Filed pursuant to Rule 424(b)(3)
Registration No. 333-32662
TTR TECHNOLOGIES, INC.
10,468,505 shares of Common Stock
We design and develop anti-piracy technologies that provide copy
protection for electronic content distributed on optical media and over the
Internet.
Holders of our common stock identified in this prospectus are offering all
of the shares to be sold in the offering. These shares may be offered any time
after the date of this prospectus in one or more types of transactions,
including through broker-dealers, in over-the-counter market or directly by the
selling stockholders in negotiated transactions. Prices for the shares may be
the market prices prevailing at the time of sale or may be negotiated by the
selling stockholder and the buyer. For additional information on the methods of
sale, you should refer to the section entitled "Plan of Distribution." We will
not receive any of the proceeds from the offering.
Each of the selling stockholders may be deemed to be an "underwriter," as
such term is defined in the Securities Act of 1933.
Shares of our common stock trade on the OTC Electronic Bulletin Board
under the symbol "TTRE". The closing sale price of the common stock on May 10,
2000 on the OTC Electronic Bulletin Board was $4.00 per share.
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This investment involves a high degree of risk. You should purchase shares
only if you can afford a complete loss of your investment. See "Risk Factors"
beginning on Page 2 of this Prospectus.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The information in this prospectus is not complete and may be changed. The
stockholders selling our common stock pursuant to this prospectus may not sell
these shares until the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus is not an offer to sell these
shares and it is not an offer to buy these shares in any state where the offer
or sale is not permitted.
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The date of this prospectus is May 11, 2000
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TABLE OF CONTENTS
Page
Prospectus Summary............................................. 1
Risk Factors................................................... 2
Disclosure Regarding Forward-Looking Statements ............... 10
Dividend Policy................................................ 10
Use of Proceeds ............................................... 10
Price Range of Common Stock.................................... 10
Selected Consolidated Financial Data........................... 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 12
Business....................................................... 15
Conditions in Israel........................................... 23
Management..................................................... 25
Certain Relationships and Related Transactions................. 30
Principal and Selling Stockholders............................. 31
Description of Securities...................................... 35
Plan of Distribution........................................... 37
Legal Matters.................................................. 38
Experts........................................................ 38
Where to Find More Information................................. 39
Index to Financial Statements.................................. F-1
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PROSPECTUS SUMMARY
This summary highlights certain information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, especially the
risks of investing in our common stock discussed under "Risk Factors." Except as
otherwise noted, the information in this prospectus does not give effect to the
conversion of outstanding convertible securities or to the exercise of
outstanding options and warrants. Unless otherwise noted, references in this
prospectus to "TTR," "we," "our" and "us" refer to TTR Technologies, Inc., a
Delaware corporation, and our wholly owned subsidiary, TTR Technologies, Ltd.,
an Israeli company.
We design and develop anti-piracy software technologies that provide copy
protection for electronic content distributed on optical media and over the
Internet. Our proprietary anti-piracy technology, MusicGuard(TM), is a unique
hardware-based technology designed to prevent the unauthorized copying of audio
content distributed on CDs. Our copy protection technologies are designed to be
transparent to the legitimate end-user.
As of November 24, 1999, we entered into an agreement with Macrovision
Corporation to jointly design and develop and market a copy protection product
designed to thwart the illegal copying of audio content on CDs, DVDs and other
optical media. The new product will be based primarily upon our MusicGuard
technology as well as related Macrovision technology and will be jointly owned
by us and Macrovision. We expect that the immediate application of the
technology we are developing with Macrovision will be of interest for the music
distribution business and recording studios whose products are customarily
distributed on CDs. We granted to Macrovision an exclusive world-wide royalty
bearing license to design, develop and market the copy protection technology
which we are jointly developing.
Our immediate goal is to establish the proposed audio content protection
technology which we and Macrovision are developing as the leading product in the
target market of audio content copy protection for the high-volume recording
industry. Additionally, we are actively developing other technologies and
looking to acquire technologies which are synergistic with our current business
and will enable us to leverage our knowledge base and skill.
We were organized in July 1994. We have an Israeli subsidiary, organized
in December 1994, through which we conduct research and development. Our
principal executive offices are located at 2 HaNager Street, Kfar Saba, Israel,
telephone 011-972-9-766-2393. We also have a mailing address at 67 Wall Street,
Suite 2411, New York, New York 10005 and can be reached by telephone in New York
at 212-323-8284. Our Web site is www.ttrtech.com. Information contained on our
Web site is not, and should not be deemed to be, a part of this prospectus.
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The Offering
<TABLE>
<S> <C>
Securities offered..................10,468,505 shares of common stock. (1)
Shares outstanding..................15,967,890 shares of common stock. (2)
Use of proceeds.....................We will not receive any proceeds from the sale of
common stock by the selling stockholders. We may,
however, receive proceeds from the sale of certain of
the warrants held by certain of the selling
stockholders.
</TABLE>
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(1) Includes (i) 7,552,493 shares of common stock held by certain selling
stockholders, and (ii) 2,916,012 shares of common stock issuable upon exercise
of certain warrants and options held by certain selling stockholders.
(2) Does not include (a) up to an aggregate of 1,166,400 shares of our common
stock issuable upon exercise of options granted under our 1996 Stock Option
Plan, (b) any of the shares described in clause (ii) in footnote (1) above, or
(c) 95,000 shares issuable upon exercise of certain outstanding options and
warrants that are not held by the selling stockholders.
We are registering the shares offered hereby in order to satisfy various
obligations to the selling stockholders to register their resale of our common
stock. See "Plan of Distribution."
RISK FACTORS
This offering involves a high degree of risk. You should be able to bear a
complete loss of your investment. You should carefully consider the risks
described below and the other information in this prospectus before deciding to
invest in shares of our common stock. If any of the following risks actually
occur, our business, financial condition and results of operations would likely
suffer. In such case, the market price of our common stock could decline, and
you may lose all or a part of the money you pay to buy our common stock.
Our relationship with Macrovision is very important to us, since it will
be the exclusive licensee of our anti-piracy products and it is responsible for
marketing them.
As of November 24, 1999, we entered into a ten year agreement with
Macrovision to jointly develop a commercially viable anti-piracy protection
technology and product for audio content distribution on optical media. We
granted to Macrovision exclusive worldwide royalty bearing rights to our
proprietary anti-piracy technology, MusicGuard, which serves as the primary
basis for the proposed audio content protection technology. Under the terms of
our agreement, Macrovision is responsible for promoting and marketing the
proposed music protection technology or product. Macrovision has the discretion
to determine the staffing and resources it allocates to commercialize the
technology consistent with Macrovision's good faith determination as to the
technology's commercial potential. We also granted to Macrovision exclusive
rights to our proprietary CD software anti-piracy protection technology,
DiscGuard, which is the only commercially available product we currently have.
Only a limited portion of the license for DiscGuard is royalty bearing and
Macrovision is not required to pay any minimum royalties in order to retain its
exclusivity. We
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expect that sales through Macrovision will account for most of our revenues for
at least the next two years. We believe that the rapid penetration of the
proposed music protection technologies in the recording industry in the United
States and Europe to be crucial to our success. If we are unable to effectively
manage and maintain our relationship with Macrovision or for any reason
Macrovision cannot successfully market MusicGuard, our business will be
materially adversely affected. In addition, our condition could be adversely
affected by changes in the financial condition of Macrovision or by any other
changes to Macrovision's business.
We do not currently have any commercially viable products or technologies
and we cannot assure you that we will develop any.
MusicGuard, our proprietary anti-piracy protection technology for audio
content distributed on CDs, is not currently commercially viable but will serve
as the primary basis for the proposed music protection technology that we and
Macrovision are jointly designing and developing. Under the terms of our
agreement with Macrovision, we will work jointly with Macrovision to complete a
product suitable for commercial launch. We estimate that this project will take
nine months, six months until the commercial launch and three months following
the commercial launch. We have also given to Macrovision an exclusive worldwide
partially royalty bearing license to DiscGuard, which we launched commercially
in February, 1998. We expect that Macrovision will use components of DiscGuard
to support its CD-ROM product, SafeDisc(TM). Although we are working to develop
technologies with applications in other areas, these technologies are at an
early stage. Currently, we have no other commercially viable product or
technology.
Even if we develop other commercially viable technologies, the right of
first refusal we have granted to Macrovision with respect to certain products
may impair our ability to exploit them.
Under the terms of our agreement with Macrovision, we have granted to
Macrovision first refusal rights until December 31, 2009 with respect to any
music protection technology we develop which is not included in the license to
Macrovision and any Internet digital rights management technologies we develop
which are applicable to music, music video, video, software or data publishing
products or markets. These rights include rights of ownership if we decide to
sell the technology or worldwide exclusive marketing or distribution rights if
we decide to license the technology. Our obligation is to negotiate a sale or
license to Macrovision in good faith should we receive a bona fide offer from a
third party to purchase or license the technology and should Macrovision notify
us of its interest in acquiring the technology. As is ordinarily the case where
a right of first refusal is granted, the existence of this right may impair our
ability to fully exploit the commercial potential inherent in other technology
we may develop which is subject to this right by creating the possibility that
an interested third party may abstain from making an offer for our technology
due to a possible concern on the part of such third party that its offer will be
utilized by us solely for negotiating an offer from Macrovision on more
favorable terms.
We have lost money in every quarter and year, and we expect these losses
to continue in the foreseeable future.
Since we began our operations in 1994, we have lost money in every quarter
and year. As of December 31, 1999, we had an accumulated deficit of
approximately $24.8 million. If our revenue does not increase and we cannot
adjust our level of spending adequately, we may not generate sufficient revenue
to become profitable. Even if we do become profitable, we may not be able to
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sustain or increase profitability on a quarterly or annual basis in the future.
Our ability to generate revenue depends primarily upon our ability to jointly
develop with Macrovision the audio content copy protection technology to the
point it becomes commercially viable and Macrovision's success in promoting and
marketing the technology.
We have only been in business for a short period of time, so your basis
for evaluating us is limited.
We are a development stage company with a limited history of operations.
Prior to the commencement of our joint efforts with Macrovision to develop a
commercially viable audio content protection product and before our software
product, DiscGuard, first became commercially available in February 1998, we
were engaged primarily in research and development. As a result, there is a
limited history of operations for evaluating our business. You must consider the
risks and difficulties frequently encountered by early stage companies in new
and rapidly evolving markets, including the audio content copy protection and
anti-piracy market. Some of these risks and uncertainties relate to our ability
to:
o complete, together with Macrovision, the design and development of audio
content protection technology of a commercially viable product or
technology;
o stay ahead of the efforts of hackers and counterfeiters to circumvent our
copy protection technologies;
o respond effectively to actions taken by our competitors;
o build our organizational and technical infrastructures to manage our
growth effectively;
o design, develop and implement effective products for existing clients and
new clients;
o extend MusicGuard protection to DVDs; and
o attract, retain and motivate qualified personnel.
If we are unsuccessful in addressing these risks and uncertainties, our
business, financial condition and results of operations will be materially and
adversely affected.
The market for audio content copy protection technology is unproven.
The market for copy protection technology for audio content distribution
on CDs, especially in the consumer multi-media market, is unproven. For us to be
successful in entering this market, recording studios and artists must accept
copy protection generally and also adopt the solution that we are developing
with Macovision. There can be no assurance that copy protection of multi-media
audio content distributed on CDs will be widely commercially accepted. For
example, consumers may react negatively to the introduction of copy protected
CDs if they are prevented from copying the content of their favorite audio
content. Moreover, copy protection may not be effective or compatible with all
hardware platforms or configurations or may prove to be easily circumvented.
Further, the technology we are developing with Macrovision may not achieve or
sustain market acceptance under emerging industry standards. If the market for
copy protection of audio content distributed on CDs fails to develop or develops
more slowly than expected, or if MusicGuard does
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not achieve or sustain market acceptance, our business, financial condition and
results of operations would be materially adversely affected.
You should not rely on our quarterly operating results as an indication of
how we will do in the future.
Our quarterly operating results may vary significantly in the foreseeable
future due to a number of factors that could affect our revenue, expenses or
prospects during any particular quarter. These factors include:
o the success of Macrovision in promoting and marketing any music protection
technology developed through our joint efforts.
o the demand for audio content anti-piracy protection in general and for CDs
in particular, and, potentially, for DVDs;
o the degree of acceptance of our copy protection technologies by recording
studios and artists;
o changes in our operating expenses;
o changes in fees paid for copy protection of audio content distributed on
CDs resulting from competition or other factors;
o economic conditions specific to the recording industry;
o anticipated seasonality of revenues relating to sales of music CDs to
consumers in our target market.
In any given quarter, we may expend substantial funds and management
resources and yet not obtain adequate revenue, and we may not be able to adjust
spending in a timely manner to compensate for any unexpected shortfall in our
revenue. Any significant shortfall could have an immediate material and adverse
effect on our business, financial condition and results of operations.
Due to all of the foregoing factors, and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our operating results will be below the expectations of public
market analysts and investors. In this event, the price of our common stock
would likely fall.
For at least the next two years, we expect to derive most of our net
revenues and operating income from royalties collected from Macrovision in
respect of sales of copy protection technology or products. We cannot assure you
that we will receive any revenues from these royalties or if revenues are
received, that they will grow significantly or at all. Any growth in revenues
from these fees will depend on the use of our copy protection technology by a
larger number of recording studios and artists. In order to increase our market
penetration, we must persuade recording studios and artists that the cost of
licensing our technology is outweighed by the increase in revenues from
additional sales of the copy protected material that the recording studios and
artists would achieve as a result of using copy protection.
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There are many competitors in the copy protection industry and we may not
be able to compete effectively against them.
There is currently no commercially available technology which prevents the
faithful copying of compact discs. There can be no assurance that companies with
substantially greater financial, technological, marketing, personnel and
research development resources than ours will not develop and begin marketing a
similar technology. While no technology is currently available, the Secure
Digital Music Initiative is a forum of companies who have agreed to develop a
standard for copy protection of digital music. The standard developed and being
improved upon by the Initiative will apply to next generation portable playback
devices. There can be no assurance that if and when the standard is implemented,
the MusicGuard technology will be able to effectively compete against copy
protection technologies based on the Initiative's standard.
Third parties may be able to circumvent our anti-piracy technology.
We must continually enhance and upgrade audio content protection
technology to stay ahead of the efforts of counterfeiters and hackers to
circumvent our technologies, even in the face of the new United States Digital
Millennium Copyright Act. The Act outlaws copy protection circumvention devices
and technologies beginning in May 2000 and currently provides for both criminal
and civil penalties for companies or individuals who import, produce or
distribute devices designed to circumvent copy protection devices and
technologies. It is conceivable that counterfeiters and hackers could develop a
way to circumvent our copy protection techniques, which may result in a
potentially substantial decrease in the demand for our products. Additionally,
music rights owners could choose not to use our anti-piracy technology if they
believe that our technology will be unable to deter counterfeiters or if they
believe it interferes with legitimate consumer use of the original copyrighted
product. In this regard, the copy protection technologies are intended to
prevent both consumer copying and professional remastering and replication. Any
reduction in demand for our products could have a material adverse effect on our
business, financial condition and results of operations.
We are vulnerable to technological obsolescence.
The proposed audio protection technology is based upon a single set of
core technologies. The market for this technology and products is characterized
by rapid change, often resulting in product obsolescence or short product life
cycles. Although we are not aware of any developments in the audio content
protection industry which would render our planned products less competitive or
obsolete, there can be no assurance that future technological changes or the
development of new or competitive products by others will not do so.
We have very few employees and are particularly dependent on our Chief
Technology Officer.
We have a small number of employees. Although we believe we maintain a
core group sufficient for us to effectively conduct our operations, the loss of
certain of our key personnel could, to varying degrees, have an adverse effect
on our operations and product development. The loss of Dr. Baruch Sollish, our
Chief Technology Officer, would have a material adverse affect. We have not
obtained "key-man" life insurance on the life of Dr. Sollish. Our key employees
and corporate officers all reside in Israel.
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We are subject to risks associated with international operations.
We conduct business from our facilities in Israel and the United States,
and through our exclusive licensee, Macrovision. Our international operations
and activities subject us to a number of risks, including the risk of political
and economic instability, difficulty in managing foreign operations, potentially
adverse taxes, higher expenses and difficulty in collection of accounts
receivable. In addition, although we receive most of our revenue in U.S.
dollars, a substantial portion of our payroll and other expenses are paid in the
currency of Israel, where most of our employees reside and our research and
development operations are located. Because our financial results are reported
in U.S. dollars, they are affected by changes in the value of the various
foreign currencies that we use to make payments in relation to the U.S. dollar.
We do not currently cover known or anticipated operating exposures through
foreign currency exchange option or forward contracts.
We are subject to risks associated with operations in Israel.
Our Israeli subsidiary maintains offices and research and development
facilities in Israel and is directly affected by prevailing economic, military
and political conditions that affect Israel.
We need to establish and maintain licensing relationships with companies
in related fields.
Our success in developing and commercializing other technologies will
depend in part upon our ability to establish and maintain licensing
relationships with companies in related business fields, including international
distributors. We believe that these relationships can allow us greater access to
manufacturing, sales and distribution resources. However, the amount and timing
of resources to be devoted to these activities by these other companies may not
be within our control. We may not be able to maintain relationships or enter
into beneficial relationships in the future. Other parties may not perform their
obligations as expected. Our reliance on others for the development,
manufacturing and distribution of our technologies and products may result in
unforeseen problems. There can be no assurance that our licensees will not
develop or pursue alternative technologies either on their own or in
collaboration with others, including our competitors, as a means of developing
or marketing products targeted by the collaborative programs and by our
products.
Our efforts to protect our intellectual property rights may not be adequate.
Our success depends on our proprietary technologies. We rely on a
combination of patent, trademark, copyright and trade secret laws, nondisclosure
and other contractual provisions, and technical measures to protect our
intellectual property rights. Our patents, trademarks or copyrights may be
challenged and invalidated or circumvented. Any patents that issue from our
pending or future patent applications or the claims in pending patent
applications may not be of sufficient scope or strength or be issued in all
countries where our products can be sold or our technologies can be licensed to
provide meaningful protection or any commercial advantage to us. Others may
develop technologies that are similar or superior to our technologies, duplicate
our technologies or design around our patents. Effective intellectual property
protection may be unavailable or limited in certain foreign countries. Despite
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise use aspects of processes and devices that we regard as
proprietary. Policing unauthorized use of our proprietary information is
difficult, and there can be no assurance that the steps we have taken will
prevent misappropriation of our technologies. In the event that our intellectual
property protection is insufficient to protect our intellectual property rights,
we could
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face increased competition in the market for our products and technologies,
which could have a material adverse effect on our business, financial condition
and results of operations.
Litigation may be necessary in the future to enforce any patents that may
issue and other intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others. There can
be no assurance that any litigation of these types will be successful.
Litigation could result in substantial costs, including indemnification of
customers, and diversion of resources and could have a material adverse effect
on our business, financial condition and results of operations, whether or not
this litigation is determined adversely to us. In the event of an adverse ruling
in any litigation, we might be required to pay substantial damages, discontinue
the use and sale of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses to infringed technology. Our
failure to develop or license a substitute technology could have a material
adverse effect on our business, financial condition and results of operations.
The rights of first refusal we have granted to Macrovision relating to the
sale of our equity securities may impair our ability to obtain other financing.
In the January 12, 2000 stock purchase agreement under which we sold to
Macrovision $4 million of our common stock, we granted to Macrovision rights of
first refusal to purchase equity securities (including securities convertible or
exchangeable into common stock) we propose to sell to third parties if the
amount of the securities to be sold would constitute a majority of our
outstanding common stock. Subject to some exceptions, we further granted to
Macrovision a right to purchase its pro rata share (based on Macrovision's then
current ownership of common stock) of any equity securities we offer in private
transactions above a certain amount. The existence of these rights may impair
our ability to obtain equity financing from third parties on terms satisfactory
to us or at all because investors may be reluctant to devote the time and
expense necessary to negotiate the terms of a transaction which we may not be
able to consummate with them if Macrovision elects to exercise its rights.
However, Macrovision waived its right of first refusal with respect to our
private placement in February 2000 of 1,800,000 shares of Common Stock and
900,000 Class A Warrants for an aggregate purchase price of $10 million.
We face Year 2000 risks.
Many currently installed computer systems and software products are unable
to distinguish between twentieth century dates and twenty-first century dates
because such systems may have been developed using two digits rather than four
to determine the applicable year. This could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced to comply with such "Year
2000" requirements. Some of these concerns have continued to persist after
January 1, 2000. Our business depends on the operation of numerous systems that
could potentially be affected by Year 2000 related problems. Those systems
include hardware and software systems used internally by us in the management of
our business; hardware and software products developed by us; the internal
systems of our customers and suppliers; and non-information technology systems
and services used by us in the management of our business, such as telephone
systems and building systems. Success of our Year 2000 readiness efforts may
depend on the success of our customers in dealing with their Year 2000 issues.
Although we believe that our Year 2000 readiness efforts are designed to
appropriately identify and address those Year 2000 issues that
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are within our control, there can be no assurance that our efforts will be fully
effective or that the Year 2000 issues will not have a material adverse effect
on our business, financial condition or results of operations. We do not
presently have a contingency plan for handling Year 2000 issues that are not
detected and corrected prior to their occurrence. Any failure by us to address
any unforeseen Year 2000 issue could adversely affect our business, financial
condition and results of operations.
Future sales of our common stock by our holders of outstanding stock, options
and warrants could have an adverse effect on the market price of our common
stock.
We anticipate that some or all of the selling stockholders may from time
to time sell all or part of the shares offered hereby. In addition, there are
currently outstanding options or warrants to purchase 3,682,412 shares of our
common stock (comprised of 1,166,400 options granted under our 1996 Stock Option
Plan, 2,421,012 options and warrants held by selling stockholders with exercise
prices ranging from $1.50 to $8.84 per share and 95,000 options and warrants not
held by selling stockholders) and warrants to purchase an additional 495,000
shares of our common stock which are issuable upon exercise of certain
outstanding warrants with an exercise price of $21.22 per share. The market
price of our common stock could decline as a result of sales by our existing
stockholders of a large number of shares of common stock in the market after
this offering, or the perception that these sales may occur. These sales also
might make it more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate.
Our stock price is volatile and could continue to be volatile.
Investment interest in our common stock may not lead to the development of
an active or liquid trading market. The market price of our common stock has
fluctuated in the past and is likely to continue to be volatile and subject to
wide fluctuations. In addition, the stock market has experienced extreme price
and volume fluctuations. The stock prices and trading volumes for many "high
tech" companies fluctuate widely for reasons that may be unrelated to their
business or results of operations. The market price of our common stock may
decline below the offering price. General economic, market and political
conditions could also materially and adversely affect the market price of our
common stock and investors may be unable to resell their shares of common stock
at or above the offering price.
It may be difficult for a third party to acquire us.
Provisions of Delaware law could make it more difficult for a third party
to acquire us, even if it would be beneficial to our stockholders.
Penny Stock Regulation may be applicable to investment in our shares.
Broker-dealer practices in connection with transactions in "penny stocks"
are regulated by certain penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks generally are equity securities with a price
of less than $5.00 (other than securities registered on certain national
securities exchanges or quoted on the Nasdaq system, provided that current
prices and volume information with respect to transactions in such securities
are provided by the exchange or system). The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market. The
broker-dealer also must
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provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and monthly account statements showing the market value of each penny stock held
in the customer's account. In addition, the penny stock rules generally require
that prior to a transaction in a penny stock the broker-dealer make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "Forward-Looking Statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this prospectus, including statements
regarding our future financial position, business strategy, budgets, project
costs and plans and objectives of management for future operations, are
Forward-Looking Statements. In addition, Forward-Looking Statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "except," "should," "intend," "estimate," "anticipate," "believe," or
"continue" or their negatives or variations of these terms or similar
terminology. Although we believe that the expectations reflected in such
Forward-Looking Statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors (or Cautionary
Statements) that could cause actual results to differ materially from our
expectations are disclosed under "Risk Factors" and elsewhere in this
prospectus. All subsequent written and oral Forward-Looking Statements
attributable to us, or to persons acting on our behalf, are expressly qualified
in their entirety by the Cautionary Statements.
DIVIDEND POLICY
We have never paid a cash dividend on our common stock. Payment of
dividends is at the discretion of the board of directors. The board of directors
plans to retain earnings, if any, for operations and does not intend to pay
dividends in the foreseeable future.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling stockholders. We may receive up to $11,557,865 in proceeds from the
exercise by certain of the selling stockholders of warrants to purchase up to an
aggregate of 2,421,012 shares of our common stock and an additional $10,503,900
upon exercise of 495,000 warrants issuable upon exercise of certain outstanding
warrants. The warrants have exercise prices ranging from $1.50 to $21.22 per
share and are exercisable until various dates through February 28, 2005 (and
with respect to the warrants issuable upon exercise of certain outstanding
warrants, three years after the issuance date). The resale of the common stock
underlying these warrants has been registered in the registration statement of
which this prospectus is a part.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the OTC Electronic Bulletin Board of the
National Association of Securities Dealers, Inc., under the symbol "TTRE".
Although trading in our common stock has occurred on a relatively consistent
basis, the volume of shares traded has been sporadic.
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There can be no assurance that an established trading market will develop, that
the current market will be maintained or that a liquid market for our common
stock will be available in the future. Investors should not rely on historical
stock price performance as an indication of future price performance.
The following table summarizes the high and low bid prices of TTR's common
stock as reported on the OTC Electronic Bulletin Board for the periods
indicated. The closing price of our common stock on May 10, 2000 was $4.00
per share.
Common Stock
Quarter Ended High Low
1999 ---- ---
----
December 31 $6.00 $2.45
September 30 $4.80 $2.45
June 30 $3.125 $ .75
March 31 $1.4375 $ .75
1998
----
March 31 $6.00 $4.00
June 30 $5.50 $2.625
September 30 $3.25 $ .875
December 31 $3.0625 $ .6875
The foregoing represent inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
As of March 9, 2000 there were approximately 173 holders of record of our
common stock. We believe that there are a significant number of shares of our
common stock held either in nominee name or street name brokerage accounts and
consequently, we are unable to determine the number of beneficial owners of our
common stock.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our consolidated financial data for
the five years ended December 31, 1999. The selected consolidated financial data
for the years ended December 31, 1997, 1998 and 1999 are derived from our
consolidated financial statements for such years, which have been audited by
Brightman Almagor & Co., a member of Deloitte Touch Tohmatsu, independent
auditors. The selected consolidated financial data for the years ended December
31, 1995 and 1996 are derived from our consolidated financial statements for
such period and years, which have been audited by Schneider Ehrlich & Associates
LLP (formerly known as Schneider Ehrlich & Wengrover LLP), independent auditors.
The consolidated financial data set forth below should be read in conjunction
with our Consolidated Financial Statements and related Notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
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<TABLE>
<CAPTION>
Year
Ended December 31, From Inception
---------------------------------------------------------------------- (July 14, 1994) to
Income Statement Data: 1995 1996 1997 1998 1999 December 31, 1999
---------- ----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues -- -- -- 54,922 68,803 123,725
Total expenses 692,801 790,108 3,784,635 5,178,872 7,944,252 18,424,000
Operating loss (692,801) (790,108) (3,784,635) (5,123,950) (7,875,449) (18,300,275)
Net loss (896,663) (1,121,211) (4,119,612) (5,578,540) (13,072,237) (24,830,348)
Net loss per share (0.37) (0.62) (1.35) (1.54) (2.07)
Weighted average shares outstanding 2,399,793 1,801,366 3,054,519 3,615,908 6,321,719
<CAPTION>
December 31,
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficiency) (616,839) (2,563,908) 448,679 (2,834,448) (494,744)
Total assets 403,204 1,191,688 1,188,627 490,545 467,867
Total liabilities 1,274,427 2,785,545 278,898 3,588,712 798,863
Total Stockholders' equity (deficit) (871,223) (1,593,857) 677,229 (3,098,167) (330,996)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto included elsewhere in
this prospectus.
General
We design and develop anti-piracy software technologies that provide copy
protection for electronic content distributed on optical media and over the
Internet. Our proprietary anti-piracy technology, MusicGuard, is a unique
hardware-based technology designed to prevent the unauthorized copying of audio
content distributed on CDs.
As of November 24, 1999, we entered into an agreement with Macrovision
Corporation to jointly design and develop and market a copy protection product
designed to thwart the illegal copying of audio content on CDs, DVDs and other
optical media. Optical media store data which may be retrieved by utilizing a
laser and include compact discs which are commonly referred to as CDs and
digital versatile discs which are commonly referred to as DVDs. The new product
will be based primarily upon our MusicGuard technology, as well as related
Macrovision technology, and will be jointly owned by us and Macrovision. We
expect that the immediate application of the technology we are developing with
Macrovision will be of interest for the music distribution business and
recording studios whose products are customarily distributed on CDs. We granted
to Macrovision an exclusive world-wide royalty bearing license to design,
develop and market the copy protection technology which we are jointly
developing. The license to Macrovision relates to all technologies and products
designed to prevent the illicit duplication of audio programs (including the
audio portion of music videos, movies and other video or audio content)
distributed on optical media (not limited to CDs and DVDs) and technologies for
Internet digital rights management for audio applications. The proposed copy
protection technology we are developing with Macrovision will be transparent to
the legitimate end-user.
Our immediate goal is to establish the proposed audio content protection
technology which we and Macrovision are developing as the leading product in the
target market of audio content copy protection for the high-volume recording
industry. Additionally, we are actively developing other technologies and
looking to acquire technologies which are synergistic with our current business
and will enable us to leverage our knowledge base and skill.
We have not had any significant revenues to date. As of December 31, 1999,
we had an accumulated deficit of approximately $24.8 million. Our expenses have
related primarily to expenses related to and expenditures on research and
development, marketing, recruiting and retention of personnel, costs of raising
capital and operating expenses.
Revenue Sources
We expect, for the near-term, that our primary source of revenue will be
royalties under our license agreements with Macrovision. We are currently
seeking to develop or
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acquire other technologies that will provide other sources of revenue. However,
there can be no assurance that we will develop or acquire other technologies or
if we do, that such technologies will generate any revenue or profits.
Stock Based Compensation
Compensation expense arising from stock grants, and options and warrants
issued at exercise prices below the quoted market price as of the date of grant
is recognized over the period that services are rendered. As more fully
described below in "Results of Operations," we have recorded expense in
connection with stock based compensation during 1997, 1998 and 1999.
Results of Operations
Year Ended December 31, 1999 Compared to Year December 31, 1998.
Revenues for the year ended December 31, 1999 and 1998 were $68,803 and
$54,922, respectively and were derived from licensing fees of our DiscGuard
product.
Research and development costs for the year ended December 31, 1999 were
$345,989 as compared to $1,017,073 for 1998. These decreases are attributable
primarily to reduced staffing effected in the latter part of 1998.
Sales and marketing expenses for the year ended December 31, 1999 were
$815,586 as compared to $1,155,998 for 1998. This decrease was primarily due to
reduced staffing in 1999.
General and administrative expenses for the year ended December 31, 1999
were $630,090 as compared to $1,663,912 for 1998. This decrease was primarily
due to reduced staffing in 1999.
Stock-based compensation for the year ended December 31, 1999 was
$6,152,587 as compared to $1,341,889 for 1998. Due to the shortage of available
funds in 1999, we compensated employees and other consultants by issuing common
stock, warrants and options.
Amortization of deferred financing costs for the year ended December 31,
1999 period was $4,180,540 as compared to $72,288 for the same period in 1998.
As a result of the issuance of 1.3 million warrants in connection with the sale
of our 10% Convertible Debentures, we recognized significant non-cash financing
costs. Using the Black-Scholes model for estimating the fair value of the
warrants, we recorded $3,845,400 as deferred financing costs and charged the
entire balance to operations when the debentures were converted.
Interest expense for the year ended December 31, 1999 increased to
$1,019,937 as compared to $410,715 during 1998. Included in interest expense is
non-cash amortization of note discount in the amount of $272,009 and $214,454
for the years ended December 31, 1999 and 1998, respectively. Note discounts
were imputed to reflect the equity component of the related financings. Also
included in interest expense for 1999 was
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$572,505, which represents the value of the beneficial conversion feature
relating to the conversion of outstanding debt into shares of our Common Stock.
We reported a net loss for the year ended December 31, 1999 of $13,072,237
or $(2.07) per share on a basis and diluted basis, as compared to a net loss of
$5,578,540 or $(1.54) per share for the year ended December 31, 1998.
Year Ended December 31, 1998 Compared to Year December 31, 1997.
We reported revenues for the first time in 1998, totaling $54,922. All of
the revenues were derived from license fees received from licensees of
DiscGuard.
Research and development costs for the year ended December 31, 1998 were
$1,017,073 as compared to $957,232 for 1997. Research and development costs in
1998 were expended in developing improved versions of DiscGuard following its
commercial introduction in February 1998.
Sales and marketing expenses for the year ended December 31, 1998 were
$1,155,998 as compared to $914,060 for 1997. This increase reflects our
intensified marketing activities when DiscGuard became commercially available in
the first quarter of 1998.
General and administrative expenses for the year ended December 31, 1998
were $1,663,912 as compared to $604,151 for 1997. The increase in general and
administrative spending was primarily due to increased staffing, public
relations and professional fees relating to a proposed secondary public offering
of common stock in July 1998.
Stock-based compensation for the year ended December 31, 1998 was
$1,341,889 and $1,309,192 for 1997.
Interest expense for the year ended December 31, 1998 increased to
$410,715 as compared to $113,445 during 1997 due to the increase in debt
financing activity in the year. Included in interest expense is non-cash
amortization of note discount in the amount of $272,009 for the year ended
December 31, 1998. Note discounts were imputed to reflect the equity component
of the related financings.
Interest income was $3,413 for the year ended December 31, 1998 as
compared to $42,069 for 1997. The decrease was a result of higher average cash
holdings during 1997.
We reported a net loss for the year ended December 31, 1998 of $5,578,540,
or $(1.54) per share on a basic and diluted basis, as compared to a net loss of
$4,119,612, or $(1.35) per share for the year ended December 31, 1997.
Liquidity and Capital Resources
At December 31, 1999, we had cash of approximately $210,000, representing
an increase of approximately $135,000 over December 31, 1998. In February 2000,
we completed a private placement of 1,800,000 shares of our common stock and
900,000 Class A Warrants for an aggregate purchase price of $10,000,000. The
Class A Warrants are exercisable for a period of five years at an exercise price
of $8.84 per share and upon exercise, we will issue Class B Warrants for an
additional
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495,000 shares. The Class B Warrants are exercisable for a period of three years
from the date of issuance at an exercise price of $21.22. Under certain
circumstances the Class A and Class B Warrants may be redeemed.
In November 1999, we signed an agreement with Macrovision Corporation
("Macrovision") to jointly develop and market music copy protection technology
for optical based media. In connection with the agreement, We granted to
Macrovision an exclusive world-wide, royalty-bearing license to use our
proprietary technology through December 31, 2009. We will be entitled to a 30%
royalty which may be adjusted to twenty five 25%, under certain conditions. Also
under certain conditions, the exclusive license may revert to a non-exclusive
license as of the second anniversary of the commercial launch of the product
that we are jointly developing. If certain conditions relating to the timing of
such commercial launch transpire, We will be entitled to minimum annual
guaranteed royalty advances, commencing on the first anniversary of the
Commercial Launch and continuing through the ninth year, aggregating $25
million.
Also under the Agreement, in January 1999, Macrovision made a $4 million
equity investment in the Company for an 11.4% interest and received an exclusive
license to our proprietary DiscGuard(TM) technology.
In the fourth quarter of 1999, we significantly reduced our accrued
interest and long-term debt through a series of conversions to Common Stock. We
also realized proceeds of approximately $1.4 from the exercise of outstanding
warrants and options.
BUSINESS
Introduction
We design and develop anti-piracy technologies that provide copy
protection for electronic content distributed on optical media and over the
Internet. Optical media store data which may be retrieved by utilizing a laser
and include compact discs which are commonly referred to as CDs and digital
versatile discs which are commonly referred to as DVDs. Our technologies utilize
both encryption and non-standard codewords on the optical media. As a result of
our research and development efforts we believe we have become the technological
leader in optical media authentication and verification. Our proprietary
anti-piracy technology, MusicGuard(TM), is a unique hardware-based technology
designed to prevent the unauthorized copying of audio content distributed on
CDs. MusicGuard leverages know-how we gained during the development of our
DiscGuard(TM) software protection product. Our copy protection technologies are
designed to be transparent to the legitimate end-user. Copy protected CDs are
compatible with and are designed to play on currently existing compact disc
players.
As of November 24, 1999, we entered into an agreement with Macrovision
Corporation to jointly design and develop and market a copy protection product
designed to thwart the illegal copying of audio content on CDs, DVDs and other
optical media. The new product will be based primarily upon our MusicGuard
technology as well as related Macrovision technology. We granted to Macrovision
an exclusive world-wide royalty bearing license to market the copy protection
technology which we are jointly developing. The license to Macrovision relates
to all technologies and products designed to prevent the illicit duplication of
audio programs (including the audio portion of music videos, movies and other
video or audio content) distributed on optical media (not limited to CDs and
DVDs) and technologies for Internet digital rights management for audio
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applications.
We are entitled to thirty percent (30%) of the net revenues collected by
Macrovision or its affiliates from any products or components incorporating the
proposed music protection technology. Under certain conditions, our share of the
net revenues may be readjusted to twenty-five percent (25%) of net revenues. We
agreed to reimburse Macrovision for up to $1 million of its costs incurred in
the twelve months ending December 31, 2000 in co-developing and commercially
launching MusicGuard.
As part of the agreement, we granted to Macrovision an exclusive
world-wide license to modify and market DiscGuard, our software anti-piracy
product. Part of the DiscGuard technology license is royalty free. The
encryption portion is royalty bearing. Macrovision has its own proprietary
software anti-piracy product known as Safe Disc. For five years we are entitled
to 5% of Macrovision's net revenues, if any, collected by Macrovision from the
licensing of Safe Disc to customers located in the Peoples Republic of China.
Other than for these revenues we do not anticipate that we will receive any
significant revenues as a result of our license of DiscGuard to Macrovision.
Macrovision develops and markets content copy protection and rights
management technologies and products to prevent the illicit duplication,
reception or use of video and audio programs and computer software. Macrovision
provides its products and services primarily to the consumer multimedia and
business software publishers, home video, pay-per-view, cable, satellite and
video security markets. Macrovision has its headquarters in Sunnyvale,
California with subsidiaries in London and Tokyo.
Our immediate goal is to establish the proposed audio content copy
protection technology which we and Macrovision are developing as the leading
product in the target market of audio content copy protection for the
high-volume recording industry. Additionally, we are actively developing other
technologies and looking to acquire technologies which are synergistic with our
current business and will enable us to leverage our knowledge base and skill.
Industry Background
Losses related to the unauthorized reproduction and use of music CDs
present a continuing concern for the recording industry as well as performing
artists. According to the Recording Industry Association of America, a national
trade organization, the recording industry loses about $5 billion annually to
global piracy of recorded music. Losses of up to $1 million a day have been
estimated in the U.S. alone. Two recent developments have exacerbated the
problem of piracy, causing it to become one the highest priorities of the
industry.
First, the cost of producing good quality copies of CDs has been
drastically reduced. Until recently, to produce good quality CDs required a
significant investment. Recent developments in consumer electronics technology
have enabled consumers to purchase, for as little as $180, a CD burner
(recorder) from a local retail outlet. CD burners now often are bundled with new
computers. Blank recordable discs are widely available for less than $1. With
this technology, even the casual user can easily copy unprotected CDs.
Second, it is now possible to easily download pirated music via the
Internet because of the acceptance and widespread use of MP3 compression
technology. This technology has made the
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Internet a feasible vehicle for the electronic transmission of music. Today
there are thousands of websites offering music in MP3 format. Most of the music
being downloaded is pirated; i.e., no royalties are being paid to the artists or
to the record companies which produced this music. This form of piracy is
rapidly growing.
Attempts by third parties to circumvent copy protection technologies have
been and are expected to be a persistent problem, even in the face of the United
States Digital Millennium Copyright Act, which was signed in October 1998. The
Act outlaws copy protection circumvention devices and technologies beginning in
May 2000 and provides for both criminal and civil penalties for companies or
individuals who import, produce or distribute devices designed to circumvent
copy protection devices and technologies.
Since prior laws to combat music piracy have not served as an effective
deterrent and the effect of the new legislation cannot yet be ascertained,
recording studios and artists are seeking more effective methods to prevent the
replication of unauthorized copies of their proprietary products. To combat
music piracy, leaders of the music recording industry have cooperated with
leaders of more than 120 companies and organizations representing a broad
spectrum of information technology and consumer electronics businesses, Internet
service providers and security technology companies to form the Secure Digital
Music Initiative. The Initiative is a forum for these industries to develop the
voluntary, open framework for playing, storing and distributing digital music
necessary to enable a new market to emerge. The Initiative has already produced
a standard, or specification, for portable devices. The longer-term effort is
focused upon completion of an overall architecture for delivery of digital music
in all forms which system will include anti-piracy protection.
The standard developed by the Initiative is intended to be applied to the
next generation of portable playback devices. It will not prevent currently
existing playback devices from playing pirated music. Since these devices will
likely be in use for quite some time we believe that there will be a need for
copy protection on the products played on the devices. To our knowledge there
are no commercially available technologies or products providing copy protection
for audio content distributed on CDs.
Our Solution
We believe that the audio content copy protection which we and Macrovision
are jointly developing will offer recording studios and artists the most
effective solution to protect works distributed on CDs, while offering
convenience and cost effectiveness to the music rights owner and end-user. We
believe that the proposed technology embodies unique know-how designed to
prevent the unauthorized copying of CDs. The proposed music protection
technology will be based primarily on our proprietary technology, MusicGuard, as
well as related Macrovision technologies.
Most music is currently offered for sale on a CD. To our knowledge, there
is no existing commercially available technology except MusicGuard, which
protects content on the original CD. Software-based technologies available today
claim to protect music during electronic transmission, but we believe that these
technologies are easily overcome. For example, according to an article appearing
in the August 18, 1999 edition of "Wired News", one month after Microsoft
released its software-based protection technology, Windows Media Audio, a
program was available on the Internet that removed the copying protection
afforded by the software. MusicGuard protection is embedded on the CD itself and
is introduced as part of the production process. The production process includes
the creation of a glass master from which metal molds, or stampers, used to mass
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produce, or replicate, CDs are made.
During the glass mastering process, a specially modified CD-encoder
introduces selective alternative alterations to the data placed on the glass
master. These alterations do not affect the audio quality of the original CDs in
any manner. CDs that will be protected by music copy protection technology we
are developing with Macrovision will be designed to play normally in the
currently existing CD and DVD players around the world. Music quality will not
be degraded as compared to the original. The technology will be designed so that
when one tries to make a copy of a protected CD with any of the many CD-to-CD
copying programs or "track rippers", the copy will be unusable. Either the
copying process itself will abort or the quality of the unauthorized copy will
be unacceptably inferior to the original music. Similarly, attempts to produce
MP3 files from a protected CD will either fail or result in inferior and
unusable audio. We will design the technology so that it will be easy to apply
and use. Record companies or recording studios need only inform an authorized
glass mastering facility that it wishes to protect against copying with the
technology. We don't envision any special preparation or changes that will be
needed to be made to the data which the recording mastering studio supplies to
the glass mastering facility. The technology will leverage existing encoder
technology used in our DiscGuard(TM) software protection product. Glass
mastering facilities worldwide will be able to simply, cheaply and immediately
upgrade their existing encoders to enable the use of the copy protection
technology. Since the protection will be applied only during the glass mastering
process, once a glass master and stampers have been produced, protected discs
can be mass-produced by any replicator. We are working together with Macrovision
and the encoder manufacturers to develop the most efficient and effective
manufacturing solution.
Mastering Equipment Manufacturers
In order to produce protected CDs, modifications to the encoder portion of
the laser optics system in CD mastering equipment are required. Under our
contract with Macrovision, Macrovision is responsible for coordinating with the
companies which produce and sell these encoders. We believe that three
companies, Doug Carson & Associates, Media Morphics and Eclipse, effectively
control the market for encoders. We will work with Macrovision and these encoder
producers to develop the necessary modifications to produce protected CDs.
We envision that Macrovision will authorize licensed CD replicators to
replicate protected CDs. Macrovision has licensing arrangements in place with
more than 75 replication facilities worldwide including the largest
multinational replicators such as, Sonopress, MPO, Americ Disc, Nimbus, Cinram,
and JVC. Therefore, we believe that Macrovision is in a good position to
leverage its current business relationships to the benefit of the audio content
copy protection technology we will develop with Macrovision.
Marketing and Sales
Under our agreement with Macrovision, Macrovision will be responsible, at
its expense, for the marketing of the proposed audio content copy protection
technology and will determine the staffing and other resources to be allocated
to the commercialization of the technology consistent with Macrovision's good
faith determination of its commercial potential.
Macrovision markets its products, including video cassettes, digital PPV
and DVD copy protection and video scrambling technologies, through a combination
of direct sales and licensing
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as well as through independent distributors. Macrovision has a network of
authorized duplication, authoring and replication facilities throughout the
world.
We are entitled to thirty percent (30%) of the net revenues received by
Macrovision from customers, distributors, OEM partners or other sublicensees of
the jointly developed technology. Under certain conditions, our share of net
revenues may be adjusted to twenty-five percent (25%) of the net revenues. Under
certain circumstances, the exclusive license relating to MusicGuard and the
jointly developed technology which we granted to Macrovision reverts to a
non-exclusive license as of the second anniversary of the commercial launch.
Under our agreement with Macrovision, commercial launch is deemed to occur when
a certain pre-designated number of protected music CDs are manufactured, with a
certain specified number being manufactured by at least one of certain
designated major commercial music labels. If certain conditions relating to the
timing of the commercial launch transpire, we will be entitled to minimum annual
guaranteed royalty advances, recoupable against royalties actually earned by us,
commencing on the first anniversary of the commercial launch and continuing
through the term of the development agreement which ends on December 31, 2009.
Macrovision markets its video and consumer protection technologies
internationally from its Sunnyvale, California headquarters and through its
subsidiaries in Japan and the United Kingdom. It supplements its direct sales
efforts with a variety of marketing initiatives, including trade show
participation, trade advertisements, industry education and news letters.
Macrovision provides technical support to its licensed duplicators, including
hardware installation assistance and quality control. As of December 1, 1999,
Macrovision employed 33 sales and marketing personnel and 38 additional
employees who assisted in customer support and operations.
We have only a limited internal sales and marketing capability. To
maintain our focus on product development and to avoid the expense of
establishing our own global sales and marketing staff, we do not anticipate
expanding our marketing capability until we are in a position to commercialize
products other than MusicGuard.
Research And Development
We intend to maintain our position as the technological leader in
anti-piracy products by leveraging our existing knowledge base and skillset and
exploiting to the fullest our existing technologies. We are interested in
acquiring or establishing business arrangements with other parties which have
promising technologies that offer synergy to our technological and commercial
expertise. We are particularly focusing upon companies in Israel due to their
geographic proximity and because Israel has a large pool of startup companies
with raw technologies from which to choose.
The software and entertainment industries in general are characterized by
rapid product changes resulting from new technological developments, performance
improvements and lower production costs. Our research and development activities
have focused on developing products responsive to perceived immediate market
demands. We believe that our future growth in anti-piracy products will depend
in large part on our ability to develop and apply our proprietary technology and
know-how. We believe that the key to ensuring that the audio content copy
protection technology we are developing with Macrovision becomes the industry
standard for CD copy protection lies in our and Macrovision's ability to
continually enhance and upgrade our unique anti-piracy technologies.
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New Products and Technologies
We intend to extend our range of activities in two specific directions:
o Exploiting existing technologies and expertise - the development and
commercialization of products which are similar to and share common
distribution channels with MusicGuard.
o Other technologies - the result of cooperation with outside parties,
including applications which offer synergy with MusicGuard.
We have developed other technologies with applications in the following areas:
o DiscAudit - a system for identifying genuine disc replicas. During
the mastering process, a special non-reproducible authenticating
mark is embedded outside the data portion of the disc. The
authenticating mark is not present in unauthorized replicas. By
means of a laptop with CD or DVD drive and software supplied by us,
law enforcement authorities, including customs inspectors, can
quickly determine the authenticity of a disc. DiscAudit is
applicable to CD and DVD, including both software and audio discs.
The product has been tested with fully satisfactory results. Unlike
the following three technologies, this technology is not subject to
the right of first refusal we have granted to Macrovision to acquire
rights in the technology if we decide to license or sell our rights
in it.
o Encryption Engine - a strong encryption engine for a variety of
applications including electronic software distribution, secure
electronic music distribution, dedicated music and video playback
devices and dedicated games machines. We can supply the encryption
technology and software library for the content to be protected.
o Smart Card Application Binding - Our DiscGuard technology "binds" a
protected application to a signature on an authentic optical disc so
that the protected application runs correctly only in the presence
of the disc. In many applications, it would be desirable to run the
protected application on any PC. This can be accomplished by
transferring binding information to the user's smart card. Use of
smart cards is expected to grow substantially. Reading devices are
inexpensive and readers are included in Microsoft's PC hardware
specifications. The binding could be by direct download via the
Internet. For example, an end user can download a demo version of
sample music. If he chooses, he can unlock the application by an
on-line registration process that transmits the unlock key directly
to the end users's smart card. As a result, the end user has
complete mobility - he can run the application from any Internet
connected PC, while the music publisher has no concerns about
unauthorized replication.
o Dedicated Playback Devices with Smart Card - GSM (Global System for
Mobile Communications) modules throughout the world work with small
smart card modules containing the user's authorization and personal
preferences. We intend to extend this concept to a wide range of
consumer devices, including computers, video and audio playback
devices and game stations. In all cases, protected content such as
software, video, audio or games, must be bound to the user's smart
card before it can be played correctly. The binding can be achieved
by leveraging our existing encryption and binding
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mechanisms.
Under our agreement with Macrovision, we granted to Macrovision an
exclusive right of first refusal through December 31, 2009, to any music copy
protection technology that we develop which is not included in the license to
Macrovision, and any Internet digital rights management technologies developed
by us which are applicable to music, music video, video, software or data
publishing products or markets. We are required to notify Macrovision of the
details of any bona- fide third party offers to purchase or license such
technologies. If Macrovision notifies us of its interest in such purchase or
license within 10 business days of Macrovision's receipt of our notification, we
are required to negotiate in good faith with them such purchase or license. The
encryption engine, smart card application binding and the GSM systems are
subject to Macrovision's first refusal rights.
A major part of future business strategy will be the identification and
setting up of cooperation arrangements with the developers of technologies,
including those that share our anti- piracy theme.
We are already active in the process of screening potential partners. The
model will be to invest in such companies and to allow them to benefit from our
strengths - technical knowledge (especially in optical media), professional
management, market awareness and established relationship with Macrovision and
other marketing partners. We believe that we can identify several early stage
technology companies and can provide the added value necessary to achieve
success and cut time to market.
In connection with the design and development of DiscGuard, our
proprietary software anti- piracy product, our Israeli subsidiary has received a
grant of $210,000 from the Chief Scientist of the State of Israel. We are
required to pay royalties to the Chief Scientist on proceeds from the sale of
products derived from the research and development funded by the grant at the
rate of 3% of the sales revenue for the first three years of such sales, 4% for
the following three years, and 5% thereafter, up to a maximum of 100% of the
grant. For example, royalties will be payable to the Chief Scientist based on
royalties we receive from Macrovision relating to DiscGuard. We do not believe
that any royalties are payable to the Chief Scientist in respect of the proposed
audio content protection technology. Our obligation to pay royalties to the
Chief Scientist is limited to the amount of the grant received and is linked to
the exchange rate of the dollar and the New Israeli Shekel. The Chief Scientist
places certain restrictions on companies that receive funding relating to the
transfer of know-how. We believe that these restrictions and obligations will
not have a material adverse effect on our operations since we do not presently
anticipate transferring ownership of the technology developed by us to third
parties. The restrictions do not apply to the exports from Israel of products
developed with such technologies.
From the date of inception through December 31, 1999, we have expended
approximately $3 million on research and development activities, including
approximately $2.6 million through the year ended December 31, 1998, and
approximately $.4 million for the year ended Dectember 31, 1999. We expect to
maintain our research and development expense at approximately the current level
for the foreseeable future.
We are a member of the Software and Information Industry Association and
of the Israeli Export Institute.
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Competition
We are not aware of the existence of any commercially available
anti-piracy technologies in the area of copy protection for electronic content
distributed on optical media. There can be no assurance that other companies
will not enter the market in the future, particularly if the audio content
protection technology we are developing with Macrovision is successfully
commercialized. There can be no assurance that we will be able to continue
developing products with innovative features and functions, or that development
by others of similar or more effective products will not render our products or
technologies noncompetitive or obsolete.
Proprietary Rights
We currently rely on a combination of trade secret, copyright and
trademark law, as well as non-disclosure agreements and invention-assignment
agreements, to protect the technologies used in our products and other
proprietary information. We have filed patent applications in the United States
and Israel and under the Patent Cooperation Treaty with respect to the
technology underlying DiscGuard and in Israel for MusicGuard. We have also
applied for a United States trademark registration of MusicGuard. There can be
no assurance that any patent or trademark will be issued or that our proprietary
technology will remain a secret or that others will not develop similar
technology and use such technology to compete with us.
We believe that our software and audio content protection products and
technologies are proprietary and are protected by copyright law, non-disclosure
and secrecy agreements. We also rely on proprietary know-how and employ various
methods, such as proper labeling of confidential documents and non-disclosure
agreements, to protect our 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.
Our policy is to require our employees, consultants, and other advisors to
execute confidentiality agreements upon the commencement of employment,
consulting or advisory relationships with us. These agreements generally provide
that all confidential information developed or made known to the individual by
us during the course of the individual's relationship with us is to be kept
confidential and not to be disclosed to third parties except in specific
circumstances. In the case of employees and consultants, the agreements provide
that all inventions conceived by the individual in the course of their
employment or consulting relationship with us shall be our exclusive property.
There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for our trade secrets in the event of
unauthorized use or disclosure of such information.
Employees
We have 5 full-time employees, all of whom work in Israel. None of our
employees is covered by a collective bargaining agreement or is represented by a
labor union. We have not experienced any organized work stoppages and consider
our relations with our employees to be good.
Our future performance depends highly upon the continued service of
members of our senior management and of Dr. Baruch Sollish, our
Vice-President-Research and Development, in particular.
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<PAGE>
We believe that our future success will also depend upon our continuing ability
to identify, attract, train and retain other highly skilled managerial,
technical, sales and marketing personnel. Hiring for such personnel is
competitive, and there can be no assurance that we will be able to retain our
key employees or attract, assimilate or retain the qualified personnel necessary
for the development of its business.
Properties
We lease a 2400 square foot facility used in our research and development
and administrative activities in Kfar Saba, Israel. The lease provides for a
monthly rent of approximately $2292 and an expiration date of May 31, 2000
subject to one optional annual renewal through May 2001. We have improved this
facility to meet the requirements of our research and development activities. We
believe that this facility is sufficient to meet our current and anticipated
future requirements. We believe that we will be able either to renew our present
lease or obtain suitable replacement facilities. In the opinion of management,
our leased facility is adequately covered by insurance.
CONDITIONS IN ISRAEL
The following information discusses certain conditions in Israel that
could affect our Israeli subsidiary, TTR Technologies, Ltd. All figures and
percentages are approximate. A portion of the information with respect to Israel
presented hereunder has been taken from Annual Reports of the Bank of Israel and
publications of the Israeli Central Bureau of Statistics.
Political Conditions
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. However, a peace agreement between
Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan
was signed in 1994 and, since 1993, several agreements between Israel and the
Palestine Liberation Organization --Palestinian Authority representatives have
been signed. In addition, Israel and several other Arab states have announced
their intention to establish trade and other relations and are discussing
certain projects. As of the date of this prospectus, although Israel and Syria
have resumed negotiations, Israel has not entered into any peace agreement with
Syria or Lebanon. Recently there has been stagnation in the peace process in the
Middle East. There can be no assurance as to whether or how the "peace process"
will develop or what effect it may have upon us. Beginning in 1948, nearly all
Arab countries formally adhered to a boycott of Israel and Israeli companies
and, since the early 1950's of non-Israeli companies doing business in Israel or
with such companies. Despite measures to counteract the boycott, including
anti-boycott legislation in the United States, the boycott has had an
indeterminate negative effect upon trade with and foreign investment in Israel.
We do not believe that the boycott has had a material adverse effect on us, but
there can be no assurance that restrictive laws, policies or practices directed
toward Israel or Israeli businesses will not have an adverse impact on the
operation or expansion of our business.
Generally, all male adult citizens and permanent residents of Israel under
the age of 54 are, unless exempt, obligated to perform certain military duty
annually. Additionally, all such residents are subject to being called to active
duty at any time under emergency circumstances. Some of the employees of our
Israeli subsidiary currently are obligated to perform annual reserve duty. While
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<PAGE>
our Israeli subsidiary has operated effectively under these and similar
requirements in the past, no assessment can be made of the full impact of such
requirements on us in the future, particularly if emergency circumstances occur.
Economic Conditions
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts,
security incidents and for at least the five years preceding 1997, expansion.
The Israeli government has, for these and other reasons, intervened in the
economy by utilizing, among other means, fiscal and monetary policies, import
duties, foreign currency restrictions and control of wages, prices and exchange
rates. The Israeli government periodically changes its policies in all these
areas.
The economic recession which began in 1997 continued during 1998, with a
further decline in the rate of GDP growth and an increase in unemployment,
despite a significant decrease in the balance of payments deficit and in the
growth rate of the public sector deficit. These developments reflect the
continued slow growth of domestic demand, the global economic slowdown,
instability in international financial markets and continued tight fiscal and
monetary policies aimed at maintaining economic stability and achieving budget
deficit and inflation targets determined by the government. Other factors
contributing to the continued economic slowdown were security and political
uncertainty, and changes in the labor market, such as increases in the minimum
wage and public sector employment.
Despite improvements during 1998, Israel maintains a significant balance
of payments deficit, primarily as a result of its defense burden, the absorption
of immigrants, especially from the former Soviet Union, the provision of a
minimum standard of living for lower income segments of the community and the
maintenance of a minimum level of net foreign reserves. In order to finance this
deficit, Israel must sustain an adequate inflow of capital from abroad. The
major sources of the country's capital imports include U.S. military and
economic aid, personal remittances from abroad, sales of Israeli government
bonds (primarily in the United States) and loans from foreign governments,
international institutions and the private sector.
Assistance From The United States
The State of Israel receives significant amounts of economic and military
assistance from the United States, averaging approximately $3 billion annually
over the last several years. In addition, in 1992, the United States approved
the issuance of up to $10 billion in loan guarantees during United States fiscal
years 1993-1998 to help Israel absorb a large influx of new immigrants,
primarily from the republics of the former Soviet Union. Under the loan
guarantee program, Israel may issue up to $2 billion in principal amount of
guaranteed loans each year, subject to reduction in certain circumstances. There
is no assurance that foreign aid from the United States will continue at or near
amounts received in the past. If the grants for economic and military assistance
or the United States loan guarantees are eliminated or reduced significantly,
the Israeli economy could suffer material adverse consequences.
Trade Agreements
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<PAGE>
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is also a signatory to the General Agreement on
Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United States, Australia, Canada and
Japan. These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs.
Israel and the European Union concluded a Free Trade Agreement in July,
1975 which confers certain advantages with respect to Israeli exports to most
European countries and obligates Israel to lower its tariffs with respect to
imports from these countries over a number of years.
In 1985, Israel and the United States entered into an agreement to
establish a Free Trade Area, under which most products received immediate
duty-free status, and by 1995 all other tariffs and certain non-tariff barriers
on most trade between the two countries were ultimately eliminated.
On January 1, 1993, an agreement between Israel and EFTA, which at present
includes Norway, Switzerland, Iceland and Liechtenstein, established a
free-trade zone between Israel and the EFTA nations.
In recent years, Israel has established commercial and trade relations
with a number of other nations, including Russia, China and nations in Eastern
Europe, with which Israel had not previously had such relations.
Employees
Our Israel subsidiary is subject to various Israeli labor laws and
collective bargaining agreements between Histadrut and the federation of
industrial employers. Such laws and agreements cover a wide range of areas,
including hiring practices, wages, promotions, employment conditions (such as
working hours, overtime payment, vacations, sick leave and severance pay),
benefits programs (such as pension plans and education funds) and special
issues, such as equal pay for equal work, equal opportunity in employment and
employment of women. The collective bargaining agreements also cover the
relations between management and the employees' representatives, including
Histadrut's involvement in certain aspects of hiring and dismissing employees
and procedures for settling labor disputes. Our Israel subsidiary continues to
operate under the terms of Israel's national collective bargaining agreement,
portions of which expired in 1994. Israeli employers and employees are required
to pay predetermined sums to the National Insurance Institute, an organization
similar to the United States Social Security Administration. These contributions
entitle the employees to receive a range of medical services and other benefits.
Certain employees of our Israel subsidiary are covered by individual employment
agreements.
MANAGEMENT
Directors and Officers
Our directors, officers and key employees are as follows:
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Name Age Position
---- --- --------
Marc D. Tokayer 43 Chairman of the Board, Chief Executive
Officer, President and Treasurer; and
President and Director of our Israeli
subsidiary
Emanuel Kronitz 40 Chief Operating Officer
Baruch Sollish 52 Director, Vice President-Research and
Development, Secretary; Chief Technology
Officer of our Israeli subsidiary
Michael Braunold 40 Director
Michael Fine 49 Director
All officers serve until the next annual meeting of directors and until
their successors are elected and qualified.
MARC. D. TOKAYER, has been Chairman of the Board of Directors, President,
and Treasurer of TTR since he founded TTR in July 1994 and has been Chief
Executive Officer of TTR since he resumed the position in January 1999. He has
served as President and Chairman of the Board of Directors of TTR's Israeli
subsidiary since its inception in December 1994.
EMANUEL KRONITZ, has been the Chief Operating Officer of TTR since June 1,
1999. From January through May 1999 he served as CEO of Smart Vending Solutions
Inc., a Delaware corporation, which developed a novel vending machine based on
free access technology. From November 1997 through January 1999, he was
president of Orgad Creations Ltd., an Israeli company engaged in the
electroforming of gold jewelry. From January 1996 through November 1997, he was
a Senior Investment Manager at Leumi & Co, Investment Bankers Ltd., an Israeli
investment bank, where he was in charge of an investment portfolio of
approximately 30 high-tech and industrial companies. Between January 1994 and
December 1995, he was a Vice President of Business Development at the Elul
Group, an Israeli high tech marketing and investment company, where he was
primarily responsible for identifying and negotiating new business ventures. He
received an LLB (law degree) from Bar Ilan University, Tel Aviv in 1983 and an
MBA from York University in Toronto in 1988.
BARUCH SOLLISH, Ph.D, has been a Director of TTR since December 1994 and
has served as Vice President--Research and Development and Secretary of TTR
since September 1996. 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 holds six United States patents in the fields of electro optics,
ultrasound and electronics and has published and lectured extensively. Dr.
Sollish received a Ph.D. in Electrical Engineering from Columbia University in
1973.
MICHAEL FINE has been a director of the Company since May 10, 2000. Since
November 1992, Mr. Fine has been President of Fine Sound Productions, an
independent music production firm. From April 1997 through May 1999, Mr. Fine
worked at Deutsche Grammophon GmbH, where he served as Vice President, Artists
and Repertoire and was in charge of the music and recording program of the
world's oldest record label, the company having been founded in 1898. From
September 1989 through April 1997, he was Vice President of KOCH International
LP and General Manager of KOCH International Classics. KOCH International LP is
a multi-national music and media technology company and one of the world's
largest independent distributors of recorded music. Mr. Fine is a Grammy Award
winning producer.
MICHAEL BRAUNOLD has been a director of the Company since May 10, 2000.
Since March 2000, Mr. Braunold has been the Chief Executive Officer and a
director of PLT Solutions, Inc., a company engaged in providing solutions for
rapid data telecommunication utilizing electrical power-lines. Since March 1998
Mr. Braunold also has been Chief Executive Officer and Chairman of the Board of
SPO Medical Equipment Ltd., an Israeli company that specializes in medical
technology related to pulse oximetry techniques. Prior to this assignment, Mr.
Braunold was Senior Director of Business Development at Scitex Corporation Ltd.,
a multinational corporation specializing in visual information communication. As
part of his corporate role, Mr. Braunold played a strategic role in managing a
team of professionals assigned to M&A activities. During his 12-year tenure at
Scitex, he held various positions within the worlwide organization including
aperiod in the United States as Vice President of a Scitex U.S. subsidiary
specializing in medical imaging. Mr. Braunold originates from the United Kingdom
where he obtained a B.Sc. in Management Sciences and a Master of Business
Administration from Imperial College Business School, London.
There are no family relationships 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.
Our Board of Directors is currently comprised of four Directors, Marc
Tokayer, Baruch Sollish, Michael Fine and Michael Braunold. All directors hold
office until the next annual meeting of stockholders and the election and
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qualification of their successors. Directors receive no cash compensation for
serving on the Board of Directors. Officers are elected annually by the Board of
Directors and serve at the discretion of the Board.
Summary Compensation Table
The following table sets forth the cash and noncash compensation for each
of the last three fiscal years awarded to, or earned by, our Chief Executive
Officer and to all other executive officers serving as such at the end of 1999
whose salary and bonus exceeded $100,000 for the year ended December 31, 1999 or
who, as of December 31, 1999, was being paid a salary at a rate in excess of
$100,000 per year.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
------ Payouts
Name and Restricted Securities LTIP
Principal Position Salary Bonus Other Stock Payouts All Other
------------------ Year ($) ($) ($) Underlying ($) Compensation
---- -------- --- ------- Awards(#) Options(#) --- ------------
--------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Marc D. Tokayer 1999 $108,075 -- $27,676(1) -- -- -- --
Chairman and 1998 $ 64,430 $12,019 $14,423(1) -- -- -- --
President 1997 $ 73,850 $ 7,647 $26,307(1) -- -- -- --
Emanuel Kronitz(2) 1999 $ 35,915 -- $ 7,158 304,500 --
Chief Operating 1998 -- -- -- -- -- -- --
Officer 1997 -- -- -- -- -- -- --
Baruch Sollish 1999 $110,522 -- $21,886(1) -- 80,000 -- --
Vice-President- 1998 $ 91,678 $42,105 $13,927(1) -- -- -- --
Research & 1997 $ 99,931 $50,000(3) $24,875(1) -- -- -- --
Development
</TABLE>
----------
(1) Includes contributions to insurance premiums, car allowance and car
expenses.
(2) Mr. Kronitz' employment by TTR commenced on June 1, 1999.
(3) Comprises a one-time payment made in consideration of Dr. Sollish's waiver
of incentive bonus payments due to him under his employment agreement.
Options Granted in Last Fiscal Year
The following table sets forth certain information concerning options
granted during 1999 to the executive officers named in the Summary Compensation
Table. Since January 1, 2000 we have also granted options to Mr. Tokayer and Dr.
Sollish, which grants are discussed in "Certain Relationships and Related
Transactions" below.
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<PAGE>
<TABLE>
<CAPTION>
Market Potential Realizable Value
Percentage Price of At Assumed Annual Rates
Number of of Total Common of Stock Price
Securities Options Stock on Appreciation for
Underlying Granted to Exercise Date of Option Term
Name Options Employees Price Grant Expiration -------------
Granted (#) in 1999 ($/Share) ($/Share) Date 5% ($) 10%($)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Marc Tokayer 0 -- -- -- -- -- --
Emanuel Kronitz 235,000 31.7% $. 01 $2.906 2009 $1,110,038 $1,768,943
Emanuel Kronitz 69,500 9.4% $. 01 $ 2.56 2009 $ 289,118 $ 460,784
Baruch Sollish 20,000 2.7% $. 01 $ 2.56 2009 $83,999 $ 132,600
Baruch Sollish 60,000 8.1% $2.56 N/A 2009 $96,598 $ 244,799
</TABLE>
Aggregate Options Exercised in Last Fiscal Year
and Fiscal Year End Option Values
The following table sets forth information with respect to option
exercises during the year ended December 31, 1999 and the number and value of
options outstanding at December 31, 1999 held by the executive officers named in
the Summary Compensation Table:
<TABLE>
<CAPTION>
Number of Value of Unexercised
Shares Number of Un-exercised In-the-money Options at
Acquired on Value Options at December 31, 1999 December 31, 1999(1)
Name Exercise Realized (#) ($)
(#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---------------- ----------- -------- ------------------------- ----------------------
<S> <C> <C> <C> <C>
Emanuel Kronitz -- -- 108,666/195,834(2) $650,909/$1,173,045
Baruch Sollish -- -- 20,000/60,000 $119,800/$206,400
</TABLE>
(1) Based upon the difference between the exercise price of such options and the
closing price of the common stock ($6.00) on December 31, 1999, as reported on
the OTC Electronic Bulletin Board.
(2) On January 12, 2000, the terms of options to purchase an aggregate of
235,000 shares were amended to provide that options to purchase 150,000 shares
became immediately vested and exercisable.
Stock Option Plans
1996 Stock Option Plan. Our current policy is 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 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 our business success.
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<PAGE>
We have adopted our 1996 Incentive and Non-Qualified Stock Option Plan.
The 1996 Option Plan provides for the grant to qualified employees (including
officers and directors) of options to purchase shares of our common stock. A
total of 1,500,000 shares of our common stock have been reserved for issuance
upon exercise of stock options granted under the 1996 Option Plan.
The 1996 Option Plan is administered by the Board of Directors. The board
has discretion to select the optionee and to establish the terms and conditions
of each option, subject to the provisions of the 1996 Option Plan. Options
granted under the 1996 Option Plan may be non- qualified stock options or
incentive stock options (an option which qualifies under Section 422 of the
Internal Revenue Code) but in any case the exercise price of incentive stock
options granted may not be less than 100% of the fair market value of the common
stock as of the date of grant (110% of the fair market value if the grant is an
incentive stock 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 stock option to any employee who owns
more than 10% of the outstanding common stock). The board may, in its discretion
(i) accelerate the date or dates on which all or any particular option or
options granted under the 1996 Option Plan may be exercised, or (ii) extend the
dates during which all, or any particular, option or options granted under the
1996 Option Plan may be exercised, provided, that no such extension will be
permitted if it would cause the 1996 Option Plan to fail to comply with Section
422 of the Code or with Rule 16b-3 of the Securities Exchange Act of 1934, as
amended. Except as otherwise determined by the board at the date of the grant of
the option, and subject to the provisions of the 1996 Option Plan, an optionee
may exercise an option at any time within one year (or within such lesser period
as may be specified in the applicable option agreement) following termination of
the optionee's employment or other relationship with us if such termination was
due to the death or disability (as defined) of the optionee but in no event
later than the expiration date of the option. Except as otherwise determined by
the board at the date of the grant of an option, if the termination of the
optionee's employment or other relationship is for any other reason the option
will expire immediately upon such termination. Options granted under the 1996
Option 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 Option 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 January 31, 2000, options to purchase 1,166,400 shares of our common
stock were outstanding under the 1996 Option Plan.
Non-Executive Directors Stock Option Plan. We adopted our 1998
Non-Executive Director Stock Option Plan in July 1998 to provide an incentive
for attracting and retaining on our board the service of qualified individuals
who are not otherwise employed by us or any subsidiary.
The Directors Plan is administered by the Board of Directors. We have
reserved 25,000 shares of our common stock under the Directors Plan for issuance
upon the exercise of stock options. Options are exercisable upon the date of
grant and expire five years from the date of grant. Upon termination of a
person's services as a director, the options expire within two months of such
termination. The exercise price of the option will be the fair market value of
our common stock on the date of the grant of the option. The number of options
and prices at which they are exercisable are subject to adjustment in the case
of certain transactions such as mergers, recapitalizations, stock splits or
stock dividends. No options may be granted under the Directors Plan after July
2008. As
29
<PAGE>
of March 1, 2000, no options were outstanding under the Directors Plan.
Employment Agreements
Our Israeli subsidiary signed an employment agreement in August 1994 with
Marc Tokayer, pursuant to which Mr. Tokayer is employed as its General Manager
for a term which is automatically renewable from year to year unless either
party gives notice of termination at least 90 days prior to the current
expiration date. Mr. Tokayer currently receives an annual salary of $120,000,
subject to increase and the grant of a performance bonus in the Board's
discretion. If Mr. Tokayer is terminated other than for engaging in willful
misconduct or acts of bad faith or conviction of a felony, he will be entitled
to continue to receive his salary and benefits for an additional 12 months,
subject to certain limitations.
We signed an employment agreement with Emanuel Kronitz as of June 1, 1999,
pursuant to which Mr. Kronitz is employed as our Chief Operating Officer. The
agreement is for a term of one year and is automatically renewable for
additional one year terms, unless terminated by either party upon 90 days prior
notice. Mr. Kronitz is paid a monthly salary of $5,000 plus benefits.
Our Israeli subsidiary entered into an employment agreement with Dr.
Baruch Sollish in December 1994 which was amended in July 1998. Pursuant to the
agreement Dr. Sollish is employed as Director of Product Research and
Development of our Israeli subsidiary. The agreement is renewable for terms of
three years, subject to termination by either party on not less than 60 days
notice prior to the end of any term. The current term expires on December 1,
2001. Dr. Sollish currently receives an annual base salary of $120,000 subject
to increase and the grant of a performance bonus in the board's discretion.
Each of the executives with an agreement has agreed to certain customary
confidentiality and non-compete provisions that prohibit him from competing with
us for one year, or soliciting our employees for one year, following the
termination of his employment.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of November 24, 1999, we entered into an agreement with Macrovision
Corporation to jointly design and develop and market a copy protection product
designed to thwart the illegal copying of audio content on CDs, DVDs and other
optical media. The new product will be based primarily upon our MusicGuard
technology as well as related Macrovision technology. We granted to Macrovision
an exclusive world-wide royalty bearing license to market the copy protection
technology which we are jointly developing. The license to Macrovision relates
to all technologies and products designed to prevent the illicit duplication of
audio programs (including the audio portion of music videos, movies and other
video or audio content) distributed on optical media (not limited to CDs and
DVDs) and technologies for Internet digital rights management for audio
applications.
We are entitled to thirty percent (30%) of the net revenues collected by
Macrovision or its affiliates from any products or components incorporating the
proposed music protection technology. Under certain conditions, our share of the
net revenues may be readjusted to twenty- five percent (25%) of net revenues. We
agreed to reimburse Macrovision for up to $1 million of its costs incurred in
the twelve months ending December 31, 2000 in co-developing and commercially
launching MusicGuard.
As part of the agreement, we granted to Macrovision an exclusive
world-wide license to modify and market DiscGuard, our software anti-piracy
product. Part of the DiscGuard technology license is royalty free. The
encryption portion is royalty bearing. Macrovision has its own proprietary
software anti-piracy product known as Safe Disc. For five years we are entitled
to 5% of Macrovision's net revenues, if any, collected by Macrovision from the
licensing of Safe Disc to customers located in the Peoples Republic of China.
Other than for these revenues we do not anticipate that we will receive any
significant revenues as a result of our license of DiscGuard to Macrovision.
Under the terms of the agreement, we also granted to Macrovision first
refusal rights until December 31, 2009 with respect to any music protection
technology we develop which is not included in the license to Macrovision and
any Internet digital rights management technologies we develop which are
applicable to music, music video, video, software or data publishing products or
markets. These rights include rights of ownership if we decide to sell the
technology or worldwide exclusive marketing or distribution rights if we decide
to license the technology. Our obligation is to negotiate a sale or license to
Macrovision in good faith should we receive a bona fide offer from a third party
to purchase or license the technology and should Macrovision notify us of its
interest in acquiring the technology.
On January 12, 2000 pursuant to stock purchase agreement we sold to
Macrovision $4 million of our common stock, and granted to Macrovision rights of
first refusal to purchase equity securities (including securities convertible or
exchangeable into common stock) we propose to sell to third parties if the
amount of the securities to be sold would constitute a majority of our
outstanding common stock. Subject to some exceptions, we further granted to
Macrovision a right to purchase its pro rata share (based on Macrovision's then
current ownership of common stock) of any equity securities we offer in private
transactions above a certain amount. Macrovision waived its right of first
refusal with respect to our private placement in February 2000 of 1,800,000
shares of Common Stock and 900,000 Class A Warrants for an aggregate purchase
price of $10 million.
In January 2000, we issued to Mr. Tokayer, options under the 1996 Stock
Option Plan to purchase 347,000 shares of our common stock at an exercise price
per share of $4.00, of which options to purchase 173,000 shares were vested upon
issuance and options to purchase 174,000 shares will vest over 12 months.
In February 1999, we issued to Dr. Sollish options to purchase 50,000
shares of our common stock. All of the options vested at the time they were
issued. In November 1999, we issued to Dr. Sollish options to purchase 80,000
shares of our common stock under the 1996 Stock Option Plan, with 20,000 of
these options being vested upon issuance with an exercise price of $.01 per
share and 60,000 of these options vesting over a 3 year period with an exercise
price per share of $2.56. In January 2000, we issued to Dr. Sollish additional
options to purchase 70,000 shares of our common stock under our 1996 Stock
Option Plan, of which 30,000 options were fully vested upon grant at an exercise
price of $4 per share, 20,000 options were fully vested upon grant at an
exercise price of $.01 per share and the remaining 20,000 options with an
exercise price of $.01 per share will vest upon the commercial launch of the
audio content protection product being jointly developed by us and Macrovision.
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<PAGE>
In June 1999, we granted options to purchase 235,000 shares of our common
stock under the 1996 Stock Option Plan to Emanuel Kronitz, our Chief Operating
Officer, which options were to vest, subject to Mr. Kronitz's continued
employment with us, in 36 equal monthly installments and have an exercise price
of $.01 per share. On January 12, 2000, at the direction of the board, the
options were amended to provide that 150,000 of Mr. Kronitz's options became
vested and the balance of 85,000 options will vest in one lump sum on November
12, 2000. In November, 1999, we issued to Mr. Kronitz fully vested options to
purchase an additional 69,500 under the 1996 Stock Option Plan at an exercise
price of $.01 per share.
Marc D. Tokayer, Chairman of the Board, The Tokayer Family Trust, Baruch
Sollish, director, and four other stockholders with an aggregate of 1,137,430
shares of our common stock, entered into a voting arrangement dated August 10,
1996, whereby they agreed to vote their respective shares to elect directors and
in support of positions favored by a majority of the shares held among them.
This arrangement was terminated in July 1999.
In November 1999, we issued to Gershon Tokayer, our sales manager and the
brother of Marc D. Tokayer, the Chairman of the Board, options to purchase
249,500 shares of our common stock under the 1996 Stock Option Plan, of which
options to purchase 209,500 shares were immediately vested upon issuance at an
exercise price of $.01 per share and 40,000 options were to vest over a 3 year
period at an exercise price of $2.56 per share.
PRINCIPAL AND SELLING STOCKHOLDERS
The following table provides information as of March 1, 2000 concerning
the beneficial ownership of our common stock by (i) each director, (ii) each of
the Named Executive Officers, (iii) each stockholder (or group) known to us to
be the beneficial owner of more than 5% of the outstanding common stock, (iv)
the directors and officers as a group and (v) each selling stockholder.
<TABLE>
<CAPTION>
Common Stock
To be Beneficially
Owned if All Shares
Name of Shares of Shares Hereunder are sold
Beneficial Owner(1) Common Stock Percent of Offered -----------------------
------------------- Beneficially Class(2) Hereby Shares(3) Percent(2)(3)
Owned(1) -------- ------ ------ -------------
--------
<S> <C> <C> <C> <C> <C>
Macrovision Corporation 1,880,937 11.78 1,880,937 0 0
Wall & Broad Equities, Inc. 1,300,000(4) 7.89 1,300,000 0 0
Machtec Limited 1,202,000 7.53 1,202,000 0 0
Marc D. Tokayer(5) 766,547(6) 4.75 0 766,547(6) 4.75
Dimensional Partners, Ltd. 1,260,000(7) 7.63 1,260,000 0 0
Econor Investment Corporation 442,810 2.77 256,060 186,750 1.28
Dimensional Partners, L.P. 315,000(8) 1.96 315,000 0 0
Bentley Equity Partners, L.P. 299,250(9) 1.86 299,250 0 0
L&H Foundation 281,736 1.76 281,736 0 0
Madison Trading 269,613 1.69 269,613 0 0
Robert Sussman 204,750(10) 1.28 204,750 0 0
Mantle International
Investment Ltd. 200,000(11) 1.24 200,000 0 0
Inglewood Holdings Inc. 200,000(11) 1.24 200,000 0 0
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Baruch Sollish(5) 195,000(12) 1.21 0 195,000(12) 1.21
Emanuel Kronitz(5) 194,500(13) 1.20 0 194,000(13) 1.20
Burstein & Lindsay Securities
Corp. 174,310 1.09 174,310 0 0
Gotham Holdings, L.P. 157,500(14) * 157,500 0 0
The dotCOM Fund L.L.C 157,500(14) * 157,500 0 0
American High Growth 157,500(14) * 157,500 0 0
Oak Creek Capital L.P. 126,000(15) * 126,000 0 0
Dalimore Consulting Limited 125,000 * 125,000 0 0
Steven L. Barsh 120,000 * 120,000 0 0
Manhattan Group Funding-
Partnership 110,250(16) * 110,250 0 0
Silver Cloud L.P. 110,250(16) * 110,250 0 0
H.C. Wainwright & Co., Inc. 126,000(17) * 126,000 0 0
Jarvis Developments Limited 105,000 * 105,000 0 0
Robert Friedman 100,000(18) * 100,000 0 0
Biscount Overseas Ltd. 83,000(18) * 83,000 0 0
Gerald Levine 78,750(19) * 78,750 0 0
Bentley International Equity
Ltd. 78,750(19) * 78,750 0 0
Mathew Balk 82,250(20) * 82,250 0 0
Jason T. Adelman 87,500(21) * 87,500 0 0
SDM Partners 63,000(22) * 63,000 0 0
Abraham Stephansky 51,637 * 51,637 0 0
Neve Yerushalayim 43,750 * 43,750 0 0
Scott Weisman 50,750(23) * 50,750 0 0
Yeshiva Darchei Torah
(Rabbis Fund) 42,250(24) * 42,250 0 0
Yeshiva Darchei Torah
(Building Fund) 40,393 * 40,393 0 0
Mordecai Lerer 35,000 * 35,000 0 0
Mylock Holdings Inc. 31,500(25) * 31,500 0 0
Yaakov Bender 27,096 * 27,096 0 0
Plans Inc. 25,000 * 25,000 0 0
Schneider Ehrlich &
Associates 25,000 * 25,000 0 0
Wayne M. Wilde Revocable
Trust 23,000(26) * 23,000 0 0
Mitchell Hirth 15,947 * 15,947 0 0
CYGNI S.A 12,500 * 12,500 0 0
Bnos Bais Yaaakov 12,497(27) * 12,497 0 0
Cherson Ltd. 17,250(28) * 17,250 0 0
Catamaran Corp. 11,500(29) * 11,500 0 0
Solomon Mayer 74,625(30) * 74,625 0 0
Abraham & Barabara
Stefansky 15,613 * 15,613 0 0
Philip Kenneth Wood 14,000(31) * 14,000 0 0
Jerome Todder 15,000 * 15,000 0 0
Yitzchak Stefansky 11,772 * 11,772 0 0
Earl Freeman 11,500(32) * 11,500 0 0
Donald K. Currie 11,500(32) * 11,500 0 0
Ralph Falk 11,500 * 11,500 0 0
Murray Kimmel 11,500 * 11,500 0 0
Robert D. Zucker 11,500(32) * 11,500 0 0
Ralph Cotton 8,625(27) * 8,625 0 0
Lawrence & Karen
Dalessandri 7,000(33) * 7,000 0 0
PJ Realty Trust 7,000(33) * 7,000 0 0
Tom McCann IRA
CIBA Oppenheimer
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Corp., as Cust 7,000(33) * 7,000 0 0
Leon Goldstein 5,750(34) * 5,750 0 0
K. David Isaacs 5,750(34) * 5,750 0 0
Judith Wohlberg 5,750(34) * 5,750 0 0
Jack's Coffee House
Inc. 5,750 * 5,750 0 0
Rothschild & Banks,
Inc. 5,750(35) * 5,750 0 0
William T. Grifffin 5,750(35) * 5,750 0 0
Tim Martin 5,750(35) * 5,750 0 0
Sarki Galbut 5,250 * 5,250 0 0
Estee Margules 5,250 * 5,250 0 0
Shana Margules 5,250 * 5,250 0 0
Rena Margules 5,250 * 5,250 0 0
Raphael Margules 5,250 * 5,250 0 0
Abe Katzman 2,875(36) * 2,875 0 0
Eliot Brody 2,000(36) * 2,000 0 0
Kanan Corbin Schupak &
Aronow, Inc. 1,269 * 1,269 0 0
Parnell Limited 750 * 750 0 0
Michael Braunold(37) 0 0 0 0 0
Michael Fine(37) 0 0 0 0 0
All directors and officers
as a Group(38) 1,156,047 10.25 0 1,156,047 10.25
</TABLE>
* Indicates less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities. In
accordance with SEC rules, shares which may be acquired upon exercise of stock
options which are currently exercisable or which become exercisable within 60
days after the date of the information in the table are deemed to be
beneficially owned by the optionee. Except as indicated by footnote, and subject
to community property laws where applicable, to our knowledge, the persons or
entities named in the table above are believed to have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them.
(2) For purposes of calculating the percentage of outstanding shares held by
each person named below, any shares which such person has the right to acquire
within 60 days after the date of the information in the table are deemed to be
outstanding, but not for the purpose of calculating the percentage ownership of
any other person.
(3) Assumes the sale of all of the shares offered hereby.
(4) Includes 503,202 shares issuable upon exercise of warrants. As required by
SEC rules, the number of shares shown as beneficially owned includes shares
which could be purchased within 60 days after the date of this prospectus.
However, the terms of the warrants held by this selling stockholder specify that
the stockholder can not exercise its warrants to the extent that such exercise
would result in the selling stockholder and its affiliates beneficially owning
more than 4.99% of our then outstanding common stock. Thus, although some of the
shares listed in the table might not be subject to purchase by the selling
stockholder during that 60 day period, they are nevertheless included in this
table. The actual number of shares of common stock issuable upon the exercise of
the warrants is subject to adjustment and could be materially less or more than
the number estimated in the table. This variation is due to factors that cannot
be predicated by us at this time. The most significant of these factors is the
future market price of our common stock.
(5) The address of such person is c/o TTR Technologies Ltd., 2 Hanagar Street,
Kfar Saba, Israel.
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<PAGE>
(6) Includes 324,274 shares held by The Tokayer Family Trust. Mr. Tokayer's wife
is the trustee and Mr. Tokayer's children are the income beneficiaries of the
Trust. Mr. Tokayer disclaims beneficial ownership of all such shares. Also
includes 173,000 shares issuable upon the exercise of fully vested employee
stock options issued from the Company 1996 Employee Stock Option Plan. Does not
include 249,500 shares issuable upon exercise of options held by Gershon
Tokayer, Mr. Tokayer's brother, as to which shares Mr. Tokayer disclaims
beneficial ownership.
(7) Includes 360,000 shares issuable upon exercise of Class A Warrants and
180,000 shares issuable upon the exercise of Class B Warrants, which warrants
are to be issued upon the exercise of the Class A Warrants.
(8) Includes 90,000 shares issuable upon exercise of Class A Warrants and 45,000
shares issuable upon the exercise of Class B Warrants, which warrants are to be
issued upon the exercise of the Class A Warrants.
(9) Includes 85,500 shares issuable upon exercise of Class A Warrants and 42,750
shares issuable upon the exercise of Class B Warrants, which warrants are to be
issued upon the exercise of the Class A Warrants.
(10) Includes 58,500 shares issuable upon exercise of Class A Warrants and
29,250 shares issuable upon the exercise of Class B Warrants, which warrants are
to be issued upon the exercise of the Class A Warrants.
(11) Represents shares issuable upon exercise of warrants.
(12) Includes 120,000 shares issuable upon exercise of fully vested options.
(13) Represents shares issuable upon exercise of fully vested options.
(14) Includes 45,000 shares issuable upon exercise of Class A Warrants and
22,500 shares issuable upon the exercise of Class B Warrants, which warrants are
to be issued upon the exercise of the Class A Warrants.
(15) Includes 36,000 shares issuable upon exercise of Class A Warrants and
18,000 shares issuable upon the exercise of Class B Warrants, which warrants are
to be issued upon the exercise of the Class A Warrants.
(16) Includes 31,500 shares issuable upon exercise of Class A Warrants and
15,750 shares issuable upon the exercise of Class B Warrants, which warrants are
to be issued upon the exercise of the Class A Warrants.
(17) Represents shares issuable upon exercise of warrants.
(18) Represents shares issuable upon fully vested options.
(19) Includes 22,500 shares issuable upon exercise of Class A Warrants and
11,250 shares issuable upon the exercise of Class B Warrants, which warrants are
to be issued upon the exercise of the Class A Warrants.
(20) Includes 9,000 shares issuable upon exercise of Class A Warrants and 4,500
shares issuable upon exercise of Class B Warrants, which warrants are to be
issued upon exercise of Class A Warrants. Includes 50,750 shares issuable upon
exercise of other warrants.
(21) Represents shares issuable upon exercise of warrants.
34
<PAGE>
(22) Includes 18,000 shares issuable upon exercise of Class A Warrants and 9,000
shares issuable upon the exercise of Class B Warrants, which warrants are to be
issued upon the exercise of the Class A Warrants.
(23) Represents shares issuable upon exercise of warrants.
(24) Includes 17,250 shares issuable upon exercise of warrants.
(25) Includes 12,875 shares issuable upon exercise of warrants.
(26) Includes 17,250 shares issuable upon exercise of warrants.
(27) Includes 5,750 shares issuable upon exercise of warrants.
(28) Includes 11,500 shares issuable upon exercise of warrants.
(29) Includes 5,750 shares issuable upon exercise of warrants.
(30) Includes 25,875 shares issuable upon exercise of warrants.
(31) Includes 4,000 shares issuable upon exercise of warrants.
(32) Includes 8,625 shares issuable upon exercise of warrants.
(33) Includes 2,000 shares issuable upon exercise of warrants.
(34) Includes 2,875 shares issuable upon exercise of warrants.
(35) Includes 4,312 shares issuable upon exercise of warrants.
(36) Includes 1,437 shares issuable upon exercise of warrants.
(37) Such person became a director on May 10, 2000.
(38) See Footnotes 6, 12 and 13.
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue 25,000,000 shares of common stock, $.001 par
value per share, of which 15,967,890 shares were outstanding and held of record
as of March 8, 2000 by approximately 173 stockholders of record. A significant
portion or our common stock is held in either nominee name or street name
brokerage accounts. Holders of shares of common stock are entitled to one vote
for each share held of record on all matters to be voted on by stockholders.
There are no preemptive, subscription, conversion or redemption rights
pertaining to the shares of common stock. Holders of shares of common stock are
entitled to receive dividends when, as and if declared by the Board of Directors
from funds legally available therefor and to share ratably in our assets
available upon liquidation, dissolution or winding up. The holders of shares of
common stock do not have cumulative voting rights for the election of directors
and, accordingly, the holders of more than 50% of the shares of common stock are
able to elect all directors.
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<PAGE>
Preferred Stock
We are authorized to issue 5,000,000 shares of preferred stock, $.001 par
value per share, of which no shares are issued and outstanding. The shares of
preferred stock may be issued from time to time in one or more series, in any
manner permitted by law, as determined from time to time by the Board of
Directors, and stated in the resolution or resolutions providing for the
issuance of such shares adopted by the Board of Directors pursuant to authority
vested in it. Without limiting the generality of the foregoing, shares in such
series shall have voting powers, full or limited, or no voting powers, and shall
have such designations, preferences and relative, participating, optional, or
other special rights, and qualifications, limitations, or restrictions thereof,
permitted by law, as shall be stated in the resolution or resolutions providing
for the issuance of such shares adopted by the Board of Directors. The number of
shares of any such series so set forth in the resolution or resolutions may be
increased (but not above the total number of authorized shares of preferred
stock) or decreased (but not below the number of shares thereof then
outstanding) by further resolution or resolutions adopted by the Board of
Directors.
Effect of Delaware Anti-takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law (the
anti-takeover law), which regulates corporate acquisitions. The anti-takeover
law prevents certain Delaware corporations from engaging under certain
circumstances in a "business combination" with any "interested stockholder" for
three years following the date that such stockholder became an interested
stockholder. For purposes of the anti- takeover law, a "business combination"
includes, among other things, a merger or consolidation involving us and the
interested shareholder and the sale of more than 10% of our assets. In general,
the anti-takeover law defines an "interested stockholder" as any entity or
person beneficially owning 15% or more our outstanding voting stock and any
entity or person affiliated with or controlling or controlled by such entity or
person. A Delaware corporation may "opt out" of the anti-takeover law with an
express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or bylaws resulting from
amendments approved by the holders of at least a majority of our outstanding
voting shares. We have not "opted out" of the provisions of the anti-takeover
law.
Anti-takeover Effects of By-laws
Under Delaware law, all stockholder actions must be effected at a duly
called annual or special meeting or by written consent. Our by-laws provide
that, except as otherwise required by law, special meetings of the stockholders
can only be called by the president, the Board of Directors, the Chairman of the
Board, the President or the holders of a majority of all shares entitled to vote
at the meeting.
Transfer Agent
North America Transfer Co., 147 W. Merrick Road, Freeport, New York, is
the transfer agent for our common stock.
Certain Limited Liability and Indemnification Provisions
Pursuant to our Certificate of Incorporation and By-laws, as amended, our
officers and directors shall be indemnified by us to the fullest extent allowed
under Delaware law for claims brought against them in their capacities as
officers and directors. Indemnification is not allowed if the officer or
director does not act in good faith and in a manner reasonably believed to be in
our best interests, or if the officer or director had no reasonable cause to
believe his conduct was lawful. Accordingly, indemnification may occur for
liabilities arising under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted for our directors,
officers and controlling persons pursuant to the foregoing provisions or
otherwise, we have been advised that in the opinion of the SEC, such
36
<PAGE>
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
PLAN OF DISTRIBUTION
As used in this prospectus, stockholders selling our shares pursuant to
this prospectus includes donees and pledgees selling shares received after the
date of this prospectus from a selling stockholder named in this prospectus.
Upon our being notified by a selling stockholder that a donee or pledgee intends
to sell more than 500 shares, a supplement to this prospectus will be filed.
We have agreed to bear all costs, expenses and fees of registration of the
shares of common stock offered by the selling stockholders for resale other than
the legal fees and expenses of counsel or other advisors to the selling
stockholders. Any brokerage commissions, discounts, concessions or other fees,
if any, payable to broker-dealers in connection with any sale of the shares of
common stock will be borne by the selling stockholders selling those shares or
by the purchasers of such shares.
Sales of shares may be effected by selling stockholders from time to time
in one or more types of transactions, including block transactions,
over-the-counter markets, negotiated transactions, put or call options on the
shares and short sales of shares. Shares may be sold at market prices prevailing
at the time of sale or at negotiated prices. The stockholders selling shares
pursuant to this prospectus may effect such transactions by selling shares
directly to purchasers or to or through broker-dealers as principals or agents
or to broker-dealers who may purchase shares of common stock as principals and
thereafter sell the shares from time to time in any one or more of such
transactions. In effecting sales, broker-dealers engaged by a selling
stockholder may arrange for other broker-dealers to participate. Such
brokers-dealers may receive compensation in the form of discounts, concessions
or commissions from the selling stockholders and/or the purchasers of the shares
for whom such broker-dealers may act as agents or to whom they may sell as
principals, or both (which compensation, as a particular broker-dealer, might be
in excess of customary commissions). The selling stockholders have advised us
that they have not entered into any agreements, understandings or arrangements
with any underwriters or broker-dealers regarding the sale of their shares, nor
is there an underwriter or coordinating broker acting in connection with the
proposed sale of shares by the selling stockholders.
The selling stockholders and any broker-dealers that act in connection
with the sale of shares might be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act. We have agreed to indemnify those
selling stockholders who were issued common stock upon conversion of 10%
Convertible Debentures due April 30, 2001 against certain liabilities, including
liabilities arising under the Securities Act. The selling stockholders may agree
to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.
Because selling stockholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling stockholders will be
subject to the prospectus delivery requirements of the Securities Act. We have
informed the selling stockholders that the anti-manipulative provisions of
Regulation M promulgated under the Exchange Act may apply to their sales in the
market.
Selling stockholders also may resell all or a portion of the shares under
this prospectus in open market transactions in reliance upon Rule 144 under the
Securities Act, provided they meet the criteria and conform to the requirements
of that rule.
Upon our being notified by a selling stockholder that any material
arrangement has been entered
37
<PAGE>
into with a broker-dealer for the sale of shares through a block trade, special
offering, exchange distribution or secondary distribution or a purchase by a
broker or dealer, a supplement to this prospectus will be filed, if required,
pursuant to Rule 424(b) under the Act, disclosing:
o The name of each such selling stockholder and of the participating
broker-dealer(s);
o The number of securities involved;
o The price at which such securities were sold;
o The commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
o That such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in this
prospectus; and
o Other facts material to the transaction.
We have agreed to indemnify certain selling stockholders or their
transferees or assignees against certain liabilities, including liabilities
under the Securities Act of 1933, or to contribute to payments to which such
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest may be required to make in respect thereof.
Certain of our stockholders holding a total of approximately 991,800
shares have agreed not to sell more than 25% of the shares offered by such
selling stockholder under this prospectus in any 30 day period. Each of such
other selling stockholders who holds warrants has also agreed not to sell any of
the common stock underlying such warrants for 30 days after the effective date
of this prospectus. Each of our directors and principal officers has undertaken
that, without the prior consent of these stockholders, he will not sell or
otherwise transfer or offer to sell or otherwise transfer (except in a private
transaction in which the transferee agrees to be bound by such restriction) any
shares of common stock directly or indirectly held by him prior to April 6,
2000.
All of the purchasers of an aggregate of 1,800,000 shares of our Common
Stock and 900,000 Class A Warrants sold in a private placement closed on
February 25, 2000 have agreed not to sell such shares or shares of Common Stock
issuable upon exercise of such warrants until after May 25, 2000.
LEGAL MATTERS
The legality of the securities offered by this prospectus will be passed
upon for us by Wolf, Block, Schorr and Solis-Cohen LLP, New York, New York.
EXPERTS
The consolidated financial statements of TTR Technologies, Inc. for the
three years ended December 31, 1999, included in this prospectus, have been
included in reliance upon the report of Brightman Almagor & Co., a member of
Deloitte Touche Tohmatsu, independent certified public accountants, given upon
the authority of said firm as experts in accounting and auditing.
38
<PAGE>
Auditor Change
On June 30, 1998, we appointed Brightman Almagor & Co. to re-issue a
report on our consolidated financial statements for the year ended December 31,
1997. On July 3, 1998, Schneider Ehrlich & Wengrover LLP (or SE&W) resigned as
our independent auditors by mutual agreement. The decision to change accountants
was approved by the Board of Directors.
During the fiscal years ended December 31, 1997 and 1996 and the period
between January 1, 1998, up to and including the day of its resignation, there
were no disagreements between us and SE&W on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedures
which if not resolved to SE&W's satisfaction would have caused them to make
reference in connection with their opinion to the subject matter of the
disagreement. SE&W's report on our financial statements for such fiscal years
indicated that substantial doubt exists regarding our ability to continue as a
going concern.
The audit of Brightman Almagor & Co., a member of Deloitte Touche
Tohmatsu, as our independent accountants did not result in any changes to such
financial statements, and the related audit report of Brightman Almagor & Co., a
member of Deloitte Touche Tohmatsu, also states that substantial doubt exists
regarding our ability to continue as a going concern.
WHERE TO FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information on file at the SEC's public reference room in Washington, D.C. You
can request copies of those documents, upon payment of a duplicating fee, by
writing to the SEC.
We have filed a registration statement on Form S-1 with the SEC. This
prospectus, which forms a part of the registration statement, does not contain
all of the information included in the registration statement. Certain
information is omitted and you should refer to the registration statement and
its exhibits. With respect to references made in this prospectus to any contract
or other document, such references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract or document. You may review a copy of the registration statement
at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C.,
20549 and at the SEC's regional offices at CitiCorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661 and at 7 World Trade Center, Suite 1300,
New York, New York 10048. You can call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our SEC filings and
the registration statement can also be reviewed by accessing the SEC's Internet
web site at http://www.sec.gov.
39
<PAGE>
TTR TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F-2
Consolidated Financial Statements
Balance Sheets as of December 31, 1998 and 1999 F-3
Statements of Operations for the years ended December 31, 1997, 1998
and 1999 and the period from July 14, 1994 (inception) to
December 31, 1999 F-4
Statements of Comprehensive Loss for the years ended December 31, 1997,
1998 and 1999 and the period from July 14, 1994 (inception) to
December 31, 1999 F-5
Statements of Stockholder's Equity (Deficiency) for the years ended
December 31, 1997, 1998 and 1999 and the period from July 14, 1994
(inception) to December 31, 1999 F-6
Statements of Cash Flows for the years ended December 31, 1997, 1998
and 1999 and the period from July 14, 1994 (inception) to
December 31, 1999 F-8
Notes to the Consolidated Financial Statements F-9
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Shareholders of TTR Technologies, Inc.
We have audited the accompanying consolidated balance sheets of TTR
Technologies, Inc. (formerly, TTR Inc.) ("the Company") (a development-stage
company) as of December 31, 1998 and 1999, and the related consolidated
statements of operations, comprehensive loss, stockholders' deficit and cash
flows for the three years ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the Company's management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1998 and 1999, and the consolidated results of
operations, and its cash flows for the three years ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
Certified Public Accountants (Israel)
A member of Deloitte Touche Tohmatsu
Tel-Aviv, Israel
March 1, 2000
F-2
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 74,445 $ 209,580
Accounts receivable 7,793 10,103
Other current assets 21,250 38,630
------------ ------------
Total current assets 103,488 258,313
Property and equipment - net 311,493 205,854
Deferred financing costs, net 70,712 --
Other assets 4,852 3,700
------------ ------------
Total assets $ 490,545 $ 467,867
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Current liabilities
Current portion of long-term debt $ 873,153 $ 7,764
Short-term borrowings, net of discount 264,335 --
Accounts payable 744,103 409,521
Accrued expenses 1,056,345 335,772
------------ ------------
Total current liabilities 2,937,936 753,057
Long-term debt, less current portion 594,011 8,219
Accrued severance pay 56,765 37,587
------------ ------------
Total liabilities 3,588,712 798,863
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred Stock, $ 0.001 par value;
5,000,000 shares authorized; none issued and outstanding -- --
Common stock, $ 0.001 par value;
15,000,000 shares authorized; 4,176,326 and 10,653,560
issued and outstanding, respectively 4,177 10,654
Additional paid-in capital 9,170,585 24,710,602
Other accumulated comprehensive income 79,415 56,971
Deficit accumulated during the development stage (11,758,111) (24,830,348)
Less: deferred compensation (594,233) (278,875)
------------ ------------
Total stockholders' deficit (3,098,167) (330,996)
------------ ------------
Total liabilities and stockholders' deficit $ 490,545 $ 467,867
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
TTR TECHNOLOGIES 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,
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ -- $ 54,922 $ 68,803 $ 123,725
Expenses
Research and development 957,232 1,017,073 345,989 2,940,847
Sales and marketing 914,060 1,155,998 815,586 3,319,442
General and administrative 604,151 1,663,912 630,090 3,340,770
Stock based compensation 1,309,192 1,341,889 6,152,587 8,822,941
------------ ------------ ------------ ------------
Total expenses 3,784,635 5,178,872 7,944,252 18,424,000
------------ ------------ ------------ ------------
Operating loss (3,784,635) (5,123,950) (7,875,449) (18,300,275)
Other (income) expense
Legal settlement 232,500 -- -- 232,500
Loss on investment -- -- -- 17,000
Other income (50,000) (25,000) -- (75,000)
Amortization of deferred financing costs 81,101 72,288 4,180,540 4,516,775
Interest income (42,069) (3,413) (3,689) (61,995)
Interest expense 113,445 410,715 1,019,937 1,900,793
------------ ------------ ------------ ------------
Total other (income) expenses 334,977 454,590 5,196,788 6,530,073
------------ ------------ ------------ ------------
Net loss $ (4,119,612) $ (5,578,540) $(13,072,237) $(24,830,348)
============ ============ ============ ============
Per share data:
Basic and diluted $ (1.35) $ (1.54) $ (2.07)
============ ============ ============
Weighted average number
of common shares used in
basic and diluted loss per share 3,054,519 3,615,908 6,321,719
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
From
Inception
Year Ended (July 14,
December 31, 1994) to
---------------------------------------------- December 31,
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (4,119,612) $ (5,578,540) $(13,072,237) $(24,830,348)
Other comprehensive income (loss)
Foreign currency translation adjustments (19,667) 41,386 (22,444) 56,971
------------ ------------ ------------ ------------
Comprehensive loss $ (4,139,179) $ (5,537,154) $(13,094,681) $(24,773,377)
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Foreign
Common Stock Additional Currency
Common Stock Subscribed Paid-in Translation
Shares Amount Shares Amount Capital Adjustment
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at July 14, 1994
(date of inception) -- $ -- -- $ -- $ -- $ --
Issuances of common stock, par value $ 0.001
Services rendered 1,200,000 1,200
Cash 1,200,000 1,200 23,800
Net loss
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1994 2,400,000 2,400 -- -- 23,800 --
Common stock contributed (561,453) (561) 561
Issuances of common stock, par value $ 0.001
Services rendered 361,453 361 17,712
Stock options and warrants granted 600
Foreign currency translation adjustment 22,652
Net loss
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1995 2,200,000 2,200 -- -- 42,673 22,652
Issuances of common stock, par value $ 0.001
Cash, net of offering costs of $ 11,467 850,000 850 362,683
Foreign currency translation adjustment 35,044
Net loss
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1996 3,050,000 3,050 -- -- 405,356 57,696
Common stock contributed (135,000) (135) 135
Issuances of common stock, par value $ 0.001
Cash, net of offering costs of $ 832,551 908,000 908 5,000,440
Services rendered 74,000 74 832,551
Exercise of options 374,548 375 3,370
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
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1997 4,271,548 4,272 16,000 100,000 8,117,275 38,029
<CAPTION>
Deficit
Accumulated
During
Development Deferred
Stage Compensation Total
----------- ----------- -----------
<S> <C> <C> <C>
Balances at July 14, 1994
(date of inception) $ -- $ -- $ --
Issuances of common stock, par value $ 0.001
Services rendered 1,200
Cash 25,000
Net loss (42,085) (42,085)
----------- ----------- -----------
Balances at December 31, 1994 (42,085) -- (15,885)
Common stock contributed
Issuances of common stock, par value $ 0.001
Services rendered 18,073
Stock options and warrants granted 600
Foreign currency translation adjustment 22,652
Net loss (896,663) (896,663)
----------- ----------- -----------
Balances at December 31, 1995 (938,748) -- (871,223)
Issuances of common stock, par value $ 0.001
Cash, net of offering costs of $ 11,467 363,533
Foreign currency translation adjustment 35,044
Net loss (1,121,211) (1,121,211)
----------- ----------- -----------
Balances at December 31, 1996 (2,059,959) -- (1,593,857)
Common stock contributed
Issuances of common stock, par value $ 0.001
Cash, net of offering costs of $ 832,551 5,001,348
Services rendered (500,000) 332,625
Exercise of options 3,745
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) (4,119,612)
----------- ----------- -----------
Balances at December 31, 1997 (6,179,571) (1,402,776) 677,229
</TABLE>
F-6
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Foreign
Common Stock Additional Currency
Common Stock Subscribed Paid-in Translation
Shares Amount Shares Amount Capital Adjustment
---------- ------------ -------- ------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Common Stock Subscriptions 16,000 16 (16,000) (100,000) 99,984
Common Stock Forfeited (1,000,000) (1,000) 1,000
Transfer of Temporary Equity to Permanent Capital 15,000 15 77,141
Issuances of common stock, par value $ 0.001
Cash 41,667 42 24,958
Services rendered 244,000 244 620,344
Stock options and warrants granted (cancelled) (255,992)
Discount relating to shares and warrants issued 156,111 156 486,307
Amortization of deferred compensation
Warrant exchange 432,000 432 (432)
Foreign currency translation adjustment 41,386
Net loss
---------- ------------ -------- ------ ------------ ---------
Balances at December 31, 1998 4,176,326 4,177 -- -- 9,170,585 79,415
Issuances of common stock, par value $ 0.001
Cash 314,774 315 225,140
Services rendered 1,227,000 1,227 1,669,548
Exercise of options 1,714,952 1,715 1,401,660
Stock options granted (cancelled) 4,449,015
Conversion of debt into common stock 3,220,508 3,220 3,376,749
Fair value of warrants associated
with financing agreement 3,845,400
Amortization of deferred compensation
Value assigned to beneficial conversion feature
of convertible notes 572,505
Foreign currency translation adjustment (22,444)
Net loss
---------- ------------ -------- ------ ------------ ---------
Balances at December 31, 1999 10,653,560 $ 10,654 $ -- $ -- $ 24,710,602 $ 56,971
========== ============ ======== ====== ============ =========
<CAPTION>
Deficit
Accumulated
During
Development Deferred
Stage Compensation Total
------------- ----------- ------------
<S> <C> <C> <C>
Common Stock Subscriptions
Common Stock Forfeited
Transfer of Temporary Equity to Permanent Capital 77,156
Issuances of common stock, par value $ 0.001
Cash 25,000
Services rendered (620,588)
Stock options and warrants granted (cancelled) 255,992
Discount relating to shares and warrants issued 486,463
Amortization of deferred compensation 1,173,139 1,173,139
Warrant exchange
Foreign currency translation adjustment 41,386
Net loss (5,578,540) (5,578,540)
------------- ----------- ------------
Balances at December 31, 1998 (11,758,111) (594,233) (3,098,167)
Issuances of common stock, par value $ 0.001
Cash 225,455
Services rendered (445,725) 1,225,050
Exercise of options 1,403,375
Stock options granted (cancelled) (613,435) 3,835,580
Conversion of debt into common stock 3,379,969
Fair value of warrants associated
with financing agreement 3,845,400
Amortization of deferred compensation 1,374,518 1,374,518
Value assigned to beneficial conversion feature
of convertible notes 572,505
Foreign currency translation adjustment (22,444)
Net loss (13,072,237) (13,072,237)
------------- ----------- ------------
Balances at December 31, 1999 $ (24,830,348) $ (278,875) $ (330,996)
============= =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
TTR TECHNOLOGIES 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,
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $ (4,119,612) $ (5,578,540) $(13,072,237) $(24,830,348)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 184,290 187,298 4,273,778 4,901,407
Amortization of note discount -- 272,009 214,454 486,463
Translation adjustment -- -- -- (1,528)
Amortization of deferred compensation 972,567 1,173,139 1,374,518 3,520,224
Beneficial conversion feature of convertible debt -- -- 572,505 572,505
Stock and warrants issued for services
and legal settlement 565,125 -- 4,891,880 5,475,678
Payment of common stock issued with
with guaranteed selling price -- (155,344) -- (155,344)
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable 478 (8,480) (2,305) (10,622)
Other current assets (7,204) 99,113 (4,081) (30,886)
Other assets (72,700) 69,000 (3,700)
Accounts payable (72,401) 624,547 (694,469) 204,596
Accrued expenses 22,297 958,098 (109,220) 803,914
Accrued severance 26,299 33,009 (19,332) 58,238
Interest payable (234,508) 90,920 160,099 251,019
------------ ------------ ------------ ------------
Net cash used by operating activities (2,735,369) (2,235,231) (2,414,410) (8,758,384)
------------ ------------ ------------ ------------
Cash flows from investing activities
Proceeds from sales of fixed assets -- -- 6,098 6,098
Purchases of property and equipment (175,507) (64,363) (6,822) (682,585)
Increase in organization costs -- -- -- (7,680)
------------ ------------ ------------ ------------
Net cash used by investing activities (175,507) (64,363) (724) (684,167)
------------ ------------ ------------ ------------
Cash flows from financing activities
Proceeds from issuance of common stock 5,520,837 125,000 1,628,830 7,664,400
Proceeds from officer loan 10,000 16,000 -- --
Stock offering costs (309,565) -- -- (475,664)
Deferred financing costs (19,000) (143,000) (276,901) (682,312)
Proceeds from short-term borrowings 200,000 206,553 -- 1,356,155
Proceeds from long-term debt -- 1,737,688 -- 2,751,825
Proceeds from convertible debentures -- -- 2,000,000 2,000,000
Repayment of short-term borrowings (1,049,602) -- (307,480) (1,357,082)
Repayments of long-term debt (1,053,455) (15,839) (494,207) (1,599,517)
------------ ------------ ------------ ------------
Net cash provided by financing activities 3,299,215 1,926,402 2,550,242 9,657,805
------------ ------------ ------------ ------------
Effect of exchange rate changes on cash (1,955) (2,403) 27 (5,674)
------------ ------------ ------------ ------------
Increase in cash and cash equivalents 386,384 (375,595) 135,135 209,580
Cash and cash equivalents at beginning of period 63,656 450,040 74,445 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 450,040 $ 74,445 $ 209,580 $ 209,580
============ ============ ============ ============
Supplemental disclosures of
cash flow information
Cash paid during the period for:
Interest $ 345,258 $ 42,609 $ 50,046 $ 472,157
============ ============ ============ ============
Transfer of common stock issued with
guaranteed selling price to permanent capital $ 77,156
============
Non cash financing activity:
Conversion of debt and accrued interest to common stock $ 3,379,969
============
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
TTR TECHNOLOGIES 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. In December 1998 the Company amended its
certificate of incorporation to change its name to TTR Technologies, Inc.
TTR Technologies Ltd., ("TTR Ltd.") 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
limited revenues to date. Business activities to date have focused on
product and marketing research, product development, and raising capital.
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 Ltd. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
consolidated amounts have been reclassified for consistent presentation.
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.
Cash Equivalents
Cash equivalents consist of short-term, highly liquid debt investments
that are readily convertible into cash with original maturities when
purchased of three months or less.
Fair Value of Financial Instruments
Substantially all of the Company's financial instruments, consisting
primarily of cash equivalents, current receivables, accounts payable and
accrued expenses, are carried at, or approximate, fair value because of
their short-term nature or because they carry market rates of interest.
F-9
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition".
SOP 97-2 provides guidance in recognizing revenue on software transactions
and is required for transactions entered into after December 15, 1997.
Subsequently, in March 1998 and December 1998, the AICPA issued SOP 98-4
and SOP 98-9, respectively, which defer until the Company's fiscal year
beginning January 1, 2000, the application of several paragraphs and
examples in SOP 97-2. Management does not believe that the adoption of the
remaining portions of SOP 97-2, which were deferred by SOP 98-4 and SOP
98-9, will have a material impact on the Company's financial statements.
Revenues are generated from licensing software and are recognized upon
delivery to the customer, provided no significant obligations of the
Company remain and collection for the resulting receivable is probable.
Stock Based Compensation
The Company accounts for stock based compensation under the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). As permitted by SFAS 123, the
Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related interpretations in accounting for stock based compensation to
employees. Accordingly, compensation cost for stock options granted to
employees is measured as the excess, if any, of the quoted market price of
the Company's Common Stock at the measurement date (generally, the date of
grant) over the amount an employee must pay to acquire the stock. This
amount is recognized over the vesting periods of the related grants.
Stock options granted to non-employees are valued using a Black-Scholes
option pricing model with appropriate assumptions for risk free investment
rates, expected lives, dividend yields and volatility factors. The value
of options granted to non-employees is charged to appropriate asset or
expense accounts when the options are granted.
Foreign Currency Translations
The financial statements of TTR Ltd. 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 statements 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-10
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
Net Loss Per Share
The Company has adopted the provisions of Statement of Financial
Accounting Standards No.128 (SFAS 128) "Earnings per Share". 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 (loss) 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 have been included in the net loss per share
computation for the period, because their inclusion would be
anti-dilutive.
Depreciation and Amortization
Equipment, vehicles and leasehold improvements are stated at cost.
Equipment and vehicles are depreciated over the estimated useful lives of
the related assets, which range from three to fourteen 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 uses the liability method to determine its income tax expense
as required under the Statement of Financial Accounting Standards No. 109,
(SFAS 109). SFAS 109 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, if it is more likely than not that all or a portion
of it will not be realized.
F-11
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)
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
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.
Comprehensive Income (Loss)
In January 1998, the Company adopted SFAS 130, "Reporting Comprehensive
Income," which establishes standards for reporting the components of
comprehensive income. The foreign currency translation adjustment is the
Company's only component of comprehensive income.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for all derivative
instruments. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The Company believes that the adoption of SFAS No. 133 on
January 1, 2000 will not have a significant effect on its financial
statements.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
----------------------
1998 1999
-------- --------
Computer equipment $205,477 $186,690
Leasehold improvements 109,350 114,928
Office equipment 150,608 140,242
Vehicles 84,601 93,585
-------- --------
550,036 535,445
Less: Accumulated depreciation 238,543 329,591
-------- --------
$311,493 $205,854
======== ========
Depreciation expense was $ 88,311, $ 113,858 and $ 107,010 for the years
ended December 31, 1997, 1998 and 1999.
F-12
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
------------------------
1998 1999
---------- ----------
Accrued payroll and related amounts $ 749,371 $ 66,868
Taxes 24,257 4,738
Accrued interest 90,920 --
Settlement (a) -- 125,000
Other 191,797 139,166
---------- ----------
$1,056,345 $ 335,772
========== ==========
(a) In June 1999, the Company received notice from a shareholder,
threatening to commence litigation, alleging that the Company failed
to register its stock. The shareholder was seeking the return of its
investment in the amount of $ 400,000 plus interest to date. In
November 1999 the Company settled the matter, and agreed to pay a
total of $ 200,000 over specified periods, and to issue a total of
50,000 warrants with exercise prices ranging from $ 2.50 to $ 3.50.
NOTE 5 - ACCRUED SEVERANCE PAY
Under Israeli law, TTR Ltd. 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 and the purchase
of insurance policies.
NOTE 6 - DEBT FINANCINGS
Short-Term Borrowings
December 31,
---------------------
1998 1999
-------- -------
Promissory Note (a)
(net of discount of $ 42,555) $ 57,445 $ --
Other loans (b) 81,455 --
Bank Loan 125,435 --
-------- -------
$264,335 $ --
======== =======
(a) In September 1998, the Company issued a short-term non-interest
bearing $ 100,000 promissory note to a private investor. In
connection with the loan, the company also sold to the investor
111,111 shares of Common Stock at par. For financial reporting
purposes, the Company recorded a note discount totaling $ 87,500, to
reflect the value of the stock. The discount was amortized on a
straight-line basis over the term of the note.
F-13
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - DEBT FINANCINGS (contd.)
Short-Term Borrowings (contd.)
(b) This amount represents non-interest bearing advances which were used
to purchase 100,517 additional shares of Common Stock in February
1999.
Long-Term Debt
December 31,
------------------------
1998 1999
---------- ----------
Bank loan (a) $ 26,563 $ 15,983
10% Promissory Notes (b)
(net of discount of $130,475) 1,332,025 --
8% Promissory Notes (c)
(net of discount of $41,424) 108,576 --
---------- ----------
1,467,164 15,983
Less: current portion 873,153 7,764
---------- ----------
$ 594,011 $ 8,219
========== ==========
(a) The loan is denominated in New Israeli Shekels (NIS), bears interest
at the Israeli prime rate (at December 31, 1999 - 12.2%) plus 3% per
annum, and are secured by substantially all the assets of TTR Ltd..
Principal payments are due in various installments through 2001.
(b) From April through August 1998, the Company realized gross proceeds
of $ 1,462,500 from a private offering of 29.25 Units, each Unit
consisting of a $ 50,000 10% Promissory Note and Warrants to
purchase 11,500 shares of Common Stock. The exercise price of the
warrant is $ 1.50 per share. For financial reporting purposes, the
Company recorded a discount of $ 357,450, to reflect the value of
the Warrants. The discount was being amortized on a straight-line
basis over the terms of the respective notes. The notes and accrued
interest were due at the earlier of one year or 30 days following
any public or private equity or debt financing exceeding $
1,000,000.
In December 1999, the Company offered any remaining note holders an
option to convert their outstanding principal and accrued interest
to shares of common stock. The conversion rate was based on 85% of
the average closing bid price of the common shares for the 30
trading days preceding the date of conversion. In accordance with
applicable accounting rules, the Company recorded a charge to
interest expense in the amount of $ 572,505 to reflect this
beneficial conversion feature. A total of $ 1,329,202 of note
principal and accrued interest was converted to common stock.
F-14
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - DEBT FINANCINGS (contd.)
Long-Term Debt (contd.)
(c) In December 1998, the Company realized gross proceeds of $ 150,000
from a private offering of 5 Units, each Unit consisting of a $
30,000 8% Promissory Note, 9,000 shares of Common Stock and Warrants
to purchase an additional 3,000 shares. For financial reporting
purposes, the Company recorded a note discount of $ 41,513, to
reflect the value of the Stock and Warrants. The discount was being
amortized on a straight-line basis over the term of the notes. In
November 1999, the entire principal balance plus accrued interest on
these notes was repaid.
The aggregate maturities of long-term debt for the next two years ending
December 31, are as follows: 2000 - $ 7,764; and 2001 - $ 8,219.
10% Convertible Debentures
In May 1999 the Company agreed to issue $ 2,000,000 of its 10% Convertible
Debentures to private investors. The Debentures were convertible into
shares of the Company's Common Stock at the rate of $ 0.77 per share based
on the closing trading prices of the Common Stock during certain specified
periods. In addition, upon conversion, warrants were issued to purchase
additional shares of Common Stock equal to one-half of the shares of
Common Stock issued. The warrants were exercisable at a price per share
equal to 120% of the conversion rate and expire in April 2002.
In October and November 1999, the investors converted all of the
outstanding debentures and were issued 2,681,934 shares of common stock
and 1,340,967 warrants exercisable at $ 0.92 per share. In November 1999,
the investors exercised of all the outstanding conversion warrants.
In connection with the sale of Debentures, the Company also issued
warrants to purchase up to 1.3 million shares of Common Stock to an
independent consultant. These warrants expire in April 2002 and are
exercisable at a nominal price per share. Using the Black-Scholes model
for estimating the fair value of the warrants, the Company recorded $
3,845,400 as deferred financing costs. This amount was charged to
operations in the period the debentures were converted.
F-15
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES
At December 31, 1999, the Company had available $ 6,475,000 of net
operating loss carryforwards for U.S. federal income tax purposes which
expire in the years 2014 through 2019, and $ 6,822,000 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:
Year ended
December 31,
---------------------------
1998 1999
----------- -----------
Net operating loss carryforwards $ 3,094,809 $ 4,398,088
Research and development 227,000 130,853
Stock based compensation 40,813 2,313,232
Accrued vacation and severance 32,000 22,905
----------- -----------
Total deferred tax assets 3,394,622 6,865,078
Valuation allowance (3,394,622) (6,865,078)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
NOTE 8 - STOCKHOLDERS' EQUITY
Stock Options
1996 Incentive and Non-Qualified 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. In December 1999,
the Plan was amended to increase the total number of shares available for
grant to 1,500,000. 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. The Plan will terminate in 2006.
F-16
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY (contd.)
Stock Options (contd.)
1996 Incentive and Non-Qualified Stock Option Plan (contd.)
In 1997, the Company granted 60,000 options with an exercise price below
the fair value of the underlying common stock. The issuance of the options
resulted in a charge to deferred compensation in the amount of $ 300,000
which was being amortized over the vesting period. In 1999, the Company
granted 534,000 $ 0.01 options under the Plan, which were immediately
exercisable to employees. The issuance of the options resulted in a charge
to stock based compensation in the amount of $ 1,502,610. Included in this
amount, were 209,500 options granted to an employee who is also the
brother of the Company's president and chief executive officer.
A total of 24,000 stock options granted to non-employees in 1997 resulted
in a charge to deferred compensation of $ 53,032, which is being amortized
over the four-year vesting period.
Non-Executive Directors Stock Option Plan
In July 1998, the Board of Directors adopted the Non-Executive Directors
Stock Option Plan ("the Directors' Plan") and has reserved up to 25,000
shares of common stock for issuance thereunder. The plan provides for the
grant of options to directors who are not otherwise employed by the
Company. Options are exercisable upon the date of grant and expire five
years from the date of the grant. Upon the termination of director, the
options expire within two months of such termination. The exercise price
of the option will be the fair market value of the share on the date of
the grant of the option. The Plan will terminate in 2008. As of December
31, 1999, no options had been granted under the Directors' Plan.
F-17
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY (contd.)
Stock Options (contd.)
Non-Executive Directors Stock Option Plan (contd.)
A summary of the status of the Plan as of December 31, 1999 and changes
during the year ending on that date are presented below:
Range of
Exercise
Shares Prices
------- ----------
Options outstanding, January 1, 1997 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
Granted 291,600 3.03- 7.00
Canceled (294,950) 3.03-13.88
Exercised -- --
------- ----------
Options outstanding, December 31, 1998 157,750 4.00-13.88
Granted 736,500 0.01- 5.06
Canceled (144,850) 4.00-13.88
Exercised -- --
------- ----------
Options outstanding, December 31, 1999 749,400 $0.01- 7.00
======== ==========
Shares of common available for future grant 750,600
========
The following table summarizes information about stock options under the
plan outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average Weighted Average
---------------- ----------------
Remaining
Number Contractual Exercise Number Exercise
Range of price Outstanding Life Price Exercisable Price
-------------- ----------- ---- ----- ----------- -----
$ 0.01 534,000 9.70 $ 0.01 449,000 $ 0.01
$ 0.90 100,000 9.14 0.90 100,000 0.90
$ 2.56 100,000 9.89 2.56 -- --
$ 4.00-$5.81 8,900 8.16 4.96 3,650 4.81
$ 7.00 6,500 7.00 7.00 3,500 7.00
------- ---- ------ ------- --------
$ 0.01-$7.00 749,400 9.61 $ 0.59 556,150 $ 0.25
======= ==== ====== ======= ========
Weighted-average grant date fair value of options granted in 1997, 1998
and 1999, under the Black-Scholes option pricing model, was $ 5.82, $ 1.14
and $ 2.20 per option, respectively.
F-18
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY (contd.)
Other Option Grants
In 1997, the Company issued options to purchase 217,473 shares to the
Chief executive Officer of TTR Ltd. The options have an exercise price of
$ 0.01 per share and vest over a four- year period. The issuance of the
options resulted in a charge to deferred compensation expense of $
1,522,300 which was being amortized over the vesting period. In November
1998 the officer resigned and a settlement agreement was executed.
Pursuant to the agreement, 48,328 options were cancelled and the remaining
169,145 become exercisable at various dates in 1999.
In 1999, the Company issued non-plan options to purchase 196,000 shares to
various employees . The options have an exercise price of $ 0.01 per share
and vested immediately. The issuance of these options resulted in a charge
to stock based compensation in the amount of $ 163,660.
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:
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Net loss
As reported $ (4,119,612) $ (5,578,540) $ (13,072,237)
Proforma $ (4,599,940) $ (5,635,574) $ (13,123,185)
Loss per share
As reported $ (1.35) $ (1.54) $ (2.07)
Proforma $ (1.51) $ (1.56) $ (2.08)
The fair value of each option granted in 1997, 1998 and 1999 is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:
1997 1998 1999
---- ---- ----
Risk free interest rates 6.23% 5.51% 5.52%
Expected option lives 2.5 years 2.5 years 2.5 years
Expected volatilities 46.5% 46.5% 46.5%
Expected dividend yields None None None
F-19
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY (contd.)
Warrants
o In April 1996, in connection with a private placement, the Company
issued warrants to purchase an additional 1,000,000 shares of Common
Stock. The warrants were exercisable for a period of three years
commencing February 1997 at an exercise price of $ 7.00 per share.
In July 1998, the warrants were exchanged for 400,000 shares of
Common Stock.
o In February 1997, in connection with the Company's initial public
offering the Company sold to the underwriter, for $ 80, five-year
warrants to purchase up to an additional 80,000 shares of the
Company's Common Stock at an exercise price equal to $ 11.20 per
share. In July 1998, the warrants were exchanged for 32,000 shares
of Common Stock.
o In December 1997, in connection with a private placement, the
Company issued warrants to purchase an additional 33,000 shares of
Common Stock. The warrants are exercisable for a period of four
years at an exercise price of $ 7.80 per share. However, in lieu of
cash payments for exercising the shares, the investor is entitled to
accept a smaller number of shares of Common Stock based on the
spread between the exercise price and the then public market price
of the Company's Common Stock.
o In April 1998, in connection with a proposed public offering of
additional shares of Common Stock, the Company issued to an
underwriter four-year Warrants to purchase up to 25,000 shares of
the Company Stock at an exercise price of $ 5.63.
o From April through August 1998, in connection with a private
placement, the Company issued warrants to purchase an additional
336,375 shares of Common Stock. The warrants are exercisable for a
period of four years at exercise prices ranging from $ 3.41 to $
6.47 per share. In consideration of extending the term of the
related notes, the Company has reduced the exercise price to $1.50
per share.
o In June 1998 the Company issued warrants to purchase 25,000 shares
of Common Stock to a consultant pursuant to a one-year consulting
agreements. The warrants are exercisable for a period of four years
at an exercise price of $ 5.75. In April 1999, the exercise price
was reduced to $ 1.50 per share.
F-20
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY (contd.)
Warrants (contd.)
o In December 1998, in connection with a private placement, the
Company issued warrants to purchase an additional 15,000 shares of
Common Stock. The warrants are exercisable for a period of five
years at an exercise price of $ 6.00.
o In May 1999, in connection with the sale of convertible debentures
(see Note 6) the Company issued 1.3 million warrants. These warrants
expire in April 2002 and are exercisable at a nominal price per
share.
o In July 1999, the Company issued 200,000 warrants exercisable at $
2.75 to a consultant pursuant to a three-month consulting agreement.
o In August 1999 a consultant was issued warrants to purchase up to 1
million shares of common stock at a nominal price per share. The
warrants are exercisable only upon the Company entering into an
agreement with a strategic investor through the efforts of the
consultant. The warrants expire in October 2002. In November 1999,
upon the signing of an agreement with a strategic investor, the
warrants became exercisable (see Note 10). Using the Black-Scholes
model for estimating the fair value of the warrants, the Company
recorded a charge to operations of $ 2,741,000 in connection with
the warrants.
o In November 1999, in connection with a legal settlement, the Company
issued a total of 50,000 warrants with exercise prices ranging from
$ 2.50 to $ 3.50. (see Note 4)
o In November 1999, the Company issued 25,000 warrants exercisable at
a nominal price per share to a consultant.
o At December 31, 1999, the Company had outstanding warrants to
purchase a total of 2,814,536 shares of Common Stock with exercise
prices ranging from $ 0.01 to $ 7.80 per share.
F-21
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY (contd.)
Stock Issuances
During the year ended December 31, 1997, the Company completed the
following common stock transactions:
o 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.
o In March 1997, the Company issued 5,000 shares of Common Stock to a
consultant and recorded a $ 50,000 compensation charge.
o In March 1997, the Company issued 50,000 shares of Common Stock to
an employee, pursuant to a one-year employment agreement. The
Company recorded deferred compensation in the amount of $ 500,000
relating to the issuance of the shares, and amortized this over the
term of the agreement.
o In April 1997, the Company issued 19,000 shares of Common Stock to
two consultants and recorded a $ 282,625 compensation charge.
o On December 24, 1997, the Company entered into a stock subscription
agreement for the sale of 64,000 shares of 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. The Company also issued warrants to the investor to purchase
an additional 33,000 shares of Common Stock.
During the year ended December 31, 1998, the Company completed the
following common stock transactions:
o An aggregate of 250,000 shares of the Company's Common Stock, owned
beneficially by its President, and designated as escrow shares were
forfeited and returned to the Company. In June 1998, the Company's
President waived his rights to the remaining 750,000 escrowed
shares.
o The Company issued a total of 244,000 shares of Common Stock and
25,000 warrants to various consultants for services rendered. the
value of the services totaling $ 642,700 is being amortized over the
one-year contract terms.
o In December 1998, the Company entered into an agreement with a
private investor for the sale of an additional 150,758 shares of
Common Stock. The total purchase price was $ 90,455, of which $
25,000 was received in 1998.
F-22
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - STOCKHOLDERS' EQUITY (contd.)
Stock Issuances (contd.)
During the year ended December 31, 1999, the Company completed the
following common stock transactions:
o In January and February 1999 the Company issued 627,000 shares of
Common Stock and 10,000 warrants exercisable at $ 1.75 to various
consultants pursuant to one year consulting agreements. The value of
the services totaling $ 445,725 is being amortized over the one-year
contract terms.
o In January 1999, the Company issued 250,000 shares of Common Stock
as payment of an outstanding liability in the amount of $ 168,750.
o In February and April 1999, the Company received $ 160,000 from the
issuance of an additional 205,682 shares of its Common Stock.
o In July 1999, the Company issued 150,000 shares of Common Stock in
exchange for previously issued options in connection with the
termination of, and settlement of certain claims by an ex-employee.
o In October 1999, the Company issued 200,000 shares of Common Stock
to a consultant pursuant to a consulting agreement.
o In October 1999, the Company issued 2,681,934 shares of Common Stock
as a result of the conversion of all the outstanding 10% convertible
debentures plus accrued interest thereon.
o In December 1999, the Company issued 538,574 shares as a result of
the conversion of long-term debt.
o In 1999, the Company issued 1,714,952 shares of Common Stock from
the exercise of various outstanding warrants.
F-23
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMON STOCK ISSUED WITH GUARANTEED SELLING PRICE
In 1997, the Company and TTR Ltd. 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.
In May 1997, pursuant to a settlement agreement, the Company issued to the
individual 15,000 shares of Common Stock subject to a guaranteed selling
price of $ 15.50 per share. In 1998, the individual sold his shares in the
open market for $ 77,156, and the Company paid the shortfall of $ 155,344,
as required by the guarantee. In 1997, the Company recorded an expense of
$ 232,500 in connection with the settlement agreement.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Royalties
TTR Ltd. is committed to pay royalties to the Office of the Chief
Scientist of the Government of Israel (OCS) on proceeds from sales of
products of which the OCS has participated by way of grants. The royalties
are payable at the rate of 3% for the first three years of product sales,
4% for the following three years, and 5% thereafter up to a maximum of
100% of the grant. The total amount of grants received at December 31,
1999 was $ 210,000.
The research and development grants are presented in the statement of
operations as a reduction of research and development expenses.
The refund of the grant is contingent on future sales and the Company has
no obligation to refund these grants if the sales are not sufficient.
Operating Leases
TTR Ltd. has entered into a lease agreement for office space expiring
through 2001. Future minimum rentals on these leases as of December 31,
1999 are as follows:
Year ended December 31,
-----------------------
2000 $ 32,180
2001 13,408
F-24
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES (contd.)
Employment Agreement
Effective, June 1, 1999, the Company entered into an employment agreement
with its new Chief Operating Officer. The agreement is for a term of one
year and is automatically renewable for additional one-year terms, unless
terminated in accordance with the agreement upon 90 days prior notice. The
agreement provides for a monthly salary of $ 5,000 plus benefits and the
issuance of options under the 1996 Option Plan to purchase 235,000 shares
of the Company's common stock, at an exercise price of $ 0.01 per share.
Upon the consummation of the equity investment by Macrovision Corporation
("Macrovision"), 150,000 of the options became exercisable, with the
remaining options vesting at the end of the tenth month thereafter.
Consulting Agreement
In June 1999, the Company entered into a consulting agreement which will
terminate in January 2003. The agreement provides for quarterly fees of
$15,000.
Amended Marketing and Sales Representation Agreement
In August 1999, the Company amended an existing agreement to provide for
the issuance of 200,000 shares of common stock upon the commencement of an
approved marketing campaign of the Company's proposed product to prevent
the unauthorized copying of audio CR-ROM discs. In addition, the
representative was granted warrants to purchase up to 1,000,000 shares of
common stock at a nominal price per share. The warrants are exercisable
only upon the Company entering into an agreement with a Strategic Partner
as a direct result of the representatives activity. Such agreement must
provide for an equity investment of at least $ 3,000,000 and the licensing
of the Company's technology. The warrants expire in October 2002.
In October 1999, pursuant to the agreement, the Company issued 200,000
shares of common stock. In November 1999, upon the signing of an agreement
with a Strategic Partner, the warrants became exercisable. Using the
Black-Scholes model for estimating the fair value of the warrants, the
Company recorded a charge to operations of $ 2,741,000 in connection with
the warrants.
F-25
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES (contd.)
Licensing and Investment Agreement
In November 1999, the Company signed an agreement with Macrovision
Corporation to jointly develop and market music copy protection technology
for optical based media. In connection with the agreement the Company
granted to Macrovision an exclusive world-wide, royalty-bearing license to
use the Company's proprietary technology through December 31, 2009. The
Company will be entitled to a 30% royalty which may be adjusted to 25%,
under certain conditions. Also under certain conditions, the exclusive
license may revert to a non-exclusive license as of the second anniversary
of the Commercial Launch, as defined. If certain conditions relating to
the timing of the Commercial Launch transpire, the Company will be
entitled to minimum annual guaranteed royalty advances, commencing on the
first anniversary of the Commercial Launch and continuing through the
ninth year, aggregating $ 25 million.
Under the Agreement, in January 2000, Macrovision made a $ 4 million
equity investment in the Company for an 11.4% interest and received an
exclusive license to the Company's proprietary DiscGuard(TM) technology.
Also under the agreement, the Company has agreed to reimburse Macrovision
for up to $ 1 million of research and development expenses incurred within
the first year of the joint development.
NOTE 11 - GEOGRAPHIC DATA
U. S. % of Total Israel % of Total
----- ---------- ------ ----------
For the year ended
December 31, 1999:
Revenue $ 5,550 8.07% $ 63,253 91.93%
Operating loss (6,371,600) 80.90% (1,503,849) 19.10%
Identifiable assets 239,995 51.30% 227,872 48.70%
For the year ended
December 31, 1998:
Revenue $ -- -- $ 54,922 100.00%
Operating loss (2,090,049) 40.79% (3,033,901) 59.21%
Identifiable assets 171,678 35.00% 318,867 65.00%
For the year ended
December 31, 1997:
Revenue $ -- -- $ -- --
Operating loss (1,414,007) 37.36% (2,370,628) 62.64%
Identifiable assets 633,285 53.28% 555,342 46.72%
F-26
<PAGE>
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RELATED PARTY TRANSACTION
In October 1997, TTR Ltd. entered into a two-year management agreement
with Ultimus LTD, (Ultimus) an Israeli company. Under the agreement, the
Company provided management and administrative services relating to
Ultimus' day-to-day operations and earned fees totaling $ 75,000. The
agreement was terminated in April 1998. An ex-officer of the Company holds
approximately 7.5% of the outstanding shares of Ultimus and, together with
the Company's Chairman, served on their Board of Directors.
NOTE 13 - SUBSEQUENT EVENTS
Private Placement
In February 2000, the Company completed a private placement of 1,800,000
shares of its Common Stock and 900,000 Class A Warrants for an aggregate
purchase price of $10,000,000. The Class A Warrants are exercisable for a
period of 60 months at an exercise price per share of $8.84. The Company
may redeem the Class A Warrants for $ 0.10 per warrant 6 months following
issuance if the underlying common stock is registered and the Company's
common shares have traded at or above 200% of the exercise price for a
period of twenty consecutive trading days. Upon exercise of the Class A
Warrants, the Company will issue Class B Warrants for an additional
450,000 shares. The Class B Warrants are exercisable for a period of 36
months from the date of issuance at an exercise price per share of $21.22.
The Class B Warrants may be redeemed by the Company if the underlying
common stock is registered and the common shares have trade at $26 or
above for a period of twenty consecutive trading days. The Company paid a
placement agent a fee of $500,000 and issued 180,000 warrants exercisable
at $5.56 per share, 90,000 Class A Warrants exercisable at $8.84 and upon
exercise an additional 45,000 Class B Warrants exercisable at $21.22. Also
in connection with the private placement, the Company paid $200,000 and
issued 275,000 warrants, exercisable at $2.75, as a finder fee.
Authorized Shares
In January 2000, the Company's stockholders voted to increase the number
of authorized shares of Common Stock to 25,000,000.
F-27
