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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 September 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 ______
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)
4424 16th Avenue, Brooklyn, New York 11204
(Address of principal executive offices) (Zip Code)
914-921-4004
(Registrant's telephone number, including area code)
1091 BOSTON POST ROAD, RYE, NEW YORK 10580
(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 November
14, 2003, is 16,440,630 shares.
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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
September 30, 2003 and December 31, 2002 1
Consolidated Statements of Operations
For the nine and three months ended September 30, 2003 and
2002 2
Consolidated Statements of Comprehensive Income (Loss) For the nine and
three months ended September 30, 2003 and 2002 3
Consolidated Statements of Cash Flows
For the nine and three months ended September 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 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES
*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
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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.
ii
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 3,962,776 $ 653,885
Note receivable, officer - 33,333
Prepaid expenses and other current assets 182,068 64,999
-------------- -------------
Total current assets 4,144,844 752,217
Property and equipment - net 2,356 23,093
Note receivable, officer - 33,334
Other asset 6,488 6,300
-------------- -------------
Total assets $ 4,153,688 $ 814,944
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities
Accounts payable $ 470,480 $ 497,898
Accrued expenses 342,007 61,011
Accrued severance 79,360 -
-------------- -------------
Total current liabilities 891,847 558,909
-------------- -------------
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 (36,710,347) (40,370,429)
Less: deferred compensation - (9,661)
-------------- -------------
Total stockholders' equity 3,261,841 256,035
-------------- -------------
Total liabilities and stockholders' equity $ 4,153,688 $ 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
Nine Months (July 14, Three Months
Ended 1994) to Ended
September 30, September 30, September 30,
2003 2002 2003 2003 2002
---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue $ - $ - $ 125,724 $ - $ -
-------------- ------------- -------------- ------------- --------------
Expenses
Research and development (1) - 741,484 5,704,131 - 231,334
Sales and marketing (1) - 238,324 4,457,457 - 77,005
General and administrative (1) 1,733,135 1,664,764 12,804,575 431,207 554,276
Stock-based compensation 6,050 33,017 11,405,710 1,424 810
Bad debt expense - 161,000 161,000 - 31,000
-------------- ------------- -------------- ------------- --------------
Total expenses 1,739,185 2,838,589 34,532,873 432,631 894,425
-------------- ------------- -------------- ------------- --------------
Operating loss (1,739,185) (2,838,589) (34,407,149) (432,631) (894,425)
-------------- ------------- -------------- ------------- --------------
Other (income) expense
Legal settlement 333,333 - 565,833 333,333 -
Loss on investment - - 17,000 - -
Other income - - (75,000) - -
Net losses of affiliate - 298,457 1,196,656 - 121,522
Impairment loss on investment in affiliate - 742,000 748,690 - -
Amortization of deferred financing costs - - 4,516,775 - -
Gain on sale of copy protection business (5,708,328) - (5,708,328) - -
Gain on sale of investment in affiliate (40,000) - (40,000) - -
Loss on disposition of fixed assets 28,963 159,255 28,963 15,348 159,255
Interest income (13,301) (34,658) (913,536) (11,002) (7,855)
Interest expense 66 1,029 1,966,145 - (612)
-------------- ------------- -------------- ------------- --------------
Total other (income) expenses (5,399,267) 1,166,083 2,303,198 337,679 272,310
-------------- ------------- -------------- ------------- --------------
Net income (loss) $ 3,660,082 $(4,004,672) $(36,710,347) $ (770,310) $ (1,166,735)
============== ============= ============== ============= ==============
Per share data:
Basic and diluted $ 0.21 $ (0.23) $ (0.05) $ (0.07)
============== ============= ============= ==============
Weighted average number
of common shares used in
basic and diluted income (loss) per share 17,437,511 17,728,785 16,440,630 17,858,068
============== ============= ============= ==============
(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 6,050 2,430 5,612,913 1,424 810
-------------- ------------- -------------- ------------- --------------
$ 6,050 $ 33,017 $ 11,405,710 $ 1,424 $ 810
============== ============= ============== ============= ==============
See Notes to Consolidated Financial Statements.
-2-
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
From
Inception
Nine Months (July 14, Three Months
Ended 1994) to Ended
September 30, September 30, September 30,
2003 2002 2003 2003 2002
---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net income (loss) $ 3,660,082 $(4,004,672) $(36,710,347) $ (770,310) $ (1,166,735)
Other comprehensive income (loss)
Foreign currency translation adjustments (1,999) (4,281) 82,271 - 6,829
-------------- ------------- -------------- ------------- --------------
Comprehensive income (loss) $ 3,658,083 $(4,008,953) $(36,628,076) $ (770,310) $ (1,159,906)
============== ============= ============== ============= ==============
See Notes to Consolidated Financial Statements.
-3-
TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
From
Nine Months Inception
Ended (July 14, 1994)
September 30, September 30,
2003 2002 2003
---- ---- ----
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,660,082 $(4,004,672) $(36,710,347)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 4,092 56,240 953,116
Forgiveness of note receivable, officer 66,667 - 100,000
Loss from disposition of fixed assets 32,963 159,469 195,155
Bad debt expense - 161,000 161,000
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 6,050 33,017 11,578,671
Payment of common stock issued with guaranteed selling price - - (155,344)
Net losses of affiliate - 298,457 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 - 949 554
Prepaid expenses and other current assets (117,043) 9,284 (211,766)
Other assets (188) (2,750) (6,488)
Accounts payable (27,419) (293) (76,713)
Accrued expenses 267,000 (234,661) 1,415,009
Accrued severance pay 79,360 (400,391) (43,003)
Interest payable - - 251,019
-------------- ------------- --------------
Net cash used in operating activities (1,776,764) (3,182,351) (21,114,917)
-------------- ------------- --------------
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) (111,620) (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 by (used in) investing activities 5,073,933 (211,620) 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 by financing activities - 1,982 23,154,451
-------------- ------------- --------------
Effect of exchange rate changes on cash 11,722 (513) 4,930
-------------- ------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,308,891 (3,392,502) 3,962,776
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 653,885 4,915,269 -
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,962,776 $ 1,522,767 $ 3,962,776
============== ============= ==============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for interest $ 66 $ 1,029 $ 476,976
============== ============= ==============
Noncash investing transaction:
Common stock returned to the company from
the sale of copy protection business $ 658,328 $ - $ 658,328
============== ============= ==============
Exchange of fixed asset for rent $ 4,000 $ - $ 4,000
============== ============= ==============
See Notes to Consolidated Financial Statements.
-4-
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 accounting principles generally accepted in the United States of America 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 nine months ended
September 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 of this report on Form 10-Q. The Company
recorded a gain on sale of $5.7 million in its statement of operations during
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 - TERMINATION AND SETTLEMENT AGREEMENT
Daniel C. Stein, TTR's former Chief Executive Officer ("Mr. Stein"), was paid a
one-time gross payment of $78,000 under the terms of his Termination and
Settlement Agreement with the Company. Additionally, in consideration of Mr.
Stein's waiver of certain claims under his employment agreement, the outstanding
balance of approximately $67,000 of the advance of $100,000 made to Mr. Stein
upon the commencement of his employment in May 2002 was extinguished. The
initial one-third of such advance (approximately $33,000) was, consistent with
the terms of Mr. Stein's employment agreement, extinguished at year-end 2002. In
addition, the 550,000 stock
-5-
options held by Mr. Stein were extinguished and are no longer exercisable. In
connection with his resignation, Mr. Stein also received certain limited
benefits, including limited indemnification and general releases.
NOTE 5 - 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.
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.
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:
Nine Months Ended Three Months Ended
September 30, September 30,
2003 2002 2003 2002
----------------- ----------------- ----------------- -----------------
Net income (loss)
As reported $ 3,660,082 $(4,004,672) $ (770,310) $(1,166,735)
Add: Stock-based employee compensation
expense included in reported
net income (loss), net of related tax effects 6,050 33,017 1,424 810
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (247,728) (566,113) (81,983) (215,473)
----------------- ----------------- ----------------- -----------------
Pro forma $ 3,418,404 $(4,537,768) $ (850,869) $(1,381,398)
================= ================= ================= =================
Net income (loss) per share, basic and diluted
As reported $ 0.21 $ (0.23) $ (0.05) $ (0.07)
================= ================= ================= =================
Pro forma $ 0.20 $ (0.26) $ (0.05) $ (0.08)
================= ================= ================= =================
Common stock equivalents have been excluded from the weighted-average shares for
the three and nine months ended September 30, 2003 and 2002, as inclusion is
anti-dilutive. Potentially dilutive options of 2,210,175 and 4,131,625 are
outstanding at September 30, 2003 and 2002, respectively.
NOTE 6 - LEGAL PROCEEDINGS
The Company is involved in the following legal proceedings:
On or about June 20, 2003, the Company initiated litigation in the Supreme Court
of the State of New York, County of Westchester, against Ripp Entertainment
Group, Inc. ("Ripp"), seeking the sum of $130,000 on a defaulted promissory
note. Ripp removed the case to Federal Court and filed an answer with two
counterclaims against the Company, seeking (a) compensatory damages in excess of
$1,000,000 and punitive damages in the amount of $3,000,000 for allegedly
fraudulently inducing Ripp to enter into a certain Consulting Agreement with the
Company, and (b) damages in excess of $210,000 for the Company's alleged failure
to pay Ripp for services rendered under the Consulting Agreement. A settlement
in principle has been reached pursuant to which both the Company's claims and
Ripp's counterclaims will be dismissed with prejudice. In
-6-
addition, Ripp will surrender 150,000 stock options which it had obtained in
conjunction with the Consulting Agreements dated June 27, 2001 and September 25,
2000.
On August 14, 2002, nine purported stockholders of the Company filed a complaint
against the Company (the "Eilenberg Action"), 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 plaintiffs in the Eilenberg Action filed a second action (the
"Sturm 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 were 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 has reached an agreement in principle consensually to
resolve the Eilenberg Action and the Sturm Action which would require the
Company to pay the plaintiffs an aggregate amount of approximately $333,000,
would require the insurer to make a payment to the plaintiffs, and would require
the exchange of mutual releases by the parties. Accordingly, as of September 30,
2003, an accrual for these contingencies has been recorded. Definitive
documentation with respect to this settlement in principle has not been executed
and there can be no assurances that it actually will be consummated.
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 $324,000.
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 Sturm Action. While
conducting discovery, the parties
-7-
engaged in settlement negotiations. On October 29, 2003, the parties executed a
Settlement Agreement agreeing to resolve all outstanding claims with regard to
the dispute. Under the terms of the Settlement Agreement, the Company's former
attorneys agreed to dismiss all outstanding claims in the action with prejudice
and the Company agreed to pay the Company's former attorneys $133,898.54 with
respect to its invoices in the Sturm Action, $73,748.32 with respect to its
invoices in the Eilenberg Action, and $42,353.14 with respect to general Company
matters. The parties also exchanged mutual general releases.
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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
From its inception in 1994 through the period immediately preceding the date on
which the Purchase Agreement discussed below was entered into, the Company 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.
-8-
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 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 on
May 28, 2003, 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 September 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 $17 million in the United States and
approximately $5 million in Israel that may be available to offset future United
States and Israeli taxable income, subject to certain specified limitations
under applicable law.
TTR and Daniel C. Stein, the Company's former Chief Executive Officer, President
and a director ("Mr. Stein"), have entered into an agreement (the "Separation
Agreement") whereby Mr. Stein has resigned from all positions held with Company.
Under the terms of the Separation Agreement, Mr. Stein was paid a one-time gross
payment of $78,000. Additionally, in consideration of Mr. Stein's waiver of
certain
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claims under his employment agreement, the outstanding balance of approximately
$67,000 of the advance of $100,000 made to Mr. Stein upon the commencement of
his employment in May 2002 was extinguished. The initial one-third of such
advance (approximately $33,000) was, consistent with the terms of Mr. Stein's
employment agreement, extinguished at year-end 2002. In addition, the 550,000
stock options held by Mr. Stein were extinguished and are no longer exercisable.
In connection with his resignation, Mr. Stein also received certain limited
benefits, including limited indemnification and general releases.
Judah Marvin Feigenbaum, a director, has been appointed as interim acting Chief
Executive Officer of the Company, pending the decision of the Company's board of
directors as to the Company's future strategic direction or the appointment of a
full-time Chief Executive Officer. Concurrent with his new appointment, Mr.
Feigenbaum will continue to carry on his present duties in the management of
other businesses.
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.
The Company has not had any significant revenues since January 1, 2003. As of
September 30, 2003, the Company had an accumulated deficit of $36,377,014. The
Company's expenses are 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
At this time the Company has no revenue sources.
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RESULTS OF OPERATIONS
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2003
COMPARED TO
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2002
There were no revenues for the nine months and three months ended September 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 $741,484 and $231,334 for the 2002 periods. The decrease
is attributable to the Company's decision in October 2002, in contemplation of
the asset sale to Macrovision, 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 $238,324 and $77,005 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 with Macrovision.
General and administrative expenses for the 2003 periods were $1,733,135 and
$431,207 as compared to $1,664,764 and $554,276 for the 2002 periods. The
increase is primarily attributable to executive compensation 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 $6,050 and $1,424 as compared
to $33,017 and $810 for the 2002 periods. The decrease in stock-based
compensation expense for the comparable nine 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 nine months ended September 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.
Interest income for the 2003 periods was $13,301 and $11,002 as compared to
$34,658 and $7,855 for the 2002 periods. The decrease for the nine month period
is attributable to the lower available cash and cash equivalent balances and
lower interest rates during the 2003 periods. The increase for the three month
period is attributable to the higher available cash and cash equivalent
balances.
The Company reported net income (loss) for the 2003 periods of $3,660,082 and
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($770,310) or $.21 and $(.05) per share on a basic and diluted basis, as
compared to a net loss of $(4,004,672) and ($1,166,735) or $(.23) and ($.07) 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 September 30, 2003, the Company had cash of approximately $4 million,
representing an increase of approximately $3.3 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 nine months ended September 30,
2003 was $1,776,764 compared to $3,182,351 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.
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.
The Company has no long-term debt.
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. 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 acting 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.
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In response to the resignation of the Directors serving on the Company's Audit
Committee, on September 12, 2003, the Company's Board of Directors appointed new
members to the Audit Committee. After the departure of the Company's former
Chief Executive Officer, the new Audit Committee and the Company's new Chief
Executive Officer and Principal Financial Officer conducted an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Exchange Act Rule 13a- 15(e)) in effect as of the
end of the period covered by this report. Based on that evaluation, the new
Audit Committee and the Company's new Chief Executive Officer and Principal
Financial Officer concluded that the Company's disclosure controls and
procedures in effect as of the end of the period covered by this report were
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 completion of that evaluation,
the Audit Committee and the Company's new Chief Executive Officer have made
changes to the Company's disclosure controls and procedures, which should
further improve the effectiveness of the Company's internal controls.
There were no significant changes in internal controls over financial reporting
that occurred during the third quarter of 2003 that have materially affected, or
are reasonably likely to materially affect, the Company's internal controls over
financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in the following legal proceedings:
On or about June 20, 2003, the Company initiated litigation in the Supreme Court
of the State of New York, County of Westchester, against Ripp Entertainment
Group, Inc. ("Ripp"), seeking the sum of $130,000 on a defaulted promissory
note. Ripp removed the case to Federal Court and filed an answer with two
counterclaims against the Company, seeking (a) compensatory damages in excess of
$1,000,000 and punitive damages in the amount of $3,000,000 for allegedly
fraudulently inducing Ripp to enter into a certain Consulting Agreement with the
Company, and (b) damages in excess of $210,000 for the Company's alleged failure
to pay Ripp for services rendered under the Consulting Agreement. A settlement
in principle has been reached pursuant to which both the Company's claims and
Ripp's counterclaims will be dismissed with prejudice. In addition, Ripp will
surrender 150,000 stock options which it had obtained in conjunction with the
Consulting Agreements dated June 27, 2001 and September 25, 2000.
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
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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
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 then Chief Executive Officer and Chief
Operating Officer be reduced or, in the alternative, they be terminated for
alleged cause. These claims were 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
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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 has
reached an agreement in principle consensually to resolve the Eilenberg Action
and the Sturm Action which would require the Company to pay the plaintiffs an
aggregate amount of approximately $333,000, would require the insurer to make a
payment to the plaintiffs, and would require the exchange of mutual releases by
the parties. Accordingly, as of September 30, 2003, an accrual for these
contingencies has been recorded. Definitive documentation with respect to this
settlement in principle has not been executed and there can be no assurances
that it actually will be consummated.
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 $324,000.
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 Sturm Action. While
conducting discovery, the parties engaged in settlement negotiations. On October
29, 2003, the parties executed a Settlement Agreement agreeing to resolve all
outstanding claims with regard to the dispute. Under the terms of the Settlement
Agreement, the Company's former attorneys agreed to dismiss all outstanding
claims in the action with prejudice and the Company agreed to pay the Company's
former attorneys $133,898.54 with respect to its invoices in the Sturm Action,
$73,748.32 with respect to its invoices in the Eilenberg Action, and $42,353.14
with respect to general Company matters. The parties also exchanged mutual
general releases.
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 nine months ended September 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
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer and Principal 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 and 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) The Company filed a current report Item 4 on Form 8-K dated July 17, 2003
reporting that Deloitte & Touche resigned as independent certified public
accountant and independent auditor and that the Company engaged Marcum &
Kliegman, LLP as its independent auditor and independent certified public
accountant.
(ii) The Company filed a current report Item 4 and 7 on Form 8-K dated July 23,
2003, attaching the resignation letter dated July 22, 2003 from Brightman
Almagor & Co., a member of Deloitte Touche, and reporting once again that
Deloitte & Touche resigned as independent certified public accountant and
independent auditor and that the Company engaged Marcum & Kliegman, LLP as its
independent auditor and independent certified public accountant.
(iii) The Company filed a current report Item 5 on Form 8-K dated July 28, 2003,
attaching a press release dated July 24, 2003, reporting the appointment of Juan
Mendes to the Board of Directors.
(iv) The Company filed a current report Item 5 on Form 8-K dated August 19,
2003, attaching a press release dated August 19, 2003, reporting the appointment
of Judah Marvin Feigenbaum to the Board of Directors and the resignations of
Richard Gottehrer and Joel Schoenfeld from the Board of Directors.
(v) The Company filed a current report Item 5 on Form 8-K dated September 3,
2003, attaching a press release dated September 3, 2003, reporting the
appointment of Richard Rosenblum to the Board of Directors and the resignation
of Neil Subin from the Board of Directors.
(vi) The Company filed a current report Item 5 on Form 8-K dated October 10,
2003 attaching a press release dated October 10, 2003, reporting the resignation
of Daniel C. Stein as the Company's President, Chief Executive Officer and a
member of the Board of Directors as well as the appointed of Judah Marvin
Feigenbaum as the Company's interim and acting Chief Executive Officer.
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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: November 14, 2003 BY /s/ Judah Marvin Feigenbaum
Judah Marvin Feigenbaum,
(CHIEF EXECUTIVE OFFICER &
PRINCIPAL FINANCIAL OFFICER)
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