with DCA to produce the DiscGuard
enhanced Signal Processor, the Company and DCA entered into a Development and
OEM Licensing Agreement as of October 31, 1997, whereby DCA has been accorded an
exclusive, non-transferable, royalty free world-wide license to merge the
DiscGuard technology into its Signal Processor to produce and market the
DiscGuard Enhanced DCA Signal Processor for CD-ROMs and DVDs (the 'DCA License')
through December 31, 1998, provided, that, if by such date DCA shall have sold
or upgraded at least 100 units of its mastering interface or other signal
processing systems into which DiscGuard can be integrated, then the Exclusive
License is to be extended through December 31, 1999. Otherwise, the exclusivity
provision in the DCA License as per CD-ROMs and DVDs terminates and the such
license is to become a non-exclusive license. Should these minimum sales/upgrade
criteria be met, TTR and DCA have undertaken to confer, by September 31, 1999,
for purposes of establishing mutually acceptable minimum unit sales or upgrade
requirements to retain the exclusivity provisions beyond their scheduled
expiration. The replicator is to lease DiscGuard enabling software directly from
the Company.
The Company and Nimbus have, as of November 24, 1997, entered into a
Development and OEM Licensing Agreement whereby Nimbus was accorded the right to
use DiscGuard for the purpose of replicating DiscGuard enhanced optical media.
Nimbus has been accorded a six month exclusive license to produce protected
media, which six month period has commenced on March 16, 1998. Under the license
with Nimbus, the Company is to receive a percentage of the proceeds of the
premium charged by Nimbus on any DiscGuard protected media. Nimbus is required
to provide sales reports to enable the Company to verify compliance. The Company
is undertaking efforts to sign on additional large replicators.
The Company has entered into agreements with certain software publishers to
use DiscGuard. In March 1998, the Company and Mach-Shevet, an Israeli
distributor of multimedia software, entered into an agreement whereby
Mach-Shevet will employ DiscGuard technology to protect the multi-media CD-ROM
program 'Barbie' by Mattel, from illegal replication. Nimbus will provide
mastering services for this project and a local Israeli replicator will handle
the disk pressing. In March 1998 the Company entered into an agreement with EHQ
Inc. ('EHQ'), a Delaware company which publishes educational software, whereby
the Company licensed to EHQ DiscGuard technology to protect EHQ's software
applications from illegal replication. Under the license agreement the Company
will integrate DiscGuard with EHQ's software and deliver the integrated EHQ
DisGuard protected software to a DiscGuard authorized replicator. The license
agreement provides for payment to the Company of a percentage of revenue
received by EHQ from sales of its DiscGuard protected software.
The Company's main office in New York City acts as the Company's sales
coordinator for North America. The Company is considering opening future
locations throughout the continental United States, the United Kingdom and
Europe. The Company intends to center its marketing efforts around advertising
and promotional campaigns designed to enhance brand name recognition. Toward
this end, the Company is in the process of interviewing appropriate candidates
to staff its marketing and sales
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forces. The Company views the rapid penetration and consolidation of the North
American and European business as a key strategic element in the success of its
business, and intends to devote significant marketing efforts in these areas.
Furthermore the Company will be exploring the possibility of establishing
strategic alliances with appropriate software distributors efforts in North
America, Israel, Europe and the Far East. In addition to the DCA and Nimbus
relationship, the Company is exploring with CD recording equipment manufacturers
the option of incorporating the DiscGuard technology into their CD recorders. No
assurance can however be provided that any such agreements will result.
The Company has a web site where it promotes DiscGuard and other products
electronically (http:/www.ttrtech.com).
CUSTOMER SUPPORT
The Company is of the view that highly efficient, responsive and prompt
customer service is essential to the Company's success in building and retaining
customer confidence.
The Company anticipates assembling and maintaining an appropriately sized
staff of customer service personnel, which will offer direct technical support.
The Company anticipates that it will geographically disperse its support staff
as needed. On a routine basis, the support staff will be expected to provide
feed-back to the Company's research and development and marketing staffs.
COMPETITION
The software protection industry is extremely competitive. The Company
faces tough competition from companies that are more established, benefit from
greater market recognition and have greater resources, financial and otherwise,
than the Company. The Company's primary competitors include Rainbow Technologies
Inc. and Aladdin Knowledge Systems Ltd., whom the Company believes to have the
largest installed product base in the limited market that exists for hard-drive
based software security products. Additionally, there are several commercially
available products, such as CDCOPS and LaserLock, which claim to provide
comprehensive optical media based anti-copying protection. Further, there can be
no assurance that existing software companies will not enter the market in the
future. Except for CDCOPS and Laserlock, from which the Company believes that
DiscGuard is favorably distinguishable, most of the software and other content
protection products distributed by each of the Company's competitors are not
oriented to optical media authentication, and many typically utilize a hardware
device such as a dongle or a key. None, to the Company's best knowledge, can
assist in 'tracing' and removing from the market counterfeit media and
identifying purported counterfeiters. Although the Company believes that its
product line is favorably distinguishable from those of its competitors, there
can be no assurance that the Company will be able to penetrate any of its
competitor's portion of the market.
The Company believes that its principal competitive advantages are its
ability to offer a comprehensive and sophisticated optical media based
anti-copying solution for use by software and other electronic content
publishers. DiscGuard is not based, as is the case with, in the Company's view,
most of the commercially available protection schemes, on the presence of 'bad
sectors' on the original disc. The Company believes that its products provide an
additional competitive advantage in that they are transparent to the end-user
and do not interfere with the operation of the computer or the protected
application. There can, however, be no assurance that the Company will be able
to continue developing products with innovative features and functions, or that
competitive pressures will not result in price reductions that could materially
adversely affect the Company.
PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION
The Company currently relies on a combination of trade secret, copyright
and trademark law, as well as non-disclosure agreements and invention-assignment
agreements, to establish and protect the technologies used in its products and
other proprietary information. In addition, the Company has filed patent
applications in the United States, Israel, Germany, France, Great Britain, the
Netherlands and
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Japan with respect to the technology underlying the DiscGuard optical media
based protection and the technology underlying the imprinting of the protection
diskettes used in SoftGuard. There can be no assurance that any patent will be
granted or that the Company's proprietary technology will remain a secret or
that others will not develop similar technology and use such technology to
compete with the Company.
The Company is of the view that its software products are proprietary and
are protected by copyright law, non-disclosure and secrecy agreements. The
Company also relies on proprietary know-how and employs various methods, such as
proper labeling of confidential documents and non-disclosure agreements, to
protect its processes, concepts, ideas and documents associated with proprietary
products. However, such methods may not afford complete protection and there can
be no assurance that others will not independently develop such processes,
concepts, ideas and documentation.
The Company believes that product recognition is an important competitive
factor. Accordingly, the Company intends to promote 'DiscGuard', 'DiscAudit',
'NetGuard', 'SoftGuard' trademarks in connection with its marketing activities.
The Company pursues the registration of its trademarks in the United States and
internationally. The Company has been granted the trademark SoftGuard in Israel
and the United Kingdom. There can be no assurance that prior registrations
and/or uses of one or more of such marks (or a confusingly similar mark) does
not exist in one or more of these jurisdictions, in which case the Company might
thereby be precluded from registering and/or using such mark in such
jurisdiction. The Company's use and registration rights with respect to any
trademark does not ensure that the Company has superior rights to others that
may register or use identical or similar marks on related goods or services.
It is the Company's policy to require its employees, consultants, outside
collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commitment of employment or consulting or
advisory relationships with the Company. These agreements generally provide that
all confidential information developed or made known to the individual during
the course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific
circumstances. In the case of employees and certain consultants, the agreements
provide that all inventions conceived by the individual in the course of their
employment or consulting relationship shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the Company's trade secrets in
the event of unauthorized use or disclosure of such information.
HUMAN RESOURCES
As of February, 1998, the Company had 18 full time employees, all of whom
are located in Israel except for the Company's Chief Financial Officer who works
out of the Company's New York Office. Ten of the Company's employees are engaged
in research and development. All of the Company's product and design development
are undertaken out of the Company's premises in Israel.
The Company's employees are not covered by a collective bargaining
agreement. The Company has never experienced employment-related work stoppages
and considers its employee relations to be excellent.
RESEARCH & DEVELOPMENT
The software industry in general is characterized by rapid product changes
resulting from new technological developments, performance improvements and
lower production costs. The Company's research & development activities to date
have focused on developing products responsive to perceived immediate market
demands. The Company believes that its future growth in the software protection
filed, of which no assurance can be given, depends in large part on its ability
to be an innovator in the development and application of its proprietary
technology and know-how.
The Company has a staff of 10 research and development personnel working on
improvements and enhancements to current and anticipated product as developing
new products for the software security industry. The Company has a policy of
recruiting highly qualified technical personnel. The Company
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intends to capitalize on the highly-skilled pool of computer and engineering
professionals in Israel pursuing its product research and development efforts.
TTR-Israel, has been approved for funding from the Chief Scientist of the
Israel Ministry of Industry and Trade (the 'Chief Scientist') in the aggregate
approximate amount of $210,000. The Company has received approximately $173,000
under such agreements through December 31, 1997. Funding is repayable on the
basis of royalties from the sale of products developed as a result of the
research activities conducted with such funds. The obligation to pay royalties
is limited to the amount of such funding received, linked to the exchange rate
of the U.S. dollar and the New Israeli Shekel. Additionally, funding by the
Chief Scientist places certain legal restrictions on the transfer of know-how
and the manufacture of resulting products outside of Israel. The Company
believes that these restrictions and obligations will not have a material
adverse effect on the operations of the Company since the Company does not
presently anticipate manufacturing its products outside of Israel or
transferring technology developed by it to third parties. Such restrictions do
not apply to exports from Israel of products developed with such technologies.
CONDITIONS IN ISRAEL
The Company conducts significant operations in Israel through its
subsidiary, TTR Ltd., and therefore is affected by the political, economic and
military conditions to which that country is subject.
CORPORATE HISTORY
TTR was organized as a holding company in Delaware on July 14, 1994. The
Company currently also conducts business through its wholly owned subsidiary,
TTR Technologies Ltd. ('TTR-Israel'), an Israeli company formed on December 5,
1994. The Company's current product design, research and development operations
are conducted at TTR- Israel's premises in Kfar Saba, Israel. The Company's US
marketing efforts are coordinated from the United States. European and Far
Eastern marketing efforts are coordinated from Israel. The Company is an
emergent software company and has not generated any revenues to date. As used
herein, the term 'Company' includes the operations of TTR and TTR Israel, unless
the context otherwise requires.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases facilities used in the operation of its research and
development and administrative activities in Kfar Saba, Israel, which facilities
are comprised of 4,860 square feet leased at a monthly rental of approximately
$4,045 pursuant to lease with a scheduled expiration date of December 31, 1999,
subject to two optional annual renewals through May 2001. These facilities have
been improved to meet the special requirements necessary for the operation of
the Company's research and development activities. The Company also leases
office space in New York City for its executive offices, comprised of 650 square
feet leased at a monthly rental of $1,660 with a scheduled expiration date of
June 30, 2002. In the opinion of management, these facilities are sufficient to
meet the current and anticipated future requirements of the Company. Management
believes that it has sufficient ability to renew its present leases related to
these facilities or obtain suitable replacement facilities.
ITEM 3. LEGAL PROCEDINGS
On May 6, 1997, the Company settled a suit filed with the District Court in
Tel Aviv-Jaffa, Israel, by Henry Israel, a former consultant to the Company,
alleging that an oral agreement exists between the Company and Mr. Israel
according to which he is entitled to 5% of 'the rights' in DiscGuard and
SoftGuard, including any further developments and enhancements therein, as well
as any proceeds received therefrom. Management believes that the allegations are
without merit. Under the terms of the settlement reached, Mr. Israel dismissed
the law suit with prejudice in consideration of the Company's issuance to him of
15,000 shares of common stock and guaranteeing, under certain circumstances, a
gross sale price in an ordinary brokerage transaction in the over-the-counter
market of $15.50 per share.
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In January 1998, Mr. Israel sold the shares issued to him in an
over-the-counter transaction. Under the terms of the settlement, the Company
owed Mr. Israel approximately $155,000 in connection with such sale, plus an
additional $7,000 in related costs. Pursuant to an understanding between the
Company and Mr. Israel, the Company paid to Mr. Israel approximately a third of
such amount, with the balance payable by June 15, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the OTC Electronic Bulletin Board
under the symbol 'TTRE'. The following table sets forth the range of high and
low bid prices for the Common Stock as reported on the OTC Electronic Bulletin
Board by the National Association of Securities Dealers, Inc., Automated
Quotations System for the periods indicated.
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YEAR ENDED DECEMBER 31, 1997 HIGH LOW
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1st Quarter............................................................... $16.23 $9 1/4
2nd Quarter............................................................... $ 15 7/8 $11
3rd Quarter............................................................... $ 13 3/4 $11
4th Quarter............................................................... $ 11 15/16 $5 5/8
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The foregoing represent inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
On March 30, 1998, there were 71 record holders of the Common Stock of the
Company.
The Company has paid no dividends on its Common Stock and does not expect
to pay cash dividends in the foreseeable future. It is the present policy of the
Board of Directors to retain all earnings to provide funds for the growth of the
Company. The declaration and payment of dividends in the future will be
determined by the Board of Directors based upon the Company's earnings,
financial condition, capital requirements and such other factors as the Board of
Directors may deem relevant. The Company is not under any contractual
restriction as to its present or future ability to pay dividends.
CHANGE IN SECURITIES & USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
On December 24, 1997, the Company issued to Biscount Overseas Ltd.
('Biscount') 48,000 shares of Common Stock, par value $0.001 (the 'Common
Stock') and, in connection therewith, the Company issued in January, 1998, four
(4) year warrants to purchase up to an additional 25,000 shares of Common Stock,
at an exercise price of $7.80 per share; provided, that, in lieu of cash
payments for exercising the shares, Biscount is entitled to accept a smaller
number of shares of Common Stock based on the spread between the per share
exercise price and the then public market price of a share of Common Stock.
(a) There were no underwriters with respect to the above transaction.
(b) The Common Stock and the Warrants were issued in consideration of the
payment of $300,000 and $250, respectively.
(c) The Company believes that the shares of Common Stock and the Warrants
were issued in a transaction not involving a public offering in reliance upon an
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended.
In connection with the transaction with Biscount, the Company issued in
February 1998 an additional 16,000 shares of Common Stock and four (4) year
warrants to purchase up to an additional 8,000 shares of Common Stock, on the
terms noted above, upon Biscount's payment of an additional $100,000.
Additionally, Biscount was accorded an option to purchase an additional 10,000
shares of the Common Stock ('Option Shares') upon the payment of $62,500,
provided, that Biscount is required to notify the Company by April 30, 1998,
whether it will elect to exercise its option. The Company
9
<PAGE>
<PAGE>
undertook to register the shares of Common Stock and Warrants issued to
Biscount, as well as any Option Shares on FORM S-3 by April 30, 1998.
USE OF PROCEEDS
On February 10, 1997, the Company's Registration Statement covering the
offering of 920,000 shares of the Company's common Stock, commission file number
333-11829, was declared effective. The offering commenced on February 12, 1997
and was managed by First Metropolitan Securities Inc., as the underwriter named
in the Registration Statement (the 'underwriter'). Of the 920,000 shares sold
pursuant to the offering, 860,000 shares were sold by the company and 60,000
were sold by certain selling stockholders (the 'Selling Stockholders'). In
connection with the offering, the company issued to the underwriter, at a
purchase price of $0.001 per warrant, warrants to purchase up to an aggregate of
80,000 shares of common stock at an exercise price equal to $11.20 per share.
The shares were sold at $7.00 per share, for aggregate proceeds of
$6,020,000 and $420,000 to the company and the Selling Stockholders,
respectively. The amount of expenses incurred for the company's account in
connection with the offering is as follows:
<TABLE>
<S> <C>
Underwriting Discounts and Commissions................................ $ 602,000
Non Accountable Expense Allowance..................................... 180,600
Expense paid to or for the Underwriters............................... 99,948
Other expense:........................................................ 436,104
----------
Total Expenses................................................... $1,318,652
----------
----------
</TABLE>
All of the foregoing expenses were direct or indirect payment to persons
other than (i) directors, officers or their associates, (ii) persons owning ten
percent (10%) or more of the company's Common stock or (iii) affiliates of the
Company.
The net proceeds of the offering to the Company after deducting the above
noted expense were $4,701,348. From the effective date of the registration
statement through December 31, 1997, a reasonable estimate of the utilization of
the net proceeds of the offering is as follows:
<TABLE>
<S> <C>
Purchase and installation of machinery & equipment.................... $ 175,507
Repayment of indebtedness............................................. 2,329,045
Additional facilities and working capital............................. 645,252
Research & Development................................................ 820,110
Marketing............................................................. 581,434
Temporary investments, including cash and cash equivalents............ 150,000
----------
$4,701,348
----------
----------
</TABLE>
ITEM 6. PLAN OF OPERATIONS
The Company is an emergent company in the software anti-copying protection
business and, to date, the Company has not generated any revenues from
operations. The Company premier optical media anti-copying protection product,
DiscGuard, has been commercially released in February 1998. Since its inception,
the Company's activities have been principally involved in capitalization
activities, recruitment of executive personnel, designing and developing the
technology underlying DiscGuard and related software protection product lines,
entering into collaborative relationships with third parties for purposes of
commercializing. DiscGuard to software and other electronic content
designers/publishers and establishing a sales and customer support
infrastructure.
The Company believes that its collaborative relationships with Doug Carson
& Associates ('DCA'), one of the world leading suppliers of mastering interface
and other signal processing systems for compact discs (CDs) and digital
versatile discs (DVDs) and with Nimbus CD International Inc. ('Nimbus'), one of
the world's leading optical media manufacturers, to produce DiscGuard enhanced
optical media for ruse by software and other electronic content publishers,
should be instrumental in establishing and consolidating DiscGuard's name
recognition. The Company anticipates broadening its marketing activities in
North America, Israel and Europe to increase product awareness. The Company
10
<PAGE>
<PAGE>
anticipates that it will be undertaking efforts to establish an adequate sales
and customer support infrastructure.
The Company also anticipates that it will be undertaking efforts to enter
into collaborative relationships with participants in the recording and music,
video and related entertainment industries. With the advent of the DVD market,
the Company believes that DiscGuard will be particularly attractive to the music
and recording, video and motion picture industries. While the development of DVD
as a medium of distribution has been delayed for reasons including technical
problems relating to playback systems, the Company believes that the
availability of the anti-copying protection afforded by DiscGuard may in fact
advance the adoption of the DVD format by the entertainment industry. The
Company has also developed DiscAudit, a unique product for audio CDs that
permits the identification of illegal counterfeit copies.
On April 1, 1998, the Company entered into a letter of an intent with an
underwriter respecting a firm commitment public offering of 2,500,000 shares of
the Company's Common Stock (the 'Public Offering'). The Company anticipates that
the Common Stock offering price at the Public Offering will be at or about the
market price of the Company's Common Stock immediately prior to the effective
date of the registration statement. Additionally, on April 6, 1998 the Company
commenced a private offering of a maximum of 20 units of its securities, each
unit consisting of a 10% promissory notes in a principal amount of $50,000 and
warrants to purchase 10,000 shares of Common Stock (the 'Private Placement').
The notes bear interest at a rate of 10% per annum and are repayable at the
earlier to occur of (i) one year from closing or (ii) the 30th day following the
closing by the Company of any public or private financing in an amount exceeding
$1,000,000. The warrants are exercisable for a 4-year period at an exercise
price equal to the lower of (i) the price of the Common Stock to be sold in the
Public Offering or (ii) $8.00. The closing of the Private Placement is subject
to the sale of a minimum of 10 units. No assurance can be given that the Company
will be successful in obtaining such financing or that such financing will be
available on terms favorable to the Company. The Company believes that existing
cash balances and cash flows from activities will be sufficient to meet its
financing needs through the first half of the second quarter of 1998.
For the year ended on December 31, 1997, the Company has incurred total
operating losses of $3,865,736 reflecting principally research and development
expenses, marketing and general and administrative expenses and activities.
The Company's operating expenses reflect the Company's growth and expansion
in all operating areas since its initial public offering. The Company believes
that continued expansion of operations is essential to achieving and maintaining
a strong competitive position. The Company's relatively high operating expenses
is due to a great extent to non-cash charges associated with the compensation of
senior Company personnel through the issuance of incentive equity stock options
and non-recurring charges incurred in settling a lawsuit against the Company. In
the first quarter of 1997, the Company recorded deferred compensation of
$2,352,311 in connection with stock options and stock grants issued to its chief
executive officer and to its chief financial officer. The amortization of this
deferred compensation resulted in non-cash charges for the year ended December
31, 1997 of $972,567. Non-cash charges of $282,625 and $50,000 were also charged
to sales and marketing and research and development, respectively, in connection
with stock grants to consultants of the Company. The Company believes that these
compensation levels were necessary to retain the services of competent
individuals.
Cash used by operations for the year ended on December 31, 1997, was
approximately $2,735,400. This amount included the repayment of accrued interest
in the amount of $305,000, including current period interest of $71,000 in
February, 1997, when the Company repaid substantially all of its debt from the
proceeds of the public offering. In addition, the Company pre-paid $120,000 of
fees under a consulting agreement with a two year term.
The Company believes that ongoing investment in research and development
and marketing activities will be critical to the ability of the Company to
generate revenues and operate profitably. For the year ended 1997, the Company
expended approximately $967,155 on its research and development activities.
Management anticipates that the Company will continue to expend funds in product
development and marketing activities.
11
<PAGE>
<PAGE>
In April, 1997, the Company was approved by the Office of the Chief
Scientist of the State of Israel for an additional grant of $112,500, which
amount was subsequently increased to $210,000. To date, the Company has received
approximately $173,000. These funds will partially offset research & development
costs.
In October 1997, TTR Israel entered into a two-year management agreement
with Ultimus Ltd., an Israeli company ('Ultimus'). Under the agreement, the
Company is to provide certain management and administrative services relating to
Ultimus' day-to-day operations. The fees for such services will be fixed by the
parties from time to time but not exceed $100,000 per annum. Through December
31, 1997, the Company has earned fees totaling $50,000.
ITEM 7. FINANCIAL STATEMENTS
The information called for by this Item 7 is included following the 'Index
to Financial Statements' contained in this Annual Report on Form 10KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is contained in the definitive proxy
material of the Company to be filed in connection with its 1998 annual meeting
of shareholders, except for the information regarding executive officers of the
Company which is presented below. The information required by this item
contained in such definitive proxy material is incorporated herein by reference.
As of March 30, 1998, the executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
41 Chairman of the Board, Chief Executive Officer,
President and Treasurer; and President and
Director of TTR Israel
Mark D. Tokayer.................................
48 Director and Vice President; Chief Executive
Officer and Director of TTR Israel
Arik Shavit ....................................
51 Director, Vice President -- Product Research and
Development and Secretary; Director of Product
Research and Development and Director of TTR
Israel
Baruch Sollish..................................
35 Chief Financial Officer
Robert Friedman ................................
</TABLE>
All officers serve until the next annual meeting of directors and until
their successors are elected and qualified.
Marc. D. Tokayer is the founder of the Company and has been chairman of the
Board of Directors, President and Treasurer of the Company since its inception
in July, 1994 and Chairman of the Board of Directors, President and Chief
Executive Officer of TTR Israel since its inception in December, 1994. From 1992
until he joined TTR, Mr. Tokayer worked as an independent consultant primarily
in the areas of business applications. From October 1990 through August, 1992,
Mr. Tokayer was employed by Yael Ltd., an Israeli company, where he managed the
development of the Central Inventory Control System.
Arik Shavit, has been a Director and Vice President of the Company and
Chief Executive Officer of TTR Israel since September, 1996. Prior thereto, Mr.
Shavit was a Manager of Business Development at IBM (Israel) Ltd., where he had
this position since August 1994. Mr. Shavit founded and managed Silvaco (Israel)
Ltd., an Israeli subsidiary of SILVACO International, Inc., a California based
software company which develops state-of-the-art computer assisted engineering
(CAE) Software Applications
12
<PAGE>
<PAGE>
and provided marketing and support services. Mr. Shavit also served as Corporate
Vice-President and Director of the US company.
Baruch Sollish, Ph.D, has been a Director of the Company and Manager of
Product Research and Development for TTR Israel since December, 1994. He was
elected the Vice President-Product Research and Development and Secretary of the
Company in September 1996. Dr. Sollish created the core technology that makes up
the DiscGuard protection process. Prior to joining the Company, from June, 1987
through December, 1994, Dr. Sollish founded and managed Peletronics Ltd., an
Israel software company, engaged primarily in the field of smart cards and
software design for personnel administration, municipal tax authorities and
billing procedures at bank clearance centers. Dr. Sollish hold six United States
patents in the fields of electro optics, ultrasound and electronics and has
published and lectured extensively.
Robert Friedman has been chief financial officer since he joined the
Company in March, 1997. Previous to joining the Company, from 1993 through 1996
he was a Vice President of Oppenheimer & Co., Inc., where he managed the Israel
Desk and was responsible for sales of equity and fixed income products primarily
to leading Israeli financial institutions. From 1989 to 1993, he was Vice
President of The Castle Group Ltd. in New York, a venture capital firm, where he
performed financial and strategic marketing analysis for seed capital
investments and equity private placements for hi-tech companies. From 1989 to
1990 he also served as CEO of The Metropolitan Media Group, a Los Angeles-based
start-up company. He has a Master's Degree from Yale University's School of
Management and a B.A. in Economics, with Honors, from Yeshiva University.
There are no family relationships, as defined, between any of the above
executive officers, and there is no arrangement or understanding between any of
the above executive officers and any other person pursuant to which he was
selected as an officer. Each of the above executive officers was elected by the
Board of Directors to hold office until the next annual election of officers and
until his successor is elected and qualified or until his earlier resignation or
removal. The Board of Directors elects the officers in conjunction with each
annual meeting of the stockholders.
SECTION 16 FILINGS
No person who, during the fiscal year ended December 31, 1997, was a
director, officer or beneficial owner of more than ten percent of the Company's
Common Stock [which is the only class of securities of the Company registered
under Section 12 of the Securities Exchange Act of 1934 (the 'Act') ], a
'Reporting Person' failed to file on a timely basis, reports required by Section
16 of the Act during the most recent fiscal year. The foregoing is based solely
upon a review by the Company of Forms 3 and 4 during the most recent fiscal year
as furnished to the Company under Rule 16a-3(d) under the Act, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, and any representation received by the Company from any reporting
person that no Form 5 is required.
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes the total compensation of the Chief
Executive Officer of the Company for 1997 and for the previous two years, as
well as all other executive officers of the Company who received compensation in
excess of $100,000 for 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------- ---------------------------------------------------
AWARDS PAYOUTS
------------------------ -----------------------
RESTRICTED SECURITIES LTIP ALL OTHER
STOCK UNDERLYING PAYOUTS COMPENSATION
NANE AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER AWARDS OPTION(#) ($) ($)
- --------------------------------- ---- -------- ------ ------- ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $ 81,500 0 $26,389(1) 0 0
1996 $ 60,000 0 (2) 0 0
1995 $ 60,000 0 (2) 0 0
Marc D. Tokayer .................
Chairman, President & CEO
1997 $100,008 0 $31,177(1) 0 217,473(4)
1996 N/A N/A N/A 0 N/A
1995 N/A N/A N/A 0 N/A
Arik Shavit .....................
Vice-President
1997 $ 94,931 50,000(3) $24,948(1) 0 0
1996 $ 65,000 0 $(2) 0 0
1995 $ 60,000 0 $(2) 0 0
Baruch Sollish ..................
Vice-President -- Research &
Development
1997 $ 60,000 0 0 $250,000(6) 100,000(7)
1996 N/A
1995 N/A
Robert Friedman .................
Chief Financial Officer(5)
</TABLE>
- ------------
(1) Consists of contributions to insurance premiums, car allowance and car
expenses.
(2) Does not include the cost to the Company of the use of automobiles leased by
the Company, the cost to the Company of benefits, including premiums for
life and health insurance and any other personal benefits provided by the
Company to such persons in connection with the Company's business, all of
which in the aggregate does not exceed the lesser of $50,000 or 10% of such
person's annual salary and bonus.
(3) In consideration of Dr. Sollish's waiver of incentive bonus payments based
due to him under his employment agreement based on Company revenues of
certain products, Dr. Sollish received in, 1997, a one-time bonus payment of
$50,000.
(4) Pursuant to the employment agreement, Mr. Shavit has been issued on February
10, 1997 warrants to purchase an aggregate of 217,473 shares of Common
Stock. The warrants are exercisable at $.01 per share until September 2002,
subject to a four-year vesting schedule, whereby the first 72,491 warrants
have vested as of September, 1997 and 48,328 are not exercisable until
September 1998, 48,327 in September 1999 and 48,327 in September 2000.
(5) Mr. Friedman commenced employment with the Company in March, 1997.
(6) In connection with his employment, Mr. Friedman was granted 50,000 shares of
the Company's Common Stock. Pursuant to an escrow arrangement, 25,000 shares
were released to him in July 1997 and the remaining 25,000 were released in
January 1998.
(7) In connection with his employment Mr. Friedman received under the Company's
1996 Incentive and Non-Qualified Stock Option Plan (i) incentive stock
options to purchase 40,000 shares of Common
(footnotes continued on next page)
13
<PAGE>
<PAGE>
(footnotes continued from previous page)
Stock at an exercise price per share of $10 and (ii) non-qualified stock
options to purchase 60,000 shares of Common Stock at an exercise price per
share of $5. All options vest over a four year period, commencing on the
date of Mr. Friedman's employment, in equal annual installments.
OPTIONS GRANTED DURING YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF TOTAL MARKET
UNDERLYING OPTIONS GRANTED EXERCISE OR PRICE
OPTIONS TO EMPLOYEES IN BASE PRICE ON GRANT EXPIRATION
NAME GRANTED(#) 1997 ($/SH) DATE DATE
- ----------------------------------------- ---------- ---------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Mark Tokayer............................. 0
Arik Shavit.............................. 217,473 55.3% $ .01 $ 7.00 8/8/2006
Baruch Sollish........................... 0
Robert Friedman.......................... 100,000 25.44% $ 10.00 $ 10.00 3/11/2007
$ 5.00 $ 10.00 3/11/2007
</TABLE>
AGGREGATED OPTION AND WARRANT EXERCISES IN THE YEAR ENDED DECEMBER 31, 1997 AND
OPTION VALUES AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXCERCISED
SHARES NUMBER OF UNEXERICSED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT DEC. 31, 1997 AT DEC. 31, 1997(1)
ON VALUE ---------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------ --------- -------- ----------- ------------- -------------------------
<S> <C> <C> <C> <C> <C>
Arik Shavit......................... 0 0 72,491 144,982 $420,629/$841,258
Robert Friedman..................... 0 0 25,000 75,000 $ 12,188/$36,563
</TABLE>
- ------------
(1) Based upon the closing price ($5.8125) on December 31, 1997, as reported on
the OTC Electronic Bulletin Board.
STOCK OPTION PLAN
It is currently the Company's policy that all full time key employees be
considered annually for the possible grant of stock options, depending upon
employee performance. The criteria for the awards are experience, uniqueness of
contribution to the Company and level of performance shown during the year.
Stock options are intended to improve loyalty to the Company and help make each
employee aware of the importance of the business success of the Company.
As of December 31, 1997, the Company has 161,100 options to purchase shares
of the Company's Common Stock outstanding under the 1996 Plan (as defined
below). During 1997, the Company also granted to its Vice President, Mr. Arik
Shavit, warrants to purchase up to 217,473 shares of its Common Stock, which
warrants vest over a four year period. See 'Summary Compensation Table' and
'Employment/Consulting Contracts.' A summary of the established stock option
plan is as follows:
The Company's Incentive & Non-Qualified Stock Option Plan, adopted in 1996,
(the '1996 Plan') provides for the grant to qualified employees (including
officers and directors) of the Company of options to purchase shares of Common
Stock. A total of 450,000 shares of Common Stock have been reserved for issuance
upon exercise of stock options granted under the 1996 Plan. The 1996 Plan is
administered by the Board of Directors or a committee of the Board of Directors
whose members are not entitled to receive options under the Plan (excluding
options granted exclusively for directors fees). The Board or the Board
committee has complete discretion to select the optionee and to establish the
terms and conditions of each option, subject to the provisions of the Plan.
Options granted under the Plan may or may not be 'incentive stock options' as
defined in Section 422 of the Internal Revenue Code ('Incentive Options')
depending upon the terms established by the Board at the time of grant, but the
exercise price of options granted may not be less than 100% of the fair market
value of the
14
<PAGE>
<PAGE>
Common Stock as of the date of grant (110% of the fair market value if the grant
is an Incentive Option to an employee who owns more than 10% of the outstanding
Common Stock). Options may not be exercised more than 10 years after the grant
(five years if the grant is an Incentive Option to any employee who owns more
than 10% of the outstanding Common Stock). Options granted under the Plan are
not transferable and may be exercised only by the respective grantees during
their lifetimes or by their heirs, executors or administrators in the event of
death. Under the 1996 Plan, shares subject to canceled or terminated options are
reserved for subsequently granted options. The number of options outstanding and
the exercise price thereof are subject to adjustment in the case of certain
transactions such as mergers, recapitalizations, stock splits or stock
dividends.
As of the date of this Prospectus, the Company has granted options for an
aggregate of 161,100 shares of Common Stock.
EMPLOYMENT/CONSULTING CONTRACTS/DIRECTORS' COMPENSATION
Marc D. Tokayer. TTR Israel has entered into an employment agreement with
Marc Tokayer, pursuant to which Mr. Tokayer is employed as the President and
General Manager for a term of three years commencing in August 1994, which term
is automatically renewable unless the one of the parties' decides otherwise.
Pursuant to the employment agreement, Mr. Tokayer will devote his full business
time in consideration of a current monthly salary of approximately $6,791,
subject to adjustment. If Mr. Tokayer is terminated without cause, as defined in
the agreement, then he shall be entitled to continue to receive his salary and
benefits for an additional 12 months subject to certain limitations.
Baruch Sollish, Ph.D. TTR Israel has entered into an employment agreement
with Baruch Sollish, pursuant to which Dr. Sollish is employed as the Director
of Product Research & Development for a term of one year commencing in December
1995 and renewable for additional one year periods. Pursuant to the employment
agreement, Dr. Sollish will devote his full business time in consideration of a
current monthly salary of approximately $7,911. In consideration of Dr.
Sollish's waiver of incentive bonus payments based due to him under the Abased
on Company revenues of certain products, Dr. Sollish received in 1997, a
one-time bonus payment of $50,000.
Arik Shavit. TTR Israel has entered into an employment agreement with Arik
Shavit, pursuant to which Mr. Shavit is employed as the Chief Executive Officer
for a term of three years commencing in September 1996. Pursuant to the
employment agreement, Mr. Shavit will devote his full business time in
consideration of a monthly salary of $8,334, subject to adjustment. Pursuant to
the employment agreement, Mr. Shavit has been issued on February 10, 1997
warrants to purchase an aggregate of 217,473 shares of Common Stock. The
warrants are exercisable at $.01 per share until September 2002, subject to a
four-year vesting schedule, whereby the first 72,491 warrants have vested as of
September, 1997 and 48,328 are not exercisable until September 1998, 48,327 in
September 1999 and 48,327 in September 2000.
Robert Friedman. TTR Inc. has entered into an employment agreement with
Robert Friedman pursuant to which Mr. Friedman is employed as the Chief
Financial Officer for a one year term, commencing in March, 1997. Pursuant to
his employment agreement, Mr. Friedman is to devote his full business time in
consideration of a monthly salary of $5,000, subject to adjustment. Pursuant to
his employment arrangement, Mr. Friedman has been issued 50,000 shares of Common
Stock. Additionally, in connection with his employment Mr. Friedman received
under the 1996 Plan (i) incentive stock options to purchase 40,000 shares of
Common Stock at an exercise price per share of $10 and (ii) non-qualified stock
options to purchase 60,000 shares of Common Stock at an exercise price per share
of $5, which options vest over a four year period, commencing on the date of Mr.
Friedman's employment, in equal annual installments. During the initial term of
employment, each of the Company and Mr. Friedman is entitled to terminate the
employment relationship upon 60 days advance written notice.
Director's Compensation. In 1997, Directors did not provide any
compensation for service on the Board or for attending Board Meetings.
15
<PAGE>
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of April 15, 1998,
concerning the ownership of the Common Stock by (a) each person who, to the best
of the Company's knowledge, beneficially owned on that date more than 5% of the
outstanding Common Stock (b) each of the Company's directors (c) all current
directors, officers and significant employees of the Company as a group. Except
as otherwise indicated, the stockholders listed in the table have the sole
voting and investment power with respect to the shares indicated.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SHARES OF COMMON STOCK PERCENT OF
BENEFICIAL OWNER BENEFICIALLY OWNED CLASS(1)
- --------------------------------------------------------------------- ---------------------- ------------------
<S> <C> <C>
Marc D. Tokayer(2) .................................................. 618,547 18.7%
c/o TTR Ltd
2 Hanagar Street
Kfar Saba, Israel
Baruch Sollish ...................................................... 100,000 3%
c/o TTR Ltd
Hanagar Street
Kfar Saba, Israel
Arik Shavit(3) ...................................................... 0 0
c/o TTR Ltd.
2 Hanagar Street
Kfar Saba, Israel
Robert Friedman(4) .................................................. 50,000 1.5%
c/o TTR Inc.
1841 Broadway
New York, New York 10023
All directors and officers as a group (4 persons).................... 903,547 23.2%
</TABLE>
- ------------
(1) Based on 3,302,548 shares of Common Stock outstanding (excluding 750,000
Escrow Shares referred to in Footnote 2 below).
(2) Includes 384,274 shares held by the Tokayer Family Trust (the 'Trust'). The
wife of Mr. Tokayer is the trustee for the Trust and the income
beneficiaries of the trust are Mr. Tokayer's children. Mr. Tokayer does not
have or share any voting power or investment power with respect to the
securities held by the Trust and, accordingly, disclaims beneficial
ownership of all such securities. The Trust may be deemed to hold 11.6% of
the outstanding shares of Common Stock.
The amount of beneficial interest for Mr. Tokayer excludes 201,949 Escrow
Shares in the name of Mr. Tokayer and 548,051 Escrow Shares in the name of
the Trust. These shares have been deposited in escrow pending the
achievement by the Company of certain revenue levels or the trading of the
Company's stock at a certain price range for a specified period. Including
the Escrow Shares would increase Mr. Tokayer's percentage of outstanding
shares owned to 33.7%
(3) Excludes 217,473 shares issuable upon exercise of a like number of warrants
exercisable as follows: 72,491 warrants have become exercisable as of
September 1997, 48,238 in September 1998 and 48,237 in each of September
1999 and September 2000. See 'Certain Transactions'.
Mr. Tokayer, the Trust and Dr. Sollish, who hold in the aggregate
approximately 21.7% of the shares of Common Stock, have entered into a
voting arrangement whereby they have agreed to vote their respective shares
to elect directors and in support of positions favored by a majority of the
shares held among them.
(4) Excludes 100,000 shares issuable upon exercise of a like number of stock
options issued to Mr. Friedman under the Company's Stock Option Plan
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1997, the Company issued to Arik Shavit a director of the
Company pursuant to his employment agreement with TTR Israel as its Chief
Executive Officer warrants to purchase up to 217,473 shares of the Company's
Common Stock. The warrants are exercisable at $.01 per share until
September 2002 subject to a four-year vesting schedule. The first 72,491
warrants vested as of September 1997. See 'Management--Employment Arrangements.'
In March 1997, the Company issued to Robert Friedman, its Chief Financial
Officer pursuant to his employment agreement, options under the Company's
Stock Option Plan to purchase up to 100,000 shares of the Company's stock.
In October 1997, TTR Israel entered into a two-year management agreement
(the 'Management Agreement') with Ultimus Ltd., an Israeli company engaged
primarily in the smart card field. ('Ultimus'). Arik Shavit, a Director
and the Company's Vice-President, holds approximately 7.5% of the outstanding
shares of Ultimus and has served on the Board of Directors of Ultimus. Mr.
Tokayer, Chairman of the Board has also served on the Board of Directors of
Ultimus. Under the Management Agreement, the Company is to provide certain
management and administrative services relating to Ultimus' day-to-day
operations. The fees for such services will be fixed by the parties from time
to time but will not exceed $100,000 per annum. Through December 31, 1997, the
Company has earned fees totaling $50,000.
16
<PAGE>
<PAGE>
ITEM 13. EXHIBITS, REPORTS ON FORM 8-K AND FINANCIAL STATEMENTS
(i) Exhibits
<TABLE>
<C> <S>
-- Articles of Incorporation of the Company (Filed as an Exhibit to the Registration Statement of
the Company on Form SB-2, dated February 10, 1997, No. 333-11829, and incorporated herein by
3.1 reference)
-- Bylaws of the Company (Filed as an Exhibit to the Registration Statement on of the Company Form
SB-2, dated February 10, 1997, No. 333-11829, and incorporated herein by reference)
3.2
-- Specimen of Common Stock Certificate (Filed as an Exhibit to the Registration Statement of the
Company on Form SB-2, dated February 10, 1997, No. 333-11829, and incorporated herein by
reference)
4.1
-- Employee Incentive and Non-Qualified Stock Option Plan Stock Option Plan (Filed as an Exhibit to
the Registration Statement of the Company on Form SB-2, dated February 10, 1997, No. 333-11829,
and incorporated herein by reference).
10.1
-- Employment Agreement between TTR Israel and Marc D. Tokayer (Filed as an Exhibit to the
Registration Statement of the Company on Form SB-2, dated February 10, 1997, No. 333-11829, and
incorporated herein by reference).
10.2
-- Employment Agreement between TTR Israel and Baruch D. Sollish (Filed as an Exhibit to the
Registration Statement of the Company on Form SB-2, dated February 10, 1997, No. 333-11829, and
incorporated herein by reference).
10.3
-- Employment Agreement between TTR Israel and Arik Shavit, as amended (Filed as an Exhibit to the
Registration Statement of the Company on Form SB-2, dated February 10, 1997, No. 333-11829, and
incorporated herein by reference).
10.4
-- Employment Agreement between TTR Israel and Robert Friedman (filed herewith)
10.5
-- Consulting Agreement dated November 1, 1994 between the Company and Shane Alexander Unterburgher
Securities Inc. (Filed as an Exhibit to the Registration Statement of the Company on Form SB-2,
dated February 10, 1997, No. 333-11829, and incorporated herein by reference).
10.6
-- Consulting Agreement dated October 1, 1995 between the Company and Holborn System Ltd. (Filed as
an Exhibit to the Registration Statement of the Company on Form SB-2, No. 333-11829, and
incorporated herein by reference).
10.7
-- Financial Consulting Agreement between the Company and First Metropolitan Securities Inc. (Filed
as an Exhibit to the Registration Statement of the Company on Form SB-2, dated February 10, 1997,
No. 333-11829, and incorporated herein by reference).
10.8
-- Consulting Agreement between the Company and Pioneer Management Corporation (Filed as an Exhibit
to the Registration Statement of the Company on Form SB-2, dated February 10, 1997, No. 333-11829,
and incorporated herein by reference).
10.9
-- Loan and Security Agreement dated September 30, 1996 between the Company and 732498 Ontario Ltd.
(Filed as an Exhibit to the Registration Statement of the Company on Form SB-2, dated February 10,
1997, No. 333-11829, and incorporated herein by reference).
10.10
-- Form of Note Extension Agreement (Filed as an Exhibit to the Registration Statement of the
Company on Form SB-2, dated February 10, 1997, No. 333-11829, and incorporated herein by
reference).
10.11
-- Settlement Agreement dated May 6, 1997 between the Company and Henry Israel settling certain
outstanding claims. (filed herewith)
10.12
-- Agreement dated January 19, 1998 between the Company and Henry Israel.
10.12(a)
-- Development and OEM Licensing Agreement dated October 31, 1997 between the Company and Doug
Carson & Associates Inc. (filed herewith) (1)
10.13
-- Development and OEM Licensing Agreement dated November 24, 1997 among the Company, Doug Carson &
Associates Inc. and Nimbus CD International, Inc. (filed herewith) (1)
10.14
-- Management Agreement dated October 1, 1997 between the Company and Ultimus Ltd. (filed herewith)
10.15
-- Stock Purchase Agreement dated December 24, 1997 between the Company and Biscount Overseas Ltd.
(filed herewith)
10.16
-- Financial Data Schedule (filed herewith)
27.1
</TABLE>
(footnotes on next page)
17
<PAGE>
<PAGE>
(footnotes from previous page)
- ------------
(1) Confidential information contained therein is omitted and identified by a *
and filed separately with the SEC.
(b) Reports on Form 8-K.
The Company filed the following Reports on From 8-K during the fourth
quarter of 1997:
(i) Report filed on November 5, 1997 relating to the execution of a
Development and OEM Licensing Agreement between the Company and Doug Carson
& Associates, Inc.
(ii) Report filed on December 1, 1997 relating to the execution of a
Development and OEM Licensing Agreement among the Company, Doug Carson &
Associates Inc. and Nimbus CD International, Inc.
(c) Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statement of Operations for the years ended December 31,
1997 and 1996
Consolidated Statement of changes in Shareholders' Equity for the
years ended December 31, 1997 and 1996
Consolidated Statement of Cash Flows for the years ended December 31,
1997 and 1996
Notes to Consolidated Financial Statements
18
<PAGE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 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.
TTR INC.
Registrant
By: /s/ MARC D. TOKAYER
...................................
MARC D. TOKAYER,
CHAIRMAN OF THE BOARD, PRESIDENT,
CHIEF EXECUTIVE OFFICER, TREASURER
Date: July 2, 1998
In accordance with 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, in the capacities and on the dates indicated
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------------ --------------------------------- ---------------------------------
<C> <S> <C>
/s/ ARIK SHAVIT
......................................... Vice-President and Director July 2, 1998
(ARIK SHAVIT)
/s/ DR. BARACH SOLLISH Secretary and Director July 2, 1998
.........................................
(DR. BARUCH SOLLISH)
</TABLE>
19
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
--------------
<S> <C>
Independent Auditors' Report.......................................................................... F-2
Report of Independent Public Accountants.............................................................. F-3
Consolidated Balance Sheet............................................................................ F-4
Consolidated Statement of Operations.................................................................. F-5
Consolidated Statement of Stockholders' Deficit....................................................... F-6
Consolidated Statement of Cash Flows.................................................................. F-7
Notes to Consolidated Financial Statements............................................................ F-8 - F-19
</TABLE>
F-1
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of TTR Inc.
Kfar Saba, Israel
We have audited the accompanying consolidated balance sheet of TTR Inc. and
its Subsidiary (A Development Stage Company) as of December 31, 1997 and 1996,
and the related consolidated statements of operations, cash flows, and
stockholders' deficit for the years then ended and for the period from July 14,
1994 (date of inception) to December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of TTR
Technologies, Ltd., a wholly owned subsidiary, which statements reflect total
assets of $555,342 and $692,102 as of December 31, 1997 and 1996, respectively,
and net losses of $2,927,080 and $790,536 for the years then ended,
respectively. Those statements were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to the amounts
included for TTR Technologies Ltd. is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of TTR Inc. and its Subsidiary as of
December 31, 1997 and 1996 and the results of their operations and their cash
flows for the years then ended and for the period from July 14, 1994 (date of
inception) to December 31, 1997 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 3 to the
financial statements, the Company has incurred recurring losses since its
inception in 1994, and has an accumulated deficit at December 31, 1997 of
$6,179,571. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
SCHNEIDER EHRLICH & WENGROVER LLP
Woodbury, New York
March 16, 1998, except for Note 17, as to
which the date is April 6, 1998
F-2
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
T.T.R. TECHNOLOGIES LTD.
(A Development Stage Company)
We have audited the accompanying balance sheet of T.T.R Technologies Ltd.(a
development stage company) ('the Company') as of December 31, 1997 and 1996 and
the related statements of operations, changes in shareholders' deficiency and
cash flows for each of the two years in the period ended December 31, 1997, and
for the period December 5, 1994 (date of inception) to December 31, 1997. 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 audit in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditor's Regulations
(Auditor's Mode of Performance), 1973. Such auditing standards are substantially
identical to generally accepted auditing standards in the United States. Those
standards require that we plan and perform the audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining on a test basis, evidence supporting the amounts and
disclosure in the financial statements. An audit also includes assessing the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the abovementioned financial statements present fairly in
all material respects, the financial position of the Company (a development
stage company) as of December 31, 1997 and 1996 and the results of its
operations, changes in shareholders' deficiency, and cash flows for each of the
two years in the period ended December 31, 1997, and for the period December 5,
1994 (date of inception) to December 31, 1997, in comformity with accounting
principles generally accepted in Israel and in the United States. As applicable
to these financial statements, such accounting principles are substantially
identical.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency and shareholders' deficiency that raise
substantial doubt about its ability to continue as a going concern. The
Company's plans are also referred to in Note 3. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
The financial statements have been translated into dollars for the purpose
of their inclusion in the financial statements of T.T.R Inc.
BDO Almagor & Co.
Certified Public Accountants
Ramat-Gan, Israel,
March 16, 1998
F-3
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................................................ $ 63,656 $ 450,040
Stock subscription receivable.................................................... -- 100,000
Other current assets............................................................. 135,828 131,538
---------- ----------
Total current assets........................................................ 199,484 681,578
Property and equipment -- net......................................................... 373,444 416,045
Deferred financing costs, net of accumulated amortization of $181,310 for 1996........ 62,101 --
Deferred stock offering costs......................................................... 515,664
Due from officer...................................................................... 26,000 16,000
Other assets.......................................................................... 14,995 75,004
---------- ----------
Total assets................................................................ $1,191,688 $1,188,627
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Current liabilities
Current portion of long-term debt................................................ $1,065,365 $ 5,564
Short-term borrowings............................................................ 849,602 --
Accounts payable................................................................. 170,323 87,363
Accrued expenses................................................................. 443,594 139,972
Interest payable................................................................. 234,508 --
---------- ----------
Total current liabilities................................................... 2,763,392 232,899
Long-term debt, less current portion.................................................. 22,153 14,804
Accrued severance pay................................................................. -- 31,195
---------- ----------
Total liabilities........................................................... 2,785,545 278,898
Common stock issued with guaranteed selling price -- $.001 par value 15,000 shares
issued and out...................................................................... -- 232,500
---------- ----------
COMMITMENTS AND CONTINGENCIES
Stockholders' Equity (Deficit)
Common stock, $.001 par value; 20,000,000 shares authorized, 3,050,000 and 4,271,548
issued and outstanding, respectively, including 1,000,000 shares placed in escrow... 3,050 4,272
Common stock subscribed, $.001 par value; 16,000 shares at December 31, 1997.......... -- 100,000
Additional paid-in capital............................................................ 405,356 8,117,275
Cumulative translation adjustments.................................................... 57,696 38,029
Deficit accumulated during the development stage...................................... (2,059,959) (6,179,571)
Less: deferred compensation........................................................... -- (1,402,776)
---------- ----------
Total stockholders' equity (deficit)........................................ (1,593,857) 677,229
---------- ----------
Total liabilities and stockholders' equity (deficit)........................ $1,191,688 $1,188,627
---------- ----------
---------- ----------
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FROM
INCEPTION
YEAR ENDED (JULY 14,
DECEMBER 31, 1994) TO
-------------------------- DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Revenue............................................................. $ -- $ -- $ --
Expenses
Research and development....................................... 344,305 967,155 1,587,708
Sales and marketing............................................ 169,840 1,421,496 1,855,294
General and administrative..................................... 382,634 1,477,085 2,121,821
----------- ----------- ------------
Total expenses............................................ 896,779 3,865,736 5,564,823
----------- ----------- ------------
Operating loss...................................................... (896,779) (3,865,736) (5,564,823)
Other (income) expense
Legal settlement............................................... -- 232,500 232,500
Loss on investment............................................. -- -- 17,000
Other income................................................... -- (50,000) (50,000)
Interest income................................................ -- (42,069) (54,893)
Interest expense............................................... 224,432 113,445 470,141
----------- ----------- ------------
Total other (income) expenses............................. 224,432 253,876 614,748
----------- ----------- ------------
Net loss............................................................ $(1,121,211) $(4,119,612) $ (6,179,571)
----------- ----------- ------------
----------- ----------- ------------
Per share data:
Basic and diluted.............................................. $ (0.62) $ (1.35)
----------- -----------
----------- -----------
Number of common shares used in basic and diluted loss per share.... 1,801,366 3,054,519
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK FOREIGN ACCUMULATED
COMMON STOCK SUBSCRIBED ADDITIONAL CURRENCY DURING
------------------ ----------------- PAID-IN TRANSLATION DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT STAGE
--------- ------ ------ -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at July 14, 1994 (date of
inception).............................. -- $-- -- $ -- $ -- $ -- $ --
Issuances of common stock, par value $.001
Services rendered at $.001 per
share............................... 1,200,000 1,200
Cash at $.0208 per share.............. 1,200,000 1,200 23,800
Net loss.................................. (42,085)
--------- ------ ------ -------- ---------- ---------- -----------
Balances at December 31, 1994............. 2,400,000 2,400 -- -- 23,800 (42,085)
Common stock contributed.................. (561,453) (561) 561
Issuances of common stock, par value $.001
Services rendered at $.05 per share....... 361,453 361 17,712
Issuance of common stock purchase warrants
Services rendered at $.04 per warrant... 600
Foreign currency translation adjustment... 22,652
Net loss.................................. (896,663)
--------- ------ ------ -------- ---------- ---------- -----------
Balances at December 31, 1995............. 2,200,000 2,200 -- -- 42,673 22,652 (938,748)
Issuances of common stock, par value $.001
Cash at $.307 per share............... 650,000 650 199,350
Cash at $.50 per share (net of stock
offering costs of $11,467).......... 150,000 150 63,383
Cash at $2.00 per share............... 50,000 50 99,950
Foreign currency translation adjustment... 35,044
Net loss.................................. (1,121,211)
--------- ------ ------ -------- ---------- ---------- -----------
Balances at December 31, 1996............. 3,050,000 $3,050 -- $ -- $ 405,356 $ 57,696 $(2,059,959)
Common stock contributed.................. (135,000) (135) 135
Issuances of common stock, par value $.001
Cash at $7.00 per share (net of stock
offering costs of $1,318,652........ 860,000 860 4,700,488
Cash at $6.25 per share............... 48,000 48 299,952
Services rendered at $10.00 per
share............................... 55,000 55 549,945
Exercise of options at $.01 per
share............................... 374,548 375 3,370
Services rendered at $14.875 per
share............................... 19,000 19 282,606
Common stock subscriptions................ 16,000 100,000
Sale of Underwriters warrants 80
Stock options and warrants granted........ 1,875,343
Amortization of deferred compensation.....
Foreign currency translation adjustment... (19,667)
Net loss.................................. (4,119,612)
--------- ------ ------ -------- ---------- ---------- -----------
Balances at December 31, 1997............. 4,271,548 $4,272 16,000 $100,000 $8,117,275 $ 38,029 $(6,179,571)
--------- ------ ------ -------- ---------- ---------- -----------
--------- ------ ------ -------- ---------- ---------- -----------
<CAPTION>
DEFERRED
COMPENSATION TOTAL
------------ ----------
<S> <C> <C>
Balances at July 14, 1994 (date of
inception).............................. $ -- $ --
Issuances of common stock, par value $.001
Services rendered at $.001 per
share............................... 1,200
Cash at $.0208 per share.............. 25,000
Net loss.................................. (42,085)
------------ ----------
Balances at December 31, 1994............. -- (15,885)
Common stock contributed..................
Issuances of common stock, par value $.001
Services rendered at $.05 per share....... 18,073
Issuance of common stock purchase warrants
Services rendered at $.04 per warrant... 600
Foreign currency translation adjustment... 22,652
Net loss.................................. (896,663)
------------ ----------
Balances at December 31, 1995............. -- (871,223)
Issuances of common stock, par value $.001
Cash at $.307 per share............... 200,000
Cash at $.50 per share (net of stock
offering costs of $11,467).......... 63,533
Cash at $2.00 per share............... 100,000
Foreign currency translation adjustment... 35,044
Net loss.................................. (1,121,211)
------------ ----------
Balances at December 31, 1996............. $ -- (1,593,857)
Common stock contributed..................
Issuances of common stock, par value $.001
Cash at $7.00 per share (net of stock
offering costs of $1,318,652........ 4,701,348
Cash at $6.25 per share............... 300,000
Services rendered at $10.00 per
share............................... (500,000) 50,000
Exercise of options at $.01 per
share............................... 3,745
Services rendered at $14.875 per
share............................... 282,625
Common stock subscriptions................ 100,000
Sale of Underwriters warrants 80
Stock options and warrants granted........ (1,875,343)
Amortization of deferred compensation..... 972,567 972,567
Foreign currency translation adjustment... (19,667)
Net loss.................................. (4,119,612)
------------ ----------
Balances at December 31, 1997............. $(1,402,776) $ 677,229
------------ ----------
------------ ----------
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FROM
INCEPTION
YEAR ENDED (JULY 14,
DECEMBER 31, 1994) TO
-------------------------- DECEMBER 31,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
Net loss....................................................... $(1,121,211) $(4,119,612) $ (6,197,571)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization............................. 155,273 184,290 440,331
Translation adjustment.................................... (967) -- (1,528)
Amortization of deferred compensation..................... -- 972,567 972,567
Stock and warrants issued for services and legal
settlement.............................................. -- 565,125 583,798
Increase (decrease) in cash attributable to changes in
assets and liabilities
Accounts receivable.................................. 1,310 478 163
Other current assets................................. (105,222) (7,204) (125,918)
Other assets......................................... -- (72,700) (72,700)
Accounts payable..................................... 137,825 (72,401) 105,768
Accrued expenses..................................... 44,043 22,297 142,048
Accrued severance.................................... -- 26,299 26,299
Interest payable..................................... 138,485 (234,508) --
----------- ----------- ------------
Net cash used by operating activities..................... (750,464) (2,735,369) (4,108,743)
----------- ----------- ------------
Cash flows from investing activities
Purchases of property and equipment............................ (240,836) (175,507) (611,400)
Increase in organization costs................................. -- -- (7,680)
----------- ----------- ------------
Net cash used by investing activities..................... (240,836) (175,507) (619,080)
----------- ----------- ------------
Cash flows from financing activities
Proceeds from issuance of common stock......................... 363,533 5,520,837 5,910,570
Loans to officer............................................... -- 10,000 (16,000)
Deferred stock offering costs.................................. (166,099) (309,565) (475,664)
Deferred financing costs....................................... (89,980) (19,000) (262,241)
Proceeds from short-term borrowings............................ 849,602 200,000 1,049,602
Proceeds from long-term debt................................... 25,096 -- 1,114,137
Repayment of short-term borrowings............................. -- (1,049,602) (1,049,602)
Repayments of long-term debt................................... (14,403) (1,053,455) (1,089,471)
----------- ----------- ------------
Net cash provided by financing activities................. 967,749 3,299,215 5,181,161
----------- ----------- ------------
Effect of exchange rates on cash.................................... (659) (1,955) (3,298)
----------- ----------- ------------
Increase (decrease) in cash and cash equivalent..................... (24,210) 386,384 450,040
Cash at beginning of period......................................... 87,866 63,656 --
----------- ----------- ------------
Cash and cash equivalents at end of period.......................... $ 63,656 $ 450,040 $ 450,040
----------- ----------- ------------
----------- ----------- ------------
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest.................................................. $ 15,788 $ 345,258 $ 379,502
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
TTR Inc. (the 'Company') was incorporated on July 14, 1994 under the laws
of the State of Delaware. TTR Technologies Ltd., ('TTR Israel') was formed under
the laws of the State of Israel on December 5, 1994 as a wholly owned research
and development subsidiary of the Company.
The Company is engaged in the design, development and commercialization of
proprietary software security products.
The Company is considered to be in the development stage and has earned no
revenues to date. Business activities to date have focused on product and
marketing research, product development, and raising capital. The Company's
primary product, DiscGuard'tm', based on its proprietary technology, became
commercially available in the first quarter of 1998.
The Company anticipates that it will continue to incur significant
operating costs and losses in connection with the development of its products
and increased marketing efforts and is subject to other risks affecting the
business of the Company. (See Note 3).
In February 1997 the Company closed on an initial public offering (IPO) in
which it sold 860,000 shares of its Common Stock at a price of $7.00 per share
and realized net proceeds of approximately $4.7 million after stock offering
costs (See Note 13).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, TTR Technologies Ltd. All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities and the reported revenues
and expenses. Actual results could vary from the estimates that were used.
REVENUE RECOGNITION
The Company anticipates that revenues from software will be recognized upon
delivery to the customer, provided that the Company's obligations, if any, are
insignificant and collectability is probable. Revenues from maintenance and
engineering services will be recognized over the term of the respective
contracts.
STOCK BASED COMPENSATION
Compensation expense arising from stock grants, and options and warrants
issued at exercise prices below the quoted market price of the underlying Common
Stock as of the grant date, is recognized over the vesting periods of the
related grants. Such stock-based compensation resulted in an aggregate charge to
operations of approximately $1,305,000 for the year ended December 31, 1997.
FOREIGN CURRENCY TRANSLATIONS
The financial statements of the Company's Israeli subsidiary have been
translated into U.S. dollars in accordance with Statement No. 52 of the
Financial Accounting Standards Board (FASB). Assets and liabilities have been
translated at year-end (period-end) exchange rates and statement of operations
have been translated at average rates prevailing during the year. The
translation adjustments have been recorded as a separate component of
stockholders' deficit (cumulative translation adjustment).
F-8
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET LOSS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.128
(SFAS 128), 'Earnings per Share,' which supersedes APB Opinion No. 15 (APB No.
15), 'Earnings per Share,' and which is effective for all periods ending after
December 15, 1997. SFAS 128 requires dual presentation of basic and diluted
earnings per share (EPS) for complex capital structures on the face of the
Statements of Operations. Basic EPS is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution from the exercise or conversion of other
securities into common stock. None of the stock options and warrants issued in
1997 and 1996 has been included in the net loss per share computation for the
years presented, because their inclusion would be anti-dilutive. Shares held in
escrow are not treated as outstanding during any period (See Note 13). Earnings
per share data for 1996 has been restated to conform with the provisions of SFAS
No. 128.
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid debt instruments with an original maturity of three months or less
to be cash equivalents.
DEPRECIATION AND AMORTIZATION
Equipment and leasehold improvements are stated at cost. Equipment is
depreciated over the estimated useful lives of the related assets, which range
from five to seven years. Leasehold improvements are amortized over the related
lease term. Depreciation is computed on the straight-line method.
RESEARCH AND DEVELOPMENT COSTS
Research and development expenditures are charged to operations as
incurred. Software development costs are required to be capitalized when a
product's technological feasibility has been established by completion of a
working model of the product and ending when a product is available for general
release to customers. To date, completion of a working model of the Company's
products and general release have substantially coincided. As a result, the
Company has not capitalized any software development costs since such costs have
not been significant.
INCOME TAXES
The Company accounts for its income taxes using the Financial ccounting
Standards Board Statement of Financial Accounting Standards No. 109, 'Accounting
for Income Taxes' (SFAS No. 109), which requires the establishment of a deferred
tax asset or liability for the recognition of future deductible or taxable
amounts and operating loss carryforwards. Deferred tax expense or benefit is
recognized as a result of the changes in the assets and liabilities during the
year. Valuation allowances are established when necessary, to reduce deferred
tax assets to amounts expected to be realized.
DEFERRED STOCK OFFERING COSTS
Costs incurred in connection with the Company's public offering of common
stock were charged to capital upon the completion of the offering in February
1997.
LONG-LIVED ASSETS
In accordance with SFAS No. 121, 'Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of', the Company
records impairment losses on long-lived assets used in operations, including
goodwill and intangible assets, when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
F-9
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, 'Accounting for Stock-based Compensation'. SFAS No. 123 requires that the
Company either recognize in its financial statements costs related to its
employee stock-based compensation plans, such as stock option and stock purchase
plans, using the fair value method, or make pro forma disclosures of such costs
in a footnote to the financial statements. The Company has elected to continue
to use the intrinsic value-based method of APB Opinion No. 25, as allowed under
SFAS No. 123, to account for its employee stock-based compensation plans, and to
include the required pro forma disclosures based on fair value accounting. The
adoption of SFAS No. 123 has not had a material effect on the Company's
financial position or results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS 130, 'Reporting Comprehensive Income,' and SFAS 131,
'Disclosures About Segments of an Enterprise and Related Information,' were
issued. SFAS 130 addresses standards for reporting and display of comprehensive
income and its components, and SFAS 131 requires disclosure of reportable
operating segments. In February 1998, SFAS 132, 'Employers' Disclosures About
Pensions and Other Post-retirement Plans' was issued. SFAS 132 standardizes
pensions disclosures. These statements are effective in 1998. The Company will
be reviewing these pronouncements to determine their applicability to the
Company, if any.
NOTE 3 -- GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has a limited
operating history, has sustained losses since its inception and has an
accumulated deficit at December 31, 1997 of $6,179,571. The Company faces a
number of risks, including uncertainties regarding demand and market acceptance
of its products, dependence on a single product line, the effects of
technological change, competition, and the development of new products.
Additionally, there are other risk factors, that may affect the future results
of the Company, such as the nature of its distribution channels, ability to
manage growth, loss of key personnel and the effects of planned expansion of
operations.
The Company anticipates that it will continue to incur significant
operating costs and losses in connection with the development of its products
and increased marketing efforts and is subject to other risks affecting its
business, as discussed above. The Company is not yet generating sufficient
revenues from its operations to fund its activities and is therefore dependent
on continued financing from external sources.
In November 1997, the Company entered into licensing agreements with a
leading supplier of mastering interface systems (MIS) for compact discs (CDs)
and digital versatile discs (DVDs), and a leading optical media manufacturer, to
produce DiscGuard'tm' enhanced CD's and DVD's for use by software and other
electronic content publishers (see Note 16). The Company believes these
relationships should be instrumental in establishing and consolidating
DiscGuard's'tm' name recognition. DiscGuard'tm' was in the product testing stage
in the fourth quarter of 1997 and has recently become commercially available.
Presently, the Company is broadening its marketing activities in North America,
Israel and Europe to increase product awareness and is undertaking efforts to
establish an adequate sales and customer support infrastructure. The Company is
also pursuing various alternatives for additional financing, including a private
placement and a secondary offering (see Note 19).
The ability of the Company to continue as a going concern is dependent upon
the success of the Company's products and its access to sufficient funding to
enable it to continue operations. There is no assurance that sufficient revenues
will be generated nor that adequate financing will be available to the
F-10
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company. Insufficient funds from operations or the inability to obtain such
financing would have a material adverse effect on the Company.
NOTE 4 -- OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Chief Scientist(1)........................................................ $ 98,432 $ 39,678
Management income receivable(2)........................................... -- 50,000
Other..................................................................... 37,396 41,860
------------ ------------
$135,828 $131,538
------------ ------------
------------ ------------
</TABLE>
- ------------
(1) In November 1996, TTR Israel received an approval from the Office of the
Chief Scientist of the Government of Israel (OCS) according to which the OCS
will fund certain research and development of the Company by way of grants.
The amount of the approved budget is $195,000 and the amount of the approved
grant is 50% of the budget. On April 8, 1997, the OCS agreed to increase the
approved budget to $420,000.
The Company will be required to pay royalties to the OCS on proceeds from
the sale of products derived from the research and development in which the
OCS has participated by way of its grant. The royalties are computed at the
rate of 3% of the proceeds from such sales, up to a maximum of 150% of the
grant.
(2) In October 1997, TTR Israel entered into a two-year management agreement
with Ultimus LTD, (Ultimus) an Israeli company. Under the agreement, the
Company will provide management and administrative services relating to
Ultimus' day-to-day operations. The fee for such services will be agreed
upon from time to time but will never exceed $100,000 per annum. The
agreement is automatically renewable for additional one year terms unless
terminated by either party with sixty days notice. The Company's
Vice-President holds approximately 7.5% of the outstanding shares of
Ultimus and, together with the Company's Chairman, serves on their
Board of Directors.
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Leasehold improvements.......................................... $ 80,085 $126,906
Office equipment................................................ 98,938 144,501
Computer equipment.............................................. 168,103 219,895
Vehicles........................................................ 94,358 86,732
------------ ------------
441,484 578,034
Less: Accumulated depreciation.................................. 68,040 161,989
------------ ------------
$373,444 $416,045
------------ ------------
------------ ------------
</TABLE>
Depreciation expense was $38,669 and $88,311 for the years ended December
31, 1996 and 1997, respectively.
F-11
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- DUE FROM OFFICER
This amount represents non-interest bearing advances to an officer of the
Company.
NOTE 7 -- ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Accrued payroll and payroll taxes............................... $ 14,513 $ 49,750
Deferred stock offering costs................................... 349,565 --
Other........................................................... 79,516 90,222
------------ ------------
$443,594 $139,972
------------ ------------
------------ ------------
</TABLE>
NOTE 8 -- ACCRUED SEVERANCE PAY
Under Israeli law, TTR Israel is required to make severance payments
to dismissed employees (including officers) and to employees leaving employment
under certain other circumstances. This liability is calculated based on the
years of employment for each employee, in accordance with the "severance pay
laws." The Company's liabilities for required severance payments are covered by
funding into severance pay funds, insurance policies and by an accrual. At
December 31, 1997, a total of $53,167 was deposited in insurance policies.
NOTE 9 -- SHORT-TERM BORROWINGS
(a) TTR Israel borrowed a total of $50,000 from a bank. Interest on the
loan was calculated at the rate of 8% per annum and was repaid in full in
December 1996.
(b) In June 1996, the Company realized net proceeds of $423,552 from a
private placement of 10 units of its securities at a purchase price of $50,000
per unit. Each unit consisted of $50,000 principal amount 10% promissory notes
and 15,000 shares of its Common Stock. The Company has allocated $7,500 per unit
to the Common Stock sold in the private placement, and the balance to promissory
note principal. The difference between the face value of the notes ($50,000) and
the amount allocated to note principal represents a discount which is being
amortized over the term of the note based upon the interest method. In January
1997, certain of these investors returned a total of 135,000 shares of the
Company's Common Stock to treasury. The principal and accrued interest on these
notes became due upon the completion of the Company's IPO and was paid in
February 1997.
In connection with this offering a placement agent received a commission of
10% of the gross proceeds and an additional 3% of such proceeds as a
non-accountable expense allowance. Certain of the investors in the private
placement have an ownership interest in the placement agent.
(c) In 1996, the Company borrowed a total of $133,400 in unsecured funds
from a private lender. Interest is calculated at the rate of 22% per annum on
outstanding financings. The principal and accrued interest became due upon the
completion of the Company's IPO and was paid in full in February 1997.
(d) In December 1996 and January 1997, the Company issued short-term
promissory notes aggregating $450,000. Interest is calculated at the rate of 15%
per annum.
The notes and accrued interest thereon became due upon the completion of
the Company's IPO and was paid in full in February 1997.
Fees totaling $45,000 which were incurred in connection with this financing
were amortized over the life of the loan using the straight-line method.
F-12
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Bank loans(1)............................................................. $ 46,438 $ 20,368
Promissory notes(2)....................................................... 1,041,080 --
------------ ------------
1,087,518 20,368
Current portion........................................................... 1,065,365 5,564
------------ ------------
Non-current portion....................................................... $ 22,153 $ 14,804
------------ ------------
------------ ------------
</TABLE>
- ------------
(1) These loans are denominated in 'New Israeli Shekel' (NIS), bear interest at
the rate of prime plus 2.4% - 3% per annum and are secured by substantially
all the assets of TTR Israel. Principal payments are due in various
installments through 2000.
(2) The Company issued two-year promissory notes aggregating $1,041,080 in a
private placement. The notes bear interest at the rate of 10% per annum
payable at the maturity date. In connection with this offering the Company
issued warrants to the noteholders to purchase up to a total of 174,548
shares of the Company's Common Stock for $.01 per share. The warrants were
exercisable during the period between the effective date and the closing
date of the Company's IPO. The Company paid the placement agent, Shane,
Alexander, Unterburgher Securities, Inc. (SAU) a commission of 10% of the
gross proceeds and an additional 4% of such proceeds as a non-accountable
expense. These fees, totaling approximately $145,000, have been capitalized
as deferred financing costs were amortized over the term of the loan using
the straight-line method. Amortization was $68,337 and $8,919 for the years
ended December 31, 1996 and 1997. In February 1997, the entire principal
balance plus accrued interest on these notes was repaid.
------------------------
The aggregate maturities of long-term debt for the next three years ending
December 31, are as follows: 1998 -- $5,564; 1999 -- $8,753 and 2000 -- $6,051.
NOTE 11 -- INCOME TAXES
At December 31, 1997, the Company had available $1,775,266 of net operating
loss carryforwards for U.S. federal income tax purposes which expire in the
years 2014 through 2018, and $2,912,000 of foreign net operating loss
carryforwards with no expiration date. Due to the uncertainty of their
realization, no income tax benefit has been recorded by the Company for these
net operating loss carryforwards as valuation allowances have been established
for any such benefits. The use of the U.S. federal net operating loss
carryforwards is subject to limitations under section 382 of the Internal
Revenue code pertaining to changes in stock ownership.
Significant components of the Company's deferred tax assets for U.S.
federal and Israel income taxes are as follows:
F-13
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Net operating loss carryforwards.......................................... $ 548,000 $ 1,839,669
Research and developments costs........................................... 89,000 --
Stock based compensation.................................................. -- 17,813
Accrued vacation and severance............................................ 25,000 20,000
------------ ------------
Total deferred tax assets............................................ 662,000 1,877,481
Valuation allowance.................................................. (662,000) (1,877,481)
------------ ------------
Net deferred tax assets.............................................. $ -- $ --
------------ ------------
------------ ------------
</TABLE>
Pre-tax losses from foreign (Israeli) operations were $790,536 and
$2,927,080 for the years ended December 31, 1996 and 1997, respectively.
NOTE 12 -- STOCK OPTION PLAN
In July 1996, the Board of Directors adopted the Company's Incentive and
Non-qualified Stock Option Plan (the 'Plan') and has reserved up to 450,000
shares of Common Stock for issuance thereunder . The Plan provides for the
granting of options to officers, directors, employees and advisors of the
Company. The exercise of incentive stock options ('ISOs') issued to employees
who are less than 10% stockholders shall not be less than the fair market value
of the underlying shares on the date of grant or not less than 100% of the fair
market value of the shares in the case of an employee who is a 10% stockholder.
The exercise price of restricted stock options shall not be less than the par
value of the shares to which the option relates. Options are not exercisable for
a period of one year from the date of grant. Thereafter, options may be
exercised as determined by the Board of Directors, with maximum terms of ten and
five years, respectively, for ISOs issued to employees who are less than 10%
stockholders and employees who are 10% stockholders. In addition, under the
plan, no individual will be given the opportunity to exercise ISO's valued in
excess of $100,000, in any calendar year, unless and to the extent the options
have first become exercisable in the preceding year. The Plan will terminate in
2006.
A summary of the status of the Plan as of December 31, 1997 and changes
during the year ending on that date is presented below:
<TABLE>
<CAPTION>
RANGE OF
EXERCISE
SHARES PRICES
-------- ---------------
<S> <C> <C>
Options outstanding, January 1, 1996......................................... -- $ --
Granted................................................................. 5,000 6.00
Canceled................................................................ -- --
Exercised............................................................... -- --
-------- ---------------
Options outstanding, December 31, 1996....................................... 5,000 6.00
Granted................................................................. 175,600 5.00 - 13.94
Canceled................................................................ (19,500) 7.00 - 13.94
Exercised............................................................... -- --
-------- ---------------
Options outstanding, December 31, 1997....................................... 161,100 $ 5.00 - 13.88
-------- ---------------
-------- ---------------
Shares of common available for future grant.................................. 288,900
--------
--------
</TABLE>
F-14
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options under the
plan outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
------------------------ ------------------------
REMAINING
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$5.00 50,000 9.25 $ 5.00 -- --
5.81 12,500 10.00 5.81 -- --
6.00 5,000 8.50 6.00 1,250 $ 6.00
7.00 27,000 9.00 7.00 -- --
10.00 50,000 9.25 10.00 -- --
10.25 1,600 9.75 10.25 -- --
13.88 15,000 9.50 13.88 -- --
----------- ----------- -------- ----------- --------
$5.00 - $13.88 161,100 9.27 $ 7.86 1,250 $ 6.00
----------- ----------- -------- ----------- --------
----------- ----------- -------- ----------- --------
</TABLE>
In the first quarter of 1998, the Company granted an additional 4,000
incentive stock options under the plan which are exercisable at $5.875 per
share.
In addition, the Company issued 10-year warrants to purchase up to 217,473
shares of Common Stock to its Chief Executive Officer. The warrants are
exercisable at $.01 per share and vest over a four-year period. At December 31,
1997 a total of 72,491 warrants are exercisable.
The Company has elected to use the intrinsic value-based method of APB
Opinion No. 25 to account for all of its employee stock-based compensation
plans. Accordingly, no compensation cost has been recognized in the accompanying
financial statements for stock options issued to employees where the exercise
price of the option equals or exceeds the fair value of the underlying common
stock as of the grant date for each stock option. Weighted-average grant date
fair value of options granted during year under the Black-Scholes option pricing
model was $3.17 per option.
The Company has adopted the pro forma disclosure provisions of SFAS No.
123. Had compensation cost for all of the Company's stock-based compensation
grants been determined in a manner consistent with the fair value approach
described in SFAS No. 123, the Company's net loss and net loss per share as
reported would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Net loss
As reported............................................... $(1,121,211) $(4,119,612)
Proforma.................................................. $(1,122,249) $(4,342,194)
Loss per share
As reported............................................... $ (.62) $ (1.35)
Proforma.................................................. $ (.62) $ (1.42)
</TABLE>
The fair value of each option granted in 1996 is estimated on the date of
grant using the minimum value method with the following weighted average
assumptions: No dividends, an expected life of 4 years, and a risk-free interest
rate of 6.05%. The fair value of each option granted in 1997 is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: No dividends, an expected life of 2.5 years,
risk-free interest rate of 6.23% and expected volatility of 46.5%.
NOTE 13 -- CAPITAL TRANSACTIONS
PRIVATE PLACEMENTS
In April 1996, the Company completed a private placement of 650,000 shares
of its Common Stock and warrants for an additional 1,000,000 shares, for an
aggregate purchase price of $200,000. The warrants are exercisable for a period
of three years commencing after the IPO at an exercise price equal to $7.00 per
share.
F-15
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INITIAL PUBLIC OFFERING
In February 1997, the Company completed an initial public offering of
860,000 shares of its Common Stock and realized net proceeds of approximately
$4,700,000 after stock offering costs. In connection with this offering, the
Company sold to the underwriter, for $80, warrants to purchase up to an
additional 80,000 shares of the Company's Common Stock at an excersice price
equal to $11.20 per share. The Company has also agreed to retain the Underwriter
as management and financial consultants for a two-year period at an annual rate
of $60,000 per annum, payable in advance. In connection with the IPO, certain
securityholders have agreed not to sell their shares for up to two years from
the offering date, without the prior written consent of the Underwriter.
STOCK GRANTS
In 1997 the Company issued 24,000 shares of its Common Stock for services
rendered. The Company has recorded a charge to operations in the amount of
$332,625 due to the issuance of these shares.
STOCK SUBSCRIPTION
On December 24, 1997, the Company entered into a stock subscription
agreement for the sale of 64,000 shares of its Common Stock for an aggregate
purchase price of $400,000. Pursuant to the agreement, 48,000 shares were paid
for and issued on that date and the remaining 16,000 shares were paid for and
issued on February 20, 1998. In connection therewith, the Company also issued
four (4) year warrants to purchase up to an additional 33,000 shares of Common
Stock, at an exercise price of $7.80 per share; provided, that, in lieu of cash
payments for exercising the shares, the warrant holder is entitled to accept a
smaller number of shares of Common Stock based on the spread between the per
share exercise price and the then public market price of a share of the
Company's Common Stock. Under the agreement, the Company is required to register
these shares no later than April 30, 1998.
An option was also granted, to purchase, on or before June 30, 1998, an
additional 10,000 shares of Common Stock at an aggregate purchase price of
$62,500. In connection therewith, the Company will also issue four (4) year
warrants to purchase up to an additional 5,000 shares of Common Stock, under the
same terms as the previous warrants.
ESCROW SHARES
An aggregate of 1,000,000 shares of the Company's Common Stock, owned
beneficially by its President, have been designated as escrow shares. The escrow
shares are not assignable nor transferable until certain earnings or market
price criteria have been met. If the conditions have not been met, such shares
will be cancelled and contributed to the Company's capital.
The escrow shares will be released from escrow on a pro-rata basis, if and
only if, one or more of the following conditions are met:
1. 250,000 shares will be released if the Company's pre-tax income,
exclusive of extraordinary items amounts to at least $1,800,000 for the
year ended December 31, 1997 or the average bid price of the Common Stock
averages in excess of $15 per share for 30 consecutive days during the 12
month period commencing on the date of a proposed public offering.
2. 300,000 shares will be released if the Company's pre-tax income,
exclusive of extraordinary items amounts to at least $4,000,000 for the
year ended December 31, 1998 or the average bid price of the Common Stock
averages in excess of $20 per share for 30 consecutive days during the 12
month period commencing 12 months from the date of a proposed public
offering.
3. 450,000 shares will be released if the Company's pre-tax income,
exclusive of extraordinary items amounts to at least $6,000,000 for the
year ended December 31, 1999 or the average bid price
F-16
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Common Stock averages in excess of $25 per share for 30 consecutive
days during the 12 month period commencing 24 months from the date of a
proposed public offering.
The shares will also be released under certain circumstances of the Company
is acquired or merged.
As shares are released from escrow, they will be accounted for as reissued
for services rendered and the fair value of such shares will be charged to
operations as compensation expense with an offset to permanent capital. These
charges will not be deductible for income tax purposes.
In February 1998, pursuant to the terms of the escrow agreement 250,000
shares were forfeited and returned to the Company.
NOTE 14 -- COMMON STOCK ISSUED WITH GUARANTEED SELLING PRICE
On March 31, 1997, the Company and TTR Israel were served with claims by an
individual demanding, among other things, royalties at the rate of 5% of the
proceeds from the sales of products in which the plaintiff claims to have
provided consulting services towards its development.
On May 6, 1997, the Company entered into a settlement agreement whereby the
Company issued the plaintiff 15,000 shares of its Common Stock, subject to the
following: (a) If the Company registers any additional shares for sale it will
include these shares in its registration statement; (b) Following the
registration of these shares and continuing for a 180 day period, if the share
price averages in excess of $15.50 per share over two consecutive days the
Company's obligation to the consultant terminates. If the share price is not
met, then during the three days commencing after 180 days the Company will remit
to the consultant the difference between $15.50 per share and the actual
consideration received. The Company has established a temporary equity account
to record its maximum liability from the guarantee. Payment of any shortfall
will be charged to this account. Any balance remaining at the end of the holding
period will be credited to permanent capital. The Company recorded an expense of
$232,500 due to the issuance of these shares.
In January 1998, the Plaintiff sold the shares at an aggregate price of
$77,156. Under the terms of the settlement agreement, the Company was required
to remit to him approximately $155,344. On January 19, 1998, the Company
remitted to the plaintiff $57,344 and agreed to remit the balance of $100,000 by
June 15, 1998, together with an additional $5,000 in consideration of deferring
the payment. The deferred amount has been secured by a guarantee issued by an
Israeli Bank.
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 107, Disclosures About Fair Value of Financial
Instruments, which requires that all entities disclose the fair value of
financial instruments, as defined, for both assets and liabilities recognized
and not recognized in the statement of financial condition. Substantially all of
the Company's financial instruments, consisting primarily of short-term
borrowings and promissory notes payable, are carried at, or approximate, fair
value because of their short-term nature or because they carry market rates of
interest.
NOTE 16 -- COMMITMENTS AND CONTINGENCIES
CONSULTING AND EMPLOYMENT AGREEMENTS
a) In August 1994, TTR Israel entered into an employment agreement with one
of its officers. The agreement has a three-year term which provides for annual
compensation of $60,000, subject to adjustment. The agreement may terminate with
60 days prior notice. In the event the termination is without cause then the
officer will be entitled to continue to receive his salary for an additional
twelve
F-17
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
month period. At the end of the initial three-year term, the agreement
automatically renews for one-year periods.
b) In October 1995, the Company entered into a three-year marketing
consulting agreement, pursuant to which the consultant receives a monthly fee of
$4,800 per month. On April 15, 1997, the Board of Directors approved the grant
of 15,000 shares of its Common Stock to the consultant for consulting services
rendered. The Company recorded a charge to operations of $223,125 upon the
issuance of these shares.
c) In December 1995, TTR Israel entered into an employment agreement with
its director of product research and development. The agreement has a one-year
term, renewable for additional one-year terms. In consideration of eliminating
the provision for royalty payments, the agreement was amended to increase the
annual base compensation to $96,000 plus fringe benefits. The Company has also
agreed to pay a one time bonus of $50,000, subject to completion of the IPO.
d) In September 1996, TTR Israel entered into a three-year employment
agreement with its Chief Executive Officer. The agreement provides for annual
compensation of approximately $100,000, subject to adjustment and is renewable
for additional one-year periods at the end of the initial term. Within the
initial term the employee may terminate the agreement with 60 days prior notice
and with 90 days notice thereafter.
The Company has also agreed to grant, on the date on which the Company's
IPO is declared effective, warrants to purchase up to 217,473 shares of Common
Stock, at an exercise price of $.01 per share. The company recorded deferred
compensation expense of $1,522,300 and is amortizing this amount over the
vesting period. The warrants will vest over a four-year period.
e) In December 1996, TTR Israel entered into a two-year consulting
agreement. The agreement provides for monthly fees of $6,100 and is renewable
for one additional year. The agreement may be terminated by either party with 30
days' prior notice. Subsequently, the consultant was also granted options to
purchase 15,000 shares of the Company's Common Stock at $7.00. The options will
vest over a four-year period commencing with the date of grant.
f) In February 1997, TTR Israel entered into an agreement with the
University of Arizona ('the University'), to become a sponsor of the Optical
Data Storage Center ('ODSC') at the University. Funding for the ODSC is provided
by industrial organizations, including TTR Israel. TTR Israel has undertaken to
contribute $50,000 to the ODSC each year for a period of three years, payable
quarterly. In consideration of this sponsorship, TTR Israel will receive voting
power in the decision-making body of the ODSC, proportional to its contribution.
In August 1997, TTR Israel decided to terminate the agreement.
g) On March 11, 1997, the Company entered into a one-year employment
agreement with an officer of the Company. The agreement provides for monthly
compensation of $5,000 and is automatically renewable for additional one-year
terms. The agreement may be terminated by either party with 30 or 60 days' prior
notice during the first and second anniversary, respectively, and with 90 day's
notice thereafter. The Company has also agreed, subject to underwriters
approval, to issue to the employee 50,000 shares of its Common Stock. Pursuant
to an escrow agreement, 25,000 shares will be released from escrow on July 31,
1997 and 25,000 on January 31, 1998. The grant of these shares will result in a
charge to deferred compensation in the amount of $500,000 which is being
amortized over one year. The officer was also granted 40,000 qualified and
60,000 nonqualified options to purchase shares of the Company's Common Stock, at
an exercise price of $10.00 and $5.00 per share, respectively. The options will
vest over a four-year period commencing with the date of grant. The issuance of
the nonqualified options resulted in a charge to deferred compensation in the
amount of $300,000. This amount is being amortized over the vesting period.
h) On March 1, 1997, the Company entered into a one year consulting
agreement which provided for a lump-sum payment of $100,000 to be paid upon
signing.
F-18
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OPERATING LEASES
The Company and TTR Israel have each entered into a lease agreements for
office space. Future minimum rentals on this lease as of December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- --------------------------------------------------------------
<S> <C>
1998.......................................................... $ 68,549
1999.......................................................... 68,549
2000.......................................................... 68,549
2001.......................................................... 40,785
2002.......................................................... 10,263
--------
$256,695
--------
--------
</TABLE>
NOTE 17 -- GEOGRAPHIC DATA
<TABLE>
<CAPTION>
U.S. % of Total Israel % of Total
---- ---------- ------ ----------
<S> <C> <C> <C> <C>
For the year ended December 31, 1997:
Revenue -- -- -- --
Operating loss (1,495,108) 38.68% (2,370,628) 61.32%
Identifiable assets 633,285 53.28% 555,342 46.72%
For the year ended December 31, 1996:
Revenue -- -- -- --
Operating loss (205,543) 22.92% (691,236) 77.08%
Identifiable assets 654,250 54.90% 537,438 45.10%
</TABLE>
NOTE 18 -- LICENSING AGREEMENTS
In October 1997, the Company entered into a five-year Development and OEM
Licensing Agreement with Doug Carson & Associates (DCA), a supplier of mastering
interface systems (MIS) that produce CD-Roms and DVD optical media. The Company
granted DCA an exclusive, nontransferable, royalty free, world-wide license to
produce and market DiscGuard'tm' enhanced MIS for CD's and DVD's through
December 31, 1998. In the event that DCA sells or upgrades at least 100 units of
its enhanced MIS systems, then the exclusivity provision will be extended
through December 31, 1999. After December 31, 1999, the Company and DCA will
negotiate mutually acceptable minimum sales and upgrade levels to retain the
exclusivity provision.
In November 1997, the Company entered into a five-year Development and OEM
License Agreement with Nimbus CD International Inc. (Nimbus), an optical media
manufacturer, whereby Nimbus was granted an exclusive license to produce
DiscGuard'tm' enhanced media. The exclusivity provision of the agreement is due
to terminate in September 1998. Under the licensing agreement, the Company will
be entitled to a percentage of the proceeds of the premium charged by Nimbus for
DiscGuard'tm' enhanced media.
NOTE 19 -- SUBSEQUENT EVENTS
PROPOSED PUBLIC OFFERING
On April 1, 1998, the Company entered into a letter of intent with an
underwriter for a firm commitment public offering of 2,500,000 shares of the
Company's Common Stock. The offering price will be at or about the market price
of the Common Stock of the Company immediately prior to the effective date of a
Registration Statement. In connection therewith, the Company also entered into a
consulting agreement with the underwriter. The agreement provides for an advance
payment of $50,000, four-year warrants to purchase up to 25,000 shares of the
Company Stock at an exercise price of $5 5/8, and a fee of 5% of the exercise
price of certain outstanding warrants that are converted to Common Stock.
CONSULTING AGREEMENT
On April 1, 1998, the Company retained the services of an individual to
perform consulting services related to the operation and development of the
Company's business under a one-year consulting agreement. The Company has paid a
$10,000 non-refundable retainer. In addition, the agreement provides for the
payment of $250,000 and the issuance of 50,000 unregistered shares of its
Common Stock upon the closing of the Company's proposed public offering.
F-19
<PAGE>
<PAGE>
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRIVATE PLACEMENT
On April 6, 1998, the Company commenced a private offering of up to 20
Units, each unit consisting of $50,000 principal amount of 10% Promissory Notes
and Warrants to purchase 10,000 shares of Common Stock. The notes bear interest
at the rate of 10% per annum and become due and payable together with accrued
interest at the earlier of one year or 30 days following the consummation by the
Company of any public or private equity or debt financing exceeding $1,000,000.
The warrants are exercisable for a four-year period at an exercise price equal
to the lower of the offering price of Common Stock to be sold in a subsequent
firm commitment underwriting of at least $1,000,000, or $8.00. The closing of
the private placement is subject to the sale of a minimum of 10 units.
F-20
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as......................... 'tm'
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the consolidated financial statements accompanying the filing of
Form 10-KSB and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 450,040
<SECURITIES> 0
<RECEIVABLES> 100,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 681,578
<PP&E> 416,045
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,188,627
<CURRENT-LIABILITIES> 232,899
<BONDS> 0
<COMMON> 4,272
0
0
<OTHER-SE> 672,957
<TOTAL-LIABILITY-AND-EQUITY> 1,188,627
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,865,736
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,445
<INCOME-PRETAX> (4,119,612)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,119,612)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,119,612)
<EPS-PRIMARY> (1.35)
<EPS-DILUTED> (1.35)
</TABLE>
