U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 0-26604
DIGITAL DESCRIPTOR SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 23-2770048
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2010-F Cabot Boulevard, Langhorne, Pennsylvania 19047
(Address of Principal Executive Offices)
(215) 752-0963
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes __X__ No _____
The number of shares outstanding of each of the issuer's classes of common
equity as of November 1, 1996:
TITLE OF EACH CLASS NUMBER OF SHARES OUTSTANDING
------------------- ----------------------------
Common Stock 2,468,750
($.001 par value)
Transitional Small Business Disclosure Format (check one):
Yes _____ No __X__
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30
30-Sep 30-Sep
1995 1996
(unaudited) (unaudited)
----------- -----------
Cash flows from operating activities:
Net loss $ (980,924) $(2,044,638)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for doubtful accounts receivable $ (28,790) $ 62,227
Provision for inventory obsolescence $ 30,000
Depreciation and amortization $ 48,886 $ 177,709
Amortizaton of unearned compensation $ -- $ 18,000
Changes in assets and liabilities:
Stock awards to consultants $ 262,800
Receivables $ 13,866 $ 136,425
Inventories $ (163,499) $ 64,601
Prepaid expenses and other $ (14,558) $ 75,617
Accounts payable $ (152,378) $ (218,021)
Accrued expenses and other liabilities $ 101,399 $ (174,885)
Deferred revenue $ 138,143 $ (98,198)
Other noncurrent assets $ -- $ (853)
Due to affiliates $ (776,987) $ (71,913)
----------- -----------
Net cash provided by (used in) operating activities $(1,814,842) $(1,781,129)
----------- -----------
Cash flows from investing activities:
Equipment purchases $ (223,787) $ (109,349)
Purchase Software Acquisition $ -- $ (150,000)
Increase in short-term investments, including
restricted cash $ -- $ 196,023
Officer notes receivable $ (148,000)
----------- -----------
Net cash used in investing activities $ (223,787) $ (211,314)
----------- -----------
Cash flows from financing activities:
Prepaid offering costs $ 412,502 $ --
Repayment of note payable $ -- $ (37,500)
----------- -----------
Net cash used in financing activities $ 412,502 $ (37,500)
----------- -----------
Increase (decrease) in cash $(1,626,127) $(2,029,943)
Cash at beginning of period $ 11,045 $ 2,778,185
----------- -----------
Cash at end of period $(1,615,082) $ 748,242
----------- -----------
<PAGE>
DIGITAL DESCRIPTOR SYTEMS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
30-Sep 30-Sep 30-Sep 30-Sep
1995 1996 1995 1996
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 429,273 441,038 $ 1,677,854 $ 2,225,367
Cost of sales $ 204,582 259,298 $ 844,731 $ 1,116,182
----------- ----------- ----------- -----------
Gross profit $ 224,691 181,740 $ 833,123 $ 1,109,185
Operating expenses:
Sales and marketing $ 114,336 340,703 $ 318,778 $ 906,066
Research and development $ 18,237 120,452 $ 99,620 $ 358,942
Depreciation and amortization $ 18,773 62,269 $ 48,886 $ 177,709
General and administrative $ 613,843 441,417 $ 1,339,065 $ 1,790,302
----------- ----------- ----------- -----------
Total operating expenses $ 765,189 964,841 $ 1,806,349 $ 3,233,019
----------- ----------- ----------- -----------
Loss from operations $ (540,498) (783,101) $ (973,226) $(2,123,834)
Interest income $ 9,878 14,332 $ 7,698 $ 86,025
Interest expense $ -- (2,048) $ -- $ (6,829)
Net loss $ (550,376) (770,817) $ (980,924) $(2,044,638)
----------- ----------- ----------- -----------
Net loss per share (0.32) (0.03) (-0.56) (-0.84)
Weighted average shares outstanding 1,774,986 2,468,750 1,744,986 2,446,852
</TABLE>
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
BALANCE SHEETS
31-Dec 30-Sep
ASSETS 1995 1996
----------- -----------
(audited) (unaudited)
Current assets:
Cash $ 2,778,185 $ 748,242
Restricted cash $ 150,000 $ 150,000
Short-term Investments $ 389,343 $ 193,320
Accounts receivable, net of allowance for
doubtful accounts $138,085 in 1995 and $ 689,240 $ 589,351
$200,312 in 1996
Unbilled receivables $ 113,172 $ 6,857
Accounts receivable - other $ 1,000 $ 8,552
Inventories $ 217,512 $ 122,911
Prepaid expenses $ 84,536 $ 71,060
Other $ 79,122 $ 16,981
----------- -----------
Total current assets $ 4,502,110 $ 1,907,274
Deposits $ 7,590 $ 8,443
Accounts receivable-officers notes -- $ 148,000
Furniture and equipment, net $ 333,901 $ 303,029
Purchase software, net -- $ 112,500
----------- -----------
Total assets $ 4,843,601 $ 2,479,246
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 329,559 $ 111,538
Notes payable $ 50,000 $ 50,000
Deferred income $ 527,340 $ 429,142
Accrued expenses $ 249,032 $ 74,147
Due to affiliates $ 71,913 $ --
----------- -----------
Total current liabilities $ 1,227,844 $ 664,827
Notes payable $ 87,500 $ 50,000
Shareholder's equity:
Common stock, $.001 par value, 10,000,000
shares authorized; 2,408,750 and 2,468,750
issued and outstanding 12/31/95 and 09/30/96 $ 2,409 $ 2,469
Additional paid-in capital $ 9,885,788 $10,148,528
Unearned compensation $ (110,000) $ (92,000)
Accumulated deficit $(6,249,940) $(8,294,578)
----------- -----------
Total shareholder's equity $ 3,528,257 $ 1,764,418
----------- -----------
$ 4,843,601 $ 2,479,246
=========== ===========
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A-BASIS OF PRESENTATIONS
The interim financial data is unaudited; however , in the opinion of management,
the interim data includes all adjustments, consisting only of normal recurring
adjustments necessary for a fair statement of the results for the interim
periods. The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statement prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. The results of
operations for the nine month period ending September 30,1996 are not
necessarily indicative of the results to be expected for the full year.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the Company's
financial statements filed as part of the Company's December 31, 1995 Form
10-KSB. This quarterly report should be read in conjunction with such annual
report.
NOTE B - NET LOSS PER COMMON SHARE
Net loss per common share was computed by dividing the net loss by the weighted
average number of shares outstanding during the period. Conversion of options
and warrants was not assumed as the effect would be anti-dilutive.
NOTE C - ACQUISITION
In January 1996, the Company acquired all of the assets of VISATEX Corporation,
including the proprietary rights to the VISATEX products, Compu-Sketch,
Compu-Scene and FotoFile which are compatible with the Company's core product,
Compu-Capture(R). Compu-Sketch is a comprehensive program to generate, touch-up
and enhance composites; Compu-Scene is a computerized drafting program for
drawing crime and accident scenes; and FotoFile is a mug-shot system similar to
Compu-Capture(R). The purchase price for the VISATEX assets was $100,000 in cash
plus potential additional payments equal to the greater of 10% of revenues from,
or a fixed commission on sales of VISATEX products for the three year period
ending December 31, 1998. An additional payment of $60,000 was made in the first
quarter of 1996. The total cost of the purchased software is being amortized
over a three year period.
NOTE D - OFFICER NOTE
Through the period ended September 31, 1996 the Company has loaned the President
of the Company $148,000. The Company has obtained an unsecured term note for
the outstanding balance payable in three years.
<PAGE>
NOTE E - CONSULTANTS AND ADVISORS COMPENSATION PLAN
In February 1996 the Company adopted a Consultants and Advisors Compensation
Plan and granted 60,000 shares of stock under the Plan to certain individuals on
April 9, 1996. Accordingly, in the first quarter, the Company has recorded a
compensation charge of $262,800 related to the issuance of those shares.
NOTE F - 1996 DIRECTOR OPTION PLAN
In August 1996, the Company adopted the 1996 Director Option Plan for the
purpose of granting stock options to directors. Two hundred thousand shares of
common stock have been reserved under this Plan. Options for 45,000 shares of
common stock have been granted to non-employee directors, subject to
stockholders approval.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
DIGITAL DESCRIPTOR SYSTEMS, INC.
Management's Discussion and Analysis Financial Condition and Results of
Operation
Results of Operations
Revenue for the third quarter, which is traditionally a slow quarter for the
Company, increased 3% to $441,038, up only marginally, from $429,273 in the same
period in 1995. On a year to date basis sales are up 33% to $2,225,367, an
increase of $547,513 over the first nine months of 1995. The sales increase is
due mainly to the higher number of contracts that the Company has been awarded.
Gross margin for the quarter decreased 20% from $224,691 to $181,740 due to the
higher percentage of hardware in the sales figure, which has a lower gross
margin. On a year to date basis gross margin has increased 33% or $276,062 on an
absolute dollar basis from $833,123 in 1995 to $1,109,185 in 1996.
Operating expenses for the quarter increased 26% from $765,189 to $964,841 with
the increase mainly in the sales and research and development areas. For the
nine months ended September 30, overall operating expenses have increased 79%
over the same period in 1995 ($1,806,349 vs. $3,233,019). Sales and marketing
expenses have increased mainly due to the hiring of additional personnel in an
effort to increase both sales volume and geographic coverage. Research and
development costs increased due to the increase in personnel and external
development costs as the Company continues to investigate and develop new
products as well as enhancing its current product line. General and
administrative costs increased due to the employee related expenses and mainly
to a one time non-cash charge of $262,800 for compensation expense relating to
stock grants to outside advisors.
Due to the Company's continued losses and revenue growth which has been below
expectation, it has undertaken a complete review of all cost areas and has
begun, and will continue to make cuts where appropriate.
Liquidity and Sources of Capital
Cash Flows from operations were a negative $1,781,129 for the nine months ended
September 30, 1996 as compared to a negative $1,814,842 in the comparable period
of 1995. This was primarily due to the loss for the first nine months.
General Risk Factors Affecting Quarterly Results
The software industry is characterized by rapid technological change as well as
changes in customer requirements and preferences. The Company believes that its
future quarterly results will depend in large part upon its ability to offer
products that compete favorably in with respect to price, product reliability,
performance, range of useful features, ease-of-use, continuing product
enhancements, reputation support and training. Further, increased competition in
the market for digital imaging could have a negative effect on the Company's
results of operations.
Due to the factors noted above, the Company's future earnings and stock price
may be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenues or earnings could have an immediate and significant
adverse effect on the trading price of the Company's stock and warrants.
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.23 1996 Director Option Plan adopted by the Board of
Directors August 14, 1996 and subject to stockholder
ratification.
10.24 Note dated as of August 14, 1996 in the principal amount
of $148,000 made by Garrett U. Cohn in favor of the
Company.
(b) Reports on Form 8-K
The Company was not required to and did not file a Form 8-K
during the quarter ended September 30, 1996.
<PAGE>
SIGNATURE PAGE
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DIGITAL DESCRIPTOR SYSTEMS,
INC.
Date: November 8, 1996 By: /s/ Garrett U. Cohn
-----------------------------------
Garrett U. Cohn, President and
Chief Executive Officer
Date: November 8, 1996 By: /s/ Michael Pellegrino
-----------------------------------
Michael Pellegrino, Vice President
Finance and Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Document
- ------ -----------------------
10.23 1996 Director Option Plan adopted by the Board of Directors August 14,
1996 and subject to stockholder ratification.
10.24 Note dated as of August 14, 1996 in the principal amount of
$148,000 made by Garrett U. Cohn in favor of the Company.
Exhibit 10.23
DIGITAL DESCRIPTOR SYSTEMS, INC.
1996 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of the 1996 Director Option Plan
are to attract and retain the best available personnel for service as Outside
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
All options granted hereunder shall be "non-statutory stock options."
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" means the Common Stock of the Company.
(d) "Company" means Digital Descriptor Systems, Inc., a Delaware
corporation.
(e) "Continuous Status as a Director" means the absence of any
interruption or termination of service as a Director.
(f) "Director" means a member of the Board.
(g) "Employee" means any person, including officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a Director's fee by the Company and the retention of a director
as a consultant shall not be sufficient in and of itself to constitute
"employment" by the Company.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(i) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
National Market System of the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market
Value of a Share of Common Stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted
on such system or exchange (or the exchange with the greatest volume
<PAGE>
of trading in Common Stock) on the date of grant, as reported in The
Wall Street Journal or such other source as the board deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not
on the National Market System thereof) or regularly quoted by a
recognized securities dealer but selling prices are not reported, the
Fair Market Value of a Share of Common Stock shall be the mean between
the bid and asked prices for the Common Stock on the last market
trading day prior to the day of determination, as reported in The Wall
Street Journal or such other source as the Board deems reliable, or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith
by the Board.
(j) "Option" means a stock option granted pursuant to the Plan.
(k) "Optioned Stock" means the Common Stock subject to an Option.
(l) "Optionee" means an Outside Director who receives an Option.
(m) "Outside Director" means a Director who is not an Employee.
(n) "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(o) "Plan" means this 1996 Director Option Plan.
(p) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 10 of the Plan.
(q) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Internal Revenue
Code of 1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 200,000 Shares (the "Pool") of Common Stock. The Shares may be
authorized but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan.
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<PAGE>
4. Administration of and Grants of Options under the Plan.
(a) Procedure for Grants. The provisions set forth in this Section
4(a) shall not be amended more than once every six months, other than to
comport with changes in the Code, the Employee Retirement Income Security
Act of 1974, as amended, or the rules thereunder. All grants of Options to
Outside Directors under the Plan shall be automatic and non-discretionary
and shall be made strictly in accordance with the following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of
Shares to be covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an
Option to purchase 15,000 Shares (the "First Option") on the date on
which the later of the following events occurs: (A) the effective date
of this Plan, as determined in accordance with Section 6 hereof, or
(B) the date on which such person first becomes a Director, whether
through election by the stockholders of the Company or appointment by
the Board to fill a vacancy.
(iii) After the First Option has been granted to an Outside
Director, such Outside Director shall thereafter be automatically
granted an Option to purchase 1,000 Shares (a "Subsequent Option")
each year on the date of the annual meeting of the stockholders of the
Company, if on such date, he shall have served on the Board for at
least six (6) months.
(iv) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, any exercise of an Option made before the Company has obtained
stockholder approval of the Plan in accordance with Section 16 hereof
shall be conditioned upon obtaining such stockholders approval of the
Plan in accordance with Section 16 hereof.
(v) The terms of a First Option granted hereunder shall be as
follows:
(A) the terms of the First Option shall be ten (10) years.
(B) the First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set
forth in Section 8 hereof.
(C) the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of the First Option.
(D) the First Option shall become exercisable in
installments cumulatively as follows: on the date which is the
six (6) month anniversary of the date of grant, for the greater
of 1/8th of the Shares subject to the First Option, or 1/48th of
the Shares subject to the First Option times the number of full
months that the Outside Director had served in such capacity as
of such six (6) month anniversary; and thereafter at the rate of
1/48th of the Shares subject to the First Option on each monthly
anniversary of the date of grant.
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<PAGE>
(vi) The terms of a Subsequent Option granted hereunder shall be
as follows:
(A) the terms of the Subsequent Option shall be ten (10)
years.
(B) the Subsequent Options shall be exercisable only while
the Outside Director remains a Director of the Company, except as
set forth in Section 8 hereof.
(C) the exercise price per Share shall be 100% of the fair
market value per Share on the date of grant of the Subsequent
Option.
(D) the Subsequent Option shall become exercisable as to
100% percent of the Shares subject to the Subsequent Option on
the first anniversary of its date of grant.
(vii) In the event that any Option granted under the Plan would
cause the number of Shares subject to outstanding Options plus the
number of Shares previously purchased under Options to exceed the
Pool, then the remaining Shares available for Option grant shall be
granted under Options to the Outside Directors on a pro rata basis. No
further grants shall be made until such time, if any, as additional
Shares become available for grant under the Plan through action of the
stockholders to increase the number of Shares which may be issued
under the Plan or through cancellation or expiration of Options
previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof. An Outside Director who has been granted an Option may, if he
is otherwise eligible, be granted an additional Option or Options in accordance
with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director of the Company
may have to terminate his or her directorship at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the stockholders of the
Company as described in Section 16 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares to
be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (ii) other shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
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<PAGE>
Shares as to which said Option shall be exercised, (iv) delivery of a properly
executed exercise notice together with such other documentation as the Company
and the broker, if applicable, shall require to effect an exercise of the Option
and delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (v) any combination of the foregoing methods of payment.
8. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any option
granted hereunder shall be exercisable at such times as are set forth in
Section 4 hereof; provided, however, that no Options shall be exercisable
until stockholder approval of the Plan in accordance with Section 16 hereof
has been obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received
by the Company. Full payment may consist of any consideration and method of
payment allowable under Section 7 of the Plan. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote or receive dividends or any other
rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. A share certificate for the
number of Shares so acquired shall be issued to the Optionee as soon as
practicable after exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in Section 10 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
(b) Rule 16b-3. Options granted to Outside Directors must comply with
the applicable provisions of Rule 16b-3 promulgated under the Exchange Act
or any successor thereto and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum
exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
(c) Termination of Continuous Status as Director. In the event an
Optionee's Continuous Status as a Director terminates [other than upon the
Optionee's death or total and permanent disability (as defined in Section
22(e)(3) of the Code)], the Optionee may exercise his or her Option, but
only within three (3) months from the date of such termination, and only to
the extent that the Optionee was entitled to exercise it at the date of
such termination (but in no event later than the expiration of its ten (10)
year term). To the extent that the Optionee was not entitled to exercise an
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<PAGE>
Option at the date of such termination, and to the extent that the Optionee
does not exercise such Option (to the extent otherwise so entitled) within
the time specified herein, the Option shall terminate.
(d) Disability of Optionee. In the event Optionee's Continuous Status
as a Director terminates as a result of total and permanent disability (as
defined in Section 22(e)(3) of the Code), the Optionee may exercise his or
her Option, but only within twelve (12) months from the date of such
termination, and only to the extent that the Optionee was entitled to
exercise it at the date of such termination (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was
not entitled to exercise an Option at the date of termination, or if he or
she does not exercise such Option (to the extent otherwise so entitled)
within the time specified herein, the Option shall terminate.
(e) Death of Optionee. In the event of an Optionee's death, the
Optionee's estate or a person who acquired the right to exercise the Option
by bequest or inheritance may exercise the Option, but only within twelve
(12) months following the date of death, and only to the extent that the
Optionee was entitled to exercise it at the date of death (but in no event
later than the expiration of its ten (10) year term). To the extent that
the Optionee was not entitled to exercise an Option at the date of death,
and to the extent that the Optionee's estate or a person who acquired the
right to exercise such Option does not exercise such Option (to the extent
otherwise so entitled) within the time specified herein, the Option shall
terminate.
9. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger, Asset
Sale or Change of Control.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of Shares covered by each
outstanding Option and the number of Shares which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per Share covered by each such outstanding
Option, shall be proportionately adjusted for any increase or decrease in
the number of issued Shares resulting from a stock split, reverse stock
split, stock dividend, combination or reclassification of the Common Stock,
or any other increase or decrease in the number of issued Shares effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Except as
expressly provided herein, no issuance by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of Shares subject to an Option.
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<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option has
not been previously exercised, it will terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option shall be assumed or an equivalent
option shall be substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation does not agree to assume the Option or to substitute an
equivalent option, each outstanding Option shall become fully vested and
exercisable, including as to Shares as which it would not otherwise be
exercisable, unless the Board, in its discretion, determines otherwise. If
an Option becomes fully vested and exercisable in the event of a merger or
sale of assets, the Board shall notify the Optionee that the Option shall
be fully exercisable for a period of thirty (30) days from the date of such
notice, and the Option will terminate upon the expiration of such period.
For the purposes of this paragraph, the Option shall be considered assumed
if, following the merger or sale of assets, the option or right confers the
right to purchase, for each Share of Option Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration
(whether stock, cash, or other securities or property) received in the
merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice
of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares).
11. Amendment and Termination of the Plan.
(a) Amendment and Termination. Except as set forth in Section 4, the
Board may at any time amend, alter, suspend, or discontinue the Plan, but
no amendment, alternation, suspension, or discontinuation shall be made
which would impair the rights of any Optionee under any grant theretofore
made, without his or her consent. In addition, to the extent necessary and
desirable to comply with Rule 16b-3 under the Exchange Act (or any other
applicable law or regulation), the Company shall obtain stockholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4 hereof. Notice
of the determination shall be given to each Outside Director to whom an Option
is so granted within a reasonable time after the date of such grant.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
- 7 -
<PAGE>
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
16. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company at or prior to the first annual
meeting of stockholders held subsequent to the granting of an Option hereunder.
Such stockholder approval shall be obtained in the degree and manner required
under applicable state and federal law.
- 8 -
Exhibit 10.24
NOTE
$148,000.00
As of August 14, 1996
Langhorne, Pennsylvania
FOR VALUE RECEIVED, GARRETT U. COHN ("Borrower"), hereby promises to pay to
the order of DIGITAL DESCRIPTOR SYSTEMS, INC. (the "Lender"), at the Lender's
principal place of business in Langhorne, Pennsylvania the principal sum of one
hundred forty eight thousand and No/100 Dollars ($148,000), in lawful money of
the United States of America, together with all accrued and unpaid interest, on
August 13, 1999.
This Note shall bear interest on the outstanding principal balance from the
date of this Note on the unpaid principal balance outstanding from time to time
at the annual rate of one percent (1%) in excess of the rate of interest
announced or published from time to time by The Wall Street Journal as the prime
or equivalent rate of interest (such announced or published rate of interest
referred to as the "Prime Rate").
Interest shall be payable on the first day of each calendar quarter
commencing on January 1, 1997 and continuing on the first day of each calendar
quarter thereafter until this Note is paid in full or otherwise discharged.
Interest hereunder shall be computed on the basis of actual days elapsed
based upon a three hundred sixty (360) day year. The interest rate shall be
adjusted in an amount equal to any increase or decrease in the Prime Rate on the
date of such adjustment. It is expressly agreed that the use of the term "Prime
Rate" is not intended nor does it imply that said rate of interest is a
preferred rate of interest or one which is offered to the most creditworthy
customers of any bank or financial institution.
This Note (this "Note") is in replacement of and substitution for that
certain Demand Note dated March 3, 1996 in the principal amount of $45,500,
between Borrower and the Lender.
1. Prepayment. This Note may be prepaid in whole or part, at any time and
from time to time without premium or penalty.
2. Acceleration on Default; Waivers. If any payment due under this Note or
any other monies owing hereunder is not paid when due, then all indebtedness
evidenced by this Note, will be due and payable in full at the election of the
Lender. The acceptance by Lender of any payment, partial or otherwise, made
after the time when it becomes due will not establish a custom or constitute a
waiver by Lender of any right to enforce prompt payment thereof or a waiver of
<PAGE>
any other default or the same default on another occasion. TO THE EXTENT
PERMITTED BY APPLICABLE LAW, BORROWER HEREBY WAIVES DEMAND, PRESENTMENT FOR
PAYMENT, PROTEST AND NOTICE OF NON-PAYMENT AND PROTEST.
3. Fees, Expenses and Other Charges. If at any time or times, Lender
attempts to or enforces any of Lender's rights and remedies against Borrower,
the reasonable costs and expenses incurred by Lender in such enforcement shall
be an additional liability, payable by Borrower to Lender on demand. Without
limiting the generality of the foregoing, such expenses, costs, charges and fees
include: (i) attorneys' fees, costs and expenses; (ii) accountants' fees, costs
and expenses; (iii) court costs and expenses; (iv) court reporter fees, costs
and expenses; (v) long distance telephone charges; and (vi) telegram, telecopy,
facsimile, messenger and overnight courier charges.
4. Amendments and Modifications. This Note may not be amended or modified,
nor shall any revision hereof be effective, except by an instrument in writing
expressing such intention executed by Lender and Borrower.
5. Choice of Law. This Note shall be governed and controlled as to
validity, enforcement, interpretation, construction and effect by the statutes,
laws and decisions of the State of Pennsylvania.
IN WITNESS WHEREOF, the undersigned has executed and delivered this Note as
of the day and year first above written.
/s/ Garrett U. Cohn
-----------------------
GARRETT U. COHN
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 898,242
<SECURITIES> 193,320
<RECEIVABLES> 789,663
<ALLOWANCES> 200,312
<INVENTORY> 122,911
<CURRENT-ASSETS> 1,907,274
<PP&E> 799,191
<DEPRECIATION> 561,766
<TOTAL-ASSETS> 2,479,246
<CURRENT-LIABILITIES> 652,328
<BONDS> 0
0
0
<COMMON> 2,469
<OTHER-SE> 1,761,950
<TOTAL-LIABILITY-AND-EQUITY> 2,479,246
<SALES> 2,224,587
<TOTAL-REVENUES> 2,225,367
<CGS> 1,116,182
<TOTAL-COSTS> 1,116,182
<OTHER-EXPENSES> 3,233,019
<LOSS-PROVISION> 200,312
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,044,638)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,044,638)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,044,638)
<EPS-PRIMARY> (00.84)
<EPS-DILUTED> (00.84)
</TABLE>
