AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY , 1997
REGISTRATION NO. 333-11829
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TTR INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
------------------------
DELAWARE 3577 11-3223672
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
2 HANAGAR STREET
KFAR SABA, ISRAEL 44425
011-972-9-766-2393
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
------------------------
MR. MARC D. TOKAYER
CHAIRMAN OF THE BOARD
TTR INC.
2 HANAGAR STREET
KFAR SABA, ISRAEL 44425
011-972-9-766-2393
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
SAMUEL F. OTTENSOSER, ESQ. MITCHELL LAMPERT, ESQ.
BAER MARKS & UPHAM LLP LAMPERT & LAMPERT
805 THIRD AVENUE, NEW YORK, NY 10022 10 E. 40TH STREET, NEW YORK, NY 10016
TEL: (212) 702-5700 FAX: (212) 702-5941 TEL: (212) 889-7300 FAX: (212) 889-5732
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED AMOUNT TO BE REGISTERED PER SHARE(1) OFFERING PRICE FEE
Common Stock, $.001 par value..................... 920,000 shares(2) $ 7.00 $ 6,440,000 $1,951.52
Representative's Warrants......................... 80,000 warrants(3) $ .001 $ 80 $ .02
Common Stock, $.001 par value..................... 80,000 shares $11.20 $ 896,000 $ 271.52
Common Stock, $.001 par value..................... 1,139,548 shares(4) $ 7.00 $ 7,976,836 $2,417.22
Common Stock, $.001 par value..................... 217,473 shares(5) $ 0.01 $ 2,175 $ .66
-------------- ---------
Total........................................ $ 15,315,091 $4,640.94(6)
(footnotes on next page)
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
________________________________________________________________________________
(footnotes from front cover)
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 promulgated under the Securities Act of 1933, as
amended.
(2) Includes 120,000 shares of Common Stock subject to an over-allotment option
granted to the Underwriters.
(3) Representative's Warrants to be issued to the Representative consist of
warrants to purchase 80,000 shares of Common Stock.
(4) Consists of shares of Common Stock offered by the Selling Securityholders.
(5) Consists of Common Stock issuable upon exercise of warrants exercisable at
$.01 per share being offered by a Selling Securityholder.
(6) This amount has been previously paid.
------------------------
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one
prospectus to be used in connection with an offering by the Company of 800,000
shares of Common Stock (the 'Offering Prospectus'), and another prospectus to be
used in connection with the sale by Selling Securityholders of the Company of
1,357,021 shares of Common Stock, including 217,473 shares of Common Stock
issuable upon the exercise of warrants (the 'Selling Securityholders'
Prospectus'). The Offering Prospectus and the Selling Securityholders'
Prospectus will be identical in all respects except for the alternative pages
for the Selling Securityholders' Prospectus included herein which are labeled
'Alternate Page for Selling Securityholders' Prospectus.'
TTR INC.
CROSS REFERENCE SHEET
ITEM NO.
CAPTION IN FORM SB-2 LOCATION IN PROSPECTUS
- ----------------------------------------------------------- -----------------------------------------------------
1. Front of Registration Statement and Outside Front
Cover of Prospectus................................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors................. Prospectus Summary; Summary Financial Information;
and Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Underwriting
6. Dilution............................................. Dilution
7. Selling Security-Holders............................. Selling Stockholders
8. Plan of Distribution................................. Selling Securityholders and Plan of Distribution
9. Legal Proceedings.................................... Business -- Legal Proceedings
10. Directors, Executive Officers, Promoters and Control
Persons............................................ Management
11. Security Ownership of Certain Beneficial Owners and
Management......................................... Principal Stockholders
12. Description of Securities............................ Description of Securities
13. Interest of Named Experts and Counsel................ Legal Matters and Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Management -- Indemnification
15. Organization Within Last Five Years.................. *
16. Description of Business.............................. Business
17. Management's Discussion and Analysis or Plan of
Operation.......................................... Plan of Operation
18. Description of Property.............................. Business -- Properties.
19. Certain Relationships and Related Transactions....... Certain Transactions
20. Market for Common Equity and Related Stockholder
Matters............................................ Dividend Policy
21. Executive Compensation............................... Management -- Executive Compensation
22. Financial Statements................................. Financial Statements
23. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................ *
- ------------
* Not Applicable
PROSPECTUS
TTR INC.
800,000 SHARES OF COMMON STOCK
[LOGO]
All of the 800,000 shares of Common Stock, par value $.001 per share (the
'Common Stock') offered hereby (the 'Offering') are being sold by TTR Inc., a
Delaware corporation (the 'Company') through First Metropolitan Securities,
Inc., the representative of the Underwriters (the 'Representative'). See
'Description of Securities.'
Prior to this offering (the 'Offering'), no public market exists for the
Common Stock. There can be no assurance that any such markets will develop. The
offering price of the shares of Common Stock has been determined in negotiations
between the Company and the Underwriter on an arbitrary basis and bears no
relationship to the assets, earnings or any other recognized criteria of value.
The price should in no event, however, be regarded as an indication of any
future market price of the Common Stock. After the Offering, the Company's
current directors, executive officers and principal stockholders will
beneficially own approximately 26.5% of the outstanding shares of Common Stock
of the Company. Marc D. Tokayer, Chairman of the Board, the Tokayer Family
Trust, Baruch Sollish, Director and four other stockholders with an aggregate of
1,137,430 shares of Common Stock (35.3% after the Offering) have entered into a
voting arrangement whereby they have agreed to vote their respective shares to
elect directors and in support of positions favored by a majority of the shares
held among them. Accordingly, the Company's present Management will in all
likelihood continue to control the Company. The Company anticipates that the
Common Stock will be quoted on the OTC Electronic Bulletin Board under the
symbol 'TTRF.' An OTC Electronic Bulletin Board quote does not imply that a
liquid and active market will develop or be sustained for the securities upon
completion of the Offering. See 'Underwriting' for a discussion of the factors
considered in determining the public offering price of the Common Stock. See
'Risk Factors.'
Only the Common Stock is being sold as part of the underwritten Offering.
This Registration Statement also relates to the offer and sale of an aggregate
of 1,357,021 shares of Common Stock, including 217,473 shares of Common Stock
issuable upon the exercise of warrants (collectively, the 'Selling
Securityholders'
(Cover continued on next page)
------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND SUBSTANTIAL DILUTION. SEE 'DILUTION' AND 'RISK FACTORS' BEGINNING ON
PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PRICE UNDERWRITING
TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
Per Share........................................................................ $7.00 $.70 $6.30
Total....................................................................... $5,600,000 $560,000 $5,040,000
(1) Does not include a 3% nonaccountable expense allowance payable to the
Representative, of which $50,000 has been paid as at the date of this
Prospectus. The Company has also agreed to sell to the Representative
warrants (the 'Representative's Warrants') to purchase up to 80,000 shares
of Common Stock, to retain the Representative as a financial consultant and
to indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the 'Securities
Act'). See 'Underwriting.'
(2) Before deducting certain expenses payable by the Company, including the
nonaccountable expense allowance in the amount of $168,000 ($193,200 if the
Underwriters' overallotment option is exercised in full), estimated at
$743,000.
(3) The Company and certain stockholders have granted the several Underwriters
an option (the 'Over-allotment Option'), exercisable with 45 days from the
date of this Prospectus, to purchase in the aggregate up to an additional
120,000 shares of Common Stock on the same terms as set forth above, solely
to cover over- allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, and Proceeds
to Company will be $6,440,000, $644,000 and $5,418,000, respectively. See
'Underwriting.'
------------------------
FIRST METROPOLITAN SECURITIES, INC.
The date of this Prospectus is , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED JANUARY 21, 1997
(Cover continued from previous page)
Shares'). The Selling Securityholders' Shares are being registered pursuant to
registration rights agreements entered into by the Company and the selling
securityholders (the 'Selling Securityholders'). The Selling Securityholders
have each agreed (except for a certain Selling Securityholder who has agreed to
lock-up an aggregate of 15,000 shares, for a period of 18 months; and except for
a certain Selling Securityholder with respect to up to 60,000 shares of Common
Stock included in the Over-allotment Option) not to sell any of the securities
being registered in the Selling Securityholders' Offering for a period of 24
months from the Effective Date without the prior written consent of the
Representative. The Representative will not consent to the release of such
lock-ups prior to the exercise or expiration of the Over-allotment Option. The
Company will not receive any of the proceeds from the sale of such securities.
See 'Selling Securityholders,' 'Selling Securityholders' Offering,' 'Selling
Stockholders,' 'Plan of Operation' and 'Underwriting.'
The Common Stock being offered through the Underwriters is being sold by
the Company on a 'firm commitment' basis subject to prior sale, when, as and if
delivered to and accepted by the several Underwriters named herein and subject
to approval of certain legal matters by counsel to the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify the Offering and to reject any order in whole or in part. It is expected
that delivery of the certificates representing the securities offered hereby
will be made against payment therefor at the offices of the Representative in
New York City on or about , 1997.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
The Company is not currently a reporting Company. Following the Offering,
the Company will be subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and in accordance there
with, will file reports, proxy and information statements and other information
with the Securities and Exchange Commission (the 'Commission'). The Company
intends to furnish to its stockholders annual reports containing audited
financial statements and such other periodic reports as the Company may
determine to be appropriate or as may be required by law.
------------------------
SoftGuard'tm', DiscGuard'tm', NetGuard'tm' and Remote Activation Center'tm'
are trademarks of the Company. Certain other trademarks of the Company and other
companies, including Microsoft Windows, Windows 95, Windows NT, MS-DOS, Apple
Macintosh and NEC, are used in this Prospectus.
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements and notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Unless otherwise indicated, all share, per share and
financial information set forth herein assumes the exercise of 374,548 warrants
into 374,548 shares of Common Stock upon completion of this Offering and no
exercise of the Over-allotment Option or the Representative's Warrants. See
'Description of Securities -- Prior Financings.'
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in 'Risk
Factors.'
THE COMPANY
TTR Inc. ('TTR' or the 'Company') is primarily engaged in the design and
development, and intends to commence marketing of, a family of proprietary
software security products that are designed to prevent the unauthorized
reproduction and use of computer software programs. TTR's proposed core product,
SoftGuard, is designed to be used by software developers for inclusion in their
software packages sold to end-users. The current version of SoftGuard, although
out of the development stage and ready for commercialization, has not yet been
released. Since its inception, the Company has been engaged primarily in product
design and testing, and has not had any sales revenue to date. The Company's
primary objective is to make SoftGuard the market standard for software
protection.
Annual losses incurred by software developers due to software piracy was
estimated by the Business Software Alliance to exceed $15 billion worldwide in
1994. SoftGuard is intended to provide comprehensive protection against
unauthorized software reproduction. Unlike most currently available software
security systems which are dependent on hardware peripherals, SoftGuard does not
entail the use of any dongles (keys) or similar devices. It is comprised of a
protection diskette, which provides anti-copying protection while the software
resides on a distribution diskette, CD-ROM or other distribution media, and a
software-based solution that protects against unauthorized reproduction once the
software is installed onto the end-user's system. The protection diskette is
used by the end-user only at the initial installation of the protected software
or upon an authorized transfer of protected software to another computer.
Without the protection diskette, the protected software will not properly
install. The Company plans on selling the SoftGuard protection diskette to
software developers who will include the protection diskette with their software
program that is ultimately sold to the legitimate end-user. When included with
such software, the developer's software program would be further protected by
the SoftGuard software licensed from the Company. The Company believes that
SoftGuard will provide an effective, versatile and relatively inexpensive,
comprehensive software protection solution.
For software distributed electronically over the Internet, the Company is
developing a system that is intended to insure that the payment for the
downloaded software has been received and that the software's use will be
restricted to one site per payment. The Company's proposed Remote Activation
Center will utilize the core technology incorporated in SoftGuard to provide
both payment confirmation and conventional software protection. Although
currently in a program design and program development phase, the Company expects
the product to begin beta testing during the second quarter of 1997 with a
targeted commercial release date by the third quarter of 1997.
For software that does not require installation on an end-user's hard drive
and is run directly from a CD-ROM, such as educational or entertainment
software, the Company is developing a technology designed to protect against the
unauthorized reproduction of the CD-ROM. The decreasing costs of CD-Recorders,
which can be used to faithfully reproduce unauthorized copies of the CD-ROM, and
the increased availability of other mass reproduction machines, have contributed
to the increase in CD-ROM piracy. Conventional protection technologies are
believed by the Company to be generally impractical and cost ineffective. The
Company's solution involves modifications to the laser optics
3
system of the CD-ROM mastering machine. This technology would prevent the
faithful reproduction of the CD-ROM itself, without reference to the data
contained on it. The Company expects to commercially release its initial
DiscGuard CD-ROM product by the third quarter of 1997.
TTR believes that the principal competitive advantages featured in its
proposed products will include the following:
A software application protected by SoftGuard will only be able to
be installed onto the end-user's system in the presence of an authentic
protection diskette containing the appropriate identification code. Once
installed onto the end-user's system, the protected software will run only
on that unit.
SoftGuard can be programmed by the software developer to permit a
limited number of installations of authorized copies of the protected
software including limited time period trial offers.
SoftGuard's avoidance of any hardware peripherals such as dongles or
keys is expected to save the end-user the inconvenience associated with
such hardware use.
Per-unit production costs associated with SoftGuard protection
diskettes will be significantly lower compared to dongle or key based
solutions.
Once the SoftGuard protected software program is installed, the
product safety features will be self-executing and entirely 'transparent'
to the end-user who will not be aware of their operation.
A software program sold over the Internet that utilizes the Remote
Activation Center would be protected against unauthorized copying and use
in a similar fashion to conventional software protected by SoftGuard.
CD-ROMs utilizing the DiscGuard CD-ROM product in their
manufacturing would be non-reproducible.
The Company intends to market its SoftGuard line of products to software
developers. The Company's strategy is to distribute its products to software
developers through independent distributors or direct marketing through the
establishment of regional based subsidiaries or affiliates. The Company intends
to market its proposed CD-ROM product directly to CD-ROM replicators.
The Company's objective is to be a leading provider of software security
products with its SoftGuard product line. Some key elements of the Company's
strategy include (i) expansion of existing software security markets; (ii)
penetration of leading geographic marketing areas; (iii) continued product
expansion and enhancement; (iv) pursue strategic acquisitions; and (v)
strengthen competitive advantages.
TTR was organized as a holding company in Delaware on July 14, 1994. The
Company currently conducts its business through its wholly-owned subsidiary, TTR
Technologies Ltd. ('TTR Israel'), a private company formed under the laws of the
State of Israel on December 5, 1994. The Company's current product design,
marketing, research and development operations are conducted at TTR Israel's
premises in Kfar Saba, Israel. As used herein, the term 'Company' includes the
operations of TTR and TTR Israel, unless the context otherwise requires.
The Company's executive offices are located at 2 Hanagar Street, Kfar Saba,
ISRAEL 44425. Its telephone number is 011-972-9-766-2393.
4
THE OFFERING
Securities offered by the Company......... 800,000 shares of Common Stock.
Securities Offered Concurrently by the
Selling Securityholders................. 1,357,021 shares of Common Stock, including 217,473 shares of Common
Stock issuable upon exercise of warrants. See 'Selling
Securityholders' Offering.'
Common Stock outstanding prior to the
Offering................................ 2,424,548(1)(2)
Common Stock to be outstanding after the
Offering................................ 3,224,548(1)(2)(3)
Use of Proceeds........................... The Company intends to apply the net proceeds from the Offering for
marketing, research and product development, the repayment of
indebtedness, the purchase of capital equipment; and working
capital and general corporate purposes. See 'Use of Proceeds.'
Risk Factors and Dilution................. Prospective investors should carefully consider the matters set forth
under the captions 'Risk Factors' and 'Dilution.' An investment in
the securities offered hereby involves a high degree of risk and
immediate and substantial dilution.
Proposed OTC Electronic Bulletin Board
Symbol(4)............................... Common Stock: TTRF
- ------------
(1) Does not include 450,000 shares of Common Stock reserved for issuance upon
exercise of stock options granted or which may be granted under the
Company's Employee Stock Option Plan (the '1996 Plan').
(2) Excludes 1,000,000 shares of Common Stock which have been deposited into
escrow by the holders thereof. The Escrow Shares are subject to cancellation
and will be contributed to the capital of the Company if the Company does
not attain certain earnings levels or the market price of the Common Stock
does not achieve certain levels. If such earnings or market price levels are
met, the Company will record a substantial non-cash charge to earnings, for
financial reporting purposes, as compensation expense relating to the value
of the Escrow Shares released to Company officers and employees. See 'Risk
Factors -- Charge to Income in the Event of Release of Escrow Shares,'
'Capitalization' and 'Principal Stockholders.'
(3) Does not give effect to the repurchase of 135,000 shares of Common Stock
(the 'Bridge Shares') from the Limited Partners (as defined hereafter). See
'Description of Securities -- Prior Financings.'
(4) The Company anticipates that the Common Stock will be quoted on the OTC
Electronic Bulletin Board. An OTC Electronic Bulletin Board quotation
listing does not imply that a liquid and active market will develop or be
sustained for the securities upon completion of the Offering.
5
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
Financial Statements included elsewhere in this Prospectus and should be read in
conjunction with such Financial Statements and the Notes thereto.
FROM INCEPTION NINE MONTHS ENDED
(JULY 14, 1994) YEAR ENDED SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, ---------------------------
1994 1995 1995 1996
--------------- ------------ ------------- ----------
Income Statement Data:
Revenue...................................... $ -- $ -- $ -- $ --
Total expenses............................... 36,441 765,867 545,650 760,872
Operating loss............................... (36,441) (765,867) (545,650) (760,872)
Net loss..................................... (42,085) (896,663) (612,811) (897,039)
--------------- ------------ ------------- ----------
--------------- ------------ ------------- ----------
Net loss per share(1)........................ $ (0.02) $ (0.37) $ (0.26) $ (0.39)
--------------- ------------ ------------- ----------
--------------- ------------ ------------- ----------
Weighted average shares outstanding.......... 2,778,533 2,399,793 2,339,337 2,641,034
AT SEPTEMBER 30, 1996
-----------------------------
DECEMBER 31, PRO FORMA AS
1995 ACTUAL ADJUSTED(2)
--------------- ------------ -------------
Balance Sheet Data:
Working capital (deficiencies)............................. $ (616,839) $(1,955,281) $ 2,488,900
Total assets............................................... 403,204 646,985 4,384,298
Total liabilities.......................................... 1,274,427 2,026,377 1,526,377
Total stockholders' equity (deficit)....................... (871,223) (1,379,392) 2,857,921
- ------------
(1) Earnings per share are presented for 1995 and the nine months ended
September 30, 1996 on a pro forma basis to reflect the exercise of 374,548
warrants as if it occurred on January 1, 1995. See 'Financial Statements.'
(2) Gives pro forma effect to (i) the exercise of 374,548 warrants and (ii) the
consummation of this Offering and the application of the estimated net
proceeds thereof. Does not take into account the repurchase of 135,000
Bridge Shares. See 'Use of Proceeds,' 'Capitalization' and 'Description of
Securities -- Prior Financings.'
6
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk and should not be purchased by persons who cannot afford the loss of their
entire investment. Prospective investors should carefully consider the following
risk factors, as well as all other information set forth elsewhere in this
Prospectus.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
projected in the forward-looking statements discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in this section, as well as in the sections entitled 'Plan of
Operation' and 'Business.'
Development Stage Company; History of Operating Losses; Accumulated
Deficit; Working Capital Deficiency; Stockholders' Deficit; Uncertainty of
Future Profitability. The Company is a development stage company with a limited
history of operations, and has an accumulated deficit from inception in July
1994 through September 30, 1996, of approximately $1,835,787. As a development
stage company, the Company has a limited relevant operating history upon which
an evaluation of the Company's prospects can be made. The Company's prospects
must therefore be evaluated in light of the problems, expenses, delays and
complications associated with a new business. At September 30, 1996, the Company
had a working capital deficiency of approximately $1,955,000 and a stockholders'
deficit of approximately $1,379,000. Losses have resulted principally from costs
incurred in research and development of the SoftGuard technologies and from
general and administrative costs. The current version of SoftGuard, although out
of the development stage and ready for commercialization, has not yet been
released. Accordingly, the Company has not realized any operating revenues to
date. The Company expects to continue to incur operating losses for the
foreseeable future until such time, if ever, as the Company is able to achieve
sufficient levels of revenues from operations. There can be no assurance that
the Company will ever generate revenues or achieve profitability. See 'Plan of
Operation.'
Explanatory Paragraph in Independent Auditors' Report. The Company's
independent auditors have included an explanatory paragraph in their report on
the Company's financial statement stating that certain factors raise substantial
doubt about the Company's ability to continue as a going concern. The Company's
continuation as a going-concern is dependent upon its ability to obtain
additional financing, including from this Offering, to generate sufficient cash
flow to meet its obligations on a timely basis. As a result of the start-up
nature of the Company's business, additional operating losses can be expected in
the foreseeable future. There can be no assurance that the Company can be
operated profitably in the future. See 'Plan of Operation' and Consolidated
Financial Statements.
Future Capital Needs; Uncertainty of Additional Financing. The Company's
cash requirements may vary materially from those now planned depending on
numerous factors, including the status of the Company's marketing efforts, the
Company's business development activities, the results of future research and
development and competition. Notwithstanding, the Company believes that the net
proceeds of this Offering, together with its projected cash flow from
operations, if any, will be sufficient to finance its working and other capital
requirements for a period of approximately 12 months from the date of this
Prospectus. Thereafter, or sooner if conditions make it necessary, the Company
may need to raise additional funds through public or private financings,
including equity financings which may be dilutive to stockholders. Any future
equity financings within the next 36 months would be subject to the approval of
the Representative. There can be no assurance that the Company will be able to
raise additional funds if its capital resources are exhausted, or that funds
will be available on terms attractive to the Company or at all. If adequate
funds are not available, the Company may be required to reduce materially its
proposed operations. See 'Use of Proceeds,' 'Underwriting' and 'Plan of
Operation.'
Dependence of Single Product Line and Limited Market. The Company proposes
to initially market one line of products to a limited market of customers
desiring to protect their software products. The Company estimates that
worldwide sales of software protection products was approximately $120,000,000
in 1995. The Company believes that future sales growth will be dependent
primarily upon expansion of the software protection products market as well as
the Company's ability to market its
7
products. There can be no assurance that the Company will successfully market
its products or that the market for software security products will grow. See
'Business -- Sales and Marketing.'
Uncertainty of End-User Acceptance of SoftGuard Products. The Company's
SoftGuard product line is intended to be sold to software developers for
inclusion in the applications programs marketed and sold by them. However, the
Company is ultimately dependent upon the end-user's acceptance of SoftGuard.
Many software development houses have elected to not include software protection
with their software programs because end-users have encountered operational
difficulties with, or have indicated an unwillingness to use, such software
protection. While the Company believes that SoftGuard is intended to address and
solve many of the operational difficulties encountered by end-users in using
many of the commercially available software protection products, there can be no
assurance that software developers will elect to include the Company's proposed
products in their software products or that if such products are included, the
products will be accepted by the general market. There can be no assurance that
the Company will be able to market its software protection successfully or that
future products, if any, will be accepted in the marketplace. See
'Business -- SoftGuard Software Protection' and ' -- Sales and Marketing.'
New Products and Rapid Technological Change. The market for the Company's
proposed products is characterized by rapidly changing technology, evolving
industry standards and new product introductions. The Company's future success
will depend in part on its ability to enhance its planned products and to
introduce new products and technologies to meet changing customer requirements.
The Company is currently devoting significant resources toward the development
of enhancements to its planned software protection line of products. There can
be no assurance that the Company will successfully complete the development of
these products in a timely fashion or that the Company's current or future
products will satisfy the needs of the software security market. There can also
be no assurance that security related products or technologies developed by
others will not adversely affect the Company's competitive position or render
its products or technologies non-competitive or obsolete. Moreover, the Company
is committed to devote a substantial portion of its revenues to research and
development efforts. There can be no assurance that these efforts will be
successful. See 'Use Of Proceeds' and 'Business -- Research and Development' and
' -- Competition.'
Proposed Expansion; Risks Associated with Acquisitions. The Company intends
to use a significant portion of the net proceeds of this Offering to expand its
operations through the establishment of its sales and marketing efforts, the
expansion of its research and development activities, or through possible
acquisitions. The Company believes that the net proceeds of the Offering will be
sufficient to enable the Company to carry out its planned growth, although there
can be no assurance it will be able to do so.
The Company may also seek to expand its operations through potential
acquisitions. The Company may use a portion of the net proceeds from this
Offering to acquire all or a portion of existing companies in businesses which
the Company believes are compatible with its business, including, but not
limited to, competitors of the Company. Any decision to make an acquisition will
be based upon a variety of factors, including, among others, the purchase price
and other financial terms of the transaction, the business prospects and the
extent to which any acquisition would enhance the Company's prospects. To the
extent that the Company may, depending upon the opportunities available to it,
finance an acquisition with a combination of cash and equity securities, any
such issuance of equity securities could result in dilution to the interests of
the Company's stockholders. However, any future equity financings within the
next 36 months would be subject to the approval of the Representative.
Additionally, to the extent that the Company, or the acquisition or merger
candidate itself, issues debt securities in connection with an acquisition, the
Company may be subject to risks associated with incurring indebtedness,
including the risks of interest rate fluctuations and insufficiency of cash flow
to pay principal and interest. The Company is not currently engaged in
identifying any potential acquisition and has no plans, agreements,
understandings or arrangements for any acquisitions. There can be no assurance
that the Company will be able to successfully consummate any acquisition or
successfully integrate into its business any acquired business or portion
thereof.
The management of the anticipated growth in expenditures will require
expansion of the Company's management and financial controls, and could place a
significant strain on the Company's resources. None of the Company's current
officers have had experience in managing a public company
8
or a company having expenditures as large as the anticipated expenditures of the
Company. While the Company intends to hire additional appropriate personnel,
there can be no assurance that these or other measures implemented by the
Company will effectively increase the Company's capabilities to manage such
growth or to do so in a timely and cost effective manner. See 'Use of Proceeds'
and 'Business.'
Limited Marketing Capability. The Company has limited marketing
capabilities and resources. Achieving market penetration will require
significant efforts by the Company to create awareness of and demand for the
Company's products. Accordingly, the Company's ability to build its customer
base will be dependent on its marketing efforts, including its ability to
establish an effective internal sales organization, or establish strategic
marketing arrangements with other companies. The Company currently has no plan,
agreement, understanding or arrangement with any distributors, and no assurance
can be given that any will be entered into. The failure by the Company
successfully to develop its marketing capabilities, both internally and through
distributors, would have a material adverse effect on the Company's business.
Further, there can be no assurance that the development of such marketing
capabilities will lead to sales of the Company's products. See 'Use of Proceeds'
and 'Business -- Sales and Marketing.'
Risks Associated with International Sales. The Company intends to initially
market its products primarily in North America and Israel with subsequent
efforts in Europe and the Far East. The Company will be subject to the risks
inherent in international business activities, including unexpected changes in
regulatory requirements and the burdens of complying with a wide variety of laws
and regulations. Moreover, if for any reason exchange or price controls or other
restrictions on the conversion of foreign currencies were imposed, the Company's
business could be materially adversely affected.
Risks Associated with Operations in Israel. The Company's offices and
production facilities are located in the State of Israel and are directly
affected by the economic, military and political conditions in that country. For
information with respect to certain factors concerning the State of Israel,
including risks related to the political and economic situation, see
'Business -- Conditions in Israel.'
Uncertain Ability to Protect Patent-Pending Technology. The Company's
ability to compete effectively depends on its success in protecting its
proprietary technology, both in the United States and abroad. The Company has
filed for patent protection in the United States, Israel, Germany, France, Great
Britain, the Netherlands and Japan for the process by which it imprints the
protection diskette used in the proposed SoftGuard line of products and in the
United States for the technology underlying the proposed DiscGuard CD-ROM based
protection (the 'Patent Rights'). No assurance can be given that any patents
will be issued from the United States or other patent offices for the Patent
Rights, that the Company will receive any patents in the future based on its
continued development in the technology, or that the Company's patent protection
within and/or outside of the United States will be sufficient to deter others,
legally or otherwise, from developing or marketing competitive products
utilizing the SoftGuard technologies.
The Company believes that the protection afforded by the Patent Rights is
material to its future revenues and earnings. There can be no assurance that the
Patent Rights will be found to be valid or that the Patent Rights will be
enforceable to prevent others from developing and marketing competitive products
or methods. A successful challenge to the validity of the Patent Rights would
have a material adverse effect on the Company, and could jeopardize its ability
to engage in its contemplated business activities. An infringement action on
behalf of the Company may require the diversion of substantial funds from the
Company's operations and may require management to expend efforts that might
otherwise be devoted to the Company's operations. Furthermore, there can be no
assurance that the Company will be successful in enforcing the Patent Rights.
The Company has received a letter from attorneys in Israel relating to
allegations that the technologies comprising the Company's proposed products
infringe certain proprietary rights of others. Although the Company believes
that the allegations are without merit, there can be no assurance that the
Company will be successful in defending against such claims. There can be no
assurance that other patent infringement claims in the United States, Israel or
in other countries will not be asserted against the Company by a competitor or
others, or if asserted, that the Company will be successful in defending against
such claims. In the event one of the Company's proposed products is adjudged to
infringe
9
patents of others with the likely consequence of a damage award, the Company may
be enjoined from using and selling such product or be required to obtain a
royalty-bearing license, if available on acceptable terms. Alternatively, in the
event a license is not offered, the Company might be required, if possible, to
redesign those aspects of the product held to infringe so as to avoid
infringement. Any redesign efforts undertaken by the Company might be expensive,
could delay the introduction or the re-introduction of the Company's products
into certain markets, or may be so significant as to be impractical. See
'Business -- Legal Proceedings,' 'Business -- Patents, Trademarks and
Proprietary Information' and 'Risk Factors -- Competition.'
Trademark Registration. The Company intends to promote the 'SoftGuard,'
'NetGuard,' 'Remote Activation Center' and 'DiscGuard' trademarks in connection
with its marketing activities. The Company pursues the registration of its
trademarks in the United States and (based upon anticipated use)
internationally, and has applied for the registration of certain of its
trademarks, including 'SoftGuard,' and intends to apply for others. There can be
no assurance that prior registrations and/or uses of one or more of such marks
(or a confusingly similar mark) does not exist in one or more of such countries,
in which case the Company might thereby be precluded from registering and/or
using such mark in such country. See 'Business -- Patents, Trademarks and
Proprietary Information.'
Competition. The software protection industry is extremely competitive. The
Company's primary competitors include companies with substantially greater
financial, technological, marketing, personnel and research and development
resources than those of the Company. There can be no assurance that the Company
will be able to compete successfully in this market. In particular, Rainbow
Technologies Inc. and Aladdin Knowledge Systems Ltd., each have an established
installed product base in the limited market that exists for software security
products. Further, there can be no assurance that existing software companies
will not enter the market in the future. Although the Company believes that its
products are distinguishable from those of its competitors on the basis of their
technological features and functionality at an attractive price/performance
ratio, there can be no assurance that the Company will be able to penetrate any
of its competitors' portion of the market. Many of the Company's competitors
have existing relationships with major software development houses in the United
States, some of which are dominant software producers worldwide, and those
existing relationships may impede the Company's ability to sell to those
customers and expand its market share. Furthermore, there can be no assurance
that the Company will be able to continue developing products with innovative
features and functions, or that developments by others of similar or more
effective products will not render the Company's products or technologies
noncompetitive or obsolete. Since the Company's proposed products will be new to
the market and sold in competition with the products of companies with greater
financial and other resources, there can be no assurance that a market for the
Company's products will develop. See 'Business -- Competition.'
Protection of Proprietary Technology and Information. The Company will also
rely on trade secrets, know-how and continuing technological advancement to
maintain its proposed competitive position. Although the Company has entered
into confidentiality and invention agreements with its employees and
consultants, no assurance can be given that such agreements will be honored or
that the Company will be able to effectively protect its rights to its
unpatented trade secrets and know-how. Moreover, no assurance can be given that
others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets and know-how. See 'Business -- Patents, Trademarks and Proprietary
Information.'
Manufacture of Production Machinery. The Company utilizes a specially
designed laser based machine (the 'Diskette Marking Machine') in mass-producing
the protection diskette used in its proposed SoftGuard products. The Diskette
Marking Machine was built by an independent third-party and specially made to
the Company's order. The Company currently has one fully-operating Diskette
Marking Machine, which it believes can meet its foreseeable needs. Although the
Company does not have a written contract with the manufacturer of its Diskette
Marking Machine, the Company believes, based upon the experience of Management
and the Company's working relationship with such manufacturer, that it will be
able to have additional Diskette Marking Machines produced on an as needed
basis. There can be no assurance that the Company will be able to purchase or
will not experience delays in shipment of future Diskette Marking Machines or
that it will have a sufficient number of such machines to produce protection
diskettes at full capacity.
10
The Company believes that it could arrange for the assembly of these
machines with alternate sources if required to do so, but that any alternate
arrangement could result in temporary disruptions of its design and
manufacturing operations. Most of the sources and components used in the
manufacture and assembly of the Diskette Marking Machine are obtainable from
local sources, except for the laser device that specially marks each protection
diskette. Although the Company believes that there are adequate alternative
sources for such devices, there can be no assurance that the usage of an
alternative source for the laser device will not render the Diskette Marking
Machine cost ineffective or that the Company will not experience delays in its
operations.
Dependence on Key Personnel. The success of the Company will be largely
dependent upon the personal efforts of Marc D. Tokayer, Dr. Baruch Sollish,
Ph.D. and Arik Shavit. The loss of the services of any of such persons could
have a material adverse effect on the Company's business and prospects. Although
the Company has entered into employment agreements with each of the
aforementioned individuals, there can be no assurance that the Company will be
able to retain their services. The Company is seeking to obtain prior to closing
of this Offering key-man life insurance on Mr. Tokayer and Dr. Sollish with
benefits of $1,000,000 payable to the Company in the event of each person's
death. The benefits receivable under these proposed policies might not be
sufficient to compensate the Company for the loss of Mr. Tokayer's or Dr.
Sollish's services should a suitable replacement not be employed. The Company is
also dependent to a substantial degree on its other technical and research
staff. Further, the success of the Company will also be dependent upon its
ability to hire and retain additional qualified management, marketing, and
financial personnel, including a chief financial officer. The Company will
compete with other companies with greater financial and other resources for
other such personnel. Although the Company has not experienced to date any
difficulty in attracting qualified personnel, there can be no assurance that the
Company will be able to retain its present personnel or acquire additional
qualified personnel as and when needed. See 'Management -- Employment and
Consulting Agreements.'
Control by Management and Current Stockholders; Absence of Outside
Directors. Upon consummation of this Offering, Management of the Company and
current stockholders will own 2,349,548 shares of Common Stock, or approximately
72.9% of the then issued and outstanding shares of Common Stock. Marc D.
Tokayer, Chairman of the Board, the Tokayer Family Trust, Baruch Sollish,
Director and four other stockholders with an aggregate of 1,137,430 shares of
Common Stock (35.3% after the Offering) have entered into a voting arrangement
whereby they have agreed to vote their respective shares to elect directors and
in support of positions favored by a majority of the shares held among them.
Accordingly, the Company's present Management may be able to effectively control
the Company, elect all of the Company's directors, increase the authorized
capital, dissolve, merge or sell all of the assets of the Company, and generally
direct the affairs of the Company. Currently, all members of the Board of
Directors are also employees of the Company. The absence of independent outside
directors may further Management's control of the Company. See 'Principal
Stockholders.'
Broad Discretion in Application of Proceeds. While the Company presently
intends to use the net proceeds of this Offering as set forth herein, Management
has broad discretion in the application of the net proceeds allocated to working
capital and general corporate purposes, which may be used, among other things,
for payment of executive salaries. As a result of the foregoing, the success of
the Company will be substantially dependent upon the discretion and judgment of
Management. See 'Use of Proceeds.'
Immediate Substantial Dilution. The Company's present stockholders acquired
their shares of the Company's Common Stock at costs substantially below the
anticipated offering price of the Common Stock to be sold in this Offering.
Therefore, investors purchasing Common Stock in this Offering will incur an
immediate and substantial dilution in net tangible book value per share of $6.32
(90%). Accordingly, investors will bear a disproportionate part of the financial
risk associated with the Company's business while effective control will remain
with existing stockholders. See 'Dilution.'
Charge to Earnings in the Event of Release of Escrow Shares. The Company
has outstanding 1,000,000 Escrow Shares which will be released from escrow if
the Company attains certain earnings levels over the next one to three years or
if the Common Stock trades at certain levels over the next three years. The
position of the Securities and Exchange Commission (the 'Commission') with
respect to such escrow arrangements provides that in the event any shares are
released from escrow to the stockholders of the Company who are officers,
directors, employees or consultants of the Company, a
11
compensation expense will be recorded for financial reporting purposes.
Accordingly, the Company will, in the event of the release of the Escrow Shares,
recognize during the period in which the earnings thresholds are met or such
stock levels achieved, a substantial noncash charge to earnings equal to the
fair value of such shares on the date of their release, which would have the
effect of significantly increasing the Company's loss or reducing or eliminating
earnings, if any, at such time. The recognition of such compensation expense may
have a depressive effect on the market price of the Company's securities. See
'Plan of Operation,' 'Principal Stockholders' and 'Description of Securities.'
Notwithstanding the foregoing discussion, there can be no assurance that the
Escrow Shares will be released from escrow.
No Dividends. To date, the Company has not paid any cash dividends. After
the consummation of this Offering, the Company does not intend, for the
foreseeable future, to declare or pay any dividends and intends to retain
earnings, if any, for the future operation and expansion of the Company's
business. The declaration and payment of any cash dividends in the future will
be determined by the Board of Directors of the Company in light of conditions
and circumstances then existing, including the Company's earnings and its
financial conditions and requirements. See 'Dividends.'
OTC Electronic Bulletin Board; Absence of Prior Public Market;
Determination of Offering Price. The Company's Common Stock will be traded in
the over-the-counter market. It is anticipated that it will be quoted on the OTC
Electronic Bulletin Board, an NASD-sponsored and operated inter-dealer automated
quotation system for equity securities not included in the Nasdaq SmallCap
Market or Nasdaq National Market, and will also be quoted in the NQB Pink Sheets
published by the National Quotation Bureau Incorporated. Prior to this Offering,
there has been no public trading market for the Common Stock, and there can be
no assurance that an active public market for the Common Stock will develop or
continue following the Offering. There can be no assurance that an active
trading market for the securities will develop, or if a trading market does
develop, that it will continue. Until such time, if ever, that an active trading
market develops, investors will, in all likelihood, be unable readily to
liquidate their investment in the Company's securities following this Offering.
The initial public offering price of the Common Stock has been determined
by negotiation between the Company and the Representative and may not
necessarily bear any relationship to the Company's assets, book value, revenues
or other established criteria of value, and should not be considered indicative
of the price at which the Common Stock will trade after completion of the
Offering. There can be no assurance that the market price of the Common Stock
will not decline below their initial public offering price. See 'Underwriting.'
Possible Volatility of Securities Prices. Trading volume and prices for the
Common Stock could be subject to wide fluctuations in response to quarterly
variations in operations, financial results, announcements with respect to sales
and earnings, technological innovations, new product developments, the sale or
attempted sale of a large amount of securities in the public market, and other
events or factors which cannot be foreseen or predicted by the Company. In
addition, various factors affecting the computer industry generally may have a
significant impact on the market price of the Common Stock, as well as price and
volume volatility affecting small and emerging growth companies, in general, and
not necessarily related to the operating performance of such companies.
Shares Eligible for Future Sale. Future sales of shares of Common Stock by
existing stockholders pursuant to Rule 144 ('Rule 144') promulgated under the
Securities Act of 1933, as amended (the 'Securities Act'), or otherwise, could
have an adverse effect on the price of the shares of Common Stock. Upon
completion of this Offering, the Company will have 3,224,548 shares of Common
Stock outstanding (excluding 1,000,000 Escrow Shares and without giving effect
to the repurchase of 135,000 Bridge Shares). In addition, the Company has
reserved for issuance 217,473 shares upon exercise of warrants at $.01 per
share, 5,000 shares upon exercise of options granted under the 1996 Plan,
445,000 shares upon exercise of options to be granted under the 1996 Plan,
1,000,000 shares for issuance upon exercise of warrants at $7.00 per share and
up to 80,000 shares for issuance upon exercise of the securities contained in
the Representative's Warrants.
The 800,000 shares of Common Stock offered hereby and the 1,139,548 shares
of Common Stock (excluding 217,473 shares issuable upon exercise of warrants
subject to a four-year vesting schedule) being offered by the Selling
Securityholders (all of which shares are subject to lock-up agreements described
below) will be freely transferable without restriction or further registration
under the Securities Act except for any shares purchased by an 'affiliate' of
the Company within the meaning of
12
Rule 144. The remaining 1,150,000 outstanding shares of Common Stock will be
'restricted securities,' as that term is defined in Rule 144, and may only be
sold pursuant to a registration statement under the Securities Act or an
applicable exemption from registration thereunder, including exemptions provided
by Rule 144. Approximately 653,547 of such shares will be eligible for resale
under Rule 144 commencing 90 days following the completion of this Offering;
however, all of such shares are subject to the lock-up agreements described
hereafter. The remaining shares will become eligible for resale under Rule 144
between July 1997 through February 1998. In addition, the Company has granted to
some securityholders certain registration rights. No prediction can be made as
to the effect that future sales of Common Stock, or the availability of shares
of Common Stock for future sales, will have on the market price of the Common
Stock prevailing from time to time. Sales of substantial amounts of Common
Stock, or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock and could impair the Company's
ability to raise capital through the future sale of its equity securities. The
Company, its officers, directors and stockholders beneficially owning 5% or more
of the Common Stock, all Selling Securityholders (except for a certain Selling
Securityholder who has agreed to lock-up his 15,000 shares, for a period of 18
months) and certain other stockholders (holding an aggregate of approximately
2,214,548 shares, excluding up to 60,000 shares included in the Over-allotment
Option) have agreed, for a period of 24 months from the date of this Prospectus,
not to sell or otherwise dispose of any securities of the Company, without the
prior written consent of the Representative. See 'Principal Stockholders,'
'Certain Transactions,' 'Shares Eligible for Future Sale' and 'Underwriting.'
Effect of Outstanding Warrants and Options. The exercise of the
Representative's Warrants, other warrants and stock options granted or to be
granted may adversely affect prevailing market prices for the Common Stock and
may dilute the interests of existing stockholders. Moreover, the terms upon
which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of such outstanding securities can be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company than
those provided in the Representative's Warrants, other warrants or the options.
The Company has granted certain demand and 'piggy-back' registration rights to
the Representative with respect to the securities issuable upon exercise of the
Representative's Warrants. See 'Description of Securities' and 'Underwriting.'
Antitakeover Provisions of Delaware Law. Certain provisions of Delaware law
may discourage third party attempts to acquire control of the Company. In
particular, Section 203 of the Delaware General Corporation Law generally
prohibits a publicly held Delaware corporation from engaging in a 'business
combination' with an 'interested stockholder' for a period of three years after
the date of the transaction in which such person became an interested
stockholder, unless certain restrictive requirements are met. The Company has
not opted to include any provisions in its Certificate of Incorporation or
By-laws electing not to be governed by Section 203 of the Delaware General
Corporation Law. The provisions of Section 203 of the Delaware General
Corporation Law may have a depressive effect on the market price of the Common
Stock because they could impede any merger, consolidating takeover or other
business combination involving the Company or discourage a potential acquiror
from making a tender offer or otherwise attempting to obtain control of the
Company. See 'Description of Securities.'
Restrictions on Israeli Government Funding for Research and Development.
TTR Israel has received from the Office of the Chief Scientist of the Israeli
Ministry of Industry & Trade (the 'OCS') certain research and development grants
in the approximate amount of $97,500. As a condition to its participation in the
funding program of the OCS, TTR Israel may not transfer the technologies
developed using such funds out of Israel without the consent of the OCS. TTR
Israel is also obligated to pay a specified level of royalties on sales of
products developed using such grants. Moreover, OCS grant programs as are
currently in effect require the Company to comply with various conditions in
order for TTR Israel to continue to be eligible for participation. The Company
anticipates that for so long as such grants continue to be available, TTR Israel
will likely seek from time to time to utilize such grants. While the Company
believes that TTR Israel will continue to participate in these grant programs,
no assurance can be given that this will be the case or that the programs, or
their conditions of participation, will be maintained in their current form or
at all. See 'Business -- Research and Development.'
13
Service of Process and Enforcement of Judgments. Service of process upon
directors and officers of the Company, all of whom reside outside the United
States, may be difficult to obtain within the United States. Furthermore, since
substantially all of the Company's assets are located outside the United States,
any judgment obtained in the United States against the Company may not be
collectible within the United States.
The Company has been informed by its Israeli legal counsel that there is
doubt as to the enforceability of civil liabilities under the Securities Act and
the Securities Exchange Act of 1934, as amended, in original actions instituted
in Israel. However, subject to certain limitations, Israeli courts may enforce
United States final executory judgments for liquidated amounts in civil matters,
obtained after a trial before a court of competent jurisdiction (according to
the rules of private international law currently prevailing in Israel) which
enforce similar Israeli judgments, provided that (i) due service of process has
been effected, (ii) such judgments or the enforcement thereof are not contrary
to the law, public policy, security or sovereignty of the State of Israel, (iii)
such judgments were not obtained by fraud and do not conflict with any other
valid judgments in the same matter between the same parties and (iv) an action
between the same parties in the same matter is not pending in any Israeli court
at the time the lawsuit is instituted in the foreign court. All of the Company's
executive officers and Directors have irrevocably appointed Samuel F.
Ottensoser, Esq. of Baer Marks & Upham as their agent to receive service of
process in any action against them in any Federal or state court of the State of
New York.
Foreign judgments enforced by Israeli courts generally will be payable in
Israeli currency, and a specific permit of the Controller of Foreign Exchange
will be required to convert the Israeli currency into dollars and to transfer
such dollars out of Israel. Judgment creditors must bear the risk that they will
be unable to convert their award into foreign currency that can be transferred
out of Israel and the risk of unfavorable exchange rates.
Penny Stock Regulation. Broker-dealer practices in connection with
transactions in 'penny stocks' are regulated by certain penny stock rules
adopted by the Securities and Exchange Commission. Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system, provided that current prices and volume information with respect to
transactions in such securities are provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules generally require that prior to a
transaction in a penny stock the broker-dealer make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. If the Company's securities become subject to the penny stock
rules, investors in this Offering may find it more difficult to sell their
securities.
Possible Conflicts of Directors. In lieu of the Representative's right to
designate two non-voting advisors to the Company's Board of Directors at any
time within the five years commencing in fiscal 1996, the Representative has the
right during such five-year period, in its sole discretion, to designate two
persons for election as directors of the Company. If and when the Representative
designates such persons to serve as directors of the Company, those individuals
may be associated persons of the Representative who may have conflicting
obligations to the Company and the Representative when serving on the Board of
Directors. See 'Underwriting.'
Relationship of Representative to Trading; Lack of Experience of the
Representative. The Representative may act in a market making capacity with
respect to the purchase or sale of the Common Stock in the over-the-counter
market where it will trade. First Metropolitan Securities, Inc. commenced
operations in November 1995, and has acted as an underwriter of only one public
offering of securities. First Metropolitan's lack of experience may have an
adverse impact on the development of a trading market for the Company's
securities following this Offering. See 'Underwriting.'
14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby (after deducting underwriting discounts and commissions and other
expenses of this Offering), are estimated to be approximately $4,297,000
($4,662,400 if the Over-allotment Option is exercised in full). The Company
expects to use the net proceeds in approximately the manner set forth in the
following table:
APPROXIMATE
APPLICATION OF APPROXIMATE PERCENTAGE OF
PROCEEDS DOLLAR AMOUNT NET PROCEEDS
- ------------------------------------------------------------------------ ------------- -------------
Repayment of Indebtedness(1)............................................ $ 2,215,000 51.6%
Research and Product Development(2)..................................... 615,000 14.3
Additional Facilities(3)................................................ 500,000 11.6
Marketing(4)............................................................ 473,000 11.0
Capital Equipment(5).................................................... 150,000 3.5
Working Capital and General Corporate Purposes(6)....................... 344,000 8.0
------------- ------
Total.............................................................. $ 4,297,000 100.0%
------------- ------
------------- ------
- ------------
(1) Represents the repayment of the outstanding Bridge Notes in the aggregate
principal amount of $500,000 plus estimated accrued interest thereon at the
rate of 10% per annum to the date of consummation of this Offering. The
Company used the net proceeds from the sale of such notes to pay for
research and product development, operating expenses, and various expenses
related to this Offering. Also represents the repayment of approximately
$1,041,000 from the 1995 Debt Financing plus estimated accrued interest
thereon at the rate of 10% per annum, $133,400 payable to 732498 Ontario
Ltd., plus estimated accrued interest thereon at the rate of 22% per annum
and $300,000 payable to six investors, plus estimated accrued interest
thereon at the rate of 15%. See 'Description of Securities -- Prior
Financings,' 'Plan of Operation' and Note 8 of Notes to Financial
Statements.
(2) Anticipated expenditures include hardware and software development,
electronics engineering and prototype and tooling costs, and the hiring of
additional personnel. The Company intends to use this allocation of net
proceeds to expand its research and development department into three
groups: a research group, a development group and a quality assurance group.
The Company anticipates hiring between 15 and 18 additional employees to
staff these groups. The Company estimates the first year's salaries of these
persons to be paid from this allocation of proceeds of this Offering to be
approximately $19,000 to $38,000 per person per annum based on the
qualifications and position of each employee. See 'Business -- Research and
Development,' ' -- Production and Supplies' and 'Plan of Operation.'
(3) The Company intends to use this allocation of net proceeds to open a sales
office in the United States over the next nine months at an estimated
initial cost of $500,000 depending on the amount of equipment, inventory and
personnel, exclusive of working capital needs. It is anticipated that the
office would be staffed with three to eight salespersons, who will be
responsible for managing and servicing the Company's business in the
respective areas, as well as developing new business. The Company estimates
the first year's salaries of these persons to be paid from this allocation
of proceeds of this Offering to be approximately $35,000 per person per
annum based on the qualifications and position of each employee. See
'Business -- Sales and Marketing.'
(4) This allocation includes approximately $358,000 of expenditures for print
media such as advertising and sales literature, and trade show
participation. The Company plans to hire two internal sales people, each at
approximately $20,000 per annum (excluding sales commissions), and three
customer service people, each at approximately $25,000 per annum, following
the completion of this Offering. See 'Business -- Sales and Marketing.'
(5) In connection with the Company's proposed expansion and the hiring of up to
20 additional employees, the Company intends to purchase for each new
employee a computer work station at an estimated cost of $7,500 per station.
See 'Plan of Operation.'
(6) Includes the repurchase of 135,000 Bridge Shares for an aggregate purchase
price of $67,500. Also includes general and administrative expenses,
including, but not limited to, the payment of rent for the Company's offices
and other office overhead, executive salaries, and anticipated professional
fees, as well as potential acquisitions as described below.
15
If the Underwriters exercise the Over-allotment Option in full, the Company
will realize additional net proceeds of approximately $365,400, which will be
added to the Company's marketing capital.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that the net proceeds of this Offering, together
with its projected cash flow from operations, if any, will be sufficient to
satisfy the Company's contemplated cash requirements for a minimum of 12 months
following the closing date of this Offering. In the event that the Company's
plans change or its assumptions change or prove to be inaccurate or if the net
proceeds of this Offering or the Company's projected cash flow prove to be
insufficient to fund operations (due to unanticipated expenses, manufacturing
problems, marketing difficulties or otherwise), the Company may find it
necessary or advisable to reallocate some of the proceeds within the
above-described categories, or to use portions of the net proceeds for other
purposes or may be required to seek additional financing or curtail its
operations. The Company has no current arrangements with respect to, or sources
of, additional financing and it is not anticipated that existing stockholders
will provide any portion of the Company's future financing requirements. There
can be no assurance that any such additional financing will be available to the
Company on commercially reasonable terms, or at all. See 'Risk Factors -- Future
Capital Needs; Uncertainty of Additional Financing' and 'Plan of Operation.'
The Company may use all or a portion of the $344,000, or 8.0%, of the net
proceeds from the Offering allocated to working capital, to acquire all or a
portion of existing companies in businesses which the Company believes are
compatible with its business including, but not limited to, competitors of the
Company. Any decision to make an acquisition will be based upon a variety of
factors, including, among others, the purchase price and other financial terms
of the transaction, the business prospects and competitive position of and the
nature of any formulations, designs or products and the extent to which any
acquisition would enhance the Company's prospects. To the extent that the
Company may, depending upon the opportunities available to it, finance an
acquisition with a combination of cash and equity securities, any such issuance
of equity securities could result in dilution to the interests of the Company's
stockholders. However, any future equity financings within the next 36 months
would be subject to the approval of the Representative. Additionally, to the
extent that the Company issues debt securities in connection with an
acquisition, the Company may be subject to risks associated with incurring
indebtedness, including the risks of interest rate fluctuations and
insufficiency of cash flow to pay principal and interest. The Company is not
currently engaged in identifying any potential acquisition and has no plans,
agreements, understandings or arrangements for any acquisitions. There can be no
assurance that the Company will be able to successfully consummate any
acquisition or successfully integrate into its business any acquired product or
business.
Pending utilization of the net proceeds of the Offering, the Company may
make temporary investments, in among other things, bank certificates of deposit,
interest-bearing investments, prime commercial paper, United States government
obligations, or money-market funds.
DIVIDEND POLICY
To date, the Company has not paid any cash dividends on its Common Stock.
The payment of future cash dividends, if any, is within the discretion of the
Board of Directors and will depend upon the Company's earnings, if any, capital
requirements and financial condition and other relevant factors. The Board does
not intend to declare any cash or other dividends in the foreseeable future,
rather it intends to retain future earnings, if any, to provide for the
operation and expansion of the Company's business. See 'Plan of Operation.'
16
DILUTION
At September 30, 1996, the negative net tangible book value of the Company
was $(1,586,368), or $(.52) per share of Common Stock based on 3,050,000 shares
of Common Stock issued and outstanding. After giving retroactive effect to the
exercise of 374,548 warrants into 374,548 shares of Common Stock upon the
consummation of this Offering and the receipt of an aggregate of $3,745.48 from
all of such exercises, the pro forma negative net tangible book value of the
Company was $(1,582,623) or $(.46) per share based on 3,424,548 shares issued
and outstanding. See 'Description of Securities -- Prior Financings.' After
giving effect to the sale of 800,000 shares of Common Stock offered by the
Company hereby (less underwriting discounts and estimated expenses of the
Offering and the application of the estimated net proceeds therefrom) but not
the repurchase of 135,000 Bridge Shares, the pro forma as adjusted net tangible
book value of the Company at September 30, 1996 would have been $2,857,921, or
$.68 per share, based on 4,224,548 shares representing an immediate increase in
net tangible book value of $1.14 per share to existing stockholders and an
immediate dilution of $6.32 per share (90%) to the purchasers of Common Stock in
the Offering.
The difference between the public offering price per share of Common Stock
and the net tangible book value per share of Common Stock after the Offering
constitutes the dilution per share of Common Stock to investors in the Offering.
Net tangible book value per share of Common Stock on any given date is
determined by dividing the net tangible book value of the Company (total
tangible assets less total liabilities) on such date by the number of
outstanding shares of Common Stock.
The following table illustrates the dilution to the purchasers of Common
Stock in the Offering on a per-share basis:
Offering price............................................................... $7.00
Pro forma net tangible book value before the Offering........................ $(.46)
-----
Increase attributable to new investors....................................... $1.14
-----
-----
Pro forma as adjusted net tangible book value after the Offering............. $ .68
-----
-----
Dilution to new investors.................................................... $6.32
-----
-----
The following table summarizes as of September 30, 1996, the total
consideration paid and the average price per share of Common Stock paid by
existing stockholders and by purchasers of Common Stock in the Offering:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ ------------------------- PRICE PER
AMOUNT PERCENTAGE AMOUNT(1) PERCENTAGE SHARE
--------- ---------- ---------- ---------- ---------
Existing Stockholders....................... 3,424,548(2) 81.1% $ 412,151 6.9% $ .12
---------
New Investors............................... 800,000 18.9 5,600,000 93.1% $7.00
--------- ---------- ---------- ---------- ---------
---------
Total.................................. 4,224,548 100.0% $6,012,151 100.0%
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
- ------------
(1) Prior to deduction of costs of issuances.
(2) Includes 1,000,000 Escrow Shares but does not give effect to the repurchase
of 135,000 Bridge Shares. See 'Principal Stockholders -- Escrow Shares' and
'Description of Securities -- Prior Financings.'
17
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 (including the 1,000,000 Escrow Shares), and as adjusted to
reflect the exercise of 374,548 warrants and the receipt of $3,745.48 therefrom,
the issuance and sale of the shares of Common Stock hereby and the application
of the estimated net proceeds therefrom, but not the repurchase of 135,000
Bridge Shares. This table should be read in conjunction with the consolidated
financial statements and the related notes thereto included elsewhere in this
Prospectus.
SEPTEMBER 30, 1996
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
Total liabilities.......................................................... $ 2,026,377 $1,526,377
----------- -----------
Stockholders' equity (deficit)
Common Stock, $.001 par value; 20,000,000 shares authorized; 3,050,000
shares issued and outstanding; 4,224,548, pro forma as adjusted..... 3,050 4,225
Additional paid-in capital............................................ 405,356 4,704,926
Cumulative translation adjustment..................................... 47,989 47,989
Accumulated deficit................................................... (1,835,787) (1,899,219 )
----------- -----------
Total stockholders' equity (deficit)............................. (1,379,392) 2,857,921
----------- -----------
Total capitalization........................................ $ 646,985 $4,384,298
----------- -----------
----------- -----------
PLAN OF OPERATION
To date, the Company has had a limited operating history, is in
development-stage and has not realized any operating revenues. The current
version of SoftGuard, although out of the development stage and ready for
commercialization, has not yet been released. Since inception, the Company's
activities have been principally limited to organizational and initial
capitalization activities, designing and developing the technology underlying
its proposed software protection product lines and recruitment of executive
personnel. See 'Business.'
The current version of SoftGuard is intended to be compatible for use on
Windows 3.x and MS-DOS based systems. Although ready for release, the Company
does not intend on releasing the product to the general public until it develops
a sales and other customer support infrastructure. The Company is actively
engaged in the development of expanding its SoftGuard product line for
multi-platform versatility and compatibility with other operating systems and
networks. Although no assurance can be given, the Company anticipates
introducing versions of SoftGuard for use with Windows 95 and the TTR Remote
Activation Center for software being distributed through the Internet
(electronic distribution) by the second quarter of 1997. A version for Windows
NT is in the system design stage, and versions for NEC based operation systems
and networks are being investigated. The Company is also actively engaged in
developing DiscGuard for CD-ROM copy protection, and anticipates releasing the
initial version by the third quarter of 1997. The Company is exploring other
compatible or complementary product offerings. There can be no assurance that
the Company will successfully develop or ultimately commercialize any of these
proposed products. See 'Business.'
The Company anticipates undertaking marketing efforts in North America,
Israel, Europe and the Far East to increase awareness of the Company's products.
In this respect, the Company will be exploring the possibility of establishing
strategic relationships with appropriate significant software distributors.
Further, it is anticipated that TTR Israel's new Chief Executive Officer, who
assumed his duties in September 1996, will devote a significant portion of his
time in developing appropriate marketing strategies. In addition, the Company is
actively seeking an independent marketing professional with experience in
introducing new hi-tech products to market. The Company would utilize the
marketing professional's services to explore the possibilities of establishing
strategic relationships with well-known software developers and distributors.
See 'Management' and 'Business -- Sales and Marketing.'
The Company anticipates that the proceeds of this Offering will be
sufficient to satisfy the Company's contemplated cash requirements for the next
12 months following the consummation of the Offering, based upon the Company's
present plans and certain assumptions relating to general economic
18
and industry conditions, market factors, and the Company's future revenues and
expenditures. If any of these factors change, the Company may be required to
raise additional funds during the next 12 months. The Company may, in any event,
seek additional financing following the completion of this Offering, even though
the Company has no present intention, agreement, understanding or commitment
with respect to any such financing.
As of September 30, 1996, the Company had an aggregate of approximately
$51,490 in bank loans of which principal payments are due in various
installments through 1998. These loans bear interest at rates of prime plus
2.4%-3% per annum and are secured by substantially all of the assets of TTR
Israel.
In September 1996, the Company entered into a loan and security agreement
with 732498 Ontario Ltd. ('Ontario') pursuant to which the Company borrowed and
aggregate of $133,400 at a per annum interest rate of 22%. The principal and
accrued interest on these loans are payable in full on the earlier of March 30,
1997 or the consummation of this Offering. To secure the repayment of all
amounts due, Ontario has been granted a floating security interest and lien,
subject to existing liens, on all tangible and intangible property of the
Company. See 'Use of Proceeds.'
At September 30, 1996, the Company had a working capital deficit of
approximately $1,955,000. Since inception, the Company has relied for all of its
funding on private sales of its debt and equity securities. See 'Description of
Securities -- Prior Financings' for a description of these sales.
The Company's product development is centralized out of TTR Israel's
facilities in Israel. The Company does not have any commitments or plans to
undertake significant capital expenditures in plant or equipment, other than the
purchase of approximately $140,000 of computer equipment. See 'Use of Proceeds.'
The Company requires the net proceeds of this Offering to continue its
product development efforts and to commence full-scale marketing of its version
of SoftGuard available for commercial release. As of September 30, 1996, the
Company has expended approximately $616,000 on its research and development
activities, and plans to spend approximately $615,000 of the net proceeds of the
Offering to continue such activities. Over the next 12 months, the Company plans
to spend approximately $473,000 of the Offering proceeds on marketing related
activities. See 'Use of Proceeds' and 'Business -- Research and Development' and
' -- Sales and Marketing.'
As of January 15, 1997, $626,203 of note principal and interest with
respect to two-year promissory notes issued in connection with the 1995 Debt
Financing (as defined hereafter) became due and payable. The holders of $619,525
note principal and interest extended the due date of such notes to March 31,
1997. The Company anticipates that the remaining holder of $5,515 note principal
will grant a similar extension. Accordingly, to date the Company has not made
payment with respect to such note. See 'Description of Securities -- Prior
Financings.'
In December 1996, the Company borrowed, on an unsecured basis, an aggregate
of $300,000 from six unaffiliated investors at a per annum interest rate of 15%.
The principal and accrued interest on these loans are payable in full on the
earlier of the first anniversary of the borrowings or the consummation of this
Offering. See 'Use of Proceeds.'
To date, the Company has not generated any revenues from operations. For
the period from its inception to September 30, 1996, the Company has incurred
net losses aggregating approximately $1,835,787, reflecting principally research
and development expenses associated with SoftGuard and general and
administrative expenses. Accordingly, the Company's independent auditors
included an explanatory paragraph in their report dated July 1, 1996, indicating
that there is substantial doubt regarding the Company's ability to continue as a
going concern. The Company's continuation as a going-concern is dependent upon
its ability to obtain additional financing, including from this Offering, to
generate sufficient cash flow to meet its obligations on a timely basis. As a
development stage company, the Company has a limited relevant operating history
upon which an evaluation of the Company's prospects can be made. The Company's
prospects must therefore be evaluated in light of the problems, expenses, delays
and complications associated with a new business. As a result of the start-up
nature of the Company's business, additional operating losses can be expected in
the foreseeable future. There can be no assurance that the Company can be
operated profitably in the future. See 'Risk Factors -- Development Stage
Company; History of Operating Losses; Accumulated Deficit; Working
19
Capital Deficiency; Uncertainty of Future Profitability,' 'Risk
Factors -- Explanatory Paragraph in Independent Auditors' Report' and the
Financial Statements.
The Company currently has ten employees, and depending on its level of
business activity, expect to hire additional employees in the next 12 months,
including marketing and sales, research and development, customer support,
production and administrative personnel, and has allocated approximately
$780,000 of the proceeds of this Offering for the recruitment and related
payroll expenses for approximately 20 additional employees over the next
12-month period. See 'Risk Factors -- Proposed Expansion' and 'Use of Proceeds.'
The Company expects that any release of the Escrow Shares to officers,
directors, employees and consultants of the Company will be deemed compensatory,
and accordingly, will result in a substantial non-cash charge to reportable
earnings equal to the fair market value of such shares on the date of release.
Such charge could substantially increase the Company's loss or reduce or
eliminate the Company's net income, if any, for financial reporting purposes for
the period(s) during which such shares are, or become probable of being,
released from escrow. Although the amount of compensation expense recognized by
the Company will not affect the Company's total stockholders' equity, it may
have a depressive effect on the market price of the Company's securities. See
'Risk Factors -- Charge to Earnings in the Event of Release of Escrow Shares.'
20
BUSINESS
The Company is primarily engaged in the design and development, and intends
to commence marketing of, a family of proprietary software security products
that are designed to prevent the unauthorized reproduction and use of computer
software programs. TTR's proposed core product, SoftGuard, is designed to be
used by software developers for inclusion in their software packages sold to
end-users. The current version of SoftGuard, although out of the development
stage and ready for commercialization, has not yet been released. Since its
inception, the Company has been engaged primarily in product design and testing,
and has not had any sales revenue to date. The Company's primary objective is to
make SoftGuard the market standard for software protection.
INDUSTRY BACKGROUND
Losses related to the unauthorized use of software present an increasing
concern for software developers and publishers. The Business Software Alliance
estimated that software-piracy related losses exceeded $15 billion worldwide in
1994. In the United States, total losses from software piracy exceeded $3
billion in 1994. Illegal copies of widely-recognized software programs can
frequently be purchased in certain parts of Eastern Europe and the Far East at
retail prices that are a fraction of those prevailing in the United States and
Europe.
Additionally, the increasing use of CD-ROMs poses new dangers. Unlike
standard distribution diskettes, CD-ROMs enable the processing, storing and
distribution of vast amounts of information. Increasingly, the data contained on
the CD-ROM is of a purely informative or entertainment nature and is not
intended to be installed permanently on the user's hard-drive. Until recently,
CD-ROM software has been relatively protected from unauthorized reproduction
owing to the relatively high-cost of CD-recording technology. With the advent of
low-cost CD Recorders and mass reproduction machines, software pirates are able
to duplicate the software applications contained on the CD-ROM with no
significant impediment. The unauthorized reproduction (and distribution) of
unprotected software applications residing on CD-ROMs can represent significant
potential revenue-losses.
Software protection is a relatively new market. Until the mid-1980's,
software developers and publishers traditionally relied on copyright and
intellectual property laws to police software piracy. However, as the frequency
and sophistication of software piracy increased, continued reliance on legal
sanctions frequently proved ineffective. Software developers began to seek ways
to aggressively and effectively halt the proliferation of unauthorized copies of
their software, thereby triggering the development of the software protection
market. Most of the security solutions which were commercially available
typically required that the software to be protected be stored in an 'encrypted'
mode so as to prevent its copying. In addition, a hardware component such as a
'dongle' (key), a physical device that plugs into a computer's parallel port,
was ordinarily utilized. The device must be present in order for the protected
software to execute (or 'decrypt'). Without the key or the plug, the protected
program wouldn't ordinarily execute. The dongle acts as 'identification code,'
enabling the protected software to execute. Dongles and keys are provided
directly to the software vendor and are frequently customized for particular
software applications. The technology underlying these solutions came to
represent the 'market standard' in terms of affording effective
software-protection.
Security solutions utilizing hardware components such as dongles present
significant operational difficulties and inconveniences for legitimate
end-users. By its very nature, the key is not 'transparent,' and needs to be
physically present on a parallel port each time that the protected application
is run. Frequently, keys are not interchangeable among different applications,
necessitating a different key for each application, giving rise to a 'daisy
chain' of plugs protruding out of the back of operating units. Furthermore,
dongles cannot currently be mass-produced. Each device must be custom made or
programmed, invariably resulting in relatively high production costs.
Accordingly, dongles are ordinarily used for higher priced applications
whose retail price typically exceeds $300. Software developers of many of the
commercially available popular software applications, such as well-known
word-processing and other business related programs, have elected to forego any
software anti-copying protection. Further, the relatively high-cost of the
dongles and other peripherals
21
render their use impractical for relatively lower priced CD-ROM applications,
such as games or other entertainment packages.
SoftGuard does not entail the use of any hardware peripherals such as
dongles, and requires the end-user to use a protection diskette only once at the
installation of the protected software onto the end-user's system. Thereafter,
the safety measures are transparent to the legitimate end-user, who need not be
aware of their operation. Furthermore, the utilization of SoftGuard does not
necessitate the software developer to implement design or code changes in the
software. Additionally, the Company expects to be able to mass-produce
SoftGuard, significantly decreasing the per-unit production costs. DiscGuard,
the proposed CD-ROM protection product, is intended to modify the laser optics
system of the CD-ROM mastering machine, rendering the CD-ROM non-reproducible
and thereby thwarting CD-ROM pirates' efforts to faithfully reproduce the
contents of the CD-ROM.
TTR believes that its proposed SoftGuard products will provide a versatile,
transparent, easy-to-use, effective and relatively inexpensive anti-copying
security solution that will not require the software developer to effect any
basic design changes to the protected software application program.
BUSINESS STRATEGY
The Company's primary objective is to make SoftGuard the 'market standard'
in software anti-copying protection. The Company intends to pursue a business
strategy that incorporates the following principal components:
Penetration of Software Security Markets. The Company intends to begin
marketing by the first quarter of 1997 its proposed SoftGuard product to
large well-known software developers whose products enjoy wide geographic
dispersion but who have previously disregarded the software security
market. By emphasizing SoftGuard's reduced costs and end-user transparency,
the Company hopes to promote the penetration of the software security
market beyond the current $300 and above retail software market. In
addition, new developments such as the proposed DiscGuard CD-ROM product
may enable the Company to expand its potential customer base from software
developers to CD-ROM replicators. See 'Business -- Sales and Marketing.'
Penetration of Leading Geographic Marketing Areas. The Company intends
to launch its marketing and distribution efforts initially in Israel by the
first quarter of 1997 and in North America by the second quarter of 1997.
The Company also expects to expand its marketing efforts to subsequently
include Europe and the Far East. The Company also intends to develop a
version of SoftGuard that is compatible with Japanese-standard NEC based
operating systems, which it expects to introduce by the second quarter of
1997. See 'Business -- Sales and Marketing' and ' -- SoftGuard Software
Protection System.'
Continued Product Expansion and Enhancement. The Company is committed
to continuous product expansion and enhancement to stay competitive with
rapid technological advancement and other changes affecting the computer
industry. The Company is focusing its research and development activities
toward lowering the cost of its existing proposed products, the design and
development of new products, and the enhancement of existing proposed
products. For example, the Company intends on increasing the SoftGuard
product line by introducing new products for multi-platform versatility
with interoperability and compatibility with operating systems including
the Apple Macintosh, the Japanese-standard NEC computers, network
environments, Microsoft's Windows 95 and Windows NT, and the Internet. See
'Business -- SoftGuard Software Protection System' and ' -- Research and
Development' and 'Use of Proceeds.'
Pursue Strategic Acquisitions. In addition to growing internally, the
Company desires to grow through strategic acquisitions. The Company plans
to seek to acquire new products or complementary product lines for
integration into the Company's product offerings and its business. The
Company is not currently engaged in identifying any potential acquisitions
and currently has no plans, agreements, understandings or arrangements for
any acquisitions. See 'Risk Factors -- Proposed Expansion' and 'Use of
Proceeds.'
Strengthen Competitive Advantages. The Company believes that the key
to competition is to offer an effective security product which is more
convenient to use and more cost-effective than the
22
competition. Research and development efforts are being focused towards
making SoftGuard even more user-friendly and cost-effective. In addition,
the Company is developing novel approaches to software security such as its
DiscGuard for CD-ROM based software, that are unavailable to its
competition. See 'Business -- Research and Development'; ' -- SoftGuard
Software Protection System' and ' -- Competition.'
SOFTGUARD SOFTWARE PROTECTION SYSTEM
The proposed SoftGuard software protection products are intended to provide
comprehensive protection against unauthorized software copying. SoftGuard is to
be comprised of a specially designed protection diskette, which provides
anti-copying protection while the software resides on a distribution diskette,
CD-ROM or other distribution medium, as is the case when the software is
initially purchased by the end-user, and a software-based solution that protects
against unauthorized reproduction once the software is installed onto the
legitimate end-user's system. SoftGuard will not include any hardware
peripherals such as dongles.
The software applications to be protected will be encrypted by the software
developer using an encryption key derived from the protection diskette. The
protection diskette will be a standard commercially available diskette which is
physically altered by means of a novel and proprietary method to imprint an
identification code that is unique to the particular software house and the
specific application. The protected software will be purchased by the end-user
in the encrypted format, and such protected software will not execute or run as
intended unless it is installed in the presence of an authentic protection
diskette containing the appropriate identification code. Without the protection
diskette, the protected software will not properly install onto the end-user's
system and cannot be used. The protection diskette will be sold to the developer
and included in the applications package that is finally distributed to the
end-user. The protection diskette will be designed to be used only once by the
end-user at the time of the initial installation of the protected software.
It is intended that the developer's software program will further be
protected by the SoftGuard software licensed from the Company. As part of the
installation of the protected software onto the legitimate end-user's hard
drive, SoftGuard re-encrypts the protected software. The re-encryption effected
by SoftGuard is designed to adapt to certain unique characteristics of the
computer on which the protected software is being installed. When the authorized
or legitimate end-user tries to run the protected software (after installation
on the end-user's system), SoftGuard verifies the validity of the installed
software, decrypts the protected file and permits execution to take place.
Protected software subsequently installed or copied onto a different unit will
not work unless so authorized by the software developer, and thus will not
execute. The software developer will fix a pre-determined number of times that
the protected software can be installed (or reinstalled in the event of hard
disk failure) by the legitimate end-user. Any attempted installation beyond such
authorized number will not properly execute. Furthermore, SoftGuard will provide
the software developer with the option of limiting any installs of the protected
software for a pre-determined time-period. Thus, the end-user can try the
protected software for a limited time-period. This option will provide the
software developer with a powerful marketing tool, enabling it to expose the
benefits and applications of its software to the market without incurring the
risk of unauthorized mass-copying and distribution of the software.
The encryption key derived from the protection diskette is based on a
published algorithm. SoftGuard utilizes a unique technology to develop the
encryption keys. The encryption key is based in part upon the pattern created by
a series of marks on the diskette generated by physically altering the diskette
to remove magnetic material from its surface in pre-determined areas. The
resulting distinct pattern, or key, is used as a parameter in creating an
encryption key that can produce different encryption formats upon a
corresponding change in the key. In Management's view, this creates a highly
effective product since the unlikely event of the successful cracking of one
encryption key by an unauthorized user will not assist in the cracking of
another key.
Additionally, most commercially available anti-copying software-based
solutions utilize an 'envelope' method of encryption whereby the executable file
to be protected is encrypted in such a manner which requires a 'jump' to the
beginning of the protected file on the system's memory when such file is
executed. For someone running a debugger, such as a potential hacker, the
envelope method
23
acts as a beacon indicating where, on a system's memory, the protected file
resides. Once the hacker knows where the protected file begins in the system's
memory, he is able to take a snapshot of the protected file in its unencrypted
and unprotected format and download it to a disk, thereby effectively 'cracking'
the program. Unlike the envelope method of encryption protection, SoftGuard will
utilize a program that monitors all program executions. Upon execution of a
SoftGuard protected file, the SoftGuard monitor will validate the protected file
and remove the encryption, thereby allowing successful execution. The SoftGuard
method of encryption requires no 'jump' to the beginning of the protected file
on the system's memory. Thus, the potential hacker is not informed as to where
the protected file begins in the system's memory. In Management's view, these
features present significant impediments to 'cracking.'
The Company intends on using a specially designed and highly accurate
laser-based duplicating machine to mass-produce the protection diskettes (the
'Diskette Marking Machine'). Mass-production of the protection diskettes will
significantly reduce the production costs of the protected software, affording
the software developer with a low-cost effective solution to unauthorized
software copying. Since the protection diskettes will only be able to be
produced by the Company's specially designed Diskette Marking Machine,
Management believes that it is highly unlikely for an unauthorized person to
make usable copies of protection diskettes.
SoftGuard is intended to be used to safeguard MS-DOS and Microsoft Windows
EXE executable files, as well as non-executable files including Windows DLL's
and runtime applications.
SOFTGUARD SOFTWARE PROTECTION PRODUCT LINE AND DEVELOPMENTS
The Company expects to initially market a version of SoftGuard that is
compatible for use on Windows 3.X and DOS based systems. The Company is planning
on expanding the proposed SoftGuard product line for multi-platform versatility
with interoperability and compatibility with other operating systems. There can
be no assurance given that the Company will successfully develop any new
products, or if developed, that they will be developed in a timely fashion
and/or result in sales. See 'Risk Factors -- New Products and Rapid
Technological Change.' The Company is currently developing or planning on
developing the following new features to the SoftGuard product line:
SoftGuard for Windows 95. The proposed SoftGuard for Windows 95 is
intended to support protected applications that are compatible with Windows
95. Upon finalization, SoftGuard for Windows 95 is expected to include all
of the features of the Windows 3.x version of SoftGuard. The program
development is completed and the system is being tested by the Company's
quality assurance staff. It is currently anticipated that it will be
available for beta testing during the first quarter of 1997. When a program
is in beta testing, it is being used at actual customer sites. The Company
receives feedback from the customers and responds to problems as they
arise. The length of the beta test depends to a large extent on the results
of the testing. The Company expects SoftGuard for Windows 95 to be
available for commercial release by the second quarter of 1997.
SoftGuard for Windows NT. This version is intended to support
protected applications (both 16 and 32 bit) under Windows NT. It is
expected to include all of the features found in the Windows 3.x version of
SoftGuard. The program is currently in a system design phase, which occurs
after the functional specifications of the software system have been
determined, whereby the system files, databases, logical processes and
interfaces with other systems and with a user are designed. The Company
expects SoftGuard for Windows NT to be available for commercial release by
the third quarter of 1997.
SoftGuard for NEC and SoftGuard for Macintosh. The overwhelming
majority of the Japanese software market utilize NEC based operating
systems. In addition, many software developers design their software to run
on Macintosh operating systems in addition to DOS/Windows. TTR is in the
functional definition stage of adapting SoftGuard to operate on these
systems, whereby the functional specifications are being developed.
NetGuard. The proposed networks version of SoftGuard is being designed
to be used on any type of network server. The networks version is intended
to support tandem servers, RAID and disk stripping, as well as automatic
crash recovery. Additionally, it is being designed to enable any
24
desired combination of fixed and floating licensing. The proposed product
is currently in a program design and program development stage. In program
design, the individual programs which comprise the processes of the system
are designed. In the program development stage, programmers use the program
design documents to write the programs which are then tested individually.
The Company expects the program to be ready for beta testing in the first
quarter of 1997, with a targeted commercial release by the third quarter of
1997.
TTR REMOTE ACTIVATION CENTER FOR INTERNET (ELECTRONIC) DISTRIBUTION
Companies desiring to distribute protected software electronically need to
insure that payment for the downloaded software is received and that such
software is restricted to use to one site per payment. Utilizing the core
technology incorporated in SoftGuard, the Company believes that it is addressing
these concerns with the Remote Activation Center for Internet (Electronic)
Distribution. The Remote Activation Center as proposed is based on a triangular
communication design, linking the end-user's system, the software distributor's
Internet server and the Company's Internet server. This will permit companies
that would like to sell protected software via electronic distribution such as
the Internet to protect their software utilizing similar procedures as in the
conventional version of SoftGuard. Once the end-user downloads and pays for the
protected (encrypted) software, the distributor's server would activate a
utility which automatically notifies the Company's Internet web server. All of
this would happen automatically and transparently to the end-user. It is
intended that when the end-user installs the protected software, the Company's
Internet server will be automatically contacted. Upon verification of payment,
the Company's server would pass a decryption key to unlock the protected
software. This part of the process is similar to the install process which takes
place in the current conventional version, with the Company's server acting like
the protection diskette. Unlike other remote activation schemes, the SoftGuard
electronic distribution product will not require the end-user to enter a
key-code in order to activate the downloaded software. Once the downloaded
software is installed onto the end-user's hard drive, it will be protected in
the same way as conventionally distributed SoftGuard treated software. Thus, the
Remote Activation Center is intended to insure payment by the end-user in
addition to providing conventional software protection. The Remote Activation
Center is currently in a program design and program development phase. The
Company expects the proposed system to begin beta testing during the second
quarter of 1997 with a targeted commercial release date by the third quarter of
1997.
DISCGUARD FOR CD-ROM BASED SOFTWARE
Increasingly, popular game, video, educational materials (i.e.,
encyclopedias), business and other professional applications are distributed via
CD-ROM. A CD-ROM is able to store vast amounts of data, rendering it a more
efficient distribution vehicle than the standard diskette. Ordinarily, the user
does not install onto a hard-drive the data contained on the CD-ROM, but merely
accesses it from time to time for educative, entertainment or professional
purposes.
Until recently, CD-ROM based applications have enjoyed some immunity from
unauthorized reproduction due to the high cost of the copying hardware. However,
the decreasing costs of CD-Recorders, which can be used to faithfully reproduce
unauthorized copies of the CD-ROM, and the increased availability of other mass
reproduction machines, have contributed to the increase in CD-ROM piracy. By use
of a CD-Recorder, a software pirate is able to read the software application
program contained on the CD-ROM and to faithfully reproduce a copy of such
program on a parallel CD-ROM. Conventional encryption based technologies that
encrypt data contained on the CD-ROM are impractical if the user does not
ordinarily install the CD-ROM data onto a hard-drive. Also, dongles are
prohibitively expensive for the popular CD-ROM applications.
The Company is developing a proprietary technology that permits it to
programmatically distinguish between an authentic original CD-ROM designed by
the software developer and an unauthorized reproduction. Thus, a software pirate
who is attempting to copy a CD-ROM will be prevented from faithfully reproducing
the software program. The Company's proposed solution involves modifications to
the laser optics system of the CD-ROM mastering machine. This technology is
intended to prevent the faithful reproduction of the CD-ROM itself, without
reference to the data
25
contained on it. The Company expects to commercially release its DiscGuard
CD-ROM product by the third quarter of 1997.
ADVANTAGES OF SOFTGUARD
From an end-user's viewpoint, copy protection is not necessarily the most
welcome feature in a software program. Many software development houses have
elected to not include software protection with their software programs because
end-users have encountered operational difficulties with, or have indicated an
unwillingness to use, such software protection. The Company believes that its
proposed SoftGuard products will address many of the operational difficulties
previously encountered by end-users. Significant features of SoftGuard available
to the end-user will include the following:
Avoids the Inconvenience Associated with Hardware Components or
Peripherals. Unlike most commercially available anti-copying solutions
utilizing hardware peripherals such as dongles, SoftGuard is proposed to be
a hardware-based solution in a software format that utilizes one diskette
that is typically used by the end-user only once at the time of
installation of the protected software onto the desired computer.
Thereafter, the solution is entirely software based. With SoftGuard, the
end-user avoids the inconvenience associated with hardware peripherals each
time the software is accessed. This renders SoftGuard versatile and
especially attractive for the growing number of laptop users.
Transparent Safety Features. Upon installation by the legitimate
end-user, the anti-copying features of SoftGuard are intended to integrate
onto the operating system and will not require any subsequent end-user
interaction. The software will be able to be accessed and used by the
legitimate end-user without any inconvenient procedures or steps on the
legitimate end-user's part. Accordingly, once the protected software
program is installed utilizing the protection diskette, the SoftGuard
safety features will be self-executing and transparent to the end-user.
Competitive Pricing. Unlike most commercially available solutions
utilizing dongles, where such peripherals need to be custom made, the
protection diskettes are expected to be mass-produced, resulting in a cost
savings to the software developer that can be passed onto the end-user.
Anti-virus protection. Computer viruses typically attach themselves to
executable files. Since SoftGuard protected executable files will be
maintained in an encrypted format, a by-product of SoftGuard protection is
that viruses will not be able to attach themselves to SoftGuard protected
files.
Authorized Transfers. Increasingly, end-users work outside of, or in
addition to, the traditional office setting. If the software developer
chooses, SoftGuard will be able to enable the legitimate end-user to
perform an authorized install of the protected application on both the
office-based unit and the additional portable or home-based unit, as
needed. Authorization can thus be transferred using a built in utility to
the unit where the end-user would like to work.
RESEARCH AND DEVELOPMENT
The computer industry in general is characterized by rapid product changes
resulting from new technological developments, performance improvements and
lower production costs. The Company's research and development activities to
date have focused on developing products responsive to perceived immediate
demands in the market. The Company believes that its future growth in the
software protection field, of which no assurance can be given, depends in large
part on its ability to be an innovator in the development and application of its
proprietary technology and know-how. The Company intends to work closely with
software developers to determine their requirements and to design enhancements
and new releases to meet their needs.
The Company has a staff of six full-time and two part-time research and
development personnel working on improvements and enhancements to current and
anticipated products as well as developing new products for the software
security industry. The Company has a policy of recruiting highly qualified
technical personnel and anticipates expanding its research and development
personnel in order to
26
maintain its technological expertise. The Company intends to capitalize on the
highly-skilled pool of computer and engineering professionals in Israel in
pursuing its product research and development efforts.
Following the completion of this Offering, the Company intends to expand
its research and development department into three groups: a research group, a
development group and a quality assurance group. The Company anticipates hiring
between 15 and 18 additional employees to staff these groups. The development
team will be responsible for developing new products identified by the research
group and the maintenance and enhancement of current products. The quality
assurance group will be responsible for the quality of all products and customer
support. See 'Business -- Customer Support' and 'Plan of Operation.'
TTR Israel has received grants from the OCS aggregating approximately
$97,500. Generally, grants from OCS constitute up to 50% of certain research and
development expenses on the development of products intended for export. Under
terms of the OCS's participation, a royalty of 3% of the net sales of products
developed from a project funded by OCS must generally be paid, beginning with
the commencement of sales of products developed with grant funds and ending when
150% of the grant is repaid. The terms of the Israeli government participation
also require that the manufacture of products developed with government grants
be forever performed in Israel, even after all of the required royalty payments
are made, unless a special approval has been granted. Separate Government of
Israel consent is required to transfer to third parties technologies developed
through projects in which the OCS participates. The Company believes that these
restrictions and obligations will not have a material adverse effect on the
operations of the Company since the Company does not presently anticipate
manufacturing its products outside of Israel or transferring technology
developed by it to third parties. Further, such restrictions do not apply to
exports from Israel of products developed with such technologies. Additionally,
government consent to use less offensive third party manufacturing sites outside
of Israel is not unreasonably withheld.
The Company's research and development efforts are currently focused on the
compatibility of its products with the most widely used software functioning on
different platforms. From the date of inception through September 30, 1996, the
Company has expended approximately $616,000 on its research and development
activities including no expenses for the year ended December 31, 1994 and
approximately $276,000 for the year ended December 31, 1995. The Company expects
the level of its research and development expense to increase in the future. The
Company has allocated approximately $615,000 of the net proceeds for research
and development activities. See 'Use of Proceeds.'
SALES AND MARKETING
The Company's objective is to make SoftGuard the market standard for
software anti-copying protection. The Company has allocated approximately
$473,000 of the net proceeds to be used to launch a marketing and distribution
effort initially in Israel and North America with subsequent efforts in Europe
and the Far East. See 'Use of Proceeds' and 'Risk Factors -- Limited Marketing
Capability.'
The Company currently employs one salesman to identify beta sites locally
but anticipates expanding its sales and marketing personnel following the
completion of this Offering. See 'Use of Proceeds.' Initially, the Company plans
to open a North America sales office in Boston, Massachusetts by the second
quarter of 1997. The Company is also considering future locations in Chicago,
Illinois and Houston, Texas. The Company intends to center its marketing efforts
around advertising and promotional campaigns designed to enhance brand name
recognition. See 'Business -- Patents, Trademarks and Proprietary Information.'
Mr. Arik Shavit, the new Chief Executive Officer of TTR Israel, has
extensive experience in the hi-tech marketing field and it is anticipated that
Mr. Shavit will devote a significant amount of his business time to developing
and implementing appropriate marketing strategies designed to expand recognition
of the Company and its products. See 'Management.' Additionally, the Company has
entered into an agreement with an independent marketing professional with
experience in the introduction of new hi-tech products and concepts to the
market. Management believes that utilizing the services of a market professional
is instrumental in establishing strategic relationships with certain of the
larger and
27
internationally recognized software developers and distributors. However, no
assurance can be given that such an agreement will result in strategic
relationships with well-known software developers and distributors.
The Company intends to establish a distribution network, although no
assurance can be given, that will attempt to penetrate the relevant markets. The
Company anticipates that its marketing strategy will include original equipment
manufacturer ('OEM') arrangements with software vendors and distributors and
direct sales over the Internet. The Company views the rapid penetration of the
North American, European and Far Eastern markets as a key strategic element in
the success of its business, and it intends to devote significant marketing
efforts in these areas.
The Company intends on selling the protection diskette to software
developers or to their packagers who will include the protection diskette with
their software program that is ultimately sold to the end-user. In addition, the
Company will license its protection software to the developer. The Company will
receive a licensing fee from the developer, which is expected to be determined
on a case-by-case basis, dependent, among others, upon the retail price and the
expected sales of the software.
The Company has established an Internet web site whereby it will promote
its proposed products electronically. The Company intends on using the site, at
http:/www.ttr.co.il, to permit software houses to be able to download
demonstration test versions of its proposed Remote Activation Center. See
'Business -- TTR Remote Activation Center for Internet (Electronic)
Distribution.' Following the demonstration, the software developer will be able
to contact the Company and obtain an authorization code if it wishes to purchase
the product. The Company anticipates that electronic distribution will assume an
increasingly larger role in the product distribution efforts of software
developers. The Company plans on charging a fee to the software developer each
time the Company's Internet server is contacted by the end-user as well as a
license for including the Company's software protection in the downloaded
software, similar to conventional SoftGuard.
The Company's proposed DiscGuard CD-ROM protection technology, premised on
distinguishing between authentic and replicated CD-ROMs, will involve changes to
the circuitry controlling the laser writing of CDs on CD presses and recorders.
There is no need, however, to open up CD presses physically to modify the
circuitry. These machines are designed to accept 'plug-ins.' The Company is
developing a black box (electronic circuit), although no assurance can be given,
which can be attached to a CD press. The Company intends to license use of these
black boxes to CD-ROM replicators. The replicator may then use the machines to
produce either conventional or non-reproducible CDs for those clients requesting
it. Clients of the replicators are expected to pay a premium for the
non-reproducible CDs, a portion of which would go to the Company.
PRODUCTION AND SUPPLIES
The Diskette Marking Machine, used to specially mark the protection
diskettes used in SoftGuard, is specially made to the Company's order.
Management estimates that each Diskette Marking Machine is capable of supporting
the annual production, at full capacity, of 750,000 protection diskettes. The
Company currently has one fully-operating Diskette Marking Machine, which it
believes can meet its needs for a minimum of 12 months following the completion
of this Offering. Although the Company does not have a written contract with
Pylon Technologies Ltd., the manufacturer of its Diskette Marking Machine, the
Company believes, based upon the experience of Management and the Company's
working relationship with such manufacturer, that it will be able to have
additional Diskette Marking Machines produced on an as needed basis. All of the
sources and components used in the manufacture and assembly of the Diskette
Marking Machine are obtainable from local sources, except for the laser device
that specially marks each protection diskette. However, the Company believes
that there are adequate alternative sources for such devices.
The manufacture of the protection diskettes requires that standard
commercially available diskettes, specially formatted, be physically altered by
the Diskette Marking Machine to create the identification code from which the
encryption is derived. The Company obtains the specially formatted diskettes
from a local source, at an approximate cost to the Company of $.50 per formatted
diskette. The Company does not regard any one supplier as essential to its
operations, since equivalent
28
replacements for the diskettes are either available from one or more of the
Company's other suppliers or are available from various other sources at
competitive prices.
The Company anticipates that it will be able to fill orders for its
products within several hours to no longer than several weeks after receipt of a
firm purchase order. Consequently, the Company believes that backlog will be
kept at low levels as a result of the Company's ability to fill orders
relatively quickly. Due to the nature of its intended sales and marketing
efforts and the expected resulting close contact with the customer prior to the
receipt of a purchase order, the Company anticipates being able to plan its
production and component purchases in advance in order to enable it, although no
assurance can be given, to deliver its products quickly after receipt of an
order.
The Company intends to manufacture in-house the black boxes for its
proposed DiscGuard product. All of the sources and components used in the
manufacture and assembly of the black boxes are obtainable from local sources.
The Company currently does not have a written contract with any supplier of
these parts; however, the Company believes that there are adequate alternative
sources for each component.
CUSTOMER SUPPORT
The Company believes that highly efficient, responsive and prompt customer
service is essential for the Company's success in building and retaining
customer confidence.
Upon the commencement of commercialization of its proposed products, the
Company anticipates maintaining an appropriately sized staff of customer service
personnel, which will offer direct technical support. The Company anticipates
that it will geographically disperse its support staff as needed. On a routine
basis, the support staff will be expected to provide feed-back to the Company's
research and development and marketing staffs. The Company intends to use a
portion of the net proceeds of this Offering to increase its customer service
capabilities.
COMPETITION
The software protection industry is extremely competitive. The Company
faces tough competition from companies that are more established, benefit from
greater market recognition and have greater resources, financial and otherwise,
than the Company. The Company's primary competitors are Rainbow Technologies
Inc. and Aladdin Knowledge Systems Ltd., whom the Company believes to have the
largest installed product base in the limited market that exists for software
security products. Further, there can be no assurance that existing software
companies will not enter the market in the future. Most of the software
protection products distributed by each of these competitors utilize a hardware
device such as a dongle. Although the Company believes that its proposed
SoftGuard line of products will be favorably distinguishable from those of its
competitors, there can be no assurance that the Company will be able to
penetrate any of its competitor's portion of the market. See 'Risk
Factors -- Competition.'
The Company believes that its principal competitive advantages will be its
ability to offer a relatively inexpensive and effective software-protection
solution that does not utilize any hardware components (other than a protection
diskette) such as a dongle, plug, key or similar device that is compatible with
a wide variety of operating systems and platforms. The Company believes that its
proposed products will provide an additional competitive advantage in that they
are transparent to the end-user and do not interfere with the operation of the
computer or the protected application. Additionally, the Company's expected
ability to mass-produce the protection diskettes may provide it with an
additional competitive advantage in that it is anticipated to significantly
reduce the protected software's per-unit production costs. There can, however,
be no assurance that the Company will be able to continue developing products
with innovative features and functions, or that competitive pressures will not
result in price reductions that could materially adversely affect the Company.
See 'Risk Factors -- Competition.'
29
PATENTS, TRADEMARKS AND PROPRIETARY INFORMATION
The Company currently relies on a combination of trade secret, copyright
and trademark law, as well as non-disclosure agreements and invention-assignment
agreements, to establish and protect the technologies used in its proposed
products and other proprietary information. In addition, the Company has filed
patent applications in the United States, Israel, Germany, France, Great
Britain, the Netherlands and Japan with respect to the technology underlying the
imprinting of the protection diskettes to be used in SoftGuard and has filed a
patent application in the United States for the technology underlying the
proposed DiscGuard CD-ROM based protection and intends on filing additional
applications in other countries. There can be no assurance that any patents will
be granted or that the Company's proprietary technology will remain a secret or
that others will not develop similar technology and use such technology to
compete with the Company. See 'Risk Factors -- Uncertain Ability to Protect
Patent-Pending Technology' and ' -- Legal Proceedings.'
The Company is of the view that its software products are proprietary and
are protected by copyright law, non-disclosure and secrecy agreements. The
Company also relies on proprietary know-how and employs various methods, such as
the proper labeling of confidential documents and non-disclosure agreements, to
protect its processes, concepts, ideas and documentation associated with its
proprietary products. However, such methods may not afford complete protection
and there can be no assurance that others will not independently develop such
processes, concepts, ideas and documentation.
The Company believes that product recognition is an important competitive
factor. Accordingly, the Company intends to promote the 'SoftGuard,' 'NetGuard,'
'Remote Activation Center' and 'DiscGuard' trademarks in connection with its
marketing activities. The Company pursues the registration of its trademarks in
the United States and (based upon anticipated use) internationally, and has
applied for the registration of certain of its trademarks, including
'SoftGuard.' The Company intends on making additional applications for
registration with respect to other marks. There can be no assurance that prior
registrations and/or uses of one or more of such marks (or a confusingly similar
mark) does not exist in one or more of such countries, in which case the Company
might thereby be precluded from registering and/or using such mark in such
country. The Company's use and registration rights with respect to any trademark
does not ensure that the Company has superior rights to others that may register
or use identical or similar marks on related goods and services. See 'Risk
Factors -- Trademark Registration.'
CONDITIONS IN ISRAEL
The following information is intended to advise prospective investors of
certain conditions in Israel that could affect the Company.
POLITICAL CONDITIONS
Since the establishment of the State of Israel in 1948, a state of
hostility existed, varying as to degree, among Israel and various Arab
countries. A peace agreement was signed between Israel and Egypt in 1979 and
limited relations have been established. A peace treaty with the Hashemite
Kingdom of Jordan was signed in 1995, ending the state of war along Israel's
longest border.
Since December 1987, civil unrest has existed in the territories which came
under Israel's control in 1967. In April 1994, negotiations between Israel and
the Palestine Liberation Organization resulted in the signing of an interim
agreement to grant Palestinian Arabs limited autonomy in certain of the
Territories administered by Israel. The interim agreement was followed by a
series of agreements and understandings expanding the areas subject to
autonomous administration. No prediction can be made as to whether a final
resolution of the area's problems will be achieved, as to the nature of any such
resolution or whether the civil unrest in the administered territories will
continue and to what extent the unrest will have an adverse impact on Israel's
economic development or on the operations of the Company in the future.
All adult male permanent residents of Israel under the age of 51 are,
unless exempt, obligated to perform up to 45 days of military reserve duty
annually. Additionally, all such residents are subject to
30
being called to active duty at any time under emergency circumstances. Many of
the male employees of the Company (including its President) are currently
obligated to perform annual reserve duty. While the Company and its personnel
have operated effectively under these requirements, no assessments can be made
as to the full impact on the Company's work force or business if conditions
should change and no prediction can be made as to the effect on the Company of
any expansion or reduction of these obligations.
Certain countries and companies participate in a boycott of Israeli
companies and others doing business in Israel or with Israel companies. The
Company, however, believes that the boycott will not have an material adverse
impact on the Company's business.
ECONOMIC CONDITIONS
Israel's economy has been subject to numerous de-stabilizing factors,
including a period of rampant inflation in the early to mid 1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. For these and associated reasons, the Israeli Government has
intervened in sectors of the Israeli economy, employing among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
control of wages, prices and exchange rates, and has frequently reversed or
modified its policies in all these areas. The New Israeli Shekel ('NIS') is
linked to a weighted basket of major currencies, of which the US Dollar
constitutes 50%. Periodically, the central Bank of Israel resets the target
exchange rate of the NIS in relation to the currency basket, and allows the
actual exchange rate to float within a range of 5% of the target rate.
Israel has recently experience a wave of immigration from the former Soviet
Union and its satellite countries. Almost 600,000 new immigrants have arrived
since 1989. The rate of recent immigration, however, has declined dramatically.
If immigration were to resume to its former levels, increased strains on
government services, economic development and resources could be expected.
Notwithstanding, it could be expected that such increased immigration would also
result in an increase in the highly-skilled labor pool.
TRADE AGREEMENTS
Israel is a member of the United Nations, the international Monetary Fund,
the International Bank for Reconstruction & Development and the International
Finance Corporation. Israel is a signatory to the General Agreement on Tariffs
and Trade, which provides for reciprocal lowering of trade barriers among its
members.
Israel became associated with the European Union by an agreement concluded
in 1975 which confers certain advantages with respect to Israeli exports to most
of the European countries and obliges Israel to lower its tariffs with respect
to imports from those countries over a number of years.
In 1985, Israel and the United States entered into an agreement to
establish a Free Trade Area, which is intended to ultimately eliminate all
tariff and certain non-tariff trade between the two countries. Under the
Agreement, most products received immediate duty free status in 1985, staged
reductions are taking place on others and reductions on tariffs relative to a
third category may be accelerated prior to 1995, by which all tariffs are to be
eliminated.
PROPERTIES
The Company, through TTR Israel, currently leases approximately 4,860
square feet for its executive offices, research and production facilities in
Kfar Saba, Israel at a monthly rental of approximately $4,025 pursuant to a
three-year lease expiring in May 1999, subject to two optional annual renewals
through May 2001.
EMPLOYEES
The Company presently has ten full-time employees, of whom six were
employed in research and development, one in sales, two in management and one in
administration. In addition, the Company employs an electrical engineer and a
quality assurance engineer as consultants on an as needed per project basis.
31
LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware of
any pending or threatened litigation; except as follows:
On October 31, 1996, the Company received a letter from attorneys
representing Smart Chip Group USA ('Smart Chip') in Israel relating to
allegations that the Company was infringing certain proprietary rights of Smart
Chip and/or its affiliates. Specifically, Smart Chip alleged that the
technologies comprising the Company's proposed products use or are derived from
technologies developed by Dr. Baruch Sollish, the Company's Vice
President -- Product Research and Development, as part of his prior consulting
services provided to Smart Chip. The Company has denied these allegations.
Management believes that the allegations are without merit and intends, should
it become necessary, to vigorously defend against those claims. However, there
can be no assurance that the Company will be successful in defending against
such claims. See 'Risk Factors -- Uncertain Ability to Protect Patent-Pending
Technology.'
32
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of the executive officers and Directors of
the Company are as follows:
NAME AGE POSITION
- -------------------------------- --- -------------------------------------------------------------------------
Marc D. Tokayer................. 40 Chairman of the Board, President and Treasurer; and President and
Director of TTR Israel
Baruch Sollish.................. 50 Director, Vice President -- Product Research and Development and
Secretary; and Director of Product Research and Development and
Director of TTR Israel
Arik Shavit..................... 47 Director and Vice President; and Chief Executive Officer and Director of
TTR Israel
Marc D. Tokayer is the founder of the Company and has been Chairman of the
Board of Directors, President and Treasurer of the Company since its inception
in July 1994 and Chairman of the Board of Directors, President and Chief
Executive Officer of TTR Israel since its inception in December 1994. From
September 1992 until he joined the Company, Mr. Tokayer worked as an independent
consultant primarily in the areas of business applications. From October 1990
through August 1992, Mr. Tokayer was employed by Yael Ltd., a software company,
where he managed the development of the Central Inventory Control System.
Baruch Sollish, Ph.D. has been a Director of the Company and the Manager of
Product Research and Development for TTR Israel since December 1994. He was
elected the Vice President -- Product Research and Development and Secretary of
the Company in September 1996. Dr. Sollish created the core technology that
makes up the SoftGuard protection process. Prior to joining the Company, from
June 1987 through December 1994, Dr. Sollish founded and managed Peletronics
Ltd., an Israel software company, engaged primarily in the field of smart cards
and software design for personnel administration, municipal tax authorities and
billing procedures at bank clearance centers. Dr. Sollish holds six United
States Patents in the fields of electro optics, ultrasound and electronics and
has published and lectured extensively.
Arik Shavit has been a Director and Vice President of the Company and the
Chief Executive Officer of TTR Israel since September 1996. Prior thereto, Mr.
Shavit was a Manager of Business Development, Smart Card Services at IBM Israel
Ltd., where he had held this position since August 1994. From August 1990
through July 1994, Mr. Shavit founded and managed Silvaco (Israel) Ltd., an
Israeli subsidiary of SILVACO International, Inc., a California based software
company which develops state-of-the-art computer aided engineering (CAE)
Software Applications and provided development, marketing and support services.
Mr. Shavit also served as Corporate Vice-President and Director of the United
States company.
In accordance with the by-laws of the Company, the number of directors of
the Company shall be three, unless such number is increased or decreased by a
vote of the majority of the outstanding shares of the Company. The Company
currently has three directors, Messrs. Tokayer, Sollish and Shavit. All
directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors. Directors currently receive no
cash compensation for serving on the Board of Directors. The Representative has
the right during the five-year period following the date of this Prospectus, in
its sole discretion, to designate two persons for the election as directors, or
alternatively to designate two individuals to serve as non-voting advisors to
the Company's Board of Directors. The Representative has no intention to select
either designee in the immediate future. Officers are elected annually by the
Board of Directors and serve at the discretion of the Board.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for all services rendered to the Company during Fiscal 1996, Fiscal 1995
and Fiscal 1994 by the Company's President and Vice President -- Research and
Development. No executive officers received compensation in excess of $100,000
during such periods.
33
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
ANNUAL COMPENSATION
-------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION COMPENSATION
(1)(2)(3) YEAR SALARY ($) BONUS ($) ($)
(a) (b) (c) (d) (e)
- ----------------------------------- ------- ------------ ----------- ------------
Marc D. Tokayer ................... 1996 $ 60,000 0 (1)
Chairman, President and CEO 1995 $ 60,000 0 (1)
1994 $ 60,000 0 (1)
Baruch Sollish .................... 1996 $ 65,000 0 (1)
Vice President - Research and 1995 $ 60,000 0 (1)
Development 1994 n/a n/a n/a
LONG-TERM COMPENSATION
--------------------------------------------------
AWARDS PAYOUTS
----------------------- -----------------------
RESTRICTED SECURITIES
STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION AWARD(s) OPTIONS/ PAYOUTS COMPENSATION
(1)(2)(3) ($) SARS (#) ($) ($)
(a) (f) (g) (h) (i)
- --------------------------------------------- ---------- ------- ------------
Marc D. Tokayer ................... 0 0 0 0
Chairman, President and CEO 0 0 0 0
0 0 0 0
Baruch Sollish .................... 0 0 0 0
Vice President - Research and 0 0 0 0
Development n/a n/a n/a n/a
- ------------
(1) The above compensation figures do not include the cost to the Company of the
use of automobiles leased by the Company, the cost to the Company of
benefits, including premiums for life and health insurance and any other
personal benefits provided by the Company to such persons in connection with
the Company's business, all of which in the aggregate does not exceed the
lesser of $50,000 or 10% of such person's annual salary and bonus.
(2) See 'Employment Arrangements' for a description of Marc D. Tokayer's
employment agreement as President of TTR Israel and Baruch Sollish's
employment agreement as Director of Product Research & Development of TTR
Israel.
(3) Mr. Tokayer's compensation commenced effectively on October 15, 1994. Dr.
Sollish's compensation commenced effectively on January 1, 1995. Arik Shavit
assumed the position of Chief Executive Officer of TTR Israel in September
1996 pursuant to an employment agreement more fully described in 'Employment
Arrangements.'
------------------------
The Company did not grant any options in the last three fiscal years to any
of its executive officers. The Company does not have any long-term incentive
plans for compensating its executive officers.
EMPLOYMENT ARRANGEMENTS
TTR Israel has entered into an employment agreement with Marc Tokayer,
pursuant to which Mr. Tokayer is employed as the President and General Manager
for a term of three years commencing in August 1994. Pursuant to the employment
agreement, Mr. Tokayer will devote his full business time in consideration of a
monthly salary of $5,000, subject to adjustment. If Mr. Tokayer is terminated
without cause, as defined in the agreement, then he shall be entitled to
continue to receive his salary and benefits for an additional 12 months subject
to certain limitations.
TTR Israel has entered into an employment agreement with Baruch Sollish,
pursuant to which Dr. Sollish is employed as the Director of Product Research &
Development for a term of one year commencing in December 1995 and renewed for
an additional year. Pursuant to the employment agreement, Dr. Sollish will
devote his full business time in consideration of a monthly salary of $5,000
plus incentive compensation, payable quarterly, equal to one (1%) percent of the
initial $1,000,000 of gross receipts from the sale of certain products of the
Company (including SoftGuard), and two (2%) percent for gross receipts in excess
of such amount. If Dr. Sollish is terminated without cause, as defined in the
agreement, then such incentive compensation shall convert to royalty payments
under certain circumstances.
TTR Israel has entered into an employment agreement with Arik Shavit,
pursuant to which Mr. Shavit shall be employed as the Chief Executive Officer
for a term of three years commencing in September 1996. Pursuant to the
employment agreement, Mr. Shavit will devote his full business time in
consideration of a monthly salary of $8,334, subject to adjustment. Pursuant to
the employment agreement, Mr. Shavit will be issued warrants to purchase an
aggregate of 217,473 shares of Common Stock upon the date of this Prospectus.
The warrants are exercisable at $.01 per share until September 2002, subject to
a four-year vesting schedule, whereby the first 72,491 warrants are not
exercisable until
34
September 1997, 48,328 in September 1998, 48,327 in September 1999 and 48,327 in
September 2000. See 'Certain Transactions.'
EMPLOYEE BENEFIT PLANS
1996 STOCK OPTION PLAN
In June 1996, the Board of Directors adopted, subject to stockholder
approval, the Company's Incentive & Non-Qualified Stock Option Plan (the '1996
Plan'). The 1996 Plan provides for the grant to qualified employees (including
officers and directors) of the Company of options to purchase shares of Common
Stock. A total of 450,000 shares of Common Stock have been reserved for issuance
upon exercise of stock options granted under the 1996 Plan. The 1996 Plan is
administered by the Board of Directors or a committee of the Board of Directors
(the 'Compensation Committee') whose members are not entitled to receive options
under the Plan (excluding options granted exclusively for directors fees). The
Compensation Committee has complete discretion to select the optionee and to
establish the terms and conditions of each option, subject to the provisions of
the Plan. Options granted under the Plan may or may not be 'incentive stock
options' as defined in Section 422 of the Internal Revenue Code ('Incentive
Options') depending upon the terms established by the Compensation Committee at
the time of grant, but the exercise price of options granted may not be less
than 100% of the fair market value of the Common Stock as of the date of grant
(110% of the fair market value if the grant is an Incentive Option to an
employee who owns more than 10% of the outstanding Common Stock). Options may
not be exercised more than 10 years after the grant (five years if the grant is
an Incentive Option to any employee who owns more than 10% of the outstanding
Common Stock). Options granted under the Plan are not transferable and may be
exercised only by the respective grantees during their lifetimes or by their
heirs, executors or administrators in the event of death. Under the 1996 Plan,
shares subject to canceled or terminated options are reserved for subsequently
granted options. The number of options outstanding and the exercise price
thereof are subject to adjustment in the case of certain transactions such as
mergers, recapitalizations, stock splits or stock dividends.
As of the date of this Prospectus, the Company has granted to a former
director of the Company options exercisable for a period of four and one-half
years to purchase an aggregate of 5,000 shares of Common Stock, at an exercise
price of $6.00 per share.
INDEMNIFICATION
Pursuant to the Company's Certificate of Incorporation and By-laws,
officers and directors of the Company shall be indemnified by the Company to the
fullest extent allowed under Delaware law for claims brought against them in
their capacities as officers or directors. Indemnification is not allowed if the
officer or director does not act in good faith and in a manner reasonably
believed to be in the best interests of the Company, or if the officer or
director had no reasonable cause to believe his conduct was lawful. Accordingly,
indemnification may occur for liabilities arising under the Securities Act. The
Company and the Representative have agreed to indemnify each other (including
officers and directors) against certain liabilities, including liabilities under
the Securities Act. See 'Underwriting.' Insofar as indemnification for
liabilities arising under the Securities Act may be permitted for directors,
officers and controlling persons of the Company pursuant to the foregoing
provisions or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
35
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus and as
adjusted to reflect the sale of 800,000 shares of Common Stock offered by the
Company hereby (but not the repurchase of 135,000 Bridge Shares), certain
information, with respect to the beneficial ownership of Common Stock by (i)
each person known by the Company to be the owner of more than 5% of the
outstanding Common Stock, (ii) each director, (iii) each executive officer named
in the Summary Compensation Table and (iv) all directors and executive officers
as a group:
PERCENTAGE OF
OUTSTANDING SHARES
AMOUNT AND OWNED
NATURE OF --------------------------
NAME AND ADDRESS BENEFICIAL BEFORE AFTER
OF BENEFICIAL OWNER(1) OWNERSHIP(2) OFFERING(3) OFFERING(4)
- ------------------------------------------------------------------------- ------------ ----------- -----------
Marc D. Tokayer(5)....................................................... 753,547 31.1% 23.3%
Baruch Sollish........................................................... 100,000 4.1 3.1
Arik Shavit(6)........................................................... 0 0 0
Canova Finance Inc.(7)................................................... 639,375 22.7 17.7
Etilon Trading Ltd.(8)................................................... 639,375 22.7 17.7
Joe Ohayon(9)............................................................ 253,275 9.8 7.5
Chana Sasha Foundation Inc.(10).......................................... 167,975 6.7 5.1
All directors and executive officers as a group (3 persons)(5)(6)........ 853,547 35.2 26.5
- ------------
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
TTR Inc., 2 Hanagar Street, Kfar Saba, ISRAEL 44425.
(2) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from the date hereof upon the exercise of warrants or options. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants that are held by such person (but not those held by any
other person) and which are exercisable within 60 days from the date hereof
have been exercised.
(3) Based on 2,424,548 shares outstanding (excluding 1,000,000 Escrow Shares).
(4) Based on 3,224,548 shares outstanding (excluding 1,000,000 Escrow Shares
and without giving effect to the repurchase of 135,000 Bridge Shares),
including 800,000 shares of Common Stock offered by the Company hereby.
(5) Includes 384,274 shares held by the Tokayer Family Trust (the 'Trust'). The
wife of Mr. Tokayer is the Trustee for the Trust, and the income
beneficiaries of the Trust are Mr. Tokayer's children. Mr. Tokayer does not
have or share any voting power or investment power with respect to
securities held by the Trust, and accordingly, disclaims beneficial
ownership of all such securities. After the Offering, the Trust may be
deemed to own 11.9% of the outstanding shares of Common Stock.
The amount of beneficial ownership for Mr. Tokayer excludes 269,274 Escrow
Shares in the name of Mr. Tokayer and 730,726 Escrow Shares in the name of
the Trust. Including the Escrow Shares would increase Mr. Tokayer's
percentage of outstanding shares owned before and after the Offering to
51.2% and 41.5%, respectively. See 'Principal Stockholders -- Escrow
Shares.'
See 'Principal Stockholders -- Voting Arrangements' for a description of a
voting arrangement entered into among Mr. Tokayer, the Trust, Dr. Sollish
and four other stockholders with an aggregate of 1,137,430 shares of Common
Stock (35.3% after the Offering) whereby they have agreed to vote their
respective shares to elect directors and in support of positions favored by
a majority of the shares held among them.
(footnotes continued on next page)
36
(footnotes continued from previous page)
(6) Excludes 217,473 shares issuable upon exercise of a like number of warrants
to be issued upon the date of this Prospectus, which will not be
immediately exercisable. See 'Management -- Employment Arrangement' and
'Certain Transactions.'
(7) Includes 387,500 shares issuable upon exercise of a like number of
warrants. The address of Canova Finance Inc. is 3 New Burlington Street,
London WIX 1FE United Kingdom and its principals are Mariana Hubli and
Angela Sanchez.
(8) Includes 387,500 shares issuable upon exercise of a like number of
warrants. The address of Etilon Trading Limited is 4, Lower Hatch Street,
Dublin 2, Republic of Ireland and its principals are James Graffick, Simon
Elmont and Gilles Corset.
(9) Includes 153,500 shares issuable upon exercise of a like number of
warrants.
(10) Includes 71,500 shares issuable upon exercise of a like number of warrants.
Chana Sasha Foundation, Inc. is a charitable foundation managed by Morris
Wolfson and Ariel Wolfson, whose address is 1 State Street Plaza, New York,
NY 10004.
------------------------
By virtue of his ownership of Common Stock and position with the Company,
Marc D. Tokayer may be deemed a 'parent' and 'founder' of the Company as such
terms are defined under the Federal securities laws.
ESCROW SHARES
The 1,000,000 Escrow Shares are not assignable or transferable. The Escrow
Shares were deposited in escrow pursuant to an Escrow Agreement by and among the
Company, Mark D. Tokayer (269,274 shares), the Trust (730,726 shares) and Aboudi
& Brounstein Trustees Ltd. (the 'Escrow Agent') dated as of January 8, 1995 (the
'Escrow Agreement'). The Escrow Shares will be released from escrow, on a pro
rata basis, unless otherwise agreed to by the Representative, if one or more of
the following conditions are met:
(a) 250,000 Escrow Shares (67,319 shares to Mr. Tokayer and 182,681
shares to the Trust) shall be released if (i) the Company's net income
before provision for income taxes and exclusive of any extraordinary
earnings (all as audited by the Company's independent public accountants)
(the 'Minimum Pretax Income') amounts to at least $1,800,000 for the fiscal
year ending December 31, 1997; or (ii) the Bid Price (as defined in the
Escrow Agreement) of the Common Stock averages in excess of $15.00 per
share for 30 consecutive business days during the 12 month period
commencing on the date of this Prospectus;
(b) 300,000 Escrow Shares (80,782 shares to Mr. Tokayer and 219,218
shares to the Trust) shall be released if (i) the Company's Minimum Pretax
Income amounts to at least $4,000,000 for the fiscal year ending December
31, 1998; or (ii) the Bid Price (as defined in the Escrow Agreement) of the
Common Stock averages in excess of $20.00 per share for 30 consecutive
business days during the 12 month period commencing 12 months from the date
of this Prospectus;
(c) 450,000 Escrow Shares (121,173 shares to Mr. Tokayer and 328,827
shares to the Trust) shall be released if (i) the Company's Minimum Pretax
Income amounts to at least $6,000,000 for the fiscal year ending December
31, 1999; or (ii) the Bid Price (as defined in the Escrow Agreement) of the
Common Stock averages in excess of $25.00 per share for 30 consecutive
business days during the 12 month period commencing 24 months from the date
of this Prospectus;
(d) During the periods specified in (a), (b) or (c) above, the Company
is acquired by or merged into another entity in a transaction in which the
value of the per share consideration received by the stockholders of the
Company on the date of such transaction or at any time during the
applicable period set forth in (a), (b) or (c), respectively, equals or
exceeds the applicable levels set forth in (a), (b) or (c), respectively,
then such respective amount of Escrow Shares shall be released.
37
(e) Notwithstanding the conditions of release specified in (a), (b)
and (c) above, all remaining Escrow Shares not otherwise released or
cancelled and contributed to the capital of the Company shall be released
as of the date on which (i) the Underwriters and their customers own less
than 20% of the public float of the Common Stock or (ii) if none of the
Underwriters have made the high Bid Price on the Common Stock for 50
consecutive business days.
The Minimum Pretax Income amounts set forth above shall (i) be calculated
exclusively of any extraordinary earnings including, but not limited to, any
charge to income resulting from release of the Escrow Shares and (ii) be
increased proportionately, with certain limitations, in the event additional
shares of Common Stock or securities convertible into, exchangeable for or
exercisable into Common Stock are issued after completion of this Offering. The
Bid Price amounts set forth above are subject to adjustment in the event of any
stock splits, reverse stock splits or other similar events.
Pursuant to the Escrow Agreement, any money, securities, rights or property
distributed in respect of the Escrow Shares, including any property distributed
as dividends or pursuant to any stock split, merger, recapitalization,
dissolution, or total or partial liquidation of the Company, shall be held in
escrow by the Escrow Agent until release of the Escrow Shares. During the time
the Escrow Shares are held in escrow, the Escrow Agent will vote the Escorw
Shares in the same manner as the majority of all other shares of the Company's
outstanding Common Stock is voted. If the applicable Minimum Pretax Income, the
Bid Price or alternative tests set forth above have not been met by March 31 of
the following fiscal year, then the Escrow Shares, as well as any dividends or
other distributions made with respect thereto, will be cancelled and contributed
to the capital of the Company. The Company expects that the release, if any, of
the Escrow Shares to officers, directors, employees and consultants of the
Company will be deemed compensatory and, accordingly, will result in a
substantial charge to reportable earnings, which would equal the fair market
value of such shares on the date of release. Such charge could substantially
increase the loss or reduce or eliminate the Company's net income for financial
reporting purposes for the period(s) during which such shares are, or become
probable of being, released from escrow. Although the amount of compensation
expense recognized by the Company will not affect the Company's total
stockholders' equity, it may have a negative effect on the market price of the
Company's securities. See 'Plan of Operation,' 'Risk Factors -- Charge to
Earnings in the Event of Release of Escrow Shares' and Note 11 of Notes to
Financial Statements.
The Minimum Pretax Income and Bid Price levels set forth above were
determined by negotiation between the Company and the Representative and should
not be construed to imply or predict any future earnings by the Company or any
increase in the market price of its securities.
VOTING ARRANGEMENTS
Marc D. Tokayer, Chairman of the Board, the Tokayer Family Trust, Baruch
Sollish, Director and four other stockholders with an aggregate of 1,137,430
shares of Common Stock (35.3% after the Offering), have entered into a voting
arrangement whereby they have agreed to vote their respective shares to elect
directors and in support of positions favored by a majority of the shares held
among them. See 'Risk Factors -- Control by Management and Current
Stockholders.'
CERTAIN TRANSACTIONS
In July 1994, the Company sold 1,200,000 shares of its Common Stock to Marc
D. Tokayer, Chairman of the Board of Directors of the Company. Mr. Tokayer
subsequently contributed 561,453 shares to the Company which were immediately
cancelled by the Company and deposited 269,274 shares into escrow. The shares
were issued in consideration of services performed and Mr. Tokayer's shares of
Common Stock of TBR Systems Inc. ('TBR') (representing approximately 22% of the
then issued equity of TBR), in the aggregate valued at $1,200 ($.001 per share)
(ascribing no value to the shares of TBR). In August 1994, the Company sold
1,200,000 shares of its Common Stock to the Trust, which may be deemed an
affiliate of the Issuer, in consideration of $25,000. The Trust subsequently
transferred 85,000 shares to an unaffiliated third party in exchange for
services and deposited 730,726 shares into escrow. See 'Principal Stockholders.'
38
TTR Inc. retained Shane, Alexander, Unterburgher Securities, Inc. ('SAU')
to assist it in the establishment of a United States-based sales and
representative office at a fee of $7,900 per month and the issuance of warrants
for 185,000 shares of Common Stock for the period from November 1, 1994 through
December 31, 1995. SAU subsequently transferred the warrants to non-affiliated
third parties, and the shares of Common Stock issuable upon exercise of such
warrants are included in the Selling Securityholders Offering. See 'Selling
Securityholders' Offering.'
In November 1994, the Company loaned SAU $256,000, which was repaid in its
entirety in 1995. The terms of the loan included an interest rate of 8% per
annum, with principal and interest payable by December 31, 1995.
In January 1995, TTR Israel acquired the technology underlying certain of
the features of SoftGuard from Rina Marketing R&D Ltd., an Israeli software
company ('Rina'). Until December 1994, Dr. Baruch Sollish, a director of the
Company, was affiliated with Rina. Dr. Sollish was responsible for developing
the technology purchased by the Company from Rina. In consideration of the
purchase of such technology, the Company paid to Rina at closing $50,000.
Following purchase of the technology, the Company developed, enhanced and added
to such technology to develop the SoftGuard line of products.
In January 1996, the Company sold 50,000 shares of its Common Stock to
Chana Sasha Foundation, Inc. ('CSF') for $100,000. In April 1996, the Company
completed a private placement of 650,000 shares of Common Stock and warrants to
purchase an additional 1,000,000 shares of Common Stock to Canova Finance Inc.
(251,875 shares and 387,500 warrants), Etilon Trading Ltd. (251,875 shares and
387,500 warrants), Joe Ohayon (99,775 shares and 153,500 warrants) and CSF
(46,475 shares and 71,500 warrants) for an aggregate purchase price of $200,000,
including $10,000 ascribed to the warrants. The warrants are exercisable at
$7.00 per share. See 'Description of Securities -- Prior Financings.'
In September 1996, the Company agreed to issue upon the date of this
Prospectus 217,473 warrants to Arik Shavit, a director of the Company, pursuant
to his employment agreement with TTR Israel as its Chief Executive Officer. The
warrants are exercisable at $.01 per share until September 2002 subject to a
four-year vesting schedule, whereby the first 72,491 warrants are not
exercisable until September 1997. See 'Management -- Employment Arrangements.'
For information concerning employment and consulting agreements with, and
compensation of, the Company's executive officers and directors, see
'Management -- Executive Compensation; Employment Arrangements; and Employee
Benefit Plans.' See 'Principal Stockholders -- Voting Arrangements' for a
description of a voting arrangement to be entered into among certain members of
Management and other stockholders.
The Company believes that the terms of each of the foregoing transactions
and those which will exist after the consummation of the Offering are no less
favorable to the Company than could have been obtained from non-affiliated third
parties, although no independent appraisals were obtained. In the future, all
transactions between the Company and its affiliates will also be on terms which
the Company believes will continue to be no less favorable to the Company than
the Company could obtain from non-affiliated parties.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock, $.001
par value per share, of which 2,424,548 shares (assuming the pro forma exercise
of 374,548 warrants into 374,548 shares of Common Stock and excluding 1,000,000
Escrow Shares) are currently outstanding and held of record by approximately 60
holders. See 'Description of Securities -- Prior Financings' for a description
of the 374,548 warrants and 'Principal Stockholders -- Escrow Shares' for a
description of the Escrow Shares. Holders of shares of Common Stock are entitled
to one vote for each share held of record on all matters to be voted on by
stockholders. There are no preemptive, subscription, conversion or redemption
rights pertaining to the shares of Common Stock. Holders of shares of Common
Stock are entitled to receive dividends when, as and if declared by the Board of
Directors from funds legally
39
available therefor and to share ratably in the assets of the Company available
upon liquidation, dissolution or winding up. The holders of shares of Common
Stock do not have cumulative voting rights for the election of directors and,
accordingly, the holders of more than 50% of the shares of Common Stock are able
to elect all directors. After the completion of this Offering, the officers and
directors of the Company will be entitled to vote 26.5% of the shares of Common
Stock. Marc D. Tokayer, Chairman of the Board, the Trust, Baruch Sollish,
Director and four other stockholders with an aggregate of 1,137,430 shares of
Common Stock (35.3% after the Offering) have entered into a voting arrangement
whereby they have agreed to vote their respective shares to elect directors and
in support of positions favored by a majority of the shares held among them.
Accordingly, in all likelihood they will be able to elect all of the Company's
directors. All of the outstanding shares of Common Stock are, and the Common
Stock offered hereby, upon issuance and when paid for, will be duly authorized,
validly issued, fully paid and non-assessable.
PRIOR FINANCINGS
From November 1994 through July 1995, the Company consummated a private
placement to 26 accredited investors of two-year 10% promissory notes
aggregating approximately $1,041,000 (the '1995 Debt Financing'). In November
1996, a total of $392,500 of such notes plus accrued interest thereon of $78,500
became due and payable. In November 1996, the holders of $441,000 note principal
and interest of such notes extended the due date of the notes to March 31, 1997.
In connection with the Debt Financing, the Company issued warrants (the 'Debt
Financing Warrants') to the noteholders to purchase up to a total of 174,548
shares of Common Stock for $.01 per share. The 174,548 shares of Common Stock
issuable upon exercise of the Debt Financing Warrants are included in the
Selling Securityholders Offering. The 1995 Debt Financing will be repaid from
the proceeds of this Offering as the promissory notes become due and payable, or
sooner at the discretion of the Company. See 'Use of Proceeds.' The proceeds
from the 1995 Debt Financing were used for the initial activities of the
Company, including recruitment of personnel, acquisition of equipment and office
premises, and for general corporate purposes. Also in connection with the 1995
Debt Financing, the Company paid commissions and non-accountable expense
allowances in the aggregate amount of approximately $146,000 to SAU. See 'Plan
of Operation,' 'Selling Securityholders Offering' and 'Principal Stockholders.'
In April 1996, the Company completed a private placement of 650,000 shares
of Common Stock and warrants to purchase an additional 1,000,000 shares of
Common Stock to four sophisticated investors for an aggregate purchase price of
$200,000 (the 'Equity Financing'). The securities issued in connection with the
Equity Financing are included in the Selling Securityholders Offering. The
proceeds from the Equity Financing were used for product development and for
general corporate purposes. See 'Selling Securityholders Offering.'
In June 1996, the Company issued in a private placement to six accredited
investors (including five limited partners of the Representative (the 'Limited
Partners')) one-year 10% promissory notes in the aggregate amount of $500,000
(the 'Bridge Financing'). By its terms, the Bridge Financing must be repaid from
the proceeds of this Offering. See 'Use of Proceeds.' The net proceeds to the
Company of the Bridge Financing were approximately $423,000 after deducting
related placement expenses. The proceeds were used for product development and
working capital purposes. In connection with the Bridge Financing, the Company
issued an aggregate of 150,000 shares of Common Stock. In February 1997, the
Company agreed to repurchase from the Limited Partners, subject to the
completion of this offering, an aggregate of 135,000 shares of Common Stock for
$67,500 payable on the closing date of this Offering. The remaining 15,000
shares of Common Stock issued in connection with the Bridge Financing are
included in the Selling Securityholders Offering. Also in connection with the
Bridge Financing, the Company paid commissions and non-accountable expense
allowances in the aggregate amount of approximately $55,000 to the
Representative. See 'Use of Proceeds' and 'Selling Securityholders Offering.'
40
LIMITATIONS UPON TRANSACTIONS WITH 'INTERESTED STOCKHOLDERS'
Section 203 of the Delaware General Corporation Law prohibits a publicly
held Delaware corporation from engaging in a 'business combination' with an
'interested stockholder' for a period of three years after the date of the
transaction in which the person became an interested stockholder unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date the business combination is
approved by the board of directors and by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. A 'business combination' includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An 'interested
stockholder' is a person who, together with affiliates and associates, owns (or
within three years, did own), 15% or more of the corporation's voting stock. The
restrictions of Section 203 do not apply, among other things, if a corporation,
by action of its stockholders, adopts an amendment to its certificate of
incorporation or by-laws expressly electing not to be governed by Section 203,
provided that, in addition to any other vote required by law, such amendment to
the certificate of incorporation or by-laws must be approved by the affirmative
vote of a majority of the shares entitled to vote. Moreover, an amendment so
adopted is not effective until twelve months after its adoption and does not
apply to any business combination between the corporation and any person who
became an interested stockholder of such corporation on or prior to such
adoption. The Company's Certificate of Incorporation and By-laws do not
currently contain any provisions electing not to be governed by Section 203 of
the Delaware General Corporation Law. The provisions of Section 203 of the
Delaware General Corporation Law may have a depressive effect on the market
price of the Common Stock because they could impede any merger, consolidating
takeover or other business combination involving the Company or discourage a
potential acquiror from making a tender offer or otherwise attempting to obtain
control of the Company.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The transfer agent and registrar for the Common Stock and the warrant agent
for the Warrants is North American Transfer Co., 147 W. Merrick Road, Freeport,
New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 3,224,548 shares of
Common Stock outstanding (without giving effect to the repurchase of 135,000
Bridge Shares). Of the Common Stock to be issued and outstanding after the
Offering, an aggregate of 2,074,548 shares of Common Stock, consisting of the
800,000 shares of Common Stock sold in the Offering and the 1,139,548 shares of
Common Stock (all of which shares will be subject to a lock-up agreement as
described below) being offered by the Selling Securityholders will be freely
tradeable without restriction or further registration under the Securities Act,
except for any shares purchased by an 'affiliate' of the Company within the
meaning of Rule 144 under the Securities Act ('Rule 144'). The remaining
1,150,000 shares of Common Stock are 'restricted securities,' as that term is
defined under Rule 144, and may not be sold in the absence of registration under
the Securities Act unless an exemption from registration is available, including
the exemption provided by Rule 144. Approximately 653,547 of such shares will be
eligible for sale under Rule 144 commencing 90 days after the consummation of
the Offering; however, all of such shares will be subject to the following
lock-up agreement. The Company's officers, directors, stockholders each
beneficially owning 5% or more of the Common Stock, all Selling Securityholders
(except for a certain selling stockholder who has agreed to lock-up his 15,000
shares for a period of 18 months) and certain other stockholders (covering an
aggregate of approximately 2,214,548 shares excluding 60,000 shares included in
the Over-allotment Option) have agreed, for a period of 24 months from the date
of this Prospectus, not to sell or otherwise dispose of any securities of the
Company, without the prior written consent of the Representative.
In general, under Rule 144, as currently in effect, a person, including an
'affiliate' of the Company as defined under the Securities Act, (or persons
whose shares are aggregated), who for at least two years has beneficially owned
restricted securities acquired directly or indirectly from the Company or an
41
affiliate of the Company in a private transaction, is entitled to sell, within
any three-month period, a number of shares that does not exceed the greater of
1% of the total number of outstanding shares of the same class or the average
weekly trading volume during the four calendar weeks preceding the day notice is
given to the Securities and Exchange Commission with respect to such sale. A
person (or persons whose shares are aggregated) who is not an affiliate and has
not been an affiliate of the Company at any time during the three months
immediately preceding the sale and who has beneficially owned shares of Common
Stock for at least three years is entitled to sell such shares pursuant to
subparagraph (k) of Rule 144 without regard to the volume limitations described
above.
Prior to this Offering, there has been no public trading market for the
Common Stock, and there can be no assurance that a regular trading market will
develop after the Offering, or that if developed it will be sustained. In
addition, no prediction can be made as to the effect, if any, that market sales
of Common Stock or the availability of such shares for sale will have on the
market prices prevailing from time to time. Nevertheless, the possibility that
substantial amounts of shares of Common Stock may be sold in the public market
may adversely affect prevailing market prices for the Common Stock and could
impair the Company's ability to raise capital through the sale of its equity
securities.
Rule 701 under the Securities Act provides that, beginning 90 days after
the date of this Prospectus, shares of Common Stock acquired on the exercise of
outstanding options may be resold by persons other than affiliates subject only
to the manner of sale provisions of Rule 144, and by affiliates subject to all
provisions of Rule 144 except its two-year minimum holding period. The Company
intends to file a registration statement under the Securities Act (on Form S-8
or any successor form) to register the shares of Common Stock issued and
reserved for issuance in compensatory arrangements and under its stock plan.
Registration would permit the resale of such shares by non-affiliates in the
public market without restriction under the Securities Act.
REGISTRATION RIGHTS
The holders of 665,000 shares of Common Stock, 374,548 shares of Common
Stock of the Company issuable upon exercise of warrants at an exercise price of
$.01 per share and 1,000,000 shares of Common Stock issuable upon exercise of
warrants at an exercise price of $7.00 per share have been granted certain
incidental and/or demand registration rights. These securities were purchased in
private transactions with the Company in November 1994 through July 1995, April
1996 and June 1996. The piggyback registration rights do not apply to
registrations relating to initial public offerings, mergers, acquisitions or
pursuant to Form S-8 (or any successor form). Notwithstanding, all of such
shares of Common Stock, except for 1,000,000 shares issuable upon exercise of
warrants; are included in the Selling Securityholders' Offering.
UNDERWRITING
Subject to the terms of the Underwriting Agreement, the Underwriters,
severally and not jointly, have agreed to purchase from the Company, 800,000
shares of Common Stock, as follows:
NAME SHARES
---- ------
First Metropolitan Securities, Inc. ...............................................
-------
Total.................................................................... 800,000
-------
-------
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent. The Underwriters are
committed to purchase all of the securities offered hereby on a 'firm
commitment' basis, if any are purchased.
42
The Underwriters have advised the Company that they propose to initially
offer the Common Stock to the public at the prices set forth on the cover page
of this Prospectus and to certain dealers at such prices less concessions not in
excess of $ per share of Common Stock.
Neither the Company nor any of its officers, directors, affiliates and
associates will recommend, encourage or advise investors to open brokerage
accounts with any broker-dealer that is obtained to make a market in the
Company's Securities. Furthermore, no promoter or anyone acting at the direction
of the Company's officers, directors, affiliates, associates or promoters will
engage in such activities.
There are no current or future plans, proposals, arrangements or
understandings of the Representative or any of the Underwriters, or known to the
Representative or any of the Underwriters, with respect to engaging in any
transactions with the Selling Securityholders.
The Company and the Trust, which may be deemed an affiliate of the Company,
have granted to the Underwriters an option, exercisable during the 45 calendar
day period after the closing of the Offering, to purchase from the Company at
the initial public offering price less underwriting discounts and the
non-accountable expense allowance, up to an aggregate of 120,000 shares of
Common Stock (on a pro rata basis) for the sole purpose to cover
over-allotments, if any.
The Company has agreed that it will not issue any other securities (except
with respect to the shares of Common Stock issuable upon the exercise of
outstanding options or warrants, pursuant to the 1996 Plan, or the
Representative's Warrants) for three years from the Effective Date without the
prior written consent of the Representative. The Company has agreed to pay to
the Representative a non-accountable expense allowance of 3% of the gross
proceeds of this Offering, of which $50,000 has been paid by the Company as of
the date of this Prospectus. Further, the Company has agreed to reimburse the
Representative for certain accountable expenses relating to this Offering.
The Representative has informed the Company that no shares of Common Stock
offered hereby will be issued to discretionary accounts.
The Representative acted as Placement Agent for the Bridge Financing in
June 1996 for which it received a Placement Agent fee and a non-accountable
expense allowance of approximately $55,000.
Each of the Company's stockholders who beneficially own more than five (5%)
percent of the Company's outstanding Common Stock, or warrants or options to
purchase Common Stock or other securities convertible into Common Stock, the
Selling Securityholders (except for a certain Selling Securityholder who has
agreed to lock-up his 15,000 shares, for a period of 18 months) and certain
other stockholders, and each officer and director of the Company or relative of
such officer or director have agreed not to sell or otherwise dispose of any of
their Common Stock (covering an aggregate of approximately 2,214,548 shares,
excluding 60,000 shares included in the Over-allotment Option) or other
securities of the Company owned directly or indirectly by him or beneficially by
him on the date of this Prospectus for a period of 24 months from the date of
this Prospectus without the prior written consent of the Representative, which
consent may be granted prior to the expiration of the lock-up period, but not
prior to the exercise or expiration of the Over-allotment Option. The
Representative has no present intention to waive or shorten the lock-up
agreements. Notwithstanding these lock-up agreements, such persons may make
private transfers, provided that the transferees agree to be bound by the same
restrictions. An appropriate legend will be marked on the face of certificates
representing all such securities.
The Company has agreed, if required by the Representative at any time
within the five years commencing in fiscal 1996, to designate two individuals to
serve as non-voting advisors to the Company's Board of Directors. The
Representative's designees will receive the same compensation, if any, for such
service as other non-officer directors. In lieu of the Representative's right to
designate the non-voting advisors, the Representative shall have the right
during such five-year period, in its sole discretion, to designate two persons
for election as directors of the Company. The Representative has advised the
Company that it has no intention to select its designees as non-voting advisors
or directors in the immediate future. If and when the Representative designates
such persons to serve as directors of the Company, those individuals may be
associated persons of the Representative who may have conflicting obligations to
the Company and the Representative when serving on the Board of Directors.
43
The Company will utilize its best efforts to obtain the election of such
persons, each of whom shall be entitled to receive the same compensation,
expense reimbursements and other benefits as any other director. See 'Risk
Factors -- Possible Conflicts of Directors.'
The Company has also agreed to retain the Representative, pursuant to a
consulting agreement (the 'Consulting Agreement'), as the Company's management
and financial consultants for the two-year period commencing at or prior to the
closing of this Offering, for an annual rate of $60,000 payable in advance on
the Closing of this Offering. Pursuant to the Consulting Agreement, the
Representative will render certain financial advisory and investment banking
services to the Company, including advice as to the Company's financial public
relations, internal operations, corporate finance matters, and other related
matters. As part of the Consulting Agreement, the Company has agreed, for a
period of three years following the Effective Date, to pay the Representative a
cash finder's fee of (i) five percent of the first $1,000,000; (ii) four percent
of the second $1,000,000; (iii) three percent of the third $1,000,000; and (iv)
two percent of any consideration over $4,000,000 upon the completion of any
transaction in which the Representative was responsible for introducing a merger
or acquisition candidate to the Company. Notwithstanding, the Representative has
no current plans, proposals, arrangements or understandings with respect to
introducing a merger or acquisition candidate to the Company.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants to purchase from the Company
80,000 shares of Common Stock at 160% of the offering price (the
'Representative's Warrants'). The shares of Common Stock issuable upon exercise
of the Representative's Warrants will be identical to the securities offered
hereby. The Representative's Warrants contain anti-dilution provisions providing
for adjustment of the exercise price upon the occurrence of certain events.
The Representative's Warrants will be nontransferable for a period of one
year from the date of this Prospectus except to officers of the Representative,
other underwriters, selected dealers, or their respective officers or partners.
The holders of the Representative's Warrants will have no voting, dividend or
other rights of stockholders of the Company until such time as the
Representative's Warrants are exercised.
At the request of a majority of the holders of the Representative's
Warrants and/or underlying securities during the five-year period commencing one
year after the date of this Prospectus, the Company has agreed to file, at its
expense and on one occasion, and to use its best efforts to cause to become
effective, a new registration statement or prospectus required to permit the
public sale of the securities underlying the Representative's Warrants. In
addition, if at any time during the six-year period commencing one year after
the date of this Prospectus, the Company registers any of its securities or
exempts such securities from registration under the provisions of Regulation A
or any equivalent thereto, the holders of the Representative's Warrants will
have the right, subject to certain conditions, to include in such registration
statement at the Company's expense, all or any part of the securities underlying
the Representative's Warrants.
A new registration statement will be required to be filed and declared
effective before distribution to the public of the securities underlying the
Representative's Warrants. The Company will be responsible for the cost of
preparing such a registration statement.
During the term of the Representative's Warrants, the holders of the
Representative's Warrants are given the opportunity to profit from a rise in the
market price of the Common Stock. To the extent that the Representative's
Warrants are exercised, dilution of the interests of the Company's stockholders
will occur. The Representative and its transferees may be deemed to be
'underwriters' under the Securities Act with respect to the sale of the Common
Stock to be received upon exercise of the Representative's Warrants, and any
profit realized upon such sale may be deemed to be additional underwriting
compensation. Further, the terms upon which the Company will be able to obtain
additional equity capital may be adversely affected since the holder of the
Representative's Warrants can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than those provided in the Representative's
Warrants.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
the Registration Statement of which this
44
Prospectus forms a part, including liabilities under the Securities Act. To the
extent this section may purport to provide exculpation from possible liabilities
arising under the Federal securities laws, it is the opinion of the Commission
that such indemnification is against public policy and is therefore
unenforceable.
The foregoing is a summary of the principal terms of the Underwriting
Agreement, the Representative's Warrants and the Consulting Agreement and does
not purport to be complete. Reference is made to the copies of the Underwriting
Agreement, the Representative's Warrants Agreement and the Consulting Agreement
which are filed as exhibits to the Registration Statement of which this
Prospectus forms a part.
First Metropolitan Securities, Inc. commenced operations in November 1995,
and has acted as an underwriter of only one public offering of securities. First
Metropolitan's lack of experience may have an adverse impact on the development
of a trading market for the Company's securities following this Offering. See
'Risk Factors -- Lack of Experience of the Representative.'
Prior to this Offering, no public market exists for the Common Stock
offered hereby. Consequently, the public offering price of the Common Stock has
been determined by the Company and the Representative; and are not necessarily
related to the Company's asset value, earnings, book value or other such
criteria of value. Factors considered in determining the public offering price
of the Common Stock include primarily the prospects for the industry in which
the Company operates, the Company's Management, the general condition of the
securities markets and the demand for securities in similar industries.
SELLING SECURITYHOLDERS' OFFERING
Concurrently with this Offering, 1,357,021 shares of Common Stock,
including 217,473 shares of Common Stock issuable upon the exercise of 217,473
warrants have been registered under the Securities Act for resale on behalf of
the Selling Securityholders. The Selling Securityholders have agreed (except for
a certain Selling Securityholder who has agreed to lock-up his 15,000 shares for
a period of 18 months; and except for a certain Selling Securityholder with
respect to up to 60,000 shares of Common Stock included in the Over-allotment
Option) not to sell such securities for a period of 24 months after the date of
this Prospectus without the prior written consent of the Representative, which
consent may be granted prior to the expiration of the lock-up period.
The Company will not receive any proceeds from the sales of the Selling
Securityholders' Shares by the Selling Securityholders. Sales of the Selling
Securityholders' Shares, or even the potential of such sales, would likely have
an adverse effect on the market price of the Company's securities.
LEGAL MATTERS
The legality of the securities offered by this Prospectus will be passed
upon for the Company by Baer Marks Upham LLP, New York, New York. In addition,
certain other matters in connection with this Offering with respect to Israeli
law will be passed upon for the Company by Aboudi & Brounstein, Tel Aviv,
Israel. Certain legal matters will be passed upon for the Representative by
Lampert and Lampert, New York, New York.
45
EXPERTS
The consolidated financial statements of TTR Inc. for the period from July
14, 1994 (date of inception) to December 31, 1994 and the year ended December
31, 1995 included in this Prospectus have been included in reliance upon the
report of Schneider Ehrlich & Wengrover LLP, independent certified public
accountants, given upon the authority of said firm as experts in accounting and
auditing. The financial statements of TTR Technologies Ltd. for the period from
December 5, 1994 (date of inception) to December 31, 1994 and the year ended
December 31, 1995 included in this Prospectus in the consolidated financial
statements of TTR Inc. have been included in reliance upon the report of BDO
Almagor & Co., independent certified public accountants, given upon the
authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement on Form SB-2 including all amendments
thereto (the 'Registration Statement') under the Securities Act with respect to
the Securities offered by this Prospectus. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulation of the Commission.
For further information with respect to the Company and the Offering, reference
is made to the Registration Statement, including the exhibits filed therewith.
The Registration Statement may be inspected and copies may be obtained from the
Public Reference Section at the Commission's principal office, located at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at the Chicago Regional Office,
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60611, and the Northeast Regional Office, Seven World Trade Center,
Suite 1300, New York, New York 10048, upon payment of the fees prescribed by the
Commission. The Registration Statement has been filed electronically with the
Commission. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission, at http://www.sec.gov. Statements contained
in this Prospectus as to the contents of any contract or other document are not
necessarily complete and where the contract or other document has been filed as
an exhibit to the Registration Statement, each such statement is qualified in
all respects by such reference to the applicable document filed with the
Commission.
46
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
-----------
Independent Auditors' Report......................................................................... F-2
Report of Independent Public Accountants............................................................. F-3
Consolidated Balance Sheet........................................................................... F-4
Consolidated Statement of Operations................................................................. F-5
Consolidated Statement of Stockholders' Deficit...................................................... F-6
Consolidated Statement of Cash Flows................................................................. F-7 - F-8
Notes to Consolidated Financial Statements........................................................... F-9 - F-18
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
TTR INC.
Immanuel, Israel
We have audited the accompanying consolidated balance sheet of TTR Inc. and
its Subsidiary (A Development Stage Company) as of December 31, 1995, and the
related consolidated statements of operations, cash flows, and stockholders'
deficit for the year ended December 31, 1995 and for the period from July 14,
1994 (Date of Inception) to December 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of TTR
Technologies, Ltd. a wholly owned subsidiary, which statements reflect total
assets of $218,392 as of December 31, 1995, and net losses of $571,924 and
$2,193 for the years ended December 31, 1995 and the period from December 5,
1994 to December 31, 1994, respectively. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to the amounts included for TTR Technologies Ltd. is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of TTR Inc. and its Subsidiary as of
December 31, 1995 and the results of their operations and their cash flows for
the year ended December 31, 1995 and for the period from July 14, 1994 (Date of
Inception) to December 31, 1994 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements
and as discussed in note 3 to the financial statements, the Company has incurred
recurring losses since its inception in 1994, and has an accumulated deficit at
December 31, 1995 of $938,748. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
SCHNEIDER, EHRLICH & WENGROVER LLP
Woodbury, New York
July 1, 1996
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
T.T.R. TECHNOLOGIES LTD.
(A Development Stage Company)
We have audited the accompanying balance sheet of T.T.R. Technologies Ltd.
(a development stage company) ('the Company') as of December 31, 1995 and the
related statements of operations, changes in shareholders' deficiency and cash
flows for the year ended December 31, 1995 and for the period December 5, 1994
(date of inception) to December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditor's Regulations
(Auditor's Mode of Performance), 1973. Such auditing standards are substantially
identical to generally accepted auditing standards in the United States. Those
standards require that we plan and perform the audit to obtain reasonable
assurance that the financial statements are free of material misstatement. An
audit includes examining on a test basis, evidence supporting the amounts and
disclosure in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the management of
the Company, 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 above financial statements present fairly in all
material respects, the financial position of the Company (a development stage
company) as of December 31, 1995 and the results of its operations, changes in
shareholders' deficiency, and cash flows for the year ended December 31, 1995
and for the period December 5, 1994 (date of inception) to December 31, 1994 in
conformity with accounting principles generally accepted in Israel and in the
United States. As applicable to these financial statements, such accounting
principles are substantially identical.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency and shareholders' deficiency that raise
substantial doubt about its ability to continue as a going concern. The
Company's plans are also referred to in Note 3. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
The financial statements have been translated into dollars for the purpose
of their inclusion in the financial statements of TTR Inc.
BDO ALMAGOR & CO.
Certified Public Accountants
Ramat-Gan, Israel
July 1, 1996
F-3
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
ASSETS
Current assets
Cash.......................................................................... $ 87,866 $ 19,336
Accounts receivable........................................................... 1,680 596
Other current assets.......................................................... 15,939 22,379
------------ -------------
Total current assets..................................................... 105,485 42,311
Property and equipment -- net...................................................... 175,619 354,184
Deferred financing costs, net of accumulated amortization of $76,175 and $154,979,
for 1995 and 1996................................................................ 77,256 63,432
Deferred stock offering costs...................................................... -- 143,544
Due from officer................................................................... 26,000 26,000
Other assets....................................................................... 18,844 17,514
------------ -------------
Total assets............................................................. $ 403,204 $ 646,985
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities
Current liabilities
Current portion of long-term debt............................................. $ 528,130 $ 1,512,639
Bank loans payable............................................................ -- 50,000
Accounts payable.............................................................. 34,958 89,014
Accrued expenses.............................................................. 63,213 157,726
Interest payable.............................................................. 96,023 188,213
------------ -------------
Total current liabilities................................................ 722,324 1,997,592
Long-term debt, less current portion............................................... 552,103 28,785
------------ -------------
Total liabilities........................................................ 1,274,427 2,026,377
------------ -------------
Commitments and contingencies -- See Notes
Stockholders' deficit
Common stock, $.001 par value;
20,000,000 shares authorized,
2,200,000 and 3,050,000 issued and outstanding including 1,000,000 shares
placed in escrow............................................................. 2,200 3,050
Additional paid-in capital......................................................... 42,673 405,356
Cumulative translation adjustments................................................. 22,652 47,989
Deficit accumulated during the development stage................................... (938,748) (1,835,787)
------------ -------------
Total stockholders' deficit.............................................. (871,223) (1,379,392)
------------ -------------
Total liabilities and stockholders' deficit.............................. $ 403,204 $ 646,985
------------ -------------
------------ -------------
See Notes to Financial Statements.
F-4
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
FROM FROM FROM
INCEPTION INCEPTION INCEPTION
(JULY 14, (JULY 14, NINE MONTHS ENDED (JULY 14,
1994) TO YEAR ENDED 1994) TO SEPTEMBER 30, 1994) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------------ SEPTEMBER 30,
1994 1995 1995 1995 1996 1996
------------ ------------ ------------ ---------- ---------- -------------
(UNAUDITED) (UNAUDITED)
Revenue............................ $ -- $ -- $ -- $ -- $ -- $ --
Expenses
Research and development....... 276,248 276,248 193,363 339,769 616,017
Sales and marketing............ 15,800 248,158 263,958 169,572 101,121 365,079
General and administrative..... 20,641 241,461 262,102 182,715 319,982 582,084
------------ ------------ ------------ ---------- ---------- -------------
Total expenses............. 36,441 765,867 802,308 545,650 760,872 1,563,180
------------ ------------ ------------ ---------- ---------- -------------
Operating loss..................... (36,441) (765,867) (802,308) (545,650) (760,872) (1,563,180)
Other (income) expense
Loss on investment............. 17,000 17,000 10,000 17,000
Interest income................ (500) (12,324) (12,824) (12,324) (12,824)
Interest expense............... 6,144 126,120 132,264 69,485 136,167 268,431
------------ ------------ ------------ ---------- ---------- -------------
Total other (income)
expenses................. 5,644 130,796 136,440 67,161 136,167 272,607
------------ ------------ ------------ ---------- ---------- -------------
Net loss........................... $ (42,085) $ (896,663) $ (938,748) $ (612,811) $ (897,039) $(1,835,787)
------------ ------------ ------------ ---------- ---------- -------------
------------ ------------ ------------ ---------- ---------- -------------
Net loss per share................. $ (0.02) $ (0.37) $ (0.39) $ (0.26) $ (0.34) $ (0.70)
------------ ------------ ------------ ---------- ---------- -------------
------------ ------------ ------------ ---------- ---------- -------------
Weighted average number of shares
outstanding...................... 2,778,533 2,399,793 2,399,793 2,339,337 2,641,034 2,641,034
------------ ------------ ------------ ---------- ---------- -------------
------------ ------------ ------------ ---------- ---------- -------------
See Notes to Financial Statements.
F-5
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
DEFICIT
FOREIGN ACCUMULATED
ADDITIONAL CURRENCY DURING
COMMON STOCK PAID-IN TRANSLATION DEVELOPMENT
SHARES AMOUNT CAPITAL ADJUSTMENT STAGE TOTAL
------------ ------- ---------- ----------- ----------- -----------
Balances at July 14, 1994
(date of inception)....................... -- $ -- $ -- $-- $ -- $ --
Issuances of common stock, par value $.001
Services rendered at $.001 per share.... 1,200,000 1,200 1,200
Cash at $.0208 per share................ 1,200,000 1,200 23,800 25,000
Net loss.................................... (42,085 ) (42,085)
------------ ------- ---------- ----------- ----------- -----------
Balances at December 31, 1994............... 2,400,000 2,400 23,800 -- (42,085 ) (15,885)
Common stock contributed.................... (561,453) (561 ) 561
Issuances of common stock, par value $.001
Services rendered at $.05 per share..... 361,453 361 17,712 18,073
Issuance of common stock purchase warrants
Services rendered at $.04 per warrant... 600 600
Foreign currency translation adjustment..... 22,652 22,652
Net loss.................................... (896,663 ) (896,663)
------------ ------- ---------- ----------- ----------- -----------
Balances at December 31, 1995............... 2,200,000 2,200 42,673 22,652 (938,748 ) (871,223)
Issuances of common stock, par value $.001
Cash at $.307 per share................. 650,000 650 199,350 200,000
Cash at $.50 per share (net of stock
offering costs of $11,467)............ 150,000 150 63,383 63,533
Cash at $2.00 per share................. 50,000 50 99,950 100,000
Foreign currency translation adjustment..... 25,337 25,337
Net loss.................................... (897,039 ) (897,039)
------------ ------- ---------- ----------- ----------- -----------
Balances at September 30, 1996
(unaudited)............................... 3,050,000 $3,050 $405,356 $47,989 $(1,835,787) $(1,379,392)
------------ ------- ---------- ----------- ----------- -----------
------------ ------- ---------- ----------- ----------- -----------
See Notes to Financial Statements.
F-6
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FROM FROM
INCEPTION INCEPTION
(JULY 14, (JULY 14,
1994) TO YEAR ENDED 1994) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
Cash flows from operating activities
Net loss....................................................... $ (42,085) $ (896,663) $ (938,748)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization............................. 5,470 95,298 100,768
Translation adjustment.................................... -- (561) (561)
Stock and warrants issued for services.................... -- 18,673 18,673
Increase (decrease) in cash attributable to changes in
assets and liabilities
Accounts receivable.................................. (203) (1,422) (1,625)
Escrow............................................... (14,572) 14,572 --
Other current assets................................. -- (13,492) (13,492)
Accounts payable..................................... 161 40,183 40,344
Accrued expenses..................................... 1,070 74,638 75,708
Interest payable..................................... 4,808 91,215 96,023
------------ ------------ ------------
Net cash used by operating activities..................... (45,351) (577,559) (622,910)
------------ ------------ ------------
Cash flows from investing activities
Loans receivable............................................... (125,500) 125,500 --
Purchases of property and equipment............................ (1,402) (193,655) (195,057)
Increase in organization costs................................. (7,680) -- (7,680)
------------ ------------ ------------
Net cash used by investing activities..................... (134,582) (68,155) (202,737)
------------ ------------ ------------
Cash flows from financing activities
Proceeds from issuance of common stock......................... 26,200 -- 26,200
Loans to officer............................................... (20,000) (6,000) (26,000)
Deferred financing costs....................................... (75,319) (78,112) (153,431)
Proceeds from long-term debt................................... 483,277 605,764 1,089,041
Payments on long-term debt..................................... -- (21,613) (21,613)
------------ ------------ ------------
Net cash provided by financing activities................. 414,158 500,039 914,197
------------ ------------ ------------
Effect of exchange rates on cash.................................... (334) (350) (684)
------------ ------------ ------------
Increase (decrease) in cash......................................... 233,891 (146,025) 87,866
Cash at beginning of period......................................... -- 233,891 --
------------ ------------ ------------
Cash at end of period............................................... $ 233,891 $ 87,866 $ 87,866
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest.................................................. $ 207 $ 2,461 $ 2,668
------------ ------------ ------------
------------ ------------ ------------
See Notes to Financial Statements.
F-7
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FROM
INCEPTION
NINE MONTHS ENDED (JULY 14,
SEPTEMBER 30, 1994) TO
----------------------- SEPTEMBER 30,
1995 1996 1996
---------- --------- -------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities
Net loss........................................................... $(612,811) $(897,039) $(1,835,787)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization................................. 69,401 110,965 211,733
Amortization of discount on long-term debt.................... -- 23,854 23,854
Translation adjustment........................................ (190) 3,408 2,847
Stock and warrants issued for services........................ 18,673 -- 18,673
Increase (decrease) in cash attributable to changes in assets
and liabilities
Accounts receivable...................................... (505) 1,181 (444)
Escrow................................................... 14,572 -- --
Other current assets..................................... (6,743) 1,600 (11,892)
Accounts payable......................................... 14,636 54,577 94,921
Accrued expenses......................................... 47,300 101,356 177,064
Interest payable......................................... 65,073 92,190 188,213
---------- --------- -------------
Net cash used by operating activities......................... (390,594) (507,908) (1,130,818)
---------- --------- -------------
Cash flows from investing activities
Loans receivable................................................... 1,800 -- --
Purchases of property and equipment................................ (178,217) (201,232) (396,289)
Increase in organization costs..................................... (7,680)
---------- --------- -------------
Net cash used by investing activities......................... (176,417) (201,232) (403,969)
---------- --------- -------------
Cash flows from financing activities
Proceeds from issuance of common stock............................. -- 363,533 389,733
Loans to officer................................................... (6,000) -- (26,000)
Deferred financing costs........................................... (78,112) (64,980) (218,411)
Deferred stock offering costs...................................... (143,544) (143,544)
Proceeds from bank loans payable................................... 50,000 50,000
Proceeds from long-term debt....................................... 606,008 452,705 1,541,746
Payments on long-term debt......................................... (17,760) (16,612) (38,225)
---------- --------- -------------
Net cash used by financing activities......................... 504,136 641,102 1,555,299
---------- --------- -------------
Effect of exchange rates on cash........................................ 1,109 (492) (1,176)
---------- --------- -------------
Increase (decrease) in cash............................................. (61,766) (68,530) 19,336
Cash at beginning of period............................................. 233,891 87,866 --
---------- --------- -------------
Cash at end of period................................................... $ 172,125 $ 19,336 $ 19,336
---------- --------- -------------
---------- --------- -------------
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest........................................................... $ 249 $ -- $ 2,668
---------- --------- -------------
---------- --------- -------------
See Notes to Financial Statements.
F-8
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 ARE
UNAUDITED]
NOTE 1 -- DESCRIPTION OF BUSINESS
TTR Inc. (the 'Company') was incorporated on July 14, 1994 under the laws
of the State of Delaware. TTR Technologies Ltd., 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 development and enhancement of computer
software products which it intends to market.
The Company is considered to be in the development stage and has earned no
revenues to date. Business activities to date have focused on product and
marketing research, product development, and raising capital.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, TTR Technologies Ltd. All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities and the reported revenues
and expenses. Actual results could vary from the estimates that were used.
REVENUE RECOGNITION
The Company anticipates that revenues from software will be recognized upon
delivery to the customer, provided that the Company's obligations, if any, are
insignificant and collectability is probable. Revenues from maintenance and
engineering services will be recognized over the term of the respective
contracts.
FOREIGN CURRENCY TRANSLATIONS
The financial statements of the Company's Israeli subsidiary have been
translated into U.S. dollars in accordance with Statement No. 52 of the
Financial Accounting Standards Board (FASB). Assets and liabilities have been
translated at year-end (period-end) exchange rates and statement of operations
have been translated at average rates prevailing during the year. The
translation adjustments have been recorded as a separate component of
shareholders' deficit (cumulative translation adjustment).
NET LOSS PER SHARE
Net loss per share of common stock is computed based on the weighted
average number of common stock and common stock equivalent shares outstanding
during the period. Pursuant to SEC rules, common stock and warrants issued for
consideration below the proposed public offering price within the last twelve
months have been included in the calculation of common stock equivalents, using
the treasury stock method, as if they had been outstanding for all periods
presented. Shares held in escrow are not treated as outstanding during any
period (Note 12).
F-9
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 ARE
UNAUDITED]
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNT POLICIES -- (CONTINUED)
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid debt instruments with an original maturity of three months or less
to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Fixed assets are depreciated on
a straight-line basis over their estimated useful lives as follows:
Office furniture and equipment.............................. 5 - 7 years
Computer equipment.......................................... 5 years
Vehicles.................................................... 6.5 years
RESEARCH AND DEVELOPMENT COSTS
Research and development expenditures are charged to operations as
incurred. Software development costs are required to be capitalized when a
product's technological feasibility has been established by completion of a
working model of the product and ending when a product is available for general
release to customers. To date, completion of a working model of the Company's
products and general release have substantially coincided. As a result, the
Company has not capitalized any software development costs since such costs have
not been significant.
INCOME TAXES
The Company accounts for its income taxes using the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109, 'Accounting
for Income Taxes' (SFAS No. 109), which requires the establishment of a deferred
tax asset or liability for the recognition of future deductible or taxable
amounts and operating loss carryforwards. Deferred tax expense or benefit is
recognized as a result of the changes in the assets and liabilities during the
year. Valuation allowances are established when necessary, to reduce deferred
tax assets to amounts expected to be realized.
INTERIM FINANCIAL STATEMENTS
In the opinion of management of the Company, the unaudited financial
statements as of September 30, 1996, and for the nine months ended September 30,
1995 and 1996, have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of the results of the interim
periods.
NOTE 3 -- GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has a limited
operating history, has sustained losses since its inception and the accumulated
deficit at December 31, 1995 and at September 30, 1996 (unaudited) are $938,748
and $1,835,787, respectively. The Company faces a number of risks, including
uncertainties regarding demand and market acceptance of the Company's products,
dependence on a single product line, the effects of technological change,
competition and the development of new products. Additionally, there are other
risk factors such as the nature of the Company's distribution channels, ability
to manage growth, loss of key personnel and the effects of planned expansion of
operations on the future results of the Company.
F-10
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 ARE
UNAUDITED]
NOTE 3 -- GOING CONCERN -- (CONTINUED)
The Company anticipates that it will continue to incur significant
operating costs and losses in connection with the development of its products
and increased marketing efforts and is subject to other risks affecting the
business of the Company, as discussed above. The Company is not generating
sufficient revenues from its operations to fund its activities and is therefore
dependent on additional financing from external sources. In addition, in
November 1996, the Company will be required to commence repayment of its
long-term debt (see Note 9 and 18). The ability of the Company to continue as a
going concern is dependent upon the success of the Company's product and its
access to sufficient funding to enable it to continue operations. The Company is
investigating various possibilities for long-term financing including a proposed
initial public offering. There is no assurance that such financing will be
available to the Company and the inability to obtain such financing would have a
material adverse effect on the Company.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
Leasehold improvements......................................... $ -- $ 77,531
Office equipment............................................... 22,646 86,852
Computer equipment............................................. 112,941 144,982
Vehicles....................................................... 59,470 95,266
------------ -------------
195,057 404,631
Less: Accumulated depreciation................................. 19,438 50,447
------------ -------------
$175,619 $ 354,184
------------ -------------
------------ -------------
Depreciation expense was $57, $13,560, $8,654 and $24,012 for the periods
ended December 31, 1994, December 31, 1995, September 30, 1995 and September 30,
1996.
NOTE 5 -- DUE FROM OFFICER
This amount represents non-interest bearing advances to an officer of the
Company.
NOTE 6 -- OTHER ASSETS
Other assets consist of the following:
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
Loan receivable, employee...................................... $ 13,468 $13,290
Organization costs, net of accumulated amortization............ 5,376 4,224
------------ -------------
Total..................................................... $ 18,844 $17,514
------------ -------------
------------ -------------
The loan receivable represents non-interest bearing advances to an employee
of the Company. The loan is to be repaid over a four year period commencing in
1996.
Organization costs are being amortized over a five year period using the
straight-line method.
F-11
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 ARE
UNAUDITED]
NOTE 7 -- ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
Accrued payroll and payroll taxes.............................. $ 20,128 $ 56,864
Deferred stock offering costs.................................. -- 54,150
Other.......................................................... 43,085 46,712
------------ -------------
$ 63,213 $ 157,726
------------ -------------
------------ -------------
NOTE 8 -- BANK LOAN PAYABLE
The Company's subsidiary borrowed a total of $50,000 from a bank. The loan
bears interest at the rate of 8% per annum and must be repaid in full by
December 31, 1996.
NOTE 9 -- LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
(1) Bank loans............................................... $ 39,153 $ 51,490
(2) Promissory notes......................................... 1,041,080 1,041,080
(3) Promissory notes (net of unamortized discount of
$51,146)............................................... -- 448,854
------------ -------------
1,080,233 1,541,424
Current portion.......................................... 528,130 1,512,639
------------ -------------
Non-current portion...................................... $ 552,103 $ 28,785
------------ -------------
------------ -------------
- ------------
(1) These loans are denominated in NIS, bear interest at the rate of prime plus
2.4%-3% per annum and are secured by substantially all the assets of the
Company's subsidiary. Principal payments are due in various installments
through 1998.
(2) The Company issued two-year promissory notes aggregating $1,041,080 in a
private placement. The notes bear interest at the rate of 10% per annum
payable at the maturity date. In connection with this offering the Company
issued warrants to the noteholders to purchase up to a total of 174,548
shares of the Company's common stock for $.01 per share. The warrants are
exercisable from the date on which a registration statement with respect to
an initial public offering (IPO) becomes effective until the IPO closes. In
addition the Company utilized the services of Shane, Alexander, Unterburgher
Securities, Inc. (SAU) as a placement agent. SAU received a commission of
10% of the gross proceeds and an additional 4% of such proceeds as a
non-accountable expense allowance. These fees, totaling approximately
$145,000, have been capitalized as deferred financing costs and are being
amortized over a two-year period using the straight-line method.
Amortization was $4,645, $71,530, $55,887 and $60,467 for the periods ended
December 31, 1994, 1995, September 1995 and September 1996. The maturity
date of certain notes have been extended (See Note 18).
(3) In June 1996, the Company realized net proceeds of $423,552 from a private
placement of 10 units of its securities at a purchase price of $50,000 per
unit. Each unit consisted of $50,000 Principal
(footnotes continued on next page)
F-12
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 ARE
UNAUDITED]
NOTE 9 -- LONG-TERM DEBT -- (CONTINUED)
(footnotes continued from previous page)
Amount 10% promissory notes and 15,000 shares of its common stock. The
Company has allocated $7,500 per unit to the Common Stock sold in the
private placement, and the balance to promissory note principal. The
difference between the face value of the notes ($50,000) and the amount
allocated to note principal represents a discount which is being amortized
over the term of the note based upon the interest method. The principal and
accrued interest become due and payable at the earlier of one year or the
date the Company receives proceeds from any form of public or private equity
financing or debt financing exceeding $350,000.
In connection with this offering a placement agent received a commission of
10% of the gross proceeds and an additional 3% of such proceeds as a
non-accountable expense allowance. Certain of the investors in the private
placement have an ownership interest in the placement agent.
The aggregate maturities of long-term debt for the next three years ending
December 31, are as follows: 1996 -- $536,786; 1997 -- $1,047,273 and
1998 -- $8,511.
NOTE 10 -- LOSS ON INVESTMENT
In August 1994, the Company's president contributed to the Company his 22%
interest in the common stock of TBR, Inc. (TBR), a Florida corporation. TBR's
only asset is a software product developed by its shareholders. TBR has no other
assets or liabilities and has had no significant business operations to date.
During fiscal 1995, the Company purchased an additional 4.8% of TBR common stock
for $17,000, which funds were used in a marketing effort for TBR's software
product. As of December 31, 1995, the Company elected to write off its
investment in TBR in full.
NOTE 11 -- INCOME TAXES
At December 31, 1995, the Company had available $364,000 of net operating
loss carryforwards for U.S. federal income tax purposes which expire in the
years 2009 through 2010 and $325,000 of foreign net operating loss carryforwards
with no expiration date. Due to the uncertainty of their realization, no income
tax benefit has been recorded by the Company for these net operating loss
carryforwards as valuation allowances have been established for any such
benefits. The use of the U.S. federal net operating loss carryforwards is
subject to limitations under section 382 of the Internal Revenue code pertaining
to changes in stock ownership.
Significant components of the Company's deferred tax assets and liabilities
for U.S. federal and Israel income taxes are as follows:
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
Deferred tax assets:
Net operating loss carryforwards.......................... $ 225,000 $ 434,000
Research and developments costs........................... 65,000 119,900
Accrued vacation and severance............................ 13,000 39,700
------------ -------------
Total deferred tax assets............................ 303,000 593,600
Valuation allowance.................................. (303,000) (593,600)
------------ -------------
Net deferred tax assets................................... $ -- $ --
------------ -------------
------------ -------------
Pre-tax losses from foreign (Israeli) operations were $2,193, $571,924,
$378,727 and $661,031 for the periods ended December 31, 1994, 1995, September
1995 and September 1996, respectively.
F-13
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 ARE
UNAUDITED]
NOTE 12 -- STOCKHOLDERS' DEFICIT
CONTRIBUTED SHARES
In January 1995, the Company's President contributed a total of 561,453
shares of common stock held by him. The Company subsequently cancelled these
shares.
WARRANTS
On May 15, 1995, the Company issued warrants as compensation to a
consultant to purchase up to a total of 15,000 shares of the Company's common
stock for $.01 per share. The warrants are exercisable until January 15, 2001.
PRIVATE PLACEMENT
In April 1996, the Company completed a private placement of 650,000 shares
of its Common Stock and warrants for an additional 1,000,000 shares, for an
aggregate purchase price of $200,000. The warrants are exercisable after an
initial public offering of the Company's Common stock at an exercise price equal
to the exercise price of any warrants issued at the IPO. The terms of these
warrants were subsequently amended. (See note 18).
ESCROW SHARES
An aggregate of 1,000,000 shares of the Company's common stock, owned
beneficially by its President, have been designated as escrow shares. The escrow
shares are not assignable nor transferable until certain earnings or market
price criteria have been met. If the conditions have not been met, such shares
will be cancelled and contributed to the Company's capital.
The escrow shares will be released from escrow on a pro-rata basis, if and
only if, one or more of the following conditions are met:
1. 250,000 shares will be released if the Company's pre-tax income,
exclusive of extraordinary items amounts to at least $1,800,000 for the
year ended December 31, 1997 or the average bid price of the Common Stock
averages in excess of $15 per share for 30 consecutive days during the 12
month period commencing on the date of a proposed public offering.
2. 300,000 shares will be released if the Company's pre-tax income,
exclusive of extraordinary items amounts to at least $4,000,000 for the
year ended December 31, 1998 or the average bid price of the Common Stock
averages in excess of $20 per share for 30 consecutive days during the 12
month period commencing 12 months from the date of a proposed public
offering.
3. 450,000 shares will be released if the Company's pre-tax income,
exclusive of extraordinary items amounts to at least $6,000,000 for the
year ended December 31, 1999 or the average bid price of the Common Stock
averages in excess of $25 per share for 30 consecutive days during the 12
month period commencing 24 months from the date of a proposed public
offering.
The shares will also be released under certain circumstances of the Company
is acquired or merged. In addition, the shares will be released as of the date
the underwriters and their customers own less than 20% of the public float of
the Company's Common Stock or if none of the underwriters have made the high bid
price on the Common Stock for 50 consecutive business days.
As restriction on such shares are removed, they will be accounted for as
reissued for services rendered and the fair value of such shares will be charged
to operations as compensation expense. The charge will not affect the Company's
equity, nor will it be deductible for income tax purposes.
F-14
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 ARE
UNAUDITED]
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted SFAS 107, which requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed therein are not necessarily representative of
the amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement. The following table
summarizes financial instruments by individual balance sheet accounts as of
December 31, 1995.
CARRYING FAIR
AMOUNT VALUE
---------- ----------
Debt maturing within one year..................................... $ 528,130 $ 528,130
Long-term debt.................................................... 552,103 552,103
---------- ----------
Totals....................................................... $1,080,233 $1,080,233
---------- ----------
---------- ----------
For debt classified as current, it was assumed that the carrying amount
approximated fair value for these instruments because of their short maturities.
The fair value of long-term debt is based on current rates at which the Company
could borrow funds with similar remaining maturities. The carrying amount of
long-term debt approximates fair value.
NOTE 14 -- RELATED PARTY TRANSACTIONS
In November 1994, the Company entered into a fourteen month agreement with
SAU to assist in the establishment of a U.S. based sales office and to provide
marketing consulting services to the Company. Pursuant to the contract SAU
received a fee of $7,900 per month and was issued Warrants to purchase up to
185,000 shares of the Company's Common Stock under the same terms as the
promissory note holders. SAU subsequently assigned its rights to the Warrants to
certain of the promissory note holders.
The Company loaned a total of $256,000 to SAU under a short term loan
agreement. The loan was repaid in 1995 with interest at the rate of 8% per
annum.
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
CONSULTING AND EMPLOYMENT AGREEMENT
a) In August 1994, the Company's subsidiary entered into an employment
agreement with one of its officers. The agreement has a three-year term which
provides for annual compensation of $60,000, subject to adjustment. The
agreement may terminate with 60 days prior notice and if the termination is
without cause then the general manager will be entitled to continue to receive
his salary for an additional twelve months. At the end of the initial three-year
term the agreement automatically renews for one-year periods.
b) In December 1995, the Company's subsidiary entered into an employment
agreement with its director of product research and development. The agreement
has a one-year term, renewable for additional one-year terms and provides for
annual base compensation of $60,000 plus incentive compensation, payable
quarterly, equal to 1% of the initial $1,000,000 of gross receipts from certain
products of the Company and 2% for gross receipts in excess thereof. In the
event the agreement is terminated or not renewed without cause, and if a
properly registered patent, as defined, is in effect, the Company's subsidiary
will be required to pay royalties in the amount of the incentive compensation
for the duration of the patent.
F-15
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 ARE
UNAUDITED]
NOTE 15 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
c) The Company has entered into a three-year marketing consulting agreement
which is due to expire in October 1998. Under the agreement, the consultant
receives a monthly fee of $4,800 per month.
d) In July 1996, the Company's subsidiary entered into a three-year
employment agreement with its new President and general manager to commence no
later than September 8, 1996. The agreement provides for annual compensation of
approximately $100,000, subject to adjustment and is renewable for additional
one-year periods at the end of the initial term. Within the initial term the
employee may terminate the agreement with 60 days prior notice and with 90 days
notice thereafter.
In addition the Company has agreed to grant, on the date on which the
Company's IPO Registration Statement is declared effective, warrants to purchase
up to 217,473 shares of Common Stock at an exercise price of $.01 per share. The
Company estimates that it will record deferred compensation expense amounting to
$1,522,300, or $7.00 per share, and will amortize this amount over the period
that services are to be provided. The options will vest over a four year period
commencing with the date of grant.
OPERATING LEASES
On June 1, 1996, the Company entered into an operating lease agreement for
office space. Future minimum rentals on this lease as of December 31 are as
follows:
DECEMBER 31,
- -----------
1996................................................................ $ 22,218
1997................................................................ 48,624
1998................................................................ 48,624
1999................................................................ 24,312
--------
$143,778
--------
--------
NOTE 16 -- STOCK OPTION PLAN
In July 1996, the Board of Directors adopted the Company's Incentive and
Non-qualified Stock Option Plan (the 'Plan') and has reserved up to 450,000
shares of Common Stock for issuance thereunder. The Plan provides for the
granting of options to officers, directors, employees and advisors of the
Company. The exercise of incentive stock options ('ISOs') issued to employees
who are less than 10% stockholders shall not be less than the fair market value
of the underlying shares on the date of grant or not less than 100% of the fair
market value of the shares in the case of an employee who is a 10% stockholder.
The exercise price of restricted stock options shall not be less than the par
value of the shares to which the option relates. Options are not exercisable for
a period of one year from the date of grant. Thereafter, options may be
exercised as determined by the Board of Directors, with maximum terms of ten and
five years, respectively, for ISOs issued to employees who are less than 10%
stockholders and employees who are 10% stockholders. In addition, under the
plan, no individual will be given the opportunity to exercise ISO's valued in
excess of $100,000, in any calendar year, unless and to the extent the options
have first become exercisable in the preceding year. The Plan will terminate in
2006.
In July 1996, the Company issued 5,000 options under the plan to a former
director. The options are exercisable at $6.00 per share until January 15, 2001.
F-16
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 ARE
UNAUDITED]
NOTE 17 -- PROPOSED PUBLIC OFFERING
On September 3, 1996, the Company's board of directors approved the filing
of a registration statement by TTR Inc. with the Securities and Exchange
Commission covering the proposed sale of its common stock to the public.
NOTE 18 -- SUBSEQUENT EVENTS -- (UNAUDITED)
LEGAL MATTER
In October 1996, a claim was made against the Company's subsidiary alleging
intellectual property rights infringement. The claim threatens to seek
injunctive relief as well as damages in the amount of $1,000,000. The Company
has denied any liability and its legal advisors believe the claim is totally
without merit.
SHORT-TERM BORROWINGS
In October 1996, the Company borrowed a total of $66,700, evidenced by a
loan agreement executed in September 1996. Pursuant to the agreement the Company
may borrow, at the exclusive discretion of the lender, an additional $66,700
every 30 days up to a total of $200,100. The loans bear interest at the rate of
22% per annum. The principal and accrued interest become due and payable at the
earlier of the date the Company receives the proceeds from a proposed IPO or
March 31, 1997.
In December 1996 and January 1997, the Company issued short-term promissory
notes aggregating $300,000. The notes bear interest at the rate of 15% per
annum. The notes and accrued interest thereon become due and payable at the
earlier of the date the Company receives the proceeds from a proposed IPO or one
year from the date of issue.
WARRANTS
In January 1997, the Company amended the 1,000,000 warrants issued in the
April 1996 private placement, to provide that the exercise price of the warrants
will be equal to the IPO price of the Company's Common Stock.
RESEARCH AND DEVELOPMENT GRANT
In January 1997, the Company's Israeli Subsidiary received an approval from
the Office of the Chief Scientist of the Government of Israel (OCS) whereby the
OCS will fund certain research and development of the Company by way of grants.
The amount of the approved budget is $195,000 and the amount of the approved
grant is 50% of the budget or $97,500. The Company has since received an advance
on the account of the grant in the amount of $23,000.
The Company will be required to pay royalties to the OCS on proceeds from
the sale of products derived from the research and development in which the OCS
has participated by way of its grant. The royalties are computed at the rate of
3% of the proceeds from such sales, up to a maximum of the amount of the grant.
PROMISSORY NOTES
As of January 15, 1997, a total of $514,081 of the Company's two-year
promissory notes plus accrued interest thereon of $112,122 became due. The
Company has obtained extensions to March 1997 with respect to note principal and
interest totaling $619,525 and is awaiting a response from one other noteholder.
F-17
TTR INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[INFORMATION AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 ARE
UNAUDITED]
NOTE 19 -- RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, SFAS No. 121, 'Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of' was issued which establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain intangibles to be disposed of. SFAS
No. 121 requires that long-lived assets and certain intangibles to be held and
leased by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. SFAS No. 121 must be implemented by the Company no later than the
year ended December 31, 1996. The adoption of SFAS No. 121 is not expected to
have material impact on the Company's financial position or operating results.
In October 1995, SFAS No. 123, 'Accounting for Stock-Based Compensation'
was issued which establishes financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, SFAS No. 123 permits the Company to
continue to measure compensation costs for its stock option plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, 'Accounting for Stock Issued to Employees'.
If the Company elects to remain with its current accounting, in 1996 the
Company must make pro forma disclosures of 1995 and 1996 net income (loss) and
earnings (loss) per share as if the fair value based method of accounting had
been applied. The Company has not yet determined the valuation method it will
employ or the effect on operating results of implementing SFAS No. 123. In
addition, SFAS No. 123 requires that transactions whereby the Company issues its
equity instruments to acquire goods or services from non-employees entered into
after December 15, 1995 must be accounted for based on the fair value.
F-18
_____________________________ _____________________________
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE REPRESENTATIVE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS,
OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY, BY ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION IN THIS PROSPECTUS IS
CORRECT AS OF BY ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary......................................................................................................... 3
Summary Financial Information.............................................................................................. 6
Risk Factors............................................................................................................... 7
Use of Proceeds............................................................................................................ 15
Dividend Policy............................................................................................................ 16
Dilution................................................................................................................... 17
Capitalization............................................................................................................. 18
Plan of Operation.......................................................................................................... 18
Business................................................................................................................... 21
Management................................................................................................................. 33
Principal Stockholders..................................................................................................... 36
Certain Transactions....................................................................................................... 38
Description of Securities.................................................................................................. 39
Shares Eligible for Future Sale............................................................................................ 41
Underwriting............................................................................................................... 42
Selling Securityholders' Offering.......................................................................................... 45
Legal Matters.............................................................................................................. 45
Experts.................................................................................................................... 46
Available Information...................................................................................................... 46
Index to Financial Statements.............................................................................................. F-1
------------------------
UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
800,000 SHARES OF
COMMON STOCK
TTR INC.
--------------------------
PROSPECTUS
--------------------------
FIRST METROPOLITAN
SECURITIES, INC.
, 1997
_____________________________ _____________________________
[Alternative Page for Selling Securityholders' Prospectus]
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED FEBRUARY , 1997
PROSPECTUS
TTR INC.
1,357,021 SHARES OF COMMON STOCK
------------------------
This Prospectus relates to 1,357,021 shares of Common Stock (the 'Selling
Securityholders' Shares'), $.001 par value (the 'Common Stock'), of TTR Inc.
(the 'Company'), which are being offered for sale by certain selling
securityholders, including members of Management (the 'Selling
Securityholders'), including 1,139,548 shares of Common Stock and 217,473 shares
of Common Stock issuable upon exercise of warrants. See 'Selling Securityholders
and Plan of Distribution.'
The Company will not receive any of the proceeds from the sales of the
Selling Securityholders' Shares by the Selling Securityholders. The Selling
Securityholders' Shares may be offered from time to time by the Selling
Securityholders, their transferees, pledgees and/or their donees, through
ordinary brokerage transactions in the over-the-counter market, in negotiated
transactions or otherwise, at market prices prevailing at the time of sale or at
negotiated prices. The Selling Securityholders (except for a certain Selling
Securityholder who has agreed to lock-up 15,000 shares for a period of 18
months; and except for a certain Selling Securityholder with respect to up to
60,000 shares of Common Stock included in the Over-allotment Option) have each
agreed not to sell any of the securities being registered hereunder for a period
of 24 months from the date of the Prospectus without the prior written consent
of the Representative.
The Selling Securityholders, their pledgees and/or their donees, may be
deemed to be 'underwriters' as defined in the Securities Act of 1933, as amended
(the 'Securities Act'). If any broker-dealers are used by the Selling
Securityholders, their pledgees and/or their donees, any commission paid to
broker-dealers and, if broker-dealers purchase any Selling Securityholders'
Shares as principals, any profits received by such broker-dealers on the resale
of the Selling Securityholders' Shares, may be deemed to be underwriting
discounts or commissions under the Securities Act. In addition, any profits
realized by the Selling Securityholders, their pledgees and/or their donees, may
be deemed to be underwriting commissions. All costs, expenses and fees in
connection with the registration of the Selling Securityholders' Shares will be
borne by the Company except for any commission paid to broker-dealers.
The Selling Securityholders' Shares offered by this Prospectus may be sold
from time to time by the Selling Securityholders, their pledgees and/or their
donees. No underwriting arrangements have been entered into by the Selling
Securityholders. The distribution of the Selling Securityholders' Shares by the
Selling Securityholders, their pledgees and/or their donees, may be effected in
one or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more dealers for resale of such shares as principals, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders, their pledgees and/or their donees, in connection with sales of
the Selling Securityholders' Shares.
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering (the
'Underwritten Offering') of 800,000 shares of Common Stock (without giving
effect to the Underwriters' Over-allotment Option granted to the Representative
to purchase up to an additional 120,000 shares of Common Stock) was declared
effective by the Securities and Exchange Commission. In connection with the
Underwritten Offering, the Company granted the Representative a warrant to
purchase 80,000 shares of Common Stock (the 'Representative's Warrants').
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE 'RISK
FACTORS' BEGINNING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE OFFERING
Securities Registered(1).................. 1,274,548 shares of Common Stock. See 'Description of Securities' and 'Selling
Securityholders and Plan of Distribution.'
Risk Factors.............................. This offering involves a high degree of risk and immediate substantial dilution.
See 'Risk Factors' and 'Dilution.'
- ------------
(1) Includes 217,473 shares of Common Stock issuable upon the exercise of a like
number of warrants.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
[Alternative Page for Selling Securityholders' Prospectus]
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
The Company has issued an aggregate of 1,357,021 shares of Common Stock,
including 1,139,548 shares of Common Stock and 217,473 shares of Common Stock
issuable upon exercise of warrants. See 'Principal Stockholders.' The Selling
Securityholders have advised the Company that sales of the Selling
Securityholders' Shares may be effected from time-to-time by themselves, their
pledgees and/or their donees, in transactions (which may including block
transactions) in the over-the-counter market, in negotiated transactions,
through the writing of options on the Selling Securityholders' Shares, or a
combination of such methods of sale, at fixed prices that may be changed, at
market prices prevailing at the time of sale, or at negotiated prices. The
Selling Securityholders, their pledgees and/or their donees, may effect such
transactions by selling the Selling Securityholders' Shares directly to
purchasers or through broker-dealers that may act as agents or principals. Such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Securityholders and/or the purchasers of Selling
Securityholders' Shares for whom such broker-dealers may act as agents or to
whom they sell as principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The Selling Securityholders, their pledgees and/or their donees, and any
broker-dealers that act in connection with the sale of the Selling
Securityholders' Shares as principals may be deemed to be 'underwriters' within
the meaning of Section 2(11) of the Securities Act and any commissions received
by them and any profit on the resale of the Selling Securityholders' Shares as
principals might be deemed to be underwriting discounts and commissions under
the Securities Act. The Selling Securityholders' Shares being registered on
behalf of the Selling Securityholders are restricted securities while held by
the Selling Securityholders and the resale of such securities by the Selling
Securityholders is subject to the prospectus delivery and other requirements of
the Act. The Selling Securityholders, their pledgees and/or their donees, may
agree to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the Selling Securityholders' Shares against
certain liabilities, including liabilities arising under the Securities Act. The
Company will not receive any proceeds from the sale of the Selling
Securityholders' Shares by the Selling Securityholders. Sales of the Selling
Securityholders' Shares by the Selling Securityholders, or even the potential of
such sales, would likely have an adverse effect on the market price of the
Company's securities.
At the time a particular offer of any securities is made by or on behalf of
the Selling Securityholders, to the extent required, a prospectus supplement
will be distributed which will set forth the number of securities being offered
and the terms of the offering, including the names or names of any underwriters,
dealers or agents, the purchase price paid by any underwriter for shares
purchased from the Selling Securityholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
Under the Securities Exchange Act of 1934, as amended (the 'Exchange Act'),
and the regulations thereto, any person engaged in distribution of Company
securities offered by this Prospectus may not simultaneously engage in
market-making activities with respect to Company securities during the
applicable 'cooling off' period prior to the commencement of such distribution.
In addition, and without limiting the foregoing, the Selling Securityholders
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation, Rules 10b-6 and 10b-7, in
connection with transactions in the securities, which provisions may limit the
timing of purchases and sales of Company securities by the Selling
Securityholders.
The following table set forth certain information with respect to persons
for whom the Company is registering the Selling Securityholders' Shares for
resale to the public. The Company will not receive any of the proceeds from the
sale of the Selling Securityholders' Shares. Beneficial ownership of the Selling
Securityholders' Shares by such Selling Securityholders after the Offering will
depend on the number of Selling Securityholders' Shares sold by each Selling
Securityholders. The securities held by the Selling Securityholders are
restricted securities while held by such Selling Securityholders and the resale
of such securities by the Selling Securityholders is subject to prospectus
delivery and other requirements of the Act. The Selling Securityholders' Shares
offered by the Selling Securityholders are not being underwritten by the
Representative.
Alt-2
[Alternative Page for Selling Securityholders' Prospectus]
BENEFICIAL BENEFICIAL
OWNERSHIP PRIOR PERCENTAGE OWNERSHIP
TO SELLING OF AMOUNT OF AFTER SELLING
SECURITYHOLDERS' COMMON STOCK SHARES SECURITYHOLDERS'
OFFERING OWNED BEFORE BEING OFFERING IF ALL
SELLING SECURITYHOLDER(1) SHARES(2) OFFERING(3) REGISTERED SHARES ARE SOLD
- ---------------------------------------- ---------------- ------------ -------------- ------------------
Arnold Ackerman......................... 78,000 3.2% 78,000Shs. 0
Adelaide Corl Trust..................... 4,000 * 4,000Shs. 0
Marvin Barish........................... 8,000 * 8,000Shs. 0
Grafton Cooper.......................... 3,680 * 3,680Shs. 0
Richard Denton.......................... 12,498 * 12,498Shs. 0
Alice Fischlewitz....................... 24,000 * 24,000Shs. 0
Bertha Fischlewitz...................... 24,000 * 24,000Shs. 0
The Garrison Third Family Limited
Partnership........................... 5,920 * 5,920Shs. 0
John Hess............................... 951 * 951Shs. 0
Chana and Yecheskal Kaminsky............ 4,000 * 4,000Shs. 0
John McDonnell.......................... 3,760 * 3,760Shs. 0
Modern Technology Corp.................. 4,000 * 4,000Shs. 0
Larry Morris............................ 8,320 * 8,320Shs. 0
Yosef Muskin............................ 2,000 * 2,000Shs. 0
Dana Resnick............................ 4,000 * 4,000Shs. 0
Solomon Ross............................ 4,000 * 4,000Shs. 0
Ivan Roth............................... 1,680 * 1,680Shs. 0
Morris Rubin............................ 4,000 * 4,000Shs. 0
Doris Saltz............................. 2,000 * 2,000Shs. 0
Louis Sammut............................ 4,000 * 4,000Shs. 0
Sandra Satt............................. 8,000 * 8,000Shs. 0
Walter Scott............................ 14,000 * 14,000Shs. 0
Arthur Sterenbuck....................... 8,000 * 8,000Shs. 0
George Taylor........................... 12,743 * 12,743Shs. 0
John Winter............................. 3,033 * 3,033Shs. 0
Ulrich and Dagmar Wissman............... 10,000 * 10,000Shs. 0
Alcuin Bennet........................... 12,000 * 12,000Shs. 0
Richard Larry -- IRA.................... 6,000 * 6,000Shs. 0
Lawrence Radbell........................ 9,000 * 9,000Shs. 0
Richard Ross............................ 6,000 * 6,000Shs. 0
Yossi Simpson........................... 6,000 * 6,000Shs. 0
Jerome and Mildred Toder................ 6,000 * 6,000Shs. 0
Wayne Saker............................. 24,000 * 24,000Shs. 0
Charna Radbell.......................... 3,000 * 3,000Shs. 0
Nicole Radbell.......................... 3,000 * 3,000Shs. 0
Stuart Elfland.......................... 9,000 * 9,000Shs. 0
Jack Hirschfield........................ 3,000 * 3,000Shs. 0
Nicole Kubin............................ 6,000 * 6,000Shs. 0
Jericho Investments Ltd................. 15,000 * 15,000Shs. 0
Canova Finance Inc...................... 639,375(3) 22.7% 251,875Shs. 387,500(3)
10.7%(8)
Etilon Trading Ltd...................... 639,375(4) 22.7% 251,875Shs. 387,500(4)
10.7%(8)
(table continued on next page)
Alt-3
[Alternative Page for Selling Securityholders' Prospectus]
BENEFICIAL BENEFICIAL
OWNERSHIP PRIOR PERCENTAGE OWNERSHIP
TO SELLING OF AMOUNT OF AFTER SELLING
SECURITYHOLDERS' COMMON STOCK SHARES SECURITYHOLDERS'
OFFERING OWNED BEFORE BEING OFFERING IF ALL
SELLING SECURITYHOLDER(1) SHARES(2) OFFERING(3) REGISTERED SHARES ARE SOLD
- ---------------------------------------- ---------------- ------------ -------------- ------------------
Joe Ohayon.............................. 253,275(5) 9.8% 99,775Shs. 153,500(5)
4.5%(8)
Chana Sasha Foundation, Inc............. 167,975(6) 6.7% 46,475Shs. 121,500(6)
3.7%(8)
Leonard Lewis........................... 15,000 * 15,000Shs. 0
Tokayer Family Trust.................... 384,274(7) 15.8% 100,000Shs. 284,274
8.8%(8)
Arik Shavit............................. 217,473(9) 8.2% 217,473Shs. 0
Total:........................ 2,423,822(10) 74.7% 1,357,021Shs. 1,334,274Shs.(11)
------------ ==== ============ =================
31.6%(8)
========
* Less than 1% of the issued and outstanding shares of Common Stock.
(1) Except as otherwise indicated, no Selling Securityholder is an officer,
director or affiliate of the Company.
(2) Based on 2,424,548 shares issued and outstanding (excluding 1,000,000
Escrow Shares). Each beneficial owner's percentage ownership is determined
by assuming that options or warrants that are held by such person (but not
those held by any other person) and which are exercisable within 60 days
from the date hereof have been exercised.
(3) Includes 387,500 shares issuable upon the exercise of a like number of
warrants.
(4) Includes 387,500 shares issuable upon the exercise of a like number of
warrants.
(5) Includes 153,500 shares issuable upon the exercise of a like number of
warrants.
(6) Includes 71,500 shares issuable upon the exercise of a like number of
warrants.
(7) The wife of Marc D. Tokayer, the Company's Chairman, is the Trustee for the
Tokayer Family Trust (the 'Trust'), and the income beneficiaries of the
Trust are Mr. Tokayer's children. Accordingly, the Trust may be deemed an
affiliate of the Company. The amount of beneficial ownership excludes
730,726 Escrow Shares.
(8) Based on 3,224,548 shares issued and outstanding (excluding 1,000,000
Escrow Shares and without giving effect to the repurchase of 135,000 Bridge
Shares) after the Offering.
(9) A director and Vice President of the Company. Includes 217,473 shares
issuable upon the exercise of warrants issuable upon the date of this
Prospectus. The warrants are subject to a four-year vesting schedule,
whereby the first 72,491 warrants are not exercisable until September 1997.
(10) Includes an aggregate of 1,217,473 shares issuable upon the exercise of a
like number of warrants.
(11) Includes an aggregate of 1,000,000 shares issuable upon the exercise of a
like number of warrants.
Alt-4
[ALTERNATIVE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS]
_____________________________ _____________________________
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY, BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES, IMPLY THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF BY
ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary........................................................................................................ 3
Summary Financial Information............................................................................................. 6
Risk Factors.............................................................................................................. 7
Use of Proceeds........................................................................................................... 15
Dividend Policy........................................................................................................... 16
Dilution.................................................................................................................. 17
Capitalization............................................................................................................ 18
Plan of Operation......................................................................................................... 18
Business.................................................................................................................. 21
Management................................................................................................................ 33
Principal Stockholders.................................................................................................... 36
Certain Transactions...................................................................................................... 38
Description of Securities................................................................................................. 39
Shares Eligible for Future Sale........................................................................................... 41
Underwriting.............................................................................................................. 42
Legal Matters............................................................................................................. 45
Experts................................................................................................................... 46
Available Information..................................................................................................... 46
Selling Securityholders and Plan of Distribution.......................................................................... Alt-2
Index to Financial Statements............................................................................................. F-1
1,357,021 SHARES OF
COMMON STOCK
TTR INC.
--------------------------
PROSPECTUS
--------------------------
, 1997
_____________________________ _____________________________
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, the Issuer has
broad powers to indemnify its directors and officers against liabilities they
may incur in such capacities, including liabilities under the Securities Act of
1933, as amended (the 'Securities Act'). The Issuer's Bylaws provide that the
Issuer will indemnify its directors, executive officers, other officers,
employees and agents to the fullest extent permitted by Delaware law.
The Issuer's Certificate of Incorporation provides for the elimination of
liability for monetary damages for breach of the directors' fiduciary duty of
care to the Issuer and its stockholders. These provisions do not eliminate the
directors' duty of care and, in appropriate circumstances, equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Issuer, for acts
or omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for any transaction from which the director derived an
improper personal benefit, and for payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law. The provision
does not affect a director's responsibilities under any other laws, such as the
federal securities laws or state or federal environmental laws.
Reference is made to Section 8 of the Underwriting Agreement (Exhibit 1.1
to this Registration Statement) which provides for indemnification by the
Underwriter and its controlling persons, on the one hand, and of the Issuer and
its controlling persons on the other hand, against certain civil liabilities,
including liabilities under the Securities Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Issuer in connection with
the issuance and distribution of the securities being registered hereunder. All
of the amounts shown are estimates (except for the SEC and the NASD registration
fees).
SEC filing fee........................................................................... $ 10,648.46
NASD, Inc. filing fee.................................................................... 3,588.02
Transfer agent's fee..................................................................... 5,000.00
Printing and engraving expenses.......................................................... 125,000.00
Legal fees and expenses.................................................................. 250,000.00
Blue sky filing fees and expenses (including counsel fees)............................... 57,500.00
Accounting fees and expenses............................................................. 100,000.00
Miscellaneous expenses................................................................... 23,263.52
-----------
Total.......................................................................... $575,000.00
-----------
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ITEM 26. RECENT SALE OF UNREGISTERED SECURITIES
1. (a) In July 1994, the Company sold 1,200,000 shares of its Common Stock
to Marc D. Tokayer, Chairman of the Board of Directors of the Issuer. Mr.
Tokayer subsequently contributed 561,453 shares to the Company which were
immediately cancelled by the Company and deposited 269,274 shares into escrow to
be released from escrow if the Company attains certain future earnings levels or
if the Common Stock trades at certain levels.
(b) There were no underwriters with respect to the above transaction.
(c) The shares were issued in consideration of services performed and Mr.
Tokayer's shares of Common Stock of TBR Systems Inc. (representing approximately
22% of the then issued equity) in the aggregate valued at $1,200 ($.001 per
share) (ascribing no value to the shares of TBR Systems Inc.).
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(d) The Company believes that the shares of Common Stock were issued in a
transaction not involving a public offering in reliance upon an exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
2. (a) In August 1994, the Company sold 1,200,000 shares of its Common
Stock to the Tokayer Family Trust (the 'Trust'), which may be deemed an
affiliate of the Issuer. The Trust subsequently transferred 85,000 shares to an
unaffiliated third party in exchange for services and deposited 730,726 shares
into escrow to be released from escrow if the Company attains certain future
earnings levels or if the Common Stock trades at certain levels.
(b) There were no underwriters with respect to the above transaction.
(c) The shares were issued in consideration of $25,000 ($.0208 per share).
(d) The Company believes that the shares of Common Stock were issued in a
transaction not involving a public offering in reliance upon an exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
3. (a) From November 1994 through July 1995, the Company consummated a
private placement (the '1995 Debt Financing') to 26 accredited investors of
units (the 'Units') consisting of $25,000 principal amount 10% promissory notes
(the 'Notes') and 4,000 warrants exercisable at $.01 per share (the 'Debt
Financing Warrants') . In connection with the Debt Financing, the Company sold
41.6425 Units and issued warrants to the noteholders to purchase up to a total
of 174,548 shares of Common Stock for $.01 per share.
(b) The Company paid commissions (10%) and non-accountable expense
allowances (4%) in the aggregate amount of approximately $146,000 to Shane,
Alexander, Unterburgher Securities, Inc. ('SAU').
(c) The total offering price was $1,041,080.40 (ascribing no value to the
Debt Financing Warrants), and the total underwriting discount was $104,108.
(d) The Company believes that the Units, Notes and Debt Financing Warrants
were issued in a transaction not involving a public offering in reliance upon an
exemption from registration provided by Sections 4(2) and 4(6) of the Securities
Act of 1933, as amended, and Regulation D promulgated thereunder.
4. (a) In November 1994, the Company issued 185,000 Debt Financing Warrants
to SAU. SAU subsequently transferred all of the warrants to 17 unaffiliated
individuals.
(b) There were no underwriters with respect to the above transaction.
(c) The warrants were issued in consideration of consulting services
performed.
(d) The Company believes that the warrants were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
5. (a) In June 1995, the Company issued an aggregate of 361,453 shares of
Common Stock to six consultants, including 100,000 shares to Dr. Baruch Sollish,
a director of the Company.
(b) There were no underwriters with respect to the above transaction.
(c) The shares were issued in consideration of consulting services
performed valued at $18,073 ($.05 per share).
(d) The Company believes that the shares of Common Stock were issued in a
transaction not involving a public offering in reliance upon an exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
6. (a) In May 1995, the Company issued 15,000 Debt Financing Warrants to
Jericho Investments Ltd.
(b) There were no underwriters with respect to the above transaction.
(c) The warrants were issued in consideration of financial consulting
services performed.
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(d) The Company believes that the warrants were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
7. (a) In January 1996, the Company sold 50,000 shares of Common Stock to
the Chana Sasha Foundation.
(b) There were no underwriters with respect to the above transaction.
(c) The shares were issued in consideration of $100,000 ($2.00 per share).
(d) The Company believes that the shares of Common Stock were issued in a
transaction not involving a public offering in reliance upon an exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
8. (a) In April 1996, the Company completed a private placement of 650,000
shares of Common Stock and warrants to purchase an additional 1,000,000 shares
of Common Stock (the 'Warrants') to four sophisticated investors (the 'Equity
Financing').
(b) There were no underwriters with respect to the above transaction.
(c) The aggregate purchase price of the securities sold in the Equity
Financing was $200,000, including $10,000 ascribed to the Warrants.
(d) The Company believes that the shares of Common Stock and Warrants were
issued in a transaction not involving a public offering in reliance upon an
exemption from registration provided by Section 4(6) of the Securities Act of
1933, as amended, and Regulation D promulgated thereunder.
9. (a) In June 1996, the Company issued in a private placement to six
accredited investors one-year 10% promissory notes (the 'Bridge Financing'). In
connection with the Bridge Financing, the Company issued to such investors an
aggregate of 150,000 shares of Common Stock. The Company subsequently agreed,
subject to the completion of this Offering, to repurchase 135,000 shares for an
aggregate purchase price of $67,500 payable on the closing date of this
Offering.
(b) The Company paid commissions and non-accountable expense allowances in
the aggregate amount of approximately $55,000 to First Metropolitan Securities,
Inc.
(c) The total offering price was $500,000 (ascribing $75,000 to the shares
of Common Stock), and the total underwriting discount was $50,000.
(d) The Company believes that the promissory notes and the shares of Common
Stock were issued in a transaction not involving a public offering in reliance
upon an exemption from registration provided by Section 4(6) of the Securities
Act of 1933, as amended, and Regulation D promulgated thereunder.
10. (a) In July 1996, the Company issued 5,000 options to Sheldon Rich, a
former director of the Company. The options are exercisable at $6.00 per share
until January 15, 2001.
(b) There were no underwriters with respect to the above transaction.
(c) The warrants were issued in consideration of services performed
pursuant to the Company's 1996 Stock Option Plan.
(d) The Company believes that the options were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
11. (a) In September 1996, the Company agreed to issue 217,473 warrants
upon the date of this Prospectus to Arik Shavit, a director of the Company. The
warrants are exercisable at $.01 per share until September 2002 and are subject
to a four-year vesting schedule.
(b) There were no underwriters with respect to the above transaction.
(c) The warrants were issued in consideration of services to be performed
prior to vesting.
(d) The Company believes that the warrants were issued in a transaction not
involving a public offering in reliance upon an exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
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ITEM 27. EXHIBITS
1.1 -- Form of Underwriting Agreement, as amended.
3.1 -- Certificate of Incorporation of the Company, as amended.
3.2 -- By-Laws of the Company, as amended.
3.3 -- Memorandum of Association of TTR Israel.
3.4 -- Articles of Association of TTR Israel.
4.1 -- Form of Underwriter's Warrants, as amended.
4.2 -- Specimen Common Stock Certificate.
4.3 -- Escrow Agreement.
4.4 -- Form of Registration Rights between the Company and certain securityholders.
4.5 -- Form of Lock-up Agreement between the Company's securityholders and the Underwriter.
4.6 -- Form of Lock-up Agreement between certain selling stockholders and the Underwriter.
5.1 -- Securities Opinion of Baer Marks & Upham LLP.
9.1 -- Voting Agreement.
10.1 -- Form of Financial Consulting Agreement between the Underwriter and the Company.
10.2 -- The Company's 1996 Stock Option Plan.
10.3 -- Employment Agreement between TTR Israel and Marc D. Tokayer.
10.4 -- Employment Agreement between TTR Israel and Baruch Sollish.
10.5 -- Employment Agreement between TTR Israel and Arik Shavit, as amended.
10.6 -- Unprotected Tenancy Agreement between TTR Israel and Pharmastate Ltd. dated June 10, 1996.
10.7 -- Consulting Agreement dated November 1, 1994 between the Company and Shane Alexander Unterburgher
Securities Inc.
10.8 -- Consulting Agreement dated October 1, 1995 between the Company and Holborn Systems Ltd.
10.9 -- Consulting Agreement between the Company and Pioneer Management Corporation.
10.10 -- Purchase Agreement and Assignment dated January 5, 1995 between TTR Israel and Rina Marketing R&D Ltd.
10.11 -- Loan and Security Agreement dated September 30, 1996 between the Company and 732498 Ontario Ltd.
10.12 -- Form of Note Extension Agreement.
10.13 -- Form of Promissory Note.
21.1 -- Subsidiaries of the Company.
*23.1 -- The consent of Baer Marks & Upham LLP is included in its opinion which was filed as Exhibit 5.1 to this
Registration Statement.
*23.2 -- The consent of Aboudi & Brounstein is included in Part II of this Registration Statement.
*23.3 -- The consent of Schneider, Ehrlich & Wengrover LLP, certified public accountants, is included in Part II
of this Registration Statement.
*23.4 -- The consent of BDO Almagor & Co., certified public accountants, is included in Part II of this
Registration Statement.
24.1 -- Powers of Attorney (included on the signature page of this Registration Statement).
27 -- Financial Data Schedule.
- ------------
* Filed with this Amendment.
ITEM 28. UNDERTAKINGS
The Company hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the 'Act');
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement;
(iii) Include any additional or changed material information on the
plan of distribution.
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(2) For determining liability under the Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) To file a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(4) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
(5) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the small business issuer of expenses incurred or paid by a
Director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(6) For determining any liability under the Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the small business issuer under Rule 424(b)(1), or
(4) or 497(h) under the Act as part of this registration statement as of
the time the Commission declared it effective.
(7) For determining any liability under the Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
(8) To file a post-effective amendment if and when the Underwriters
waive the lock-ups for 10% or more of the Selling Securityholders' shares,
and to sticker the prospectus if such waiver is for less than 10% but 5% or
more of the Selling Securityholders' shares.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the State of Israel, on the 6th day of February 1997.
TTR INC.
By: /s/ MARC D. TOKAYER
...................................
MARC D. TOKAYER
CHAIRMAN
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated:
SIGNATURE TITLE DATE
- ----------------------------------------- ---------------------------------------------- -------------------
/s/ MARC D. TOKAYER Chairman of the Board, President (Principal February 6, 1997
........................................ Executive Officer) and Treasurer (Principal
MARC D. TOKAYER Financial Officer)
/s/ ARIK SHAVIT Director and Vice President February 6, 1997
........................................
ARIK SHAVIT
/s/ MARC D. TOKAYER* Director and Vice President - Product Research February 6, 1997
........................................ and Development and Secretary
BARUCH SOLLISH
/s/ MARC D. TOKAYER February 6, 1997
........................................
* MARC D. TOKAYER,
ATTORNEY-IN-FACT FOR EACH OF THE
INDIVIDUAL PERSONS
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CONSENT OF COUNSEL
The consent of Baer Marks & Upham LLP is contained in its opinion which was
filed as Exhibit 5.1 to this Registration Statement.
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CONSENT OF COUNSEL
We hereby consent to the reference to our firm under the caption 'Legal
Matters' in the Prospectus contained in this Registration Statement.
ABOUDI & BROUNSTEIN
Tel Aviv, Israel
February 6, 1997
II-8
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption 'Experts' and to
the use of our report dated July 1, 1996, in the Registration Statement on Form
SB-2 and related Prospectus of TTR Inc.
SCHNEIDER EHRLICH & WENGROVER LLP
Woodbury, New York
February 6, 1997
II-9
CONSENT OF INDEPENDENT AUDITORS
As independent auditors of T.T.R. Technologies Ltd., we hereby consent to
the inclusion of our report dated July 1, 1996 and to the reference to our firm
under the heading 'Experts' in the Registration Statement on Form SB-2 and
related prospectus of TTR Inc.
BDO ALMAGOR & CO.
Ramat-Gan, Israel
February 6, 1997
II-10
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as 'tm'
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- --------------------------------------------------------------------------------------------------- ----
23.1 -- The consent of Baer Marks & Upham LLP is included in its opinion which was filed as Exhibit 5.1
to this Registration Statement. ..............................................................
23.2 -- The consent of Aboudi & Brounstein is included in Part II of this Registration Statement. ......
23.3 -- The consent of Schneider, Ehrlich & Wengrover LLP, certified public accountants, is included in
Part II of this Registration Statement. ......................................................
23.4 -- The consent of BDO Almagor & Co., certified public accountants, is included in Part II of this
Registration Statement. ......................................................................