SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2003
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to ______
COMMISSION FILE NUMBER 0-22055
TTR TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 11-3223672
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1091 BOSTON POST ROAD, RYE, NEW YORK 10580
(Address of principal executive offices) (Zip Code)
914-921-4004
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the registrant's Common Stock as of
August 14, 2003, is 16,440,630 shares.
TTR TECHNOLOGIES, INC. AND ITS SUBSIDIARY
(A Development Stage Company)
Index
PART I. FINANCIAL INFORMATION:
Forward Looking Statements ii
Item 1. Financial Statements *
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002 1
Consolidated Statements of Operations
For the six and three months ended June 30, 2003 and 2002 2
Consolidated Statements of Comprehensive Income (Loss)
For the six and three months ended June 30, 2003 and 2002 3
Consolidated Statements of Cash Flows
For the six months ended June 30, 2003 and 2002 4
Notes to the Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
Item 4. Disclosure Controls and Procedures 12
Part II. OTHER INFORMATION 12
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
*The Balance Sheet at December 31, 2002 has been taken from the audited
financial statements at that date. All other financial statements are unaudited.
1
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY
TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS",
"ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE
NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT
LIMITATION, STATEMENTS BELOW REGARDING: THE COMPANY'S EXPECTATIONS AS TO SOURCES
OF REVENUES; THE COMPANY'S INTENDED BUSINESS PLANS; THE COMPANY'S INTENTIONS TO
ACQUIRE OR DEVELOP OTHER TECHNOLOGIES; BELIEF AS TO THE SUFFICIENCY OF ITS CASH
RESERVES; THE COMPANY'S PROSPECTS OF ENTERING INTO ONE OR MORE TRANSACTIONS AS
PART OF ENGAGING IN A NEW LINE OF BUSINESS; AND THE COMPANY'S PROSPECTS FOR
RAISING ADDITIONAL CAPITAL. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING
STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE COMPETITIVE
ENVIRONMENT GENERALLY, THE COMPANY'S DIFFICULTY IN RAISING CAPITAL, THE
COMPANY'S NET OPERATING LOSS CARRYFORWARDS, EFFECTS OF THE SALE OF THE COPY
PROTECTION BUSINESS, THE COMPANY'S FUTURE PLANS, SUFFICIENCY OF CASH RESERVES,
THE AVAILABILITY OF AND THE TERMS OF FINANCING, DILUTION OF THE COMPANY'S
STOCKHOLDERS, INFLATION, CHANGES IN COSTS AND AVAILABILITY OF GOODS AND
SERVICES, ECONOMIC CONDITIONS IN GENERAL AND IN THE COMPANY'S SPECIFIC MARKET
AREAS, DEMOGRAPHIC CHANGES, CHANGES IN FEDERAL, STATE AND/OR LOCAL GOVERNMENT
LAW AND REGULATIONS, CHANGES IN OPERATING STRATEGY OR DEVELOPMENT PLANS, AND
CHANGES IN THE COMPANY'S ACQUISITIONS AND CAPITAL EXPENDITURE PLANS. ALTHOUGH
THE COMPANY BELIEVES THAT EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING
STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES
RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THESE FORWARD-LOOKING
STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY FORWARD-LOOKING
STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL
RESULTS.
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 4,689,388 $ 653,885
Note receivable, officer 33,333 33,333
Prepaid expenses and other current assets 68,870 64,999
-------------- -------------
Total current assets 4,791,591 752,217
Property and equipment - net 22,060 23,093
Investment in ComSign, Ltd. - -
Note receivable, officer 33,334 33,334
Other asset 6,488 6,300
-------------- -------------
Total assets $ 4,853,473 $ 814,944
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities
Accounts payable $ 626,654 $ 497,898
Accrued expenses 196,092 61,011
-------------- -------------
Total current liabilities 822,746 558,909
-------------- -------------
Total liabilities 822,746 558,909
-------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value;
5,000,000 shares authorized; none issued and outstanding - -
Common stock, $.001 par value;
50,000,000 shares authorized; 16,440,630 and 18,261,567
issued and outstanding, respectively 16,441 18,262
Additional paid-in capital 39,873,476 40,533,593
Other accumulated comprehensive income 82,271 84,270
Deficit accumulated during the development stage (35,940,037) (40,370,429)
Less: deferred compensation (1,424) (9,661)
-------------- -------------
Total stockholders' equity 4,030,727 256,035
-------------- -------------
Total liabilities and stockholders' equity $ 4,853,473 $ 814,944
============== =============
See Notes to Consolidated Financial Statements.
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TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
From
Inception
Six Months (July 14, Three Months
Ended 1994) to Ended
June 30, June 30, June 30,
2003 2002 2003 2003 2002
---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue $ - $ - $ 125,724 $ - $ -
------------- ------------- -------------- ------------- --------------
Expenses
Research and development (1) - 510,150 5,704,131 - 249,691
Sales and marketing (1) - 161,319 4,457,457 - 69,685
General and administrative (1) 1,301,928 1,110,488 12,373,368 743,274 628,835
Stock-based compensation 4,626 32,207 11,404,286 1,424 810
Bad debt expense - 130,000 161,000 - 130,000
Loss on disposition of fixed assets 13,615 - 13,615 13,615 -
------------- ------------- -------------- ------------- --------------
Total expenses 1,320,169 1,944,164 34,113,857 758,313 1,079,021
------------- ------------- -------------- ------------- --------------
Operating loss (1,320,169) (1,944,164) (33,988,133) (758,313) (1,079,021)
------------- ------------- -------------- ------------- --------------
Other (income) expense
Legal settlement - - 232,500 - -
Loss on investment - - 17,000 - -
Other income - - (75,000) - -
Net losses of affiliate - 176,935 1,196,656 - 71,188
Impairment loss on investment in affiliate - 742,000 748,690 - 742,000
Amortization of deferred financing costs - - 4,516,775 - -
Gain on sale of copy protection business (5,708,328) - (5,708,328) (5,708,328) -
Gain on sale of investment in affiliate (40,000) - (40,000) (40,000) -
Interest income (2,299) (26,803) (902,534) (803) (5,583)
Interest expense 66 1,641 1,966,145 40 1,159
------------- ------------- -------------- ------------- --------------
Total other (income) expenses (5,750,561) 893,773 1,951,904 (5,749,091) 808,764
------------- ------------- -------------- ------------- --------------
Net income (loss) $ 4,430,392 $(2,837,937) $(35,940,037) $ 4,990,778 $ (1,887,785)
============= ============= ============== ============= ==============
Per share data:
Basic and diluted $ 0.25 $ (0.16) $ 0.28 $ (0.11)
============= ============= ============= ==============
Weighted average number
of common shares used in
basic and diluted income (loss) per share 17,944,159 17,663,633 17,630,239 17,732,605
============= ============= ============= ==============
(1) Excludes non-cash, stock-based compensation expense as follows:
Research and development $ - $ - $ 456,239 $ - $ -
Sales and marketing - 30,587 5,336,558 - -
General and administrative 4,626 1,620 5,611,489 1,424 810
------------- ------------- -------------- ------------- --------------
$ 4,626 $ 32,207 $ 11,404,286 $ 1,424 $ 810
============= ============= ============== ============= ==============
See Notes to Consolidated Financial Statements.
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TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
From
Inception
Six Months (July 14, Three Months
Ended 1994) to Ended
June 30, June 30, June 30,
2003 2002 2003 2003 2002
---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net income (loss) $ 4,430,392 $(2,837,937) $(35,940,037) $ 4,990,778 $ (1,887,785)
Other comprehensive income (loss)
Foreign currency translation adjustments (1,999) (11,110) 82,271 (894) (3,154)
------------- ------------- -------------- ------------- --------------
Comprehensive income (loss) $ 4,428,393 $(2,849,047) $(35,857,766) $ 4,989,884 $ (1,890,939)
============= ============= ============== ============= ==============
See Notes to Consolidated Financial Statements.
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TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
From
Six Months Inception
Ended (July 14, 1994)
June 30, to June 30,
2003 2002 2003
---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 4,430,392 $(2,837,937) $(35,940,037)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 3,736 35,237 952,760
Forgiveness of note receivable, officer - - 33,333
Loss from disposition of fixed assets 13,615 - 175,807
Bad debt expense - 130,000 161,000
Amortization of note discount and finance costs - - 4,666,225
Translation adjustment - - (1,528)
Beneficial conversion feature of convertible debt - - 572,505
Stock, warrants and options issued for services and legal settlement 4,626 32,207 11,577,247
Payment of common stock issued with guaranteed selling price - - (155,344)
Net losses of affiliate - 176,935 1,196,656
Impairment loss on investment in affiliate - 742,000 748,690
Gain on sale of copy protection business (5,708,328) - (5,708,328)
Gain on sale of investment in affiliate (40,000) - (40,000)
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable - 947 554
Prepaid expenses and other current assets (3,845) 38,382 (98,568)
Other assets (188) (2,750) (6,488)
Accounts payable 128,755 9,277 79,461
Accrued expenses 121,085 (199,494) 1,269,094
Accrued severance pay - (133,419) (122,363)
Interest payable - - 251,019
-------------- ------------- --------------
Net cash provided (used) by operating activities (1,050,152) (2,008,615) (20,388,305)
-------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of copy protection business 5,050,000 - 5,050,000
Proceeds from sale of investment in affiliate 40,000 - 40,000
Proceeds from sales of fixed assets - - 68,594
Purchases of property and equipment (16,067) (68,701) (1,002,602)
Investment in ComSign, Ltd. - - (2,000,000)
Increase in note receivable, officer - (100,000) (100,000)
Increase in note receivable - - (130,000)
Increase in organization costs - - (7,680)
-------------- ------------- --------------
Net cash provided (used) by investing activities 5,073,933 (168,701) 1,918,312
-------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock - 1,982 21,177,354
Stock offering costs - - (475,664)
Deferred financing costs - - (682,312)
Proceeds from short-term borrowings - - 1,356,155
Proceeds from long-term debt - - 2,751,825
Proceeds from convertible debentures - - 2,000,000
Repayment of short-term borrowings - - (1,357,082)
Repayments of long-term debt - - (1,615,825)
-------------- ------------- --------------
Net cash provided (used) by financing activities - 1,982 23,154,451
-------------- ------------- --------------
Effect of exchange rate changes on cash 11,722 (922) 4,930
-------------- ------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,035,503 (2,176,256) 4,689,388
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 653,885 4,915,269 -
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,689,388 $ 2,739,013 $ 4,689,388
============== ============= ==============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for interest $ 66 $ 1,641 $ 476,976
============== ============= ==============
Noncash investing transaction:
Common stock returned to the company from
the sale of copy protection business $ 658,328 $ - $ 658,328
============== ============= ==============
See Notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of TTR
Technologies, Inc. and its Subsidiary (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Form 10-K for the year ended
December 31, 2002 as filed with the Securities and Exchange Commission.
Note 2 - Closing of Sale to Macrovision Corporation
On May 28, 2003, the Company consummated the sale of its music copy protection
and digital rights management assets to Macrovision Corporation for a cash sales
price of $5,050,000 and return for cancellation 1,880,937 shares of the
Company's common stock that Macrovision purchased in January 2000 for $4.0
million. The details of the transactions surrounding the closing and sale are
further described in Item 2 Part I to this report on Form 10-Q for the quarterly
period ended June 30, 2003. The Company recorded a gain on sale of $5.7 million
in its statement of operations for the quarter ended June 30, 2003 consisting of
$5,050,000 in cash and $658,328 representing the value of the common stock
returned for cancellation to the Company based on the closing price of the stock
on May 28, 2003.
Note 3 - Investment in and Sale of ComSign, Ltd.
The Company disclosed in its Form 10-K for the year ended December 31, 2002 that
it wrote-off the remaining goodwill and the balance of its investment in
ComSign, Ltd. during the year ended 2002. During the quarter ended June 30,
2003, the Company sold its entire equity interest in ComSign, Ltd. for $40,000
to Comda, Ltd. its other joint venture partner in ComSign, Ltd. Since the
Company had previously written off this entire investment, the $40,000 has been
recorded as a gain on sale of its investment in ComSign, Ltd. during the quarter
ended June 30, 2003. Accordingly, the Company is no longer providing summarized
financial data for ComSign, Ltd.
Note 4 - Stock Based Compensation
The Company accounts for stock-based compensation in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and Financial Accounting
Standard Board ("FASB") Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation". Pursuant to these accounting
standards, the Company records deferred compensation for share options granted
to employees at the date of grant based on the difference between the exercise
price of the options and the market value of the
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underlying shares at that date. Deferred compensation is amortized to
compensation expense over the vesting period of the underlying options. No
compensation expense is recorded for fixed stock options that are granted to
employees and directors at an exercise price equal to the fair market value of
the common stock at the time of the grant.
Stock options and warrants granted to non-employees are recorded at their fair
value, as determined in accordance with Statement of Financial Accounting
Standards No. 123 ("SFAS 123") and Emerging Issues Task Force Consensus No.
96-18, and recognized over the related service period. Deferred charges for
options granted to non-employees are periodically re-measured as the options
vest.
The Company has adopted the disclosure provisions required by SFAS No. 148
"Accounting for Stock-Based Compensation-Transition and Disclosure" which amends
SFAS No. 123. Had compensation cost for all of the Company's stock-based
compensation grants been determined in a manner consistent with the fair value
approach described in SFAS No. 123 and amended by SFAS No. 148, the Company's
net income (loss) and net income (loss) per share as reported would have been
increased (decreased) to the pro forma amounts indicated below:
Six Months Ended Three Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss)
As reported $4,430,392 $(2,837,937) $4,990,778 $(1,887,785)
Add: Stock-based employee compensation
Expense included in reported
net income (loss), net of related tax effects 4,626 32,207 1,424 810
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (165,745) (350,640) (81,984) (193,573)
--------- --------- --------- ---------
Pro forma $4,269,273 $(3,156,370) $4,910,218 $(2,080,548)
========= ========= ========= =========
Net income (loss) per share, basic and diluted
As reported $.25 $(.16) $.28 $(.11)
=== === === ===
Pro forma $.24 $(.18) $.28 $(.12)
=== === === ===
Common stock equivalents have been excluded from the weighted-average shares for
the three and six months ended June 30, 2003 and 2002, as inclusion is
anti-dilutive. Potentially dilutive options of 2,910,175 and 3,921,625 are
outstanding at June 30, 2003 and 2002, respectively.
Note 5 - Legal Proceedings
The Company is involved in the following legal proceedings:
On August 14, 2002, nine purported stockholders of the Company filed a
complaint against the Company, eight of its current or former officers and
several third parties alleging, among other things, that the Company issued a
series of false and misleading statements, including press releases, that misled
the plaintiffs into purchasing the Company's common stock. The complaint seeks
relief under federal securities laws and common law, and demands compensatory
damages of $7 million or more, and punitive damages of $50 million or more. The
Company believes it has meritorious defenses to this lawsuit.
Counsel for the EILENBERG plaintiffs filed a second action against the
Company and several of its current or former officers on August 21, 2002, this
time on behalf of three additional purported stockholders as plaintiffs,
alleging, among other things, that the Company had violated the federal
securities laws by distributing false and misleading materials in connection
with the annual shareholder meeting scheduled for August 26, 2002, and that
several officers and directors had breached duties to the Company and committed
acts of waste and mismanagement by paying excessive salaries to themselves and
others. The Company believes it has meritorious defenses to this lawsuit.
On or about December 31, 2002, the same counsel purporting to represent
certain shareholders wrote to Company counsel demanding, among other things,
that the salaries and benefits of the Company's Chief Executive Officer and
Chief Operating Officer be reduced or, in the alternative, they be terminated
for alleged cause. These claims have been referred by the Company's board of
directors to a Special Litigation Committee of the board which investigated the
matter and whose report was delivered on July 9, 2003, which found that the
demand should be rejected as inappropriate and potentially detrimental to the
Company.
The Company's former attorneys commenced an action in state court in
New York in January 2003 seeking unpaid legal fees in the approximate amount of
$300,000. The Company's answer denies the complaint's material allegations and
alleges as defenses that it was over-billed in unreasonable amounts and
otherwise damaged by the law firm's failure to advise properly in the
shareholder litigation brought by Sturm et al. The case is in the discovery
stage.
From time to time the Company has been involved in other disputes and legal
actions arising in the ordinary course of business. In management's opinion,
none of these other disputes and legal actions is expected to have a material
impact on the Company's business or cash flow.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW / CONSUMMATION OF AGREEMENT FOR SALE OF OPERATING BUSINESS
From its inception in 1994 through the period immediately preceding the
date on which the Purchase Agreement discussed below was entered into, TTR
Technologies, Inc. (hereinafter, the "Company" or "TTR") was primarily engaged
in the business of designing and developing digital security technologies that
provide copy protection for electronic content distributed on optical media and
the internet (the "Copy Protection Business").
On November 4, 2002, the Company and its wholly-owned subsidiary TTR
Technologies, Ltd. ("TTR Ltd."), entered into an Asset Purchase Agreement (the
"Purchase Agreement") with Macrovision Corporation ("Macrovision"), at the time,
one of the Company's largest stockholders, and Macrovision Europe, Ltd., an
affiliate of Macrovision Corporation (collectively, the "Purchaser"), pursuant
to which the Company agreed to sell to the Purchaser all of the assets that were
utilized in operating the Copy Protection Business. The Copy Protection Business
includes the technologies underlying SAFEAUDIO, the copy protection product
designed to thwart the unauthorized copying of audio content on CDs that was
jointly developed by the Company and Macrovision pursuant to the Alliance
Agreement entered into by the Company and Macrovision as of November 1999, as
subsequently amended (the "Alliance Agreement"), as well as the tentatively
named PALLADIUMCD product line formerly marketed by the Company.
Under the terms of the Purchase Agreement, the Company was to receive at
closing an aggregate cash consideration of $5.25 million, subject to certain
downward adjustments not to exceed $400,000, as well as the endorsement and
return to the Company, for eventual cancellation, of the stock certificate
representing 1,880,937 shares of the Company's common stock, par value $0.001
(the "Common Stock") that Macrovision purchased from the Company in January 2000
in connection with its then concluded equity investment in the Company of $4
million (the "Macrovision Stock"). Under the terms of the Purchase Agreement,
upon closing, the Alliance Agreement entered into by the Company and
Macrovision, pursuant to which the Company was entitled to a 30% royalty of the
net revenues collected by Macrovision or its affiliates from any product or
component incorporating the technologies underlying SAFEAUDIO, would terminate
and be of no continuing legal effect.
One of the conditions to closing the sale of the Copy Protection Business
pursuant to the Purchase Agreement was the procurement of the consent and waiver
by the Office of the Chief Scientist of the Israeli Ministry of Trade and
Commerce ("OCS") to the transfer to the Purchaser of certain technologies
included in the assets designated under the Purchase Agreement (the "Consent").
The OCS did not furnish the required Consent on the basis of its contention,
following examinations made by it, that certain of the technologies to be
transferred to the Purchaser may have been developed with OCS funds advanced to
TTR Ltd. in 1996-1997 (the "Subject Technologies").
In order to facilitate the sale of the Copy Protection Business as
contemplated by the Purchase Agreement, an application prepared by the Company
and Macrovision was made to the OCS on March 9, 2003 requesting the consent of
the OCS to the transfer by TTR Ltd. to Macrovision Israel, Ltd., an affiliate of
Macrovision ("Macrovision Israel") of the Subject
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Technologies (the "Revised Consent"). On May 25, 2003, the OCS granted the
Revised Consent.
On May 28, 2003, the sale to the Purchaser of the Copy Protection
Business was consummated pursuant to the terms of an Amendment to Asset Purchase
Agreement, dated the same date (the "Amendment"), among the Company, TTR Ltd.,
the Purchaser and Macrovision Israel. Pursuant to the terms of the Amendment,
the cash consideration received by the Company for the sale of the Copy
Protection Business was adjusted down from $5.25 million to $5.05 million in
consideration of the fact that the Company was granted the Revised Consent in
lieu of the Consent. In exchange for the reduction in the cash consideration
received by the Company, the Purchaser and Macrovision Israel agreed and
acknowledged that the Company has no further obligation to obtain any further
consents or releases with respect to the Subject Technologies, or any other
assets, transferred to the Purchasers and/or Macrovision Israel pursuant to the
sale of the Copy Protection Business. The terms of the Amendment did not alter
Macrovision's obligation to endorse and deliver to the Company the stock
certificate representing the Macrovision Stock. Upon the consummation of the
sale of the Copy Protection Business, Macrovision did endorse and deliver to the
Company the certificate representing the Macrovision Stock, and the Macrovision
Stock has been cancelled and returned to the Company.
As a result of the consummation of the sale of the Copy Protection
Business, the Company is no longer engaged in the business of designing and
developing digital security technologies, and the Company's only significant
asset is cash and cash equivalents. Management estimates that the Company and
its subsidiary TTR Ltd. had at June 30, 2003, after taking into account the gain
from the sale of the Copy Protection Business, a net operating loss carry
forward (NOL) of approximately $21 million that may be available to offset
future United States and Israeli taxable income, subject to certain specified
limitations under applicable law.
SALE OF COMPANY INTEREST IN COMSIGN
On May 23, 2003, the Company sold its entire 50% shareholder interest in
ComSign Ltd. ("ComSign"). ComSign, an Israeli Company, currently serves as
VeriSign, Inc.'s sole principal affiliate for Israel and the Palestinian
Authority and exclusive marketer of VeriSign's digital authentication
certificates and related services. The Company invested $2 million for its
ownership interest in ComSign in 2000. During 2002, the Company wrote-down the
entire goodwill associated with its investment in ComSign due to management's
belief that the Company's investment in ComSign was impaired. Consequently, on
May 23, 2003, the Company sold its entire 50% shareholder interest in ComSign to
Comda (1985) Ltd., also an Israeli company and ComSign's other 50% shareholder,
for the sum of $40,000 in cash.
OTHER
The Company's board of directors has not yet determined the Company's
strategic direction following the consummation of the sale of the Copy
Protection Business and is considering several possible general alternatives and
along with the Company's management, continues to develop a strategic operating
plan for the deployment of the Company's capital resources. Currently, the
Company anticipates pursuing one of the following three directions: liquidation
and dissolution, retention of the proceeds and acquisition, investment in, or
development of new lines of business, or a
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partial distribution of cash and acquisition, investment in, or development of
new lines of business. Among the alternatives currently being actively
considered is entering into new lines of business through specific strategic
acquisitions. While the Company has no current binding agreements with respect
to any acquisition, it is actively exploring acquisition transactions.
In recognition of their ongoing efforts and contributions to the
Company, on July 7, 2003, the Company awarded cash bonuses of $108,000 to Daniel
C. Stein, the Company's Chief Executive Officer, and $68,000 to Samuel Brill,
the Company's Chief Operating Officer. In awarding the bonuses to Mr. Stein and
Mr. Brill, the Company's board of directors specifically referenced Mr. Stein's
and Mr. Brill's efforts which have enabled the Company to (i) consummate the
sale of the Copy Protection Business, (ii) manage and continue to defend the
ongoing litigation more fully described in Item 1 of Part II of this report on
Form 10-Q, (iii) eliminate non-essential operations and non-performing
investments which has significantly decreased its costs and expenses and (iv)
develop a strategic operating plan for the future deployment of its capital
resources.
The Company has not had any significant revenues since January 1, 2003.
As of June 30, 2003, the Company had an accumulated deficit of ($35,940,037).
The Company's expenses related primarily to expenditures on research and
development, marketing, recruiting and retention of personnel, costs of raising
capital and operating expenses incurred while it was engaged in the Copy
Protection Business, in addition to legal costs associated with the continuing
litigation more fully described in Item 1 of Part II of this report on Form
10-Q.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements and accompanying notes have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company's management to make estimates, judgments and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses. The
Company continually evaluates the accounting policies and estimates it uses to
prepare the consolidated financial statements. The Company bases its estimates
on historical experience and assumptions believed to be reasonable under current
facts and circumstances. Actual amounts and results could differ from these
estimates made by management.
The Company does not participate in, nor has it created, any off-balance
sheet special purpose entities or other off-balance sheet financing. In
addition, the Company does not enter into any derivative financial instruments
for speculative purposes.
REVENUE SOURCES
Until the execution of the Purchase Agreement in November 2002, the Company
expected, for the near-term, that its primary source of revenue, if any, would
be royalties payable to it under the Alliance Agreement and, upon completion and
commercialization of the PALLADIUMCD product line, license fees therefrom.
However, as contemplated by the Purchase Agreement, upon the consummation of the
sale of the Copy Protection Business, the Alliance Agreement was terminated and
the Company is no longer entitled to the 30%
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royalty payable under the Alliance Agreement. Accordingly, at this time the
Company has no significant revenue sources from its current operations.
RESULTS OF OPERATIONS
SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS AND
THREE MONTHS ENDED JUNE 30, 2002.
There were no revenues for the six months and three months ended June 30,
2003 or for the same periods in 2002.
The Company did not incur any research and development costs for the 2003
periods as compared to $510,150 and $249,691 for the 2002 periods. The decrease
is attributable to the Company's decision in October 2002 to terminate all
research and development activities at its Israeli based subsidiary's
facilities. Research and development costs in 2002 related primarily to the
enhancement of SAFEAUDIO features undertaken by both TTR and Macrovision, the
development and expansion of copy protection technology to CD-Rs and digital
rights management.
The Company did not incur any sales and marketing expenses for the 2003
periods as compared to $161,319 and $69,685 for the 2002 periods. The decrease
is due to the Company's decision to terminate all sales and marketing expenses
in November 2002, following the execution of the Purchase Agreement.
General and administrative expenses for the 2003 periods were $1,301,928
and $743,274 as compared to $1,110,488 and $628,835 for the 2002 periods. The
increase is primarily attributable to executive compensation including accrued
bonuses at June 30, 2003 of $176,000 and the legal and other fees associated
with the Company's continuing litigation more fully described in Item 1 of Part
II of this report on Form 10-Q.
Stock-based compensation for the 2003 periods were $4,626 and $1,424 as
compared to $32,207 and $810 for the 2002 periods. The decrease in stock-based
compensation expense for the comparable six month periods are attributable to a
reduction in remaining deferred compensation incurred in previous years. In
addition, during the 2003 periods, the Company did not issue any stock options
that would have required the Company to recognize additional deferred
compensation.
The Company reported a $5.7 million gain on the sale of the Copy Protection
Business during the six months and three months ended June 30, 2003, consisting
of $5.05 million in cash and $658,328 in value for return and cancellation of
the Macrovision Stock. The details of the transactions surrounding the sale and
consummation of the sale of the Copy Protection Business are more fully
described in Item 2 of Part I of this report on Form 10-Q.
Based on management's view that the value of the Company's investment in
ComSign had been impaired, the Company wrote-off, during the year ended December
31, 2002, the amount representing the remaining goodwill and the balance of its
investment in ComSign. The Company reported a $40,000 gain on the sale of its
entire 50% equity interest in ComSign during the six month and three month
periods ended June 30, 2003, which amount was reported as a gain since the
Company had previously written-off its entire investment in ComSign. Also, since
the Company was not committed or obligated prior to the sale of its equity
interest in ComSign to fund any continuing losses incurred by ComSign,
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the Company did not record any net loss from ComSign for the six months and
three months ended June 30, 2003 compared to a net loss of $176,935 and $71,188
for the same periods in 2002.
Interest income for the 2003 periods were $2,299 and $803 as compared to
$26,803 and $5,583 for the 2002 periods. The decrease is attributable to the
lower available cash and cash equivalent balances during the 2003 periods.
The Company reported net income for the 2003 periods of $4,430,392 and
$4,990,778 or $.25 and $.28 per share on a basic and diluted basis, as compared
to a net loss of $(2,837,937) and ($1,887,785) or $(.16) and ($.11) per share
for the 2002 periods. The increase is attributable to the consummation of the
sale of the Copy Protection Business during the 2003 periods.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company had cash of approximately $4.7 million,
representing an increase of approximately $4.0 million from December 31, 2002,
due to the net proceeds received from the consummation of the sale of the Copy
Protection Business.
Cash used by operating activities during the six months ended June 30,
2003 was $1,050,152 compared to $2,008,615 for the same period in 2002. The
decrease in cash used by operations is primarily attributable to the Company's
decision to terminate all of its research and development and sales and
marketing activities following the execution of the Purchase Agreement. Cash
used during the 2003 period was primarily for executive compensation and the
legal and related costs associated with the Company's continuing litigation more
fully described in Item 1 of Part II of this report on Form 10-Q.
Since the consummation of the sale of the Copy Protection Business, the
Company has continued to develop a strategic operating plan to deploy its
capital resources. This plan includes, among other options, identifying exiting
operating businesses for potential investment, acquisition or merger, which, if
attempted and/or consummated, would require a significant use of the Company's
cash-on-hand. In connection with any such investment, acquisition or merger, the
Company may find it desirable or advantageous to raise additional equity capital
through the private offering of its securities. The strategic operating plan
also contemplates a possible liquidation of the Company and distribution of cash
to its shareholders. In addition, the Company will continue to vigorously defend
its rights and use its cash primarily for legal and related costs associated
with the continuing litigation more fully described in Item 1 of Part II of this
report on Form 10-Q.
The Company has no long-term debt or any material debt commitments. In
April 2003, the Company relocated its offices to Rye, New York pursuant to a
month-to month lease arrangement with its largest stockholder for approximately
1,500 square feet at an aggregate annual rental expense of $24,000. The current
monthly rental expense that the Company pays for its Rye offices is
approximately 50% less than the monthly amount paid with respect to its former
offices on Lexington Avenue in New York City immediately prior to the
relocation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to changes in interest rates and foreign currency
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exchanges rates were reported in Item 7A of the Company's Annual Report on Form
10-K for the year ended December 31, 2002. There has been no material change in
these market risks since the end of the fiscal year 2002.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to the Company's
management, including its Chief Executive Officer and Principal Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As of the end of the period covered by this report on Form 10-Q, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's Chief Executive Officer and Principal Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14). Based upon that evaluation, the Chief Executive Officer and Principal
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiary) required to be
included in the Company's periodic SEC filings. Subsequent to the date of that
evaluation, there have been no significant changes in internal controls or in
other factors that could significantly affect internal controls.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in the following legal proceedings:
On August 14, 2002, nine purported stockholders of the Company filed a
complaint against the Company, eight of its current or former officers and
several third parties in the United States District Court for the Southern
District of New York. The action, which is known as EILENBERG ET AL. V. KRONITZ
ET AL. (02 Civ. 6502), alleges, among other things, that the Company issued a
series of false and misleading statements, including press releases, that misled
the plaintiffs into purchasing the Company's common stock. The complaint seeks
relief under federal securities laws and common law, and demands compensatory
damages of $7 million or more, and punitive damages of $50 million or more. The
Company believes it has meritorious defenses to this lawsuit. The Company and
most of its current or former officers have filed a motion based upon the
federal securities laws to dismiss the complaint for failure to state a claim
and to plead with particularity under Rule 9(b) of the Federal Rules of Civil
Procedure. After hearing arguments on November 26, 2002, the Court granted
defendants' motion to dismiss the complaint based on Rule 9(b). Plaintiffs filed
an amended complaint, and the Court held a
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settlement conference on June 24, 2003. Following this settlement conference,
the Court adjourned the time for the Company and all defendants to respond to
the amended complaint without date in order to facilitate settlement
negotiations. The litigation is thus in its preliminary stages and no
substantive discovery has been conducted in the case.
Counsel for the EILENBERG plaintiffs filed a second action against the
Company and several of its current or former officers in the same court on
August 21, 2002, this time on behalf of three additional purported stockholders
as plaintiffs. This action, which is known as STURM ET AL. V. TOKAYER ET AL.(602
Civ. 6672), alleged, among other things, that the Company had violated the
federal securities laws by distributing false and misleading materials in
connection with the annual shareholder meeting scheduled for August 26, 2002,
and that several officers and directors had breached duties to the Company and
committed acts of waste and mismanagement by paying excessive salaries to
themselves and others. Plaintiffs promptly moved for a temporary restraining
order to enjoin the annual shareholder meeting from being conducted on August
26, 2002. The Court denied this motion. The Company believes it has meritorious
defenses to this lawsuit. The Company and the other defendants thereafter moved
to dismiss the complaint for failure to state a claim for relief. In response,
the plaintiffs filed an amended complaint, which deleted the prior claims
concerning violations of the federal securities laws, but continued to assert
derivative claims for waste and mismanagement. The Court denied defendants'
motion to dismiss the latter claims but directed that plaintiffs submit a more
detailed verification to the amended complaint and correct an allegation
concerning one of the defendants. Plaintiffs have served their Second Verified
and Amended Complaint. Subsequent to the filing of this Second Amended and
Verified Complaint, and following a June 24, 2003 conference with the Court, the
Court adjourned the time for the Company and all defendants to respond to the
amended complaint without date in order to facilitate settlement discussions.
The litigation is thus in its preliminary stages and no substantive discovery
has been conducted in the case.
On or about December 31, 2002, the same counsel purporting to represent
certain shareholders wrote to Company counsel demanding, among other things,
that the salaries and benefits of the Company's Chief Executive Officer and
Chief Operating Officer be reduced or, in the alternative, they be terminated
for alleged cause. These claims have been referred by the Company's board of
directors to a Special Litigation Committee of the board which investigated the
matter and whose report was delivered on July 9, 2003, which found that the
demand should be rejected as inappropriate and potentially detrimental to the
Company.
The Company has notified the insurer that issued a directors and officers'
liability policy to the Company covering the period in which the filing of the
Eilenberg and Sturm actions occurred. The Company is seeking, among other
things, to recover its costs of defense to the extent provided in the policy and
has entered into an Interim Funding Agreement with the insurer pursuant to which
its costs are to be reimbursed under a full reservation of rights by the
insurer.
The Company's former attorneys commenced an action in the state court in
New York in January 2003 seeking unpaid legal fees in the approximate amount of
$300,000. The Company's answer denies the complaint's material allegations and
alleges as defenses that it was over-billed in unreasonable amounts and
otherwise damaged by the law firm's failure to advise properly in the
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shareholder litigation brought by Sturm et al. The case is in the discovery
stage. The Company has recorded the total amount billed by the former attorneys
as of June 30 2003.
As of June 30, 2003, it is not possible to estimate the liability, if any,
in connection with the first two litigation cases described above. Accordingly,
no accruals for these contingencies have been recorded.
From time to time the Company has been involved in other disputes and legal
actions arising in the ordinary course of business. In management's opinion,
none of these other disputes and legal actions is expected to have a material
impact on the Company's business or cash flow.
ITEM 2. CHANGE IN SECURITIES & USE OF PROCEEDS
SALE OF UNREGISTERED SECURITIES
There were no issuances for sale of any unregistered securities by the
Company during the six months ended June 30, 2003.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
(i) We filed a current report Item 5 on Form 8-K dated May 28, 2003
attaching our press release dated May 28, 2003 reporting the
consummation of the sale of the assets of our Music Copy Protection
and Digital Rights Management Business to Macrovision Corporation and
certain of its affiliates.
(ii) We filed a current report Item 2 and 7 on Form 8-K dated June 10,
2003, attaching our financials for the period ended March 31, 2003,
setting forth our unaudited pro forma financial information resulting
from the consummation of the sale of the assets of our Music Copy
Protection and Digital Rights Management Business to Macrovision and
certain of its affiliates.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TTR TECHNOLOGIES, INC.
DATE: August 14, 2003 BY /s/ DANIEL C. STEIN
DANIEL C. STEIN,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATE: August 14, 2003 BY /s/ SAM BRILL
SAM BRILL,
CHIEF OPERATING OFFICER
(PRINCIPAL FINANCIAL OFFICER)
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