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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 March 31, 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)
575 LEXINGTON AVENUE, NEW YORK, NEW YORK, 10022
(Former name, former address and former fiscal year,
if changed since last report)
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 May
15, 2003, is 18,321,567 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
March 31, 2003 and December 31, 2002 1
Consolidated Statements of Operations
For the three months ended March 31, 2003 and 2002 2
Consolidated Statements of Comprehensive Loss
For the three months ended March 31, 2003 and 2002 3
Consolidated Statements of Cash Flows
For the three months ended March 31, 2003 and 2002 4
Notes to the Consolidated Financial Statements 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. Controls and Procedures 11
Part II. OTHER INFORMATION 11
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 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.
-(i)-
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; THE PROSPECTS FOR COMSIGN; BELIEF AS TO
THE SUFFICIENCY OF ITS CASH RESERVES; THE PROSPECTS FOR THE CLOSING OF THE SALE
OF THE COPY PROTECTION 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, COMPANY'S DIFFICULTY IN RAISING CAPITAL, POSSIBLE ACTIONS
OF THE OFFICE OF CHIEF SCIENTIST IN CONNECTION WITH THE SALE OF THE COPY
PROTECTION BUSINESS, PROSPECTIVE TAX TREATMENT UNDER U.S. AND OTHER LAW RELATING
TO THE SALE OF THE COPY PROTECTION BUSINESS, COMPANY'S NET OPERATING LOSS
CARRYFORWARDS, PROSPECTS AS TO THE MARKETING OF SAFEAUDIO AND PALLADIUMCD,
EFFECTS OF THE SALE OF THE COPY PROTECTION BUSINESS, COMPANY'S FUTURE PLANS,
SUFFICIENCY OF CASH RESERVES, PERFORMANCE OF COMSIGN, 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.
(ii)
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 232,593 $ 653,885
Note receivable, officer 33,333 33,333
Prepaid expenses and other current assets 43,686 64,999
------------ ------------
Total current assets 309,612 752,217
Property and equipment - net 18,564 23,093
Investment in ComSign, Ltd. - -
Note receivable, officer 33,334 33,334
Other asset 6,300 6,300
------------ ------------
Total assets $ 367,810 $ 814,944
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Current liabilities
Accounts payable $ 604,012 $ 497,898
Accrued expenses 66,051 61,011
------------ ------------
Total current liabilities 670,063 558,909
------------ ------------
Total liabilities 670,063 558,909
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value;
5,000,000 shares authorized; none issued and outstanding - -
Common stock, $.001 par value;
50,000,000 shares authorized; 18,261,567 and 18,261,567
issued and outstanding, respectively 18,262 18,262
Additional paid-in capital 40,529,983 40,533,593
Other accumulated comprehensive income 83,165 84,270
Deficit accumulated during the development stage (40,930,815) (40,370,429)
Less: deferred compensation (2,848) (9,661)
------------ ------------
Total stockholders' equity (deficit) (302,253) 256,035
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 367,810 $ 814,944
============ ============
See Notes to Consolidated Financial Statements.
-1-
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
From
Inception
Three Months (July 14,
Ended 1994) to
March 31, March 31,
2003 2002 2003
---- ---- ----
(Unaudited) (Unaudited) (Unaudited)
Revenue $ - $ - $ 125,724
---------------- -------------- ---------------
Expenses
Research and development (1) - 260,459 5,704,131
Sales and marketing (1) - 91,634 4,457,457
General and administrative (1) 558,654 481,653 11,630,094
Stock-based compensation 3,202 31,397 11,402,862
Bad debt expense - - 161,000
---------------- -------------- ---------------
Total expenses 561,856 865,143 33,355,544
---------------- -------------- ---------------
Operating loss (561,856) (865,143) (33,229,820)
---------------- -------------- ---------------
Other (income) expense
Legal settlement - - 232,500
Loss on investment - - 17,000
Other income - - (75,000)
Net losses of affiliate - 105,747 1,196,656
Impairment loss on investment in affiliate - - 748,690
Amortization of deferred financing costs - - 4,516,775
Interest income (1,496) (21,220) (901,731)
Interest expense 26 482 1,966,105
---------------- -------------- ---------------
Total other (income) expenses (1,470) 85,009 7,700,995
---------------- -------------- ---------------
Net loss $ (560,386) $ (950,152) $ (40,930,815)
================ ============== ===============
Per share data:
Basic and diluted $ (0.03) $ (0.05)
================ ==============
Weighted average number
of common shares used in
basic and diluted loss per share 18,261,567 17,593,896
================ ==============
(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 3,202 810 5,610,065
---------------- -------------- ---------------
$ 3,202 $ 31,397 $ 11,402,862
================ ============== ===============
See Notes to Consolidated Financial Statements.
-2-
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
From
Inception
Three Months (July 14,
Ended 1994) to
March 31, March 31,
2003 2002 2003
---- ---- ----
(Unaudited) (Unaudited) (Unaudited)
Net loss $ (560,386) $ (950,152) $ (40,930,815)
Other comprehensive income (loss)
Foreign currency translation adjustments (1,105) (7,956) 83,165
---------------- -------------- ---------------
Comprehensive loss $ (561,491) $ (958,108) $ (40,847,650)
================ ============== ===============
See Notes to Consolidated Financial Statements.
-3-
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
From
Three Months Inception
Ended (July 14, 1994)
March 31, to March 31,
2003 2002 2003
---- ---- ----
(Unaudited) (Unaudited) (Unaudited)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (560,386) $ (950,152) $(40,930,815)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 4,563 15,536 953,587
Forgiveness of note receivable, officer - - 33,333
Loss from write-down of fixed assets - - 162,192
Bad debt expense - - 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 3,202 31,397 11,575,823
Payment of common stock issued with guaranteed selling price - - (155,344)
Net losses of affiliate - 105,747 1,196,656
Impairment loss on investment in affiliate - - 748,690
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable - 974 554
Prepaid expenses and other current assets 21,325 (9,300) (73,398)
Other assets - (2,750) (6,300)
Accounts payable 106,114 33,123 56,820
Accrued expenses 4,360 (119,586) 1,152,369
Accrued severance pay - (30,144) (122,363)
Interest payable - - 251,019
------------ ------------ ------------
Net cash used by operating activities (420,822) (925,155) (19,758,975)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed assets - (26,442) 68,594
Purchases of property and equipment - - (986,535)
Investment in ComSign, Ltd. - - (2,000,000)
Increase in note receivable, officer - - (100,000)
Increase in note receivable - - (130,000)
Increase in organization costs - - (7,680)
------------ ------------ ------------
Net cash used by investing activities - (26,442) (3,155,621)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock - - 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 by financing activities - - 23,154,451
------------ ------------ ------------
Effect of exchange rate changes on cash (470) (1,287) (7,262)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (421,292) (952,884) 232,593
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 653,885 4,915,269 -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 232,593 $ 3,962,385 $ 232,593
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for interest $ 26 $ 482 $ 476,936
============ ============ ============
See Notes to Consolidated Financial Statements.
-4-
TTR TECHNOLOGIES, INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of TTR
Technologies, Inc. and its subsidiary TTR Technologies, Ltd. (the "Company")
have been prepared in accordance with generally accepted accounting principles
in the United States of America 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
three months ended March 31, 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 - GOING CONCERN
The accompanying consolidated financial statements of the Company have been
prepared assuming that the Company will continue as a going-concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company reported in its Form 10-K for the
year ended December 31, 2002 that its ability to continue as a going concern is
dependent upon the consummation of the transactions contemplated by the Purchase
Agreement further described in Item 2 to this report on Form 10-Q for the three
months ended March 31, 2003. As described, the Company's sale of its copy
protection technology to Macrovision Corporation and its affiliates and the
related receipt of the net sales proceeds therefrom, is contingent upon and,
subject to, satisfying certain conditions. Those factors and the related
contingency creates an uncertainty about the Company's ability to continue as a
going concern in the event such transaction is not consummated. The ability of
the Company to continue as a going concern is dependent upon the consummation of
the transaction or, alternatively, raising additional capital in an amount
sufficient to continue its operations. The Company has no commitments for any
such financing, and there can be no assurance that additional capital will be
available to the Company on commercially acceptable terms. The consolidated
financial statements of the Company do not include any adjustment that might be
necessary if the Company is unable to continue as a going concern.
NOTE 3 - INVESTMENT IN COMSIGN, LTD.
The Company disclosed in its report on 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 December 31, 2002. Since the Company is
not committed or obligated to fund any continuing losses incurred by ComSign,
Ltd. and the entire investment has been written-off, there have been no
transactions recorded during the three months ended March 31, 2003 with respect
to this investment. Accordingly, the Company is not providing summarized
financial data for ComSign, Ltd. as of March 31, 2003.
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 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.
-5-
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 loss and net loss per share as reported would have been increased to the pro
forma amounts indicated below:
First quarter ended
March 31,
2003 2002
---- ----
Net loss
As reported $(560,386) $(950,152)
Add: Stock-based employee compensation
expense included in reported
net loss, net of related tax effects 3,202 31,397
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (83,761) (157,067)
------- ---------
Pro forma $(640,945) $(1,075,822)
======= =========
Net loss per share, basic and diluted
As reported $(0.03) $(0.05)
==== ====
Pro forma $(0.04) $(0.06)
==== ====
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW / 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 dated
as of November 4, 2002, (the "Purchase Agreement") with Macrovision, one of the
Company's largest stockholders and Macrovision Europe, Ltd., an affiliate of
Macrovision (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 is to receive at
closing an aggregate cash consideration of $5.25 million, with certain downward
adjustments to not exceed $400,000, as well as the endorsement and delivery to
the Company, for eventual cancellation and return to the Company's treasury, 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. Under the terms of the Purchase Agreement, upon
closing, the Alliance Agreement entered into by the Company and Macrovision,
pursuant to which the Company is 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, will terminate and be of no
continuing legal effect. To date, no significant revenues have been generated by
SAFEAUDIO.
On December 10, 2002, the Company filed with the Securities and Exchange
Commission ("SEC") a definitive proxy statement (the "Proxy Statement")
soliciting stockholder approval for the sale of the Copy Protection Business
pursuant to the terms of the Purchase Agreement. A special meeting of the
stockholders was scheduled for January 13, 2003, which was subsequently
adjourned to January 15, 2003 (the "Special Stockholders Meeting"), at which the
Company's stockholders approved the sale of the Copy Protection Business.
The Purchase Agreement contemplated that the specified conditions to
closing were to have occurred on or before March 15, 2003. One of the closing
conditions relates to 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 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, a contention
with which the Company does not agree.
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 to transfer to an Israeli
affiliate of Macrovision ("Macrovision Israel") certain of the technologies that
were developed with OCS funding (the "Subject Technologies"). As of the date of
the filing of this report on Form 10-Q for the three months ended March 31,
2003, the OCS has not responded to the application.
-7-
As described in the Proxy Statement and in the special report on Form 8-K
filed with the SEC on March 14, 2003, certain rights to terminate the Purchase
Agreement arise if the transactions contemplated by that agreement are not
consummated by March 15, 2003. No assurance can be provided that the OCS will in
fact agree to the transfer of the Subject Technologies to Macrovision Israel or
that the sale of the Company's Copy Protection Business as contemplated under
the Purchase Agreement will in fact be consummated or otherwise be concluded.
For a more detailed discussion of the Purchase Agreement and the sale of
the Copy Protection Business, reference is made to the Proxy Statement.
If the sale of the Copy Protection Business contemplated under the Purchase
Agreement is not consummated within the second quarter of 2003, then management
anticipates that it will, initially, attempt to reach an agreement with
Macrovision as to the parties' rights respecting the jointly developed
technologies. In the absence of any such agreement, the Company anticipates that
it may commence legal process against Macrovision in order to defend the
Company's interests and assert its rights under the Alliance Agreement.
Additionally, management anticipates that it may attempt to resume its marketing
efforts with respect to its PALLADIUMCD product line. However, in order to
effectively defend the Company's interests and assert its rights under the
Alliance Agreement, management anticipates that it will need to raise additional
cash significantly in excess of the available cash that the Company had as of
March 31, 2003. The Company has no present financing commitments and no
assurance can be provided that the Company will be able to raise funds on a
commercially reasonable basis.
If the sale of the Copy Protection Business is in fact consummated as
contemplated under the Purchase Agreement, the Company's only significant asset
following such closing will be cash and cash equivalents. Management estimates
that the Company and its subsidiary TTR Ltd. had at March 31, 2003, a net
operating loss carry forward (NOL) of approximately $27 million that may be
available to offset future United States and Israeli taxable income, subject to
certain specified limitations under applicable law. If the sale of the Copy
Protection Business is concluded as contemplated under the Purchase Agreement,
the Company will no longer be engaged in the copy protection business.
The Company's board of directors has not yet determined the Company's
strategic direction following the consummation, if any, of the sale of the Copy
Protection Business and is considering several possible general alternatives.
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
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.
The Company has not had any significant revenues to date. As of March 31,
2003, the Company had an accumulated deficit of $(40,930,815). 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.
In an effort to preserve the Company's cash position, as of the date of the
execution of the Purchase Agreement in November 2002, the Company has ceased to
be engaged in the copy protection area, the only field of business that it has
been actively engaged in since it commenced operations in 1994.
-8-
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 and uses derivative financial instruments primarily for
managing its exposure to changes in interest rates.
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. If
sale of the Copy Protection Business is consummated as contemplated by the
Purchase Agreement, the Company will no longer be entitled to the 30% royalty
payable under the Alliance Agreement and it is unlikely there will be any
significant revenue source, other than the anticipated net proceeds payable at
the closing.
If the closing of the sale of the Copy Protection Business contemplated
under the Purchase Agreement is not consummated, management anticipates that,
unless it reaches an agreement with Macrovision as to the parties' rights
respecting the jointly developed technologies under the Alliance Agreement, it
may commence legal process against Macrovision in order to defend the Company's
interests and assert its rights under the Alliance Agreement, as well as to
commence marketing the PALLADIUMCD product line. Under such circumstances, no
assurance can be provided that any royalties payable under the Alliance
Agreement will be collected or that the Company will be able to generate any
proceeds from the PALLADIUMCD product line.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31,
2002.
There were no revenues for the three months ended March 31, 2003 or for the
same period in 2002.
The Company did not incur any research and development costs for the 2003
period as compared to $260,459 for the 2002 period. 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
period as compared to $91,634 for the 2002 period. 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 period were $558,654 as
compared to $481,653 for the 2002 period. The increase is primarily attributable
to 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 period was $3,202 as compared to
$31,397 for the 2002 period. The decrease in stock-based compensation expense is
attributable to a reduction in remaining deferred compensation incurred in
previous years. In addition, during the 2003 period, the Company did not issue
any stock options that would have required the Company to recognize additional
deferred compensation.
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The Company's affiliate, ComSign Ltd., commenced operations in July 2000.
ComSign currently serves as VeriSign Inc.'s sole principal affiliate in Israel
and the Palestinian Authority and exclusive marketer of VeriSign's digital
authentication certificates and related services. Based on management's view
that the value of the Company's investment 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. Since the
Company is not committed or obligated to fund any continuing losses incurred by
ComSign, the Company did not record any net loss from its affiliate for the
three months ended March 31, 2003 compared to a net loss of $105,747 for the
same period in 2002.
Interest income for the 2003 period was $1,496 as compared to $21,220 for
the 2002 period. The decrease is attributable to the lower cash and cash
equivalent balances, primarily resulting from the expenditure of cash for 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, and decreased
interest rates.
The Company reported a net loss for the 2003 period of $(560,386) or $(.03)
per share on a basic and diluted basis, as compared to a net loss of $(950,152)
or $(.05)per share for the 2002 period.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company had cash of approximately $233,000,
representing a decrease of approximately $421,000 from December 31, 2002.
Cash used by operating activities during the three months ended March 31,
2003 was $420,822 compared to $925,155 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 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.
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.
If the sale of the Company's Copy Protection Business is consummated as
contemplated under the Purchase Agreement, the net proceeds thereof are expected
to result in an increase in cash of approximately $5 million. No assurance
however, can be provided that the sale of the business will in fact be
consummated.
If the sale of the Copy Protection Business is not consummated, management
believes that it will need to raise additional cash on an immediate basis in
order to defend its interests, including its rights under the Alliance Agreement
with Macrovision, and to resume limited operations in the copy protection field.
The financial statements accompanying this report for the three months ended
March 31, 2003, include an explanatory paragraph relating to the uncertainty of
the Company's ability to continue as a going concern, which may make it more
difficult for the Company to raise additional capital. At the present time, the
Company has no commitments for any such financing, and there can be no assurance
that additional capital will be available to the Company on commercially
acceptable terms. If the Company is unable to raise such financing on
commercially reasonable terms, it may no longer be able to remain in business.
Furthermore, it is anticipated that any successful financing will have a
significant dilutive effect on existing stockholders. The inability to obtain
such financing will have a material adverse effect on the Company, its condition
and prospects.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to changes in interest rates and foreign currency
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. 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.
Within the 90 days prior to the date of 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
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 $10 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 Company has requested from the Court an extension
of time until June 13, 2003 to respond to the amended complaint. 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
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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 and the Company and the
other defendants have requested from the Court an extension of time until June
13, 2003 to answer or otherwise respond to the Second Amended Complaint. 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. Plaintiffs' claims have been referred by the Company's board
of directors to a Special Litigation Committee of the board which is
investigating the matter and whose report is expected on or about May 31, 2003.
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
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 March 31, 2003.
As of March 31, 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 three months ended March 31, 2003.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 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.
99.2 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) Report on Form 8-K dated March 14, 2003
(ii) Report on Form 8-K dated January 7, 2003
-13-
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: MAY 15, 2003 BY /s/ DANIEL C. STEIN
DANIEL C. STEIN,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Principal Financial Officer
DATE: MAY 15, 2003 BY /s/ SAM BRILL
SAM BRILL,
CHIEF OPERATING OFFICER
(PRINCIPAL FINANCIAL OFFICER)
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CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel C. Stein, Chief Executive Officer, of TTR Technologies, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of TTR Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this quarterly report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiary,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions and about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons fulfilling the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the Company's ability to record, process, summarize
and report financial data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ DANIEL C. STEIN
DANIEL C. STEIN
CHIEF EXECUTIVE OFFICER
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CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Sam Brill, Chief Operating Officer, of TTR Technologies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of TTR Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this quarterly report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiary,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions and about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons fulfilling the equivalent
function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ SAM BRILL
SAM BRILL
CHIEF OPERATING OFFICER
(PRINCIPAL FINANCIAL OFFICER)
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