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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report for the Fiscal year ended December 31, 2000
TTR TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-22055 11-3223672
(State or Other Jurisdiction Commission File IRS Employer
of Incorporation) Number) Identification No.)
2 HaNagar Street, Kfar Saba
(Address of Principal Executive Offices)
011-972-9-766-2393
(Registrant's Telephone Number, including Area Code)
[Mark One]
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 2000
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
Securities registered under Section 12(b) of the Exchange Act:
Title of each Class: Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.001
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
|X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of March 27, 2001, the Registrant had outstanding 17,356,340 shares of
Common Stock, $0.001 par value per share. The aggregate market value of such
common stock held by non-affiliates of the Registrant at March 27, 2001 was
approximately $84 million. Such market value was calculated by using the
closing price of such common stock as of such date as reported on the NASDAQ
National Market.
Item 1. Business
Introduction
TTR Technologies, Inc. (hereinafter, the "Company" or "TTR") designs and
develops 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. The Company's technologies utilize non-standard codewords
on the optical media. As a result of TTR's research and development efforts,
management believes that TTR has become a leader in optical media authentication
and verification. The Company's proprietary anti-piracy technology,
MusicGuard(TM), is a unique media-based technology designed to prevent the
unauthorized copying of audio content distributed on CDs. MusicGuard leverages
know-how that the Company gained during the development of its DiscGuard(TM)
software protection product. The Company's copy protection technologies are
designed to be transparent to the legitimate end-user. Copy protected CDs are
designed to be compatible with and to play on currently existing compact disc
players.
In November 1999, the Company entered into an agreement with Macrovision
Corporation to jointly design,. 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, which is undergoing internal tests by a major
record label, will be marketed under the brand name "SafeAudio" and is based
primarily upon the Company's MusicGuard technology as well as related
Macrovision technology. SafeAudio is co-owned jointly by TTR and Macrovision.
The Company granted to Macrovision an exclusive world-wide royalty bearing
license to market SafeAudio and all other 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.
Commencing April 1, 2001, the Company is entitled to twenty-five percent
(25%) of the net revenues collected by Macrovision or its affiliates from any
products or components incorporating SafeAudio. Previously, the Company was
entitled to thirty percent (30%) of such net revenues. In light of the extended
period of time in which SafeAudio has been undergoing internal testing by record
labels, the Company is negotiating with Macrovision regarding the prospect of
reverting to the previous 30% net revenue allocation. No assurance can however
be given that the Company will be successful in obtaining a reversion to the
greater allocation of net revenues.
Pursuant to the agreement with Macrovision, the Company granted to
Macrovision an exclusive worldwide license to modify and market DiscGuard, TTR's
software anti-piracy product. Part of the DiscGuard technology license is
royalty free.
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The encryption portion is royalty bearing. Macrovision has its own proprietary
software anti-piracy product known as SafeDisc. Through December 31, 2004, the
Company is entitled to 5% of Macrovision's net revenues, if any, collected by
Macrovision from the licensing of SafeDisc to customers located in the Peoples
Republic of China. Other than for these revenues the Company does not anticipate
that it will receive any significant revenues as a result of its license of
DiscGuard to Macrovision.
Macrovision is a world leader in the development and marketing of 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.
The Company's immediate goal is to establish SafeAudio as the leading
product in the target market of audio content copy protection for the
high-volume recording industry. Additionally, The Company is actively developing
other technologies and looking to acquire technologies that are synergistic with
TTR's current business and will enable it to leverage its knowledge base and
skill.
The Company was incorporated under Delaware law in July 1994. The
principal executive offices of the Company are located at 2 HaNagar Street, Kfar
Saba, Israel
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 currently about $5 billion
annually to global piracy of recorded music. 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 a CD burner (recorder) from a local retail
outlet for as little as $180. 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 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 effectively being
pirated; i.e., no royalties are being
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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. Effective as of May 2000, the Act
outlaws copy protection circumvention devices and technologies 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 of
the Initiative is completion of an overall architecture for delivery of digital
anti-piracy protected music in all forms.
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 the best of
management's knowledge, there are no commercially available technologies or
products providing copy protection for audio content distributed on CDs.
The Solution - SafeAudio
The Company's management believes that SafeAudio offers 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 SafeAudio embodies unique know-how designed to prevent
the unauthorized copying of CDs. SafeAudio is based primarily on TTR's
proprietary technology, MusicGuard, as well as related Macrovision technologies.
Most music is currently offered for sale on CDs. 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. SafeAudio 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
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master from which metal molds, or stampers, used to mass 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. SafeAudio protected CDs are designed to play normally in the
currently existing CD and DVD players around the world. SafeAudio is designed so
that music quality is not degraded as compared to the unprotected CD. When one
tries to make a digital copy of a protected CD with any of the many CD-to-CD
copying programs or "track rippers", either the copying process itself will
abort or the quality of the unauthorized copy will be unacceptably inferior to
the original music. SafeAudio is easy to apply and use. Record companies or
recording studios need only inform an authorized glass mastering facility that
it wishes SafeAudio to protect against copying. No special preparation or
changes need to be made to the data that the recording mastering studio supplies
to the glass mastering facility. Since the protection is 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. The Company is working
together with Macrovision and the encoder manufacturers to develop the most
efficient and effective manufacturing solution. The development of the SafeAudio
Toolkit facilitates the automation of the copy protection process, representing,
in management's view, a significant milestone in developing an efficient and
cost effective manufacturing solution.
Development Status of SafeAudio
In March 2001, a major record label completed an initial beta test of the
SafeAudio Toolkit. The test was conducted by the record label in advance of
initiating a round of internal testing for the beta version of the SafeAudio
technology itself.
During the course of 2000, SafeAudio technology underwent comprehensive
internal tests in the facilities of the Company's Israeli subsidiary in Israel
as well as in Macrovision's laboratories in Sunnyvale and London. In addition,
the Company completed two consumer field trials. The first involved 850
households in the U.K. The second was a 2,000 household test across the United
States. Macrovision conducted the first test. The second test was conducted by a
leading market research company.
Through Macrovision, the Company approached most of the major record
labels and certain of the larger independent labels regarding SafeAudio. Some of
those labels are performing internal tests while others are preparing to do
commercial pilot runs of SafeAudio protected CDs. Upon the successful completion
of these internal tests and commercial pilots, the Company anticipates signing
contracts with these music labels to produce SafeAudio protected discs
commercially. However, no assurance can be provided that such record labels will
in fact be interested in protecting their discs with SafeAudio or that the
Company or Macrovision will be successful in negotiating or concluding such
commercial contracts on commercially acceptable terms.
5
Mastering Equipment Manufacturers
In order to produce SafeAudio protected CDs, modifications to the encoder
portion of the laser optics system in CD mastering equipment are required. Under
the contract with Macrovision, Macrovision is responsible for coordinating with
the companies which produce and sell these encoders. The Company believes that
three companies, Doug Carson & Associates, Media Morphics and Eclipse,
effectively control the market for encoders. The Company is working with
Macrovision and some of these encoder producers to develop the necessary
modifications to produce protected CDs.
The Company envisions 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, management believe that Macrovision is in a good
position to leverage its current business relationships to the benefit of
SafeAudio.
Marketing and Sales
Under the agreement with Macrovision, Macrovision is responsible, at its
expense, for the marketing of SafeAudio 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.
Commencing April 1, 2001, the Company is entitled to twenty-five percent
(25%) of the net revenues collected by Macrovision or its affiliates from any
products or components incorporating SafeAudio. Previously, the Company was
entitled to thirty percent (30%) of such net revenues. In light of the extended
period of time in which SafeAudio has been undergoing internal testing by record
labels, the Company is negotiating with Macrovision regarding the prospect of
reverting to the previous 30% net revenue allocation. No assurance can however
be given that the Company will be successful in obtaining a reversion to the
such greater allocation of net revenues. Under certain circumstances, the
exclusive license relating to MusicGuard and the jointly developed technology
that the Company granted to Macrovision reverts to a non-exclusive license as of
the second anniversary of the commercial launch. Under the 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.
The Company has a limited internal sales and marketing capability. To
maintain its focus on product development and to avoid the expense of
establishing its own global sales and marketing staff, the Company does not
anticipate expanding its
6
marketing capability until it is in a position to commercialize products other
than SafeAudio.
New Products and Technologies
The Company intends to exploit its existing technologies and expertise to
develop and commercialize products that are similar to and share common
distribution channels with SafeAudio. To this end, the Company is working to
port the MusicGuard technology (which underlies the SafeAudio technology) to
DVD. During 2000, the Company developed a prototype which is currently
undergoing further development. With the price of DVD recorders poised to
decrease, as management believes will occur, DVD copying will become an acute
problem.
The Company is developing other technologies with applications in the
following areas:
* 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.
* Internet Technologies - technology that facilitates the transmission
and security of content being streamed over the Internet. To this
end the Company hired a Vice President of Internet Technologies.
Under the Company's agreement with Macrovision, the Company granted to
Macrovision an exclusive right of first refusal through December 31, 2009, to
any music copy protection technology that it develops which is not included in
the license to Macrovision, and any Internet digital rights management
technologies developed by the Company which are applicable to music, music
video, video, software or data publishing products or markets. The Company is
required to notify Macrovision of the details of any bona- fide third - party
offers to purchase or license such technologies. If Macrovision notifies the
Company of its interest in purchasing or licensing such technology within 10
business days of Macrovision's receipt of the Company's notification, the
Company is required to negotiate in good faith with them such purchase or
license. Neither of the technologies noted above is, in management's view,
subject such right of first refusal.
In connection with the design and development of DiscGuard, the Company's
proprietary software anti-piracy product, TTR's Israeli subsidiary has received,
through December 31, 2000, a grant of $210,000 from the Chief Scientist of the
State of Israel. The Company is 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
7
grant, plus accrued interest. For example, royalties will be payable to the
Chief Scientist based on royalties the Company receives from Macrovision
relating to DiscGuard. The Company does not believe that any royalties are
payable to the Chief Scientist in respect of SafeAudio. The Company's 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. Management believes that
these restrictions and obligations will not have a material adverse effect on
the Company's operations since the Company does not presently anticipate
transferring ownership of the technology developed by it to third parties. The
restrictions do not apply to the exports from Israel of products developed with
such technologies.
Research & Development
From the date of inception through December 31, 2000, the Company expended
approximately $4.05 million on research and development activities, including
approximately $1.1 million for the year ended December 31, 2000, and
approximately $346,000 for the year ended December 31, 1999. The amounts
expended in 2000 were used exclusively for MusicGuard (the technology underlying
SafeAudio). We expect to maintain our research and development expense at
approximately the current level for the foreseeable future.
Competition
The Company is not aware of the existence of any commercially available
anti-piracy technologies in the area of copy protection for audio CDs. However,
there are a number of companies who claim to have an audio CD anti-piracy
technology in some stage of development. These include SunnComm, a U.S. based
company whose securities are traded on over-the-counter market, and MidbarTech a
private Israeli company. To date, none has commercialized such anti-piracy
technology/product. There can be no assurance that these technologies will not
be commercially launched prior to SafeAudio or that other companies will not
enter the market in the future, particularly if SafeAudio is successfully
commercialized. There can be no assurance that the Company 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 the
Company's products or technologies noncompetitive or obsolete.
Proprietary Rights
The Company currently relies on a combination of trade secret, copyright
and trademark law, as well as non-disclosure agreements and invention-assignment
agreements, to protect the technologies used in the Company's products and other
proprietary information. The Company has 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. As of March 2001,
two patents have been issued. The Company has also applied for and received a
United States trademark registration of MusicGuard. There can be no assurance
that any patent will be issued or that the Company's proprietary
8
technology will remain a secret or that others will not develop similar
technology and use such technology to compete with the Company.
The Company believes that its software and audio content protection
products and technologies and know-how are proprietary and are protected by
copyright law, non-disclosure and secrecy agreements. However, such methods may
not afford complete protection and there can be no assurance that others will
not independently develop such processes, concepts, ideas and documentation.
The Company's policy is to require our employees, consultants, and other
advisors to execute confidentiality agreements upon the commencement of
employment, consulting or advisory relationships. These agreements generally
provide that all confidential information developed or made known to the
individual by the Company during the course of the individual's relationship
with it 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 the Company shall be the
Company's exclusive property. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for trade
secrets in the event of unauthorized use or disclosure of such information.
Employees
The Company employs 8 full-time employees, all of whom work in Israel.
None of the Company's employees is covered by a collective bargaining agreement
or is represented by a labor union. The Company has not experienced any
organized work stoppages and considers its relations with employees to be good.
The Company's future performance depends highly upon the continued service
of members of our senior management and of Dr. Baruch Sollish, our Chief
Technology Officer, in particular.
The Company believes that its 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 the Company will be able to
retain its key employees or attract, assimilate or retain the qualified
personnel necessary for the development of its business.
Minority Subsidiary
In July 2000, the Company purchased a 50% equity interest in an Israeli
based company named ComSign Ltd. ("ComSign"), which is the exclusive marketer in
Israel and in the territories controlled by the Palestinian Authority of
VeriSign Inc.'s digital authentication certificates and related services. The
remaining 50% equity interest in ComSign is held by a private company based in
Israel. VeriSign, Inc. is a leading provider of Internet based trust services.
The agreement between ComSign and VeriSign provides ComSign with the rights to
market these services in the designated territory for a period of 5 years and a
sharing of revenues derived from
9
these activities. Comsign is to receive 50% of net revenues from web
certificates and 40% for Onsite services. ComSign is focusing on marketing the
VeriSign web certificates and Onsite enterprise services. ComSign plans to
exploit the branding and dominant position VeriSign possesses to build a leading
position in the Israeli market for trust and Internet security services and
products.
Since ComSign's inception, the Company has held (and continues to hold) a
50% equity interest in ComSign in May 2000. Under the provisions of the
shareholders agreement between the Company and its partner, 60% of any dividends
issued by ComSign will first be distributed to the Company until such time as
the Company shall have received an accumulated amount of $2 million. Thereafter,
60% of dividends will first be distributed to its partner until such time as it
shall have received an accumulated amount of $2,000,000. Thereafter, they are to
share equally in all dividend distributions.
According to the Teleseker/Taylor Nelson Sofres report Israel has the 12th
largest surfing population in the world with approximately 20% of the population
over the age of 13 hooked up to the World Wide Web. There are currently about
20,000 registered domains in Israel and according to the IDC that number should
reach 34,000 by mid 2003. Those domains, which are involved in commerce or
transactions over the Internet, are, in management's view, candidates to license
the web certificate service. Management believes that large corporations,
educational institutions, financial institutions, health services and government
agencies are candidates to purchase the Onsite services.
CONDITIONS IN ISRAEL
The following information discusses certain conditions in Israel that
could affect its 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 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. Additionally, from time to time since
December 1987, Israel has experienced civil unrest, primarily in the West Bank
and Gaza Strip territories administered by Israel since 1967. 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 Palestinian representatives have been signed. In recent months, however,
there has been intense violence, hostility and on-going clashes between the
Palestinians and Israeli Security Forces, primarily in the Gilo neighborhood of
southern Jerusalem, the West Bank and the Gaza Strip. Israel has not entered
into any peace agreement with Syria or Lebanon and is still in a state of war
with these countries. Further, there have been delays in the negotiations and
implementation of the agreements with the Palestinians.. There can
10
be no assurance as to whether or how the "peace process" will develop or what
effect it may have upon the Company. 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.
The Company does not believe that the boycott has had a material adverse effect
on it, 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 the Company's 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 the
Israeli subsidiary currently are obligated to perform annual reserve duty. While
the 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 the Company 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.
During 1997, the monetary policy of the Bank of Israel changed in several
respects. These changes included a decision of the Bank of Israel to reduce its
intervention in the currency markets to allow the NIS to trade more freely. In
addition, the Bank of Israel has adopted and implemented certain measures to
liberalize foreign 86 currency regulations. There are currently no Israeli
currency control restrictions on remittance of dividends or the proceeds from
the sale of the ordinary shares, although legislation remains in effect pursuant
to which currency controls may be imposed by administrative action at any time.
The Israeli government's monetary policy contributed to relative price and
exchange rate stability in recent years, despite fluctuating rates of economic
growth and unemployment. The Israeli inflation rates for the years 1997, 1998
and 1999 were 7.0%, 8.6% and 1.3%, respectively. No assurance can be provided
that the Israeli government will be successful in its attempts to keep prices
and exchange rates stable.
Trade Relations
11
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.
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
The 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 the Israeli subsidiary are covered by individual employment
agreements.
Item 2. Properties
The Company leases a 2,400 square foot facility used in its research and
development and administrative activities in Kfar Saba, Israel. The lease
provides for a monthly rent of approximately $2,292 and an expiration date of
May 31, 2001. The Company is currently negotiating an extension of the term
lease. Management believes that the Company will be able either to renew our
present lease or obtain suitable replacement facilities. The Company improved
this facility to meet the requirements of its research and development
activities. Management believes that this facility is sufficient to meet its
current and anticipated future requirements.
Item 3. Legal Proceedings
The Company is not involved in any legal proceedings.
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Item 4. Submission of Matters to a Vote of Security Holders
Reference is made to Item 4 of the Company's Quarterly Report on Form 10Q
for the period ended September 30, 2000, which is incorporated herein by
reference.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
As of February 6, 2001, Company's common stock, par value $0.001 per share
(the "Common Stock") is quoted on the NASDAQ National Market under the symbol
"TTRE". On October 23, 2000 through February 5, 2001, the Company's Common Stock
was quoted on the NASDAQ SmallCap Market. Prior to the NASDAQ SmallCap listing,
the Common Stock was quoted on the OTC Electronic Bulletin Board. The following
table sets forth the range of high and low bid prices for the Common Stock as
reported on the OTC Electronic Bulletin Board by the National Association of
Securities Dealers, Inc., Automated Quotations System for the periods indicated.
Common Stock
Quarter Ended High Low
2000
December 31 $8.75 $3.34
September 30 $6.47 $3.31
June 30 $6.69 $3.00
March 31 $10.50 $4.97
1999
March 31 $1.4375 $.75
June 30 $3.125 $.75
September 30 $4.80 $2.45
December 31 $6.00 $2.45
The foregoing represent inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
As of March 28, 2001, there were approximately 133 record holders of the
Common Stock of the Company. We believe that there are a significant number of
shares of 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 the Common Stock.
13
The Company has paid no dividends on its Common Stock and does not expect
to pay cash dividends in the foreseeable future. It is the present policy of the
Board of Directors to retain all earnings to provide funds for the growth of the
Company. The declaration and payment of dividends in the future will be
determined by the Board of Directors based upon the Company's earnings,
financial condition, capital requirements and such other factors as the Board of
Directors may deem relevant. The Company is not under any contractual
restriction as to its present or future ability to pay dividends.
Recent Sales of Unregistered Securities During 2000
Set forth below is a listing of all sales by the Company of unregistered
equity securities during 2000, excluding sales that were previously reported on
a Quarterly Report on Form 10-Q. Unless otherwise indicated such sales were
exempt from registration under the Securities Act of 1933, as amended (the
"Act"), pursuant to Section 4(2) of the Act, as they were transactions not
involving a public offering.
1. In October 2000, the Company issued to a consultant four (4) year
warrants for 400,000 shares of the Company's common stock, of which warrants for
134,000 shares is at a per share exercise price of $6.50, warrants for 133,000
at a per share price of $7.50 and warrants for 133,000 at a per share exercise
price of $8.50.
Item 6. Selected Consolidated Financial Data
The following table sets forth our consolidated financial data for the
five years ended December 31, 2000. The selected consolidated financial data for
the years ended December 31, 1997, 1998, 1999 and 2000 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 year ended December
31, 1996 is 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.
From
Inception
(July 14, 1994)
to December
Income Statement Data: 1996 1997 1998 1999 2000 31, 2000
---- ---- ---- ---- ---- ---------
Revenues -- -- $54,922 $68,803 $1,999 $125,724
Total expenses 790,108 3,784,635 5,178,872 7,944,252 5,107,978 23,531,978
Operating loss (790,108) (3,784,635) (5,123,950) (7,875,449) (5,105,979) (23,406,254)
Net loss ($1,121,211) ($4,119,612) ($5,578,540) ($13,072,237) ($4,796,693) ($29,627,041)
Net loss per share ($0.62) ($1.35) ($1.54) ($2.07) ($0.30)
Weighted average shares
outstanding 1,801,366 3,054,519 3,615,908 6,321,719 16,006,403
14
December 31,
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Working capital (deficiency) ($2,563,908) $448,679 ($2,834,448) ($494,744) $8,122,456
Total assets 1,191,688 1,188,627 490,545 467,867 10,348,713
Total liabilities 2,785,545 278,898 3,588,712 798,863 351,756
Total Stockholders' equity
(deficit) ($1,593,857) $677,229 ($3,098,167) ($330,996) $9,996,957
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto included elsewhere in
this Report. Certain statements made in this discussion are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements can be identified by terminology such as
"may", "will", "should", "expects", "intends", "anticipates", "believes",
"estimates", "predicts", or "continue" or the negative of these terms or other
comparable terminology and include, without limitation, statements below
regarding: the Company's intended business plans; expectations as to product
performance; intentions to acquire or develop other technologies; and belief as
to the sufficiency of cash reserves. Because forward-looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by these
forward-looking statements. These factors include, but are not limited to, the
competitive environment generally and in the Company's specific market areas;
changes in technology; failure of the Company's technology to work; lack of
market acceptance for SafeAudio; inability of Macrovision ot successfully market
SafeAudio; the availability of and the terms of financing, inflation, changes in
costs and availability of goods and services, economic conditions in general and
in the Company's specific market areas, demographic changes, changes in federal,
state and /or local government law and regulations; changes in operating
strategy or development plans; the ability to attract and retain qualified
personnel; and changes in the Company's acquisitions and capital expenditure
plans. Although the Company believes that expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
performance or achievements. Moreover, neither the Company nor any other person
assumes responsibility for the accuracy and completeness of these
forward-looking statements. The Company is under no duty to update any
forward-looking statements after the date of this Report to conform such
statements to actual results.
TTR designs and develops 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
15
are commonly referred to as CDs and digital versatile discs which are commonly
referred to as DVDs. The Company's technologies utilize non-standard codewords
on the optical media. As a result of TTR's research and development efforts,
management believes that TTR has become a leader in optical media authentication
and verification. The Company's proprietary anti-piracy technology,
MusicGuard(TM), is a unique media-based technology designed to prevent the
unauthorized copying of audio content distributed on CDs. MusicGuard leverages
know-how that the Company gained during the development of its DiscGuard(TM)
software protection product. The Company's copy protection technologies are
designed to be transparent to the legitimate end-user. Copy protected CDs are
designed to be compatible with and to play on currently existing compact disc
players.
In November 1999, the Company entered into an agreement with Macrovision
Corporation to jointly design, 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, which is undergoing internal tests by a major
record label, will be marketed under the brand name "SafeAudio" and is based
primarily upon the Company's MusicGuard technology as well as related
Macrovision technology. The Company granted to Macrovision an exclusive
world-wide royalty bearing license to market SafeAudio and all other
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.
Commencing April 1, 2001, the Company is entitled to twenty-five percent
(25%) of the net revenues collected by Macrovision or its affiliates from any
products or components incorporating SafeAudio. Previously, the Company was
entitled to thirty percent (30%) of such net revenues. In light of the extended
period of time in which SafeAudio has been undergoing internal testing by record
labels, the Company is negotiating with Macrovision regarding the prospect of
reverting to the previous 30% net revenue allocation. No assurance can however
be given that the Company will be successful in obtaining a reversion to the
such greater allocation of net revenues. Pursuant to the agreement with
Macrovision, the Company reimbursed Macrovision for $1 million of its costs
incurred in the twelve months ending December 31, 2000 in co-developing
SafeAudio.
As part of the agreement, the Company granted to Macrovision an exclusive
worldwide license to modify and market DiscGuard, TTR's 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 SafeDisc. Through December 31, 2004, the
Company is entitled to 5% of Macrovision's net revenues, if any, collected by
Macrovision from the licensing of SafeDisc to customers located in the Peoples
Republic of China. Other than for these revenues the Company does not anticipate
that it will receive any significant revenues as a result of its license of
DiscGuard to Macrovision.
16
The Company's immediate goal is to establish SafeAudio as the leading
product in the target market of audio content copy protection for the
high-volume recording industry. Additionally, The Company is actively developing
other technologies and looking to acquire technologies which are synergistic
with TTR's current business and will enable it to leverage its knowledge base
and skill.
In July 2000, the Company purchased an equity interest in ComSign Ltd., an
Israeli company ("ComSign"), which was established in May 2000 by Comda Ltd.,
another Israeli company ("Comda). ComSign is Verisign's sole principal affiliate
in Israel and the Palestinian Authority, market its digital authentication
certificates and acting as the local certifying authority. ComSign intends to
market these products and services to leading e-commerce sites, banks and other
financial institutions, government organizations and a full range of commercial
entities.
The Company has not had any significant revenues to date. As of December
31, 2000 the Company had an accumulated deficit of approximately $29.6 million.
The Company's expenses 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
The Company expects, for the near-term, that its primary source of revenue
will be royalties under the license agreement with Macrovision and distributions
from the joint venture, ComSign. However, no assurance can be provided that the
SafeAudio technology will be commercially successful or whether any royalties
from the sale thereof will be generated. The Company is currently seeking to
develop or acquire other technologies that will provide other sources of
revenue. However, there can be no assurance that the Company will develop or
acquire other technologies or if it does, that such technologies will generate
any revenue or profits.
Results of Operations
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999.
Revenues for the year ended 2000 and 1999 were $1,999 and $68,803
respectively and were derived from licensing fees of the Company's DiscGuard
product, which has since been discontinued.
Pursuant to the agreement with Macrovision, the Company agreed to
reimburse Macrovision for up to $1 million for research and development and
sales and marketing expenses incurred within the first year of the joint
development. In 2000, the Company reimbursed Macrovision the maximum obligation
of $1,000,000.
Research and development costs for the year ended 2000 were $1,111,189 as
compared to $345,989 for 1999. This increase is a result of the joint
development efforts with Macrovision on the development of SafeAudio.
17
Sales and marketing expenses for the year ended 2000 were $579,006 as
compared to $815,586 for 1999. This decrease was primarily due to the agreement
with Macrovision whereby Macrovision assumed most of the sales and marketing
responsibilities.
General and administrative expenses for the year ended 2000 were
$1,785,434 as compared to $630,090 for 1999. This increase was due was due
primarily to increased general operations. In addition, the Company incurred
additional legal and other professional fees relating to its application to be
listed on Nasdaq's National Market Quotation System.
Stock-based compensation for the year ended 2000 was $1,631,649 as
compared to $6,152,587 for 1999. Due to the shortage of available funds in 1999,
we compensated employees and other consultants by issuing common stock, warrants
and options.
The Company's fifty percent owned affiliate, ComSign Ltd., commenced
operations in July 2000. The Company's share of the net losses for the period
ended December 31, 2000, was $209,157.
Amortization of deferred financing costs for the year ended 1999 period
was $4,180,540. A significant portion of the financing costs was a result of the
issuance of 1.3 million warrants in connection with the sale of the Company's
10% Convertible Debentures in 1999. Using the Black-Scholes model for estimating
the fair value of the warrants, the Company recorded $3,845,400 as deferred
financing costs and charged the entire balance to operations when the debentures
were converted.
Interest income for the year ended 2000 increased to $524,253 as compared
to $3,689 for 1999. The increase is attributable to the higher cash and cash
equivalent balances, primarily resulting from the February 2000 private
placement.
Interest expense for the year ended 2000 decreased to $5,810 as compared
to $1,109,937 for 1999 Period. The decrease is attributable to the reduction in
debt.
The Company reported a net loss for the year ended 2000 of $4,796,693 or
$(.30) per share on a basic and diluted basis, as compared to a net loss of
$13,072,237 or $(2.07) per share for 1999. Of the net loss for 2000, $1,000,000
is attributable to the Company's reimbursement commitment to Macrovision.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
Revenues for the year ended 1999 and 1998 were $68,803 and $54,922,
respectively and were derived from licensing fees of our DiscGuard product.
18
Research and development costs for the year ended 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 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 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 1999 was $6,152,587 as
compared to $1,341,889 for 1998. Due to the shortage of available funds in 1999,
the Company compensated employees and other consultants by issuing common stock,
warrants and options.
Amortization of deferred financing costs for the year ended 1999 period
was $4,180,540 as compared to $72,288 for the same period in 1998. As previously
mentioned, the Company recognized significant non-cash financing costs as a
result of the issuance of 1.3 million warrants in connection with the sale of
the Company's 10% Convertible Debentures and charged the entire to balance to
operations when the debentures were converted.
Interest expense for the year ended 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 $272,098 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 $572,505, which represents the value of the
beneficial conversion feature relating to the conversion of outstanding debt
into shares of our Common Stock.
The Company reported a net loss for the year ended 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.
Liquidity and Capital Resources
At December 31, 2000, the Company had cash and cash equivalents of
approximately $8.2 million, representing an increase of approximately $8 million
over December 31, 1999. Cash used by operating activities during 2000 was $3.4
million compared to $2.4 million during 1999. In 2000, the Company used $2
million of its cash for its investment in ComSign and it raised approximately
$13.5 million in additional sales of Common Stock. The Company believes, that
cash on-hand is sufficient to meet its requirements for the next 12 months.
19
NASDAQ Listing
As of October 23, 2000, the Company's Common Stock was quoted on the
NASDAQ SmallCap Market (stock symbol: ttre) and as of February 6, 2001,
Company's Common Stock was quoted on the NASDAQ National Market (under the same
symbol) . Prior to the Common Stock being quoted on the NASDAQ SmallCap Market,
the Common Stock was quoted on the OTC Electronic Bulletin Board.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
To date, the Company has not utilized derivative financial instruments or
derivative commodity instruments. The Company invests its cash primarily in
money market funds, which are subject to minimal credit and market risk. The
interest payable on the Company's long-term debt is variable based on the prime
rate and, is therefore, affected by changes in market interest rates. However,
the Company believes the market risks associated with these financial
instruments are immaterial.
Foreign Currency Risk
The Company is exposed to foreign exchange rate fluctuations as they
relate to operating expenses as the financial results of foreign subsidiaries
are translated into U.S. dollars in consolidation. As exchange rates vary, these
results, when translated, may vary from expectations and adversely impact
overall expected profitability. The effect of foreign exchange rate fluctuations
on the Company in 2000 was not material.
Item 8. Financial Statements
The information called for by this Item 8 is included following the "Index to
Financial Statements" contained in this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10. Directors and Executive Officers; Compliance with Section 16(a) of the
Exchange Act
Directors and Officers
Our directors, officers and key employees are as follows:
20
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 41 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
Christopher Illick 61 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.
21
MICHAEL FINE has been a director of the Company since May 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.
CHRISTOPHER D. ILLICK was elected by the Company's board of directors in
June 2000 to serve on the board. Mr. Illick has been a Managing Director of
Brean Murray & Co. a New York based investment bank since July 1997. Mr. Illick
is also currently a general partner of Illick Brothers, a family real estate
business, which he organized in 1965. From March 1995 through June 1997, Mr.
Illick was a limited partner of the New York office of, in Oakes, Fitzwilliams &
Co. (London), an investment bank specializing in emerging growth companies. From
1986 through 1992, Mr. Illick held various management positions in CG America
Corporation, a privately held specialty reinsurance holding company. During his
tenure with CG America, Mr. Illick held various strategic positions including,
chief administrative officer, general counsel and director. Mr. Illick was
responsible for administration, legal affairs and CG America's substantial
portfolio of diversified and international investments. In 1968 Mr. Illick
founded and became the president of Robert Fleming Holding Limited (London), a
position he held for 15 years. He managed the U.S. business and was involved in
identifying investment opportunities for Fleming's clients world-wide. Mr.
Illick began his career at the law firm of Brown & Wood. He holds a B.A. from
Trinity College and an LL.B. from the University of Virginia. He is admitted to
the bar in the state of New York.
MICHAEL BRAUNOLD has been a director of the Company since May 2000. Since
March 1998, Mr. Braunold 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 worldwide
organization including a period 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.
22
Our Board of Directors is currently comprised of five Directors, Marc
Tokayer Baruch Sollish, Michael Fine, Christopher Illick and Michael Braunold.
All directors hold office until the next annual meeting of stockholders and the
election and 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.
Section 16 Filings
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers, directors and persons
who beneficially own more than 10% of a registered class of the Company's equity
securities (collectively, the "Reporting Persons") to file certain reports
regarding ownership of, and transactions in, the Company's securities with the
Securities and Exchange Commission (the "SEC"). These officers, directors and
stockholders are also required by SEC rules to furnish the Company with copies
of all Section 16(a) reports that they file with the SEC. Based solely on review
of the copies of such forms received by the Company with respect to 2000, or
written representations from certain reporting persons, the Company believes
that all filing requirements applicable to its directors and officers and
persons who own more than 10% of a registered class of the Company's equity
securities have been complied with except that the Company believes that each of
Michael Braunold, Michael Fine and Christopher Illick failed to timely file a
Form 3 in connection with their appointment as directors
Item 11. Executive Compensation
The following table sets forth all compensation earned by the Company's
Chairman of the Board of Directors, CEO and President; the only other executive
officer of the Company whose total annual salary and bonuses exceeded $100,000
for the year ended December 31, 2000 (the "Named Executive Officers"):
Annual Compensation Long Term Compensation
Awards Payouts
Name and Restricted Securities LTIP All
Stock Underlying Payouts other
Position Year Salary Bonus Other Award(s) Options compen-
sation
Marc D. Tokayer 2000 $194,307 -- $ 34,404(1) -- 970,700(2) -- --
Chairman and 1999 $108,075 -- $ 27,676(1) -- -- -- --
President 1998 $ 64,430 $12,019 $ 14,423(1) -- -- -- --
Emanuel Kronitz 2000 $127,989 $31,347 $ 23,887(1) -- 582,750(3) -- --
Chief Operating 1999 $ 35,915 -- $ 7,158(1) -- 279,500(4) -- --
Officer 1998 -- -- -- -- -- -- --
Baruch Sollish 2000 $158,324 $75,092 $ 32,078(1) -- 382,050(5) -- --
Vice President 1999 $110,522 -- $ 21,886(1) -- 80,000(6) -- --
Research & 1998 $ 91,678 $42,105 $ 13,927(1) -- -- -- --
Development
23
(1) Includes contributions to insurance premiums, car allowance and car
expenses.
(2) Represents shares of Common Stock issuable upon exercise of employee stock
options issued under the Company's 1996 Stock Option Plan and 2000 Equity
Incentive Plan, of which options for 833,100 shares are vested within 60 days of
the date on which the information on this table is provided and options for the
remaining 137,600 shares are to vest over the next two and one-half years, at
per share exercise prices ranging from $3.56 to $4.25.
(3) Represents shares of Common Stock issuable upon exercise of employee stock
options issued under the Company's 1996 Stock Option Plan and 2000 Equity
Incentive Plan, of which options for 445,150 shares are vested as of the date on
which information on this table is provided and options for the remaining
137,600 shares are to vest over the next two and one-half years, at per share
exercise prices ranging from $3.56 to $4.25.
(4) Represents shares of Common Stock issuable upon exercise of fully vested
employee stock options issued under the Company's 1996 Stock Option Plan, at a
nominal per share exercise price, previously granted to Mr. Kronitz in June 1999
in connection with his employment. In January 2000, at the direction of the
board, the options were amended such that options for 150,000 shares vested in
January 2000 and the balance of 85,000 options vested in one lump sum in
November 2000.
(5) Represents shares of Common Stock issuable upon exercise of employee stock
options issued under the Company's 1996 Stock Option Plan and 2000 Equity
Incentive Plan, of which options for 272,050 shares are vested as of the date on
which the information on this table is provided and options for the remaining
110,000 shares are to vest over the next two and one-half years, at per share
exercise prices ranging from $3.56 to $4.25.
(6) Represents shares of Common Stock upon exercise of employee stock options
issued under the Company's 1996 Stock Option Plan, of which options for 40,000
shares are vested as of the date on which the information on this table is
provided, at per share exercise prices ranging from nominal price to $2.56, and
options for the remaining 40,000 shares are to vest over the next one and
one-half years, at per share exercise price of $2.56.
Options Granted In Last Fiscal Year
The following table sets forth certain information concerning options
granted during 2000 to the executive officers named in the Summary Compensation
Table.
Market Potential Realizable Value
Percentage Price of At Assumed Annual Rates
Number of of Total Common of Stock Price
Securities Options Stock on Appreciation for
Underlying Granted to Exercise Date of Option Term
Name Options Employees Price Grant Expiration
Granted (#) in 2000 ($/Share) ($/Share) Date 5%($) 10%($)
Marc Tokayer 165,000 7.6% $3.906 $3.906 2010 $ 405,306 $1,027,151
347,000 15.99% $4.00 $5.13 2010 $1,511,612 $3,229,147
351,724 16.20% $4.25 $4.25 2009 $ 824,140 $2,029,897
106,976 4.93% $3.56 $3.56 2009 $ 209,965 $ 517,153
Emanuel Kronitz 342,091 15.76% $4.25 $4.25 2010 $ 914,342 $2,317,121
165,000 7.60% $3.906 $3.906 2010 $ 405,316 $1,027,151
75,659 3.49% $3.56 $3.56 2009 $ 148,498 $ 365,758
Baruch Solish 110,000 5.07% $3.906 $3.906 2010 $ 270,211 $ 684,767
30,000 1.38% $4.00 $5.13 2010 $ 130,687 $ 279,177
40,000 1.84% $0.01 $5.13 2010 $ 333,849 $ 531,836
127,244 5.86% $4.25 $4.25 2009 $ 298,151 $ 734,360
74,806 3.4% $3.56 $3.56 2009 $ 146,824 $ 333,091
24
Aggregate Options Exercised In Last Fiscal year
And Fiscal Year End Option Values
Number of Value of Unexercised
shares Number of Un-exercised In-the-money Options
Acquired on Value Options at December 31, 2000 at December 31, 2000(1)
Name Exercise Realized (#) ($)
(#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
Marc Tokayer -- -- 631,700 / 339,000 $1,815,073 / $1,011,492
Emanuel Kronitz -- -- 697,250 / 165,000 $3,111,493 / $500,280
Baruch Solish -- -- 382,050 / 130,000 $1,569,067 / $472,080
(1) Based upon the difference between the exercise price of such options and the
closing price of the common stock ($6.938) on December 29, 2000, as reported on
the NASDAQ SmallCap Market.
Stock Option Plans
2000 Equity Incentive Plan
The Board of Directors adopted the 2000 Equity Incentive Plan (hereinafter
the "2000 Incentive Plan") in May 2000 and the Company stockholders adopted such
plan in July 2000. The 2000 Incentive Plan is designed to give the Board of
Directors maximum flexibility in providing equity incentive compensation to key
employees and consultants. The 2000 Incentive Plan provides for the grant of
incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock, bonus stock, awards in lieu of cash obligations, other
stock-based awards and performance units. The 2000 Incentive Plan also permits
cash payments either as a separate award or as a supplement to a stock-based
award, and for the income and employment taxes imposed on a participant in
respect of any award.
The 2000 Equity Incentive Plan is administered by a committee of the Board
of Directors composed of at least two members of the Board. The committee is
designated by the Board, and the Board itself acting in its capacity as
administrator of the 2000 Incentive Plan, is referred to herein as the
"Committee." The Committee is authorized, among other things, to select the key
employees to whom awards will be granted, to determine the terms and conditions
of such awards and to make all other determinations deemed necessary or
advisable for the administration of the 2000 Incentive Plan.
The aggregate number of shares of Common Stock available for issuance,
subject to adjustment, under the 2000 Incentive Plan is 1,500,000.
Persons eligible to participate in the 2000 Incentive Plan include all key
employees and consultants of the Company and its subsidiaries, as determined by
the
25
Committee. While the specific individuals to whom awards will be made in the
future cannot be determined at this time, it is anticipated that currently
approximately four key employees presently are eligible for participation in the
2000 Incentive Plan.
Under the 2000 Incentive Plan, the Committee is authorized to grant stock
options, including both incentive stock options ("ISOs"), which can result in
potentially favorable tax treatment to the participant, and nonqualified stock
options. The Committee can also grant stock appreciation rights ("SARs")
entitling the participant to receive the excess of the fair market value of a
share of Common Stock on the date of exercise over the grant price of the SAR.
The exercise price per share of Common Stock subject to an option and the grant
price of an SAR are determined by the Committee, provided that the exercise
price of an ISO or SAR may not be less than the fair market value (110% of the
fair market value in the case of an ISO granted to a 10% shareholder) of the
Common Stock on the date of grant. However, the 2000 Incentive Plan also allows
the Committee to grant an option, an SAR or other award allowing the purchase of
Common Stock at an exercise price or grant price less than fair market value
when it is granted in substitution for some other award or retroactively in
tandem with an outstanding award. In those cases, the exercise or grant price
may be the fair market value at that date, at the date of the earlier award or
at that date reduced by the fair market value of the award required to be
surrendered as a condition to the receipt of the substitute award.
The 2000 Incentive Plan also authorizes the Committee to grant restricted
stock, awards that are denominated or payable in, or valued in whole or in part
by reference to the value of, Common Stock. and to grant shares as a bonus, free
of restrictions, or to grant shares or other awards in lieu of Company
obligations to pay cash or deliver other property under other plans or
compensatory arrangements.
The Committee is also authorized to grant performance units. A Performance
Unit is a right to receive a payment in cash equal to the increase in the book
value of the Company if specified performance goals during a specified time
period are met.
The 2000 Incentive Plan was designed to permit the deduction by the
Company of the compensation realized by certain officers in respect of long-term
incentive compensation granted under the 2000 Incentive Plan which is intended
by the Committee to qualify as "performance-based compensation" under Section
162(m) of the Code. Section 162(m) of the Code generally disallows a deduction
to the Company for compensation paid in any year in excess of $1 million to any
Covered Employee. Certain compensation, including compensation that meets the
specified requirements for "performance-based compensation," is not subject to
this deduction limit. Among the requirements for compensation to qualify as
"performance-based compensation" is that the material terms pursuant to which
the compensation is to be paid be disclosed to, and approved by, the
stockholders of the Company in a separate vote prior to the payment.
As of March 1, 2001, options for approximately 1,499,400 shares of the
Company's common stock have been issued and are outstanding under the 2000
Incentive Plan.
26
1996 Stock Option Plan
The TTR Technologies, Inc. 1996 Option Plan (the 1996 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. Upon the adoption by the Company's
stockholders of the 2000 Incentive Plan in July 2000, the Company discontinued
use of the 1996 Option Plan.
The 1996 Option Plan was 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 June 30, 2000, options for approximately 1,268,225 shares of the
Company's common stock have been issued and outstanding under the 1996 Option
Plan.
Non-Executive Directors Stock Option Plan
27
The Company adopted its 1998 Non-Executive Director Stock Option Plan (the
"Directors 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 the Company or any subsidiary.
The Directors Plan is administered by the Board of Directors. The Company
has reserved 25,000 shares of common stock under the Directors Plan for issuance
upon the exercise of stock options. Options granted under the Directors Plan 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 of March 15, 2001, 18,000 options were outstanding under the Directors
Plan.
Employment Agreements
The Company's Israeli subsidiary and Marc Tokayer entered into an
employment agreement in August 1994, pursuant to which Mr. Tokayer continues to
be employed as its President. In February 2001, the employment agreement was
amended to provide for an initial 3 year term ending in October 2003, whereupon
the employment agreement will be automatically renewable from year to year
unless either party gives notice of termination at least 90 days prior to the
scheduled expiration date. Mr. Tokayer currently receives an annual salary of
$250,000, 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 or, if there
is a change in control of the Company (as defined in the employment agreement)
and Mr. Tokayer does not continue as President on terms and conditions
substantially similar to those contained in his agreement, he will be entitled
to receive the greater of the balance of the salary then due under the agreement
through the scheduled expiration date or the equivalent of 12 months' salary.
The Company signed an employment agreement with Emanuel Kronitz as of June
1999 which was restated as of October 1, 2000. Pursuant to such restatement, Mr.
Kronitz continues to be employed as the Company's Chief Operating Officer and
also as the Vice President of the Company's Israeli subsidiary. Each of the
agreements with the Company and its Israeli subsidiary is for an initial term of
three years ending in October 2003 and is automatically renewable for additional
three year terms, unless terminated by either party upon 90 days prior notice.
Mr. Kronitz currently receives a monthly salary of $20,833 plus benefits under
the agreement with the Israeli subsidiary. Mr. Kronitz is not entitled to a
salary under the agreement with the Company. Pursuant to a subsequent amendment
in January 2001 of the agreement with the Israeli subsidiary, if Mr. Kronitz's
employment 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 the greater of his salary for the balance of the term of
28
the agreement and an additional 12 months. If there is a change in control of
the Company (as defined in the employment agreement) and Mr. Kronitz does not
continue to be employed in a substantially similar position, Mr. Kronitz will be
entitled to receive the greater of the balance of the salary then due under the
agreement through the scheduled expiration date or the equivalent of 12 months'
salary.
The Company's Israeli subsidiary and Dr. Baruch Sollish signed an
employment agreement on December 1994 which was amended in July 1998 and in
February 2001, pursuant to which, 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
$213,000 subject to increase and the grant of a performance bonus in the board's
discretion. If Dr. Sollish is terminated other than for engaging in willful
misconduct or acts of bad faith or conviction of a felony or in the event of a
change in control of the Company (as defined in the employment agreement) and
Dr. Sollish does not continue to be employed in a substantially similar
position, Dr. Sollish will be entitled to receive the greater of the balance of
the salary then due under the agreement through the scheduled expiration date or
the equivalent of 12 months' salary.
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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table provides information as of March 28, 2001 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 and (iv)
the directors and officers as a group.
Name and Address of Shares of Common Stock Percent of Class (2)
Beneficial Owner Beneficially Owned (1)
Marc D. Tokayer (3) 1,426,647 (4) 7.84%
Emanuel Kronitz (3) 724,650 (5) 4.01%
Baruch Sollish (3) 435,383 (6) 2.43%
Michael Fine (3) 0 (7) *
Michael Braunold (3) 0 (7) *
Christopher Illick (3) 0 (8) *
Macrovision Corporation (9) 1,880,937 10.84%
Dimensional Partners Ltd. 1,260,000 (10) 7.04%
29
Joseph Sandberg 1,600,000 (11) 8.88%
All directors and Executive
Officers, as a group, (6 persons) 2,586,680 (12) 13.42
(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) The address of each person listed is c/o TTR Technologies Ltd., 2 Hanagar
Street, Kfar Saba, Israel.
(4) Comprised of (i) 269,273 shares of Common Stock, (ii) 833,100 shares of
Common Stock issuable upon the exercise of employee stock options issued under
the Company's 1996 Employee Stock Option Plan and 2000 Incentive Plan and (ii)
324,274 shares of Common Stock held by The Tokayer Family Trust (the "Trust").
Mr. Tokayer's wife is the trustee of the Trust and Mr. Tokayer's children are
its income beneficiaries. Mr. Tokayer disclaims beneficial ownership of all
shares held by the Trust. Does not include (A) 137,600 shares of Common Stock
issuable upon exercise of employee stock options issued under the Company's 2000
Equity Incentive Plan, which options are scheduled to vest over the next two and
one-half years and (B) 481,000 shares issuable upon exercise of options held by
Gershon Tokayer, Mr. Tokayer's brother, as to which shares Mr. Tokayer disclaims
beneficial ownership.
(5) Represents shares of the Company's common stock issuable upon exercise of
employee stock options issued under the Company's 1996 Stock Option Plan and the
2000 Incentive Plan and exercisable within 60 days of the date on which the
information in this table is provided. Does not include options for an
additional 137,600 shares of Common Stock issuable upon exercise of options
issued under the Company's 2000 Equity Incentive Plan, which options are
scheduled to vest over the next two and one-half years.
(6) Comprised of (i) 360,383 shares of Common Stock issuable upon the exercise
of options issued under the Company's 1996 Employee Stock Option Plan and 2000
Incentive Plan and (ii) 75,000 shares of Common Stock. Does not include employee
stock options for an additional 151,667 shares of our common stock that is to
vest over the next two and one-half years.
30
(7) Does not include options for 5,000 shares of Common Stock issuable under the
1998 Non-Executive Directors Plan, of which options for 2,500 shares are
scheduled to vest in May 2001 and the options for the remaining 2,500 shares are
scheduled to vest in May 2002.
(8) Does not include options for 8,000 shares of Common Stock issuable under the
1998 Non-Executive Directors Plan, of which options for 4,000 shares are
scheduled to vest in July 2001 and options for the remaining 4,000 shares are
scheduled to vest in July 2002.
(9) The address of such person is 1341 Orleans Drive, Sunnyvale, California
94089.
(10) Includes 360,000 shares of Common Stock 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.
Dimensional Partners, Ltd. ("Dimensional II") is a Cayman Islands company with a
principal business office at Corporate Center, West Bay Road, P.O. Box 31106
SMB, Grand Cayman, Cayman Islands. JDS Capital Management, Inc., a Delaware
corporation ("JDSCM"), is the investment manager and subadvisor of Dimensional
II. JDSCM and its President, Joseph D. Samberg ("Mr. Samberg"), have shared
voting and dispositive power over the shares of Common Stock and warrants held
by Dimensional II and may each be deemed a beneficial owner of those shares and
warrants. The address of the principal business office of both JDSCM and Mr.
Samberg is 780 Third Avenue, 45th Floor, New York, New York 10017.
(11) Includes (i) 90,000 shares of Common Stock issuable on upon the exercise of
warrants held in the name of Dimensional Partners, L.P., a Delaware limited
partnership ("Dimensional I"), and (ii) the shares of Common Stock beneficially
owned by Dimensional II. Mr. Samberg is the managing member of JDS Asset
Management, LLC, a Delaware limited liability company ("JDSAM") and the general
partner of Dimensional I. As such, Mr. Samberg has shared voting and dispositive
power over the shares of Common Stock and warrants held by Dimensional I and may
be deemed a beneficial owner of those shares and warrants. The address of the
principal business office of Mr. Samberg is 780 Third Avenue, 45th Floor, New
York, New York 10017.
(12) See footnotes 1-8.
Item 13. Certain Relationships and Related Transactions
In June and August 2000, the Company issued to Mr. Garson Tokayer, the
Company's sales manager and the brother of Mr. Marc Tokayer, options under the
Company's stock option plans to purchase, respectively, 43,159 shares at an
exercise price per share of $3.56 and 78,341 shares at an exercise price per
share of $4.25. The options with respect to these shares vested in full on
October 2000 upon the listing of the Company's common stock on the NASDAQ
Smallcap Market. In October 2000, the Company issued to Garson Tokayer under its
stock option plan options for an additional 110,000 shares at an exercise price
per share of $3.91, such options to vest quarterly over 3 years.
31
In July 2000, the Company issued to Mr. Christopher Illick, one of the
Company's independent directors, options under the Company's 1998 Non-Executive
Directors Plan to purchase up to 8,000 shares of Common Stock, to vest over two
years from the date of issuance, at a per share exercise price of $5.72.
In May 2000, the Company issued to each of Messrs. Braunold and Fine,
independent directors of the Company, options under the Company's 1998
Non-Executive Directors Plan to purchase up to 5,000 shares of Common Stock, to
vest over two years from the date of issuance, at a per share exercise price of
$4.00.
In February 2000, the Company issued to Dimensional Partners Ltd.
("Dimensional") 720,000 shares of Common Stock and Class A Warrants to purchase
360,000 shares of Common Stock and undertook to issue, at the time of the
exercise of the Class A Warrants, Class B Warrants to purchase an additional
180,000 shares of Common Stock. The issuance to Dimensional was part of a
private placement of 1,800,000 shares of Common Stock and 900,000 Class A
Warrants for an aggregate purchase price of $10 million that was completed in
February 2000. The Class A Warrants are exercisable for a period of five years
at an exercise price of $8.84 per share and upon exercise, the Company will
issue Class B Warrants for an additional 450,000 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.
Part IV
ITEM 14. EXHIBITS, REPORTS ON FORM 8-K AND FINANCIAL STATEMENTS
Exhibits
3.1 Certificate of Incorporation of TTR dated July 14, 1994 and Certificate of
Amendment to the Certificate of Incorporation of TTR dated August 17, 1994(4)
3.2 Certificate of Amendment to the Certificate of Incorporation of TTR, dated
January 30, 1999(5)
3.3 Certificate of Amendment to the Certificate of Incorporation of TTR, dated
December 21, 1999(5)
*3.4 Certificate of Amendment to the Certificate of Incorporation of TTR, dated
July 15, 2000.
3.4 By-Laws of TTR, as amended(4)
4.1 Specimen Common Stock Certificate(1)
4.2.1 Warrant Agreement dated as of December 23, 1997 between TTR and Biscount
Overseas Ltd.(3)
4.2.2 Warrant Agreement dated as of February 26, 1998 between TTR and Biscount
Overseas Ltd.(3)
4.2.3 Warrant dated November 29, 1999 between TTR and Biscount Overseas Ltd.(5)
4.2.4 Warrant dated November 29, 1999 between TTR and Biscount Overseas Ltd.(5)
4.2.5 Form of Class A Warrant between TTR and certain private investors(5)
4.2.6 Warrant dated February 15, 2000 between TTR and Mantle International
Investment, Ltd.(5)
4.2.7 Form of Agent Warrant between TTR and certain entities. (5)
4.2.8 Form of Common Stock Purchase Warrant dated as of June, 2000, between TTR
and Brean Murray & Co., Inc. (6)
4.2.9 Warrant dated October 2, 2000 between TTR and Mantle International
Investment Ltd.*
10.1 Financial Consulting Agreement with Josephthal & Co., Inc. (4)
10.2 1996 Incentive and Non-Qualified Stock Option Plan, as amended (4)
10.3 Non-Executive Directors Stock Option Plan(4)
10.4 Employment Agreement between TTR Technologies Ltd. and Marc D. Tokayer (1)
10.5 Employment Agreement between TTR Technologies Ltd. and Baruch Sollish (1)
10.6 Development and OEM Licensing Agreement dated October 31, 1997 between TTR
and Doug Carson & Associates Inc.(3)
32
10.7 Development and OEM Licensing Agreement dated October 31, 1997 between TTR,
Doug Carson & Associates Inc. and Nimbus CD International, Inc.(3)
10.8 Stock Purchase Agreement dated December 20, 1997 between TTR and Biscount
Overseas Ltd.(3)
10.9 Consulting Agreement between TTR and Biscount Overseas Ltd. dated October
1, 1998(4)
10.10 Consulting Agreement between TTR and Mordecai Lerer dated January 28,
1999(4)
10.11 Lease between TTR and Peppertree Properties, Inc. dated January 23,
1999(2)
10.12 Employment Agreement dated June 1, 1999 between TTR and Emmanuel
Kronitz(2)
10.13 Alliance Agreement between TTR and Macrovision Corporation effective as of
November 24, 1999(5)
10.14 Stock Purchase Agreement, effective as of January 10, 2000 between TTR and
Macrovision Corporation(5)(6)
10.15 Agreement between TTR and H.C. Wainwright & Co. Inc. dated February 8,
2000(5)
10.16 Form of Subscription Agreement dated February 18, 2000 between TTR and
certain private investors and supplement thereto.(5)
10.17 Form of Registration Rights Agreement between TTR and certain private
investors and supplement thereto(5)
10.18 Agreement dated February 17, 2000 between TTR, TTR Technologies, Ltd., K&D
Equities, Inc., Isaac Winehouse and Wall and Broad Equities, Inc. (5)
10.19 Agreement dated February 15, 2000 between TTR and Mantle International
Investment, Ltd.(5)
10.20 Amendment to Employment Agreement between TTR and Baruch Sollish, dated
July 22, 1998
10.21 Agreement between TTR and Comda (1985) Ltd. and ComSign Ltd. dated as of
June 4, 2000.(6)
10.22 Agreement between TTR and Brean Murray & Co., Inc. dated June 19,2000.(6)
10.23 Agreement between TTR and Bluestone Capital dated August 23, 2000.(6)
10.24 2000 Equity Incentive Plan.(6)
10.25 Restated Employment Agreement between TTR and Emanuel Kronitz, dated
October 1, 2000*
10.26 Restated Employment Agreement between TTR Technologies Ltd and Emanuel
Kronitz, dated as of October 1, 2001.*
10.27 Amendment to Employment Agreement between TTR and Marc Tokayer, dated
February 1, 2001.*
10.28 Amendment to Employment Agreement between TTR and Baruch Sollish, dated
February 1, 2001.*
10.29 Agreement dated, October 2, 2001 between TTR and Mantle International
Investment, Ltd.*
21.1 Subsidiaries of TTR: TTR Technologies, Ltd., an Israeli corporation,
wholly-owned by TTR.
23.1 Consent of Brightman Almagor & Co., a member of Deloitte Touche Tohmatsu,
certified public accountants.*
* Filed herewith.
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form SB-2,
No. 333-11829, and incorporated herein by reference.
(2) Filed as an Exhibit to TTR's Registration Statement on Form SB-2, No.
333-85085 and incorporated herein by reference.
(3) Filed as an Exhibit to the Registrant's Annual Report on Form 10-KSB filed
for the year ended December 31, 1997 and incorporated herein by reference.
(4) Filed as an Exhibit to the Registrant's Annual Report on Form 10-KSB filed
for the year ended December 31, 1998 and incorporated herein by reference.
(5) Filed as an Exhibit to TTR's Registration Statement on Form S-1, No.
33-32662 and incorporated herein by reference.
(6) Filed on November 14, 2000, as an Exhibit to TTR's Report on Form 10-Q for
the third quarter of 2000.
(b) Reports on Form 8-K
33
Report on Form 8-K filed for the month January 2000
34
Signatures
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned , thereunto duly authorized.
TTR TECHNOLOGIES, INC.
By: /s/ MARC D. TOKAYER
MARC D. TOKAYER,
Date: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following person on behalf of the Company
and in the capacities so indicated.
Signature Title Date
- --------- ----- ----
/s/ Marc D. Tokayer Chief Executive Officer, Chairman of the Board March 29, 2001
- ------------------------ (Principal Executive and Financial Officer)
Marc D. Tokayer
/s/ Emanuel Kronitz Chief Operating Officer March 29, 2001
- ------------------------
Emanuel Kronitz
/s/ Baruch Sollish Vice President, Research & Development, Director March 29, 2001
- ------------------------
Baruch Sollish
/s/ Christopher Illich Director March 29, 2001
- ------------------------
Christopher Illich
/s/ Michael Fine Director March 29, 2001
- ------------------------
Michael Fine
/s/ Michael Braunold Director March 29, 2001
- ------------------------
Michael Braunold
35
TTR TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F-1
Consolidated Financial Statements
Balance Sheets as of December 31, 2000 and 1999 F-2
Statements of Operations for the years ended December 31, 2000, 1999
and 1998 and the period from July 14, 1994 (inception) to December 31,
2000 F-3
Statements of Comprehensive Loss for the years ended December 31,
2000, 1999 and 1998 and the period from July 14, 1994 (inception) to
December 31, 2000 F-4
Statements of Stockholder's Equity (Deficiency) for the period from July 14,
1994 (inception) to December 31, 2000 F-5
Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998 and the period from July 14, 1994 (inception) to December 31,
2000 F-6
Notes to the Consolidated Financial Statements F-7
(i)
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
TTR Technologies, Inc.
We have audited the accompanying consolidated balance sheets of TTR
Technologies, Inc. ("the Company") (a development-stage company) as of December
31, 2000 and 1999, and the related consolidated statements of operations,
comprehensive loss, stockholders' equity (deficit) and cash flows for the three
years ended December 31, 2000. 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. 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, 2000 and 1999, and the consolidated results of
operations, comprehensive loss, stockholders' equity (deficit) and its cash
flows for the three years ended December 31, 2000, in conformity with generally
accepted accounting principles.
/s/ Brightman Almagor & Co.
Certified Public Accountants (Israel)
A member of Deloitte & Touche
Tel-Aviv, Israel
March 14, 2001
F-1
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
December 31,
2000 1999
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 8,234,686 $ 209,580
Accounts receivable 1,019 10,103
Prepaid expenses and other current assets 101,208 38,630
------------ ------------
Total current assets 8,336,913 258,313
Property and equipment - net 220,957 205,854
Investment in ComSign, Ltd. 1,790,843 --
Other assets 3,700
------------ ------------
Total assets $ 10,348,713 $ 467,867
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Current liabilities
Current portion of long-term debt $ -- $ 7,764
Accounts payable 46,726 409,521
Accrued expenses 167,731 335,772
------------ ------------
Total current liabilities 214,457 753,057
Long-term debt, less current portion -- 8,219
Accrued severance pay 137,299 37,587
------------ ------------
Total liabilities 351,756 798,863
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, $.001 par value;
5,000,000 shares authorized; none issued and outstanding -- --
Common stock, $.001 par value;
50,000,000 shares authorized; 17,356,340 and 10,653,560
issued and outstanding, respectively 17,357 10,654
Additional paid-in capital 40,340,966 24,710,602
Other accumulated comprehensive income 46,246 56,971
Deficit accumulated during the development stage (29,627,041) (24,830,348)
Less: deferred compensation (780,571) (278,875)
------------ ------------
Total stockholders' equity (deficit) 9,996,957 (330,996)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 10,348,713 $ 467,867
============ ============
See Notes to Consolidated Financial Statements.
F-2
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
From
Inception
Year (July 14,
Ended 1994) to
December 31, December 31,
2000 1999 1998 2000
------------ ------------ ------------ ------------
Revenue $ 1,999 $ 68,803 $ 54,922 $ 125,724
Expenses
Research and development (1) 1,111,889 345,989 1,017,073 4,052,736
Sales and marketing (1) 579,006 815,586 1,155,998 3,898,448
General and administrative (1) 1,785,434 630,090 1,663,912 5,126,204
Stock based compensation 1,631,649 6,152,587 1,341,889 10,454,590
------------ ------------ ------------ ------------
Total expenses 5,107,978 7,944,252 5,178,872 23,531,978
------------ ------------ ------------ ------------
Operating loss (5,105,979) (7,875,449) (5,123,950) (23,406,254)
Other (income) expense
Legal settlement -- -- -- 232,500
Loss on investment -- -- -- 17,000
Other income -- -- (25,000) (75,000)
Net losses of affiliate 209,157 -- -- 209,157
Amortization of deferred
financing costs -- 4,180,540 72,288 4,516,775
Interest income (524,253) (3,689) (3,413) (586,248)
Interest expense 5,810 1,019,937 410,715 1,906,603
------------ ------------ ------------ ------------
Total other (income) expenses (309,286) 5,196,788 454,590 6,220,787
------------ ------------ ------------ ------------
Net loss $ (4,796,693) $(13,072,237) $ (5,578,540) $(29,627,041)
============ ============ ============ ============
Per share data:
Basic and diluted $ (0.30) $ (2.07) $ (1.54)
============ ============ ============
Weighted average number
of common shares used in
basic and diluted loss per share 16,006,403 6,321,719 3,615,908
============ ============ ============
(1) Excludes non-cash, stock based compensation expense as follows:
Research and development $ 230,258 $ 200,878 $ 15,180 $ 456,239
Sales and marketing 78,732 3,776,407 681,933 5,044,508
General and administrative 1,322,659 2,175,302 644,776 4,953,843
------------ ------------ ------------ ------------
$ 1,631,649 $ 6,152,587 $ 1,341,889 $ 10,454,590
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
F-3
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
From
Inception
Year (July 14,
Ended 1994) to
December 31, December 31,
2000 1999 1998 2000
---- ---- ---- ----
Net loss $(4,796,693) $(13,072,237) $(5,578,540) $(29,627,041)
Other comprehensive income (loss)
Foreign currency translation adjustments (10,725) (22,444) 41,386 46,246
----------- ------------ ----------- ------------
Comprehensive loss $(4,807,418) $(13,094,681) $(5,537,154) $(29,580,795)
=========== ============ =========== ============
See Notes to Consolidated Financial Statements
F-4
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Additional
Common Stock Subscribed Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
Balances at July 14, 1994 (date of inception) -- $ -- $ -- $ -- $ --
Issuances of common stock, par value $.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 $.001
Services rendered 361,453 361 17,712
Stock options and warrants granted 600
Foreign currency translation adjustment
Net loss
----------- ----------- -------- -------- ------------
Balances at December 31, 1995 2,200,000 2,200 -- -- 42,673
Issuances of common stock, par value $.001
Cash, net of offering costs of $11,467 850,000 850 362,683
Foreign currency translation adjustment
Net loss
----------- ----------- -------- -------- ------------
Balances at December 31, 1996 3,050,000 $ 3,050 -- $ -- $ 405,356
Common stock contributed (135,000) (135) 135
Issuances of common stock, par value $.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
Net loss
----------- ----------- -------- -------- ------------
Balances at December 31, 1997 4,271,548 4,272 16,000 100,000 8,117,275
Common stock subscriptions 16,000 16 (16,000) (100,000) 99,984
Common Stock forfeited (1,000,000) (1,000) 1000
Transfer of temporary equity to permanent capital 15,000 15 77,141
Issuances of common stock, par value $.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
Net loss
----------- ----------- -------- -------- ------------
Balances at December 31, 1998 4,176,326 $ 4,177 $ $ 9,170,585
Issuances of common stock, par value $.001
Cash 314,774 315 225,140
Services rendered 1,227,000 1,227 1,669,548
Exercise of option 1,714,952 1,715 1,401,660
Stock options granted (cancelled) 4,449,015
Conversion of debt into common stock 3,220,508 3,221 3,376,748
Fair value of warrants associated with finacing
agreement 3,845,400
Amortization of deferred compensation
Value assigned to beneficial conversion feature
of convertible notes 572,505
Foreign currency translation adjustment
Net loss
----------- ----------- -------- -------- ------------
Balances at December 31, 1999 10,653,560 $ 10,654 $ $ 24,710,602
Issuances of common stock, par value $.001
Cash, net of offering costs of $730,000 3,680,937 3,681 13,266,319
Services rendered 16,269 16 114,609
Exercise of options and warrants 3,005,574 3,006 220,716
Stock options granted 2,028,720
Amortization of deferred compensation
Foreign currency translation adjustment
Net loss
----------- ----------- -------- -------- ------------
Balances at December 31, 2000 17,356,340 $ 17,357 -- $ -- $ 40,340,966
=========== =========== ======== ======== ============
Deficit
Foreign Accumulated
Currency During
Translation Development Deferred
Adjustment Stage Compensation Total
---------- ----- ------------ -----
Balances at July 14, 1994 (date of inception) $ -- $ -- $ -- $ --
Issuances of common stock, par value $.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 $.001
Services rendered 18,073
Stock options and warrants granted 600
Foreign currency translation adjustment 22,652 22,652
Net loss (896,663) (896,663)
------------ ------------ ------------ ------------
Balances at December 31, 1995 22,652 (938,748) -- (871,223)
Issuances of common stock, par value $.001
Cash, net of offering costs of $11,467 363,533
Foreign currency translation adjustment 35,044 35,044
Net loss (1,121,211) (1,121,211)
------------ ------------ ------------ ------------
Balances at December 31, 1996 $ 57,696 $ (2,059,959) $ -- (1,593,857)
Common stock contributed --
Issuances of common stock, par value $.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) (19,667)
Net loss (4,119,612) (4,119,612)
------------ ------------ ------------ ------------
Balances at December 31, 1997 38,029 (6,179,571) (1,402,776) 677,229
Common stock subscriptions --
Common Stock forfeited --
Transfer of temporary equity to permanent capital 77,156
Issuances of common stock, par value $.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 41,386
Net loss (5,578,540) (5,578,540)
------------ ------------ ------------ ------------
Balances at December 31, 1998 $ 79,415 $(11,758,111) $ (594,233) $ (3,098,167)
Issuances of common stock, par value $.001
Cash 225,455
Services rendered (445,725) 1,225,050
Exercise of option 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 finacing
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) (22,444)
Net loss (13,072,237) (13,072,237)
------------ ------------ ------------ ------------
Balances at December 31, 1999 $ 56,971 $(24,830,348) $ (278,875) $ (330,996)
Issuances of common stock, par value $.001
Cash, net of offering costs of $730,000 13,270,000
Services rendered 114,625
Exercise of options and warrants 223,722
Stock options granted (2,028,720) --
Amortization of deferred compensation 1,527,024 1,527,024
Foreign currency translation adjustment (10,725) (10,725)
Net loss (4,796,693) (4,796,693)
------------ ------------ ------------ ------------
Balances at December 31, 2000 $ 46,246 $(29,627,041) $ (780,571) $ 9,996,957
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
F-5
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
From
Inception
Year (July 14,
Ended 1994) to
December 31, December 31,
2000 1999 1998 2000
------------ ------------ ----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,796,693) $(13,072,237) $(5,578,540) $(29,627,041)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 58,066 94,016 187,298 779,711
Amortization of note discount and finance costs 4,394,216 272,009 4,666,225
Translation adjustment -- -- -- (1,528)
Beneficial conversion feature of convertible debt 572,505 -- 572,505
Stock, warrants and options issued for services
and legal settlement 1,631,649 6,266,398 1,173,139 10,627,551
Payment of common stock issued with guaranteed
selling price -- -- (155,344) (155,344)
Net losses of affiliate 209,157 -- -- 209,157
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable 9,297 (2,305) (8,480) (1,325)
Other current assets (62,030) (4,081) 99,113 (92,916)
Other assets 3,700 -- 69,000 --
Accounts payable (355,881) (694,469) 624,547 (151,285)
Accrued expenses (171,181) (109,220) 958,098 632,733
Accrued severance 97,962 (19,332) 33,009 156,200
Interest payable -- 160,099 90,920 251,019
------------ ------------ ----------- ------------
Net cash used by operating activities (3,375,954) (2,414,410) (2,235,231) (12,134,338)
------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed assets 28,637 6,098 -- 34,735
Purchases of property and equipment (105,354) (6,822) (64,363) (787,939)
Investment in ComSign, Ltd. (2,000,000) -- -- (2,000,000)
Increase in organization costs -- -- -- (7,680)
------------ ------------ ----------- ------------
Net cash provided (used) by investing
activities (2,076,717) (724) (64,363) (2,760,884)
------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 13,493,722 1,628,830 125,000 21,158,122
Proceeds from officer loan -- -- 16,000 --
Stock offering costs -- -- -- (475,664)
Deferred financing costs (276,901) (143,000) (682,312)
Proceeds from short-term borrowings -- -- 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 -- (307,480) -- (1,357,082)
Repayments of long-term debt (16,308) (494,207) (15,839) (1,615,825)
------------ ------------ ----------- ------------
Net cash provided by financing activities 13,477,414 2,550,242 1,926,402 23,135,219
------------ ------------ ----------- ------------
Effect of exchange rate changes on cash 363 27 (2,403) (5,311)
------------ ------------ ----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,025,106 135,135 (375,595) 8,234,686
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 209,580 74,445 450,040 --
------------ ------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,234,686 $ 209,580 $ 74,445 $ 8,234,686
============ ============ =========== ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 869 $ 50,046 $ 42,609 $ 473,026
============ ============ =========== ============
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 $ 3,379,696
============
See Notes to Consolidated Financial Statements.
F-6
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.
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 will be adjusted to 25% effective April 1, 2001. 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. Under the agreement, the Company was required to
reimburse Macrovision $1 million of research and development and
sales and marketing expenses incurred in 2000 relating to the joint
development.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current years 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.
F-7
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Revenue recognition
Revenues are generated from licensing software The company
recognizes the revenue in accordance with Statement of Position
97-2, "Software Revenue Recognition", and related interpretations,
when delivery has occurred, the fee for the software is fixed or
determinable, collectability is reasonably assured and a written
software license agreement has been signed by the Company and the
customer.
Stock Based Compensation
The Company accounts for stock-based compensation in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and
FASB Interpretation 44, "Accounting for Certain Transactions
Involving Stock Compensation.". Pursuant to these accounting
standards, the Company records deferred compensation for share
options granted to employees at the date of grant based on the
difference between the exercise price of the options and the market
value of the underlying shares at that date. Deferred compensation
is amortized to compensation expense over the vesting period of the
underlying options. No compensation expense is recorded for fixed
stock options that are granted to employees and directors at an
exercise price equal to the fair market value of the common stock at
the time of the grant
See Note 9 for pro forma disclosures required in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation".
Stock options and warrants granted to non-employees are recorded at
their fair value, as determined in accordance with SFAS No. 123 and
Emerging Issues Task Force Consensus No. 96-18, and recognized over
the related service period. Deferred charges for options granted to
non-employees are periodically re-measured as the options vest.
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 statement of
operations have been translated at average rates prevailing during
the year. The translation adjustments have been recorded as a
separate component of stockholders' deficit (cumulative translation
adjustment).
F-8
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net loss per share
Basic earnings (loss) per share EPS is computed by dividing net
income (loss) applicable to common shares by the weighted-average of
common shares outstanding during the period. Diluted earnings (loss)
per share adjusts basic earnings (loss) per share for the effects of
convertible securities, stock options and other potentially dilutive
instruments, only in the periods in which such effect is dilutive.
The shares issuable upon exercise of stock options and warrants are
excluded from the calculation of net loss per share, as their effect
would be antidilituve
Depreciation and Amortization
Furniture, equipment and vehicles are recorded at cost and
depreciated using the straight-line method over the estimated useful
lives of the assets, which range from three to fourteen years. For
leasehold improvements, amortization is provided over the shorter of
the estimated useful lives of the assets or the lease term.
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 FASB 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.
Concentrations
Cash and cash equivalents are, for the most part, maintained with
major financial institutions. Deposits held with these banks exceed
the amount of insurance provided on such deposits. Generally these
deposits may be redeemed upon demand and therefore, bear minimal
risk.
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
F-9
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, FASB Statement No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," was issued which
establishes accounting and reporting standards for all derivative
instruments. SFAS No. 133, as amended by SFAS No, 137 and 138, is
effective for fiscal years beginning after June 15, 2000. The
Company believes that the adoption of SFAS No. 133 on January 1,
2001 will not have a significant effect on its financial statements.
Note 3 - Property And Equipment
Property and equipment consist of the following:
December 31,
2000 1999
-------- --------
Computer equipment $220,640 $186,690
Leasehold improvements 118,114 114,928
Office equipment 131,936 140,242
Vehicles 146,824 93,585
-------- --------
617,514 535,445
Less: Accumulated depreciation 396,557 329,591
-------- --------
$220,957 $205,854
======== ========
Depreciation expense was $94,393, $107,010 and $113,858 for the
years ended December 31, 2000, 1999 and 1998.
Note 4 - Investment In Comsign, Ltd.
In July 2000, the Company invested $2 million for a 50% equity
interest in ComSign Ltd. ("ComSign") a newly established subsidiary
of Comda Ltd. ("Comda"). ComSign is engaged in the distribution and
delivery of digital authentication certificates of VeriSign, Inc.
("VeriSign"). In June 2000, ComSign entered into an agreement with
VeriSign to act as VeriSign's sole principal affiliate in Israel and
the territories administered by the Palestinian Authority. Under the
provisions of the agreement with Comda 60% of any dividends up to an
accumulated amount of $2,000,000 will first be distributed to TTR
and 40% to Comda.
F-10
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Thereafter, 60% of dividends up to an accumulated amount of
$2,000,000 will first be distributed to Comda and 40% to TTR.
Thereafter, all distributions will be 50% to each.
The Company applies the equity method of accounting for this
investment. At the time of the investment the carrying value of the
investment exceeded the Company's share of the underlying net assets
of ComSign. The excess is considered to be goodwill and is being
amortized on a straight-line basis over five years. Amortization
expense is included in net losses of affiliate in the accompanying
Consolidated Statements of Operations.
The investment breakdown at December 31, 2000 is a follows:
Share in net assets of ComSign $ 830,724
Goodwill, net 960,119
----------
Total investment in affiliate $1,790,843
==========
Condensed summarized financial data for ComSign, Ltd. as of and for the seven
months ended December 31, 2000, is as follows:
Condensed balance sheet data
Current assets $ 1,491,527
Noncurrent assets 2,267,515
Current liabilities 1,224,173
Noncurrent liabilities 873,420
Condensed statement of operations data
Revenue 176,912
Net loss $ (237,013)
Note 5 - Accrued Expenses
Accrued expenses consist of the following:
December 31,
2000 1999
---- ----
Accrued payroll and related amounts $135,144 $ 66,868
Taxes -- 4,738
Settlement -- 125,000
Other 32,587 139,166
-------- --------
$167,731 $335,772
======== ========
Note 6- 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." Funding into severance pay
funds and the purchase of insurance policies covers the Company's
liabilities for required severance payments.
Note 7- Debt Financings
o 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.
o In 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
F-11
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchase 11,500 shares of Common Stock at $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 amortized on a straight-line basis over the terms
of the respective notes.
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.
o 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 at $6.00 per share. 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.
o In 1999 the Company issued $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 $.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 $.92 per share.
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 $.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 at a nominal price per share, to an independent
consultant. These warrants were exercised in 2000. Using the
Black-Scholes model for estimating the fair value of the
warrants, the Company recorded $3,845,400 as deferred
financing costs, which was charged to operations in the period
the debentures were converted.
Note 8- Income Taxes
At December 31, 2000, the Company had available $15.7 million of net
operating loss carryforwards for U.S. federal income tax purposes
which expire in the years 2014 through 2020, and $8.1 million 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
F-12
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
December 31,
------------
2000 1999
---- -----
Net operating loss carryforwards $ 7,626,174 $ 4,398,088
Stock based compensation 438,280 2,313,232
Other 229,747 153,758
----------- -----------
Total deferred tax assets 8,294,201 6,865,078
Valuation allowance (8,294,201) (6,865,078)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
Note 9- Stockholders' Equity
Stock option plans
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 1.5 million. There are currently a
total of 1,318,225 options outstanding under the 1996 Plan and
future grants have been discontinued.
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. As of December 31, 2000, 18,000
options had been granted under the Directors' Plan.
In July 2000, the Company adopted the 2000 Equity Incentive Plan
(the "2000 Incentive Plan"). A total of 1.5 million shares of common
stock have been reserved for issuance under the 2000 Incentive Plan.
The 2000 Incentive Plan provides for the grant of incentive stock
options, nonqualified stock options, stock appreciation rights,
restricted stock, bonus stock, awards in lieu of cash obligations,
other stock-based awards and performance units. The 2000 Incentive
Plan also permits cash payments under certain conditions.
The Compensation Committee of the Board of Directors is responsible
for determining the type of award, when and to whom awards are
granted, the number of shares and the terms of the awards and
exercise prices. The options are exercisable for a period not to
exceed ten years from the date of grant. Vesting periods range from
immediately to four years.
F-13
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Option Grants
In addition to the options granted under the Stock Option Plans, the
Company has issued options outside of the plans, pursuant to various
agreements.
Option activity for 1998, 1999 and 2000 is summarized as follows:
Weighted
Average
Options Exercise
Plan Non-plan Total Price
---- -------- ----- --------
Options outstanding, January 1, 1998 161,100 177,200 338,300 $3.58
Granted 291,600 -- 291,600 3.35
Forfeited (294,950) (48,328) (343,278) 3.31
---------- -------- ----------
Options outstanding, December 31, 1998 157,750 128,872 286,622 3.67
Granted 736,500 196,000 932,500 0.39
Exercised -- (128,872) (128,872) 0.01
Forfeited (144,850) -- (144,850) 6.73
---------- -------- ----------
Options outstanding, December 31, 1999 749,400 196,000 945,400 0.47
Granted 2,238,500 -- 2,238,500 3.86
Exercised (200,000) (146,000) (346,000) 0.23
Forfeited (2,275) -- (2,275) 5.19
---------- -------- ----------
Options outstanding, December 31, 2000 2,785,625 50,000 2,835,625 $3.18
========== ======== ==========
Shares of common stock available for future
grant under the plan 600
==========
F-14
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
December 31, 2000:
Weighted Average Options Exercisable
Remaining Weighted Average
Number Contractual Exercise Number Exercise
Ranges of price Outstanding Life Price Exercisable Price
- --------------- ----------- ---- ----- ----------- -----
$0.01 524,000 8.64 $0.01 504,000 $0.01
$0.35 50,000 9.92 0.35 50,000 0.35
$2.56-3.56 400,600 9.32 3.31 320,600 3.50
$3.91-5.72 1,851,025 9.51 4.10 1,138,581 4.20
$6.84-7.00 10,000 7.12 6.94 9,000 6.94
--------- ---- ----- --------- -----
$.01-$7.00 2,835,625 9.33 $3.18 2,022,181 $2.96
========= ==== ===== ========= =====
Weighted-average grant date fair value of options granted in 2000 ,1999 and
1998, under the Black-Scholes option pricing model, was $2.10, $2.20 and $1.14
per option, respectively.
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,
2000 1999 1998
---- ---- ----
Net loss
As reported ($4,796,693) ($13,072,327) ($5,578,540)
Proforma ($8,118,242) ($13,123,185) ($5,635,574)
Loss per share
As reported ($0.30) ($2.07) ($1.54)
Proforma ($0.51) ($2.08) ($1.56)
The fair value of each option granted in 2000, 1999 and 1998 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
2000 1999 1998
---- ---- ----
Risk free interest rates 6.32% 5.52% 5.51%
Expected option lives 2.46 2.50 2.50
Expected volatilities 70.00 46.50 46.50
Expected dividend yields None None None
F-15
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Authorized shares
In July 2000, the Company's stockholders approved a resolution of the Board of
Directors adopted to increase the authorized common stock to 50 million shares
Warrants
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.
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 exercisable at a nominal price per share. These
warrants were exercised in 2000.
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. In November 1999, upon the
signing of an agreement with a strategic investor, 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. These warrants were exercised in 2000.
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.
o In November 1999, the Company issued 25,000 warrants
exercisable at a nominal price per share to a consultant.
o In May 2000, the Company granted 250,000, three-year warrants
to a consultant pursuant to a one-year consulting agreement.
The agreement was subsequently amended to reduce the number of
warrants to 175,000. The first 100,000 warrants vest
immediately then each of the next 25,000 will vest when the
closing bid price of the Company's Common Stock
F-16
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exceeds $8, $12, and $16, respectively, for fifteen trading days out
of any twenty. The exercise prices of the warrants are $4.13 per
share. Using the Black-Scholes model for estimating the fair value
of the warrants, the Company recorded a charge to operations of
$123,175 in connection with the immediately vesting portion of the
warrant.
In June 2000, the Company granted 350,000 five-year warrants to
another consultant pursuant to a one-year consulting agreement. The
warrants become exercisable when the average weighted bid price of
the Company's Common Stock exceeds $10 per share for twenty
consecutive trading days. The exercise prices of the warrants are
$6.50, $7.50 and $8.50 for 125,000, 125,000 and 100,000
respectively.
These warrants are accounted for in accordance with the
provisions of EITF 96-18, Accounting for Equity Instruments
that are Issued to Other than Employees for Acquiring or in
Conjunction with Selling, Goods or Services. Due to the
uncertainty of reaching the performance measures stipulated,
the Company has not recorded any expense relating to the
issuance of the unvested warrants. Upon determination that the
achievement of the vesting thresholds is probable
("measurement date"), the Company will value the warrant and
expense it over the remaining period until the performance
criteria is met.
o In August 2000, the Company granted 200,000 five-year warrants to a
consultant pursuant to a one-year consulting agreement. The first
100,000 warrants, vest immediately and the next 100,000 vest ratable
over seven months. The warrants are not exercisable during the first
two years from the date of grant unless the Company's Common Stock
has traded at or above $10 per share for fifteen consecutive trading
days. The exercise prices of the warrants are $7.50 per share. Using
the Black-Scholes model for estimating the fair value of the
warrants, the Company recorded a charge to deferred compensation of
$596,653 and is amortizing this amount over the service period.
o In October 2000, the Company granted 400,000 four-year warrants to a
consultant pursuant to a one-year consulting agreement. The warrants
vest immediately but are not exercisable until one year from date of
grant, unless there is a sale or merger involving a majority of the
assets of the Company. The exercise prices of the warrants are
$6.50, $7.50 and $8.50 for 134,000, 133,000 and 133,000,
respectively. Using the Black-Scholes model for estimating the fair
value of the warrants, the Company recorded a charge to deferred
compensation of $483,772 and is amortizing this amount over the
service period.
Stock Issuances
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.
F-17
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 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.
During the year ended December 31, 2000, the Company completed the
following common stock transactions
o In January 2000, pursuant to its licensing and investment agreement
with Macrovision, the Company issued 1,880,937 shares of its common
for an aggregate purchase price of $4 million.
o In February 2000, the Company completed a private placement of
1,800,000 shares of 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 if the common shares have traded at or above 200% of the
exercise price
F-18
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 200,000 warrants, exercisable at $2.75, as a finder fee.
o In January 2000, the Company issued 15,000 shares of Common Stock to
a consultant. The value of the services totaling $104,625 was
charged to operations.
o In January 2000, the Company issued 1,269 shares of Common Stock as
payment of an outstanding liability in the amount of $10,000.
o In 2000, the Company issued 3,005,574 shares of Common Stock from
the exercise of various outstanding stock options and warrants.
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 plus accrued interest. The total amount of grants
received as of December 31, 2000 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.
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.
Employment Agreements
The Company entered into, and amended various employment agreements in
October 2000 and February 2001 with certain of its officers and an
employee. The Company's aggregate commitments under these employment
agreements are approximately $858,000, $608,000 and $375,000 during 2001,
2002 and 2003, respectively. In addition each of the agreements provides
for a termination payment, under certain circumstances, equal to 12 months
salary. If a change in control (as defined) occurs the termination
payments will be the greater of 12
F-19
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
months salary or the balance of the salary then due under the agreement
through the scheduled expiration date.
Note 11 - Geographic Data
U.S. % of Total Israel % of Total
For the year ended
December 31, 2000
Revenue $ -- 0.00% $ 1,999 100.00%
Operating loss (3,027,245) 59.29% (2,078,734) 40.71%
Identifiable assets 8,297,774 80.18% 2,050,939 19.82%
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%
Note 12 - Quarterly Results of Operations (UNAUDITED)
2000 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Revenues 1,999 -- -- --
Net loss (1,563,727) (1,025,946) (1,213,842) (993,178)
Net loss per share - basic and diluted (0.12) (0.06) (0.07) (0.06)
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Revenues 26,984 13,509 26,848 1,462
Net loss (1,158,346) (1,806,511) (1,470,314) (9,357,066)
Net loss per share - basic and diluted (0.23) (0.20) (0.26) (1.02)
In the fourth quarter of 1999, the Company recorded (a) $3.2 million as
amortization of deferred financing costs upon the conversion of convertible
debt; (b) $572,000 as additional interest from the conversion of debt that
included a beneficial conversion festure; (c) a $2.7 million charge as a result
of warrants issued to a consultant that became exercisable upon the Company
entering into an agreement with a strategic investor; (d) a $1.5 million charge
as a result of the issuance of additional stock and warrants to consultants and
employees of the Company.
F-20