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 March 31, 1997
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 May 1, 1997:
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.
BALANCE SHEETS
31-Dec 31-Mar
ASSETS 1996 1997
-------- --------
audited (unaudited)
Current assets:
Cash 494,091 130,249
Restricted cash 150,000 82,000
Short-term Investments 120,376 270,790
Accounts receivable, net of allowance for
doubtful accounts $187,019 in 1996 and 408,803 756,089
$183,353 in 1997
Accounts receivable - other 2,000 2,000
Inventories 145,036 40,411
Prepaid expenses 85,765 74,514
Other 16,981 20,231
---------- ----------
Total current assets 1,423,052 1,376,284
Accounts receivable-officers 125,000 125,000
Deposits 7,059 7,059
Furniture and equipment, net 274,697 252,529
Purchase Software, net 100,000 87,500
---------- ----------
1,929,808 1,848,372
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 202,082 287,836
Notes Payable 50,000 50,000
Deferred income 446,844 439,801
Accrued expenses 84,846 45,671
Total current liabilities 783,772 823,308
Notes Payable (excluding current portion) 37,500 25,000
Shareholders' equity:
Common stock, $.001 par value, 10,000,000
shares authorized; 2,468,750
issued and outstanding 03/31/97 and 12/31/96 2,469 2,469
Additional paid-in capital 10,148,528 10,148,528
Unearned compensation (86,000) (80,000)
Accumulated deficit (8,956,461) (9,070,933)
---------- ----------
Total shareholder's equity 1,108,536 1,000,064
---------- ----------
1,929,808 1,848,372
========== ==========
<PAGE>
DIGITAL DESCRIPTOR SYTEMS, INC.
STATEMENT OF OPERATIONS
Three months ended
31-Mar 31-Mar
1996 1997
--------- ---------
(unaudited) (unaudited)
Sales 910,057 950,202
Cost of sales 518,375 314,590
---------- ----------
Gross profit 391,682 635,612
---------- ----------
Operating expenses:
Sales and marketing 262,341 224,492
Research and development 166,427 102,911
Depreciation and amortization 75,559 51,111
General and administrative 590,167 379,783
---------- ----------
Total Operating expenses 1,094,494 758,297
---------- ----------
Loss from operations (702,812) (122,685)
Interest income 41,349 9,757
Interest expense (2,496) (1,544)
Net loss (663,959) (114,472)
========== ==========
Net loss per share (0.28) (0.050)
Weighted average shares outstanding 2,408,750 2,468,750
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Three months ended
31-Mar 31-Mar
1996 1997
--------- ---------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss (663,959) (114,472)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for doubtful accounts receivable (3,015) (3,666)
Depreciation and amortization 75,559 51,111
Amortizaton of unearned compensation 6,000 6,000
Changes in assets and liabilities:
Receivables (125,760) (343,620)
Inventories 16,159 104,625
Prepaid expenses and other 69,759 8,001
Accounts payable (143,291) 85,754
Accrued expenses and other liabilities 171,386 (39,175)
Deferred revenue (185,588) (7,043)
Other noncurrent assets (852) 0
Due to affiliates (71,913) 0
---------- ----------
Net cash used in operating activities (855,515) (252,485)
---------- ----------
Cash flows from investing activities:
Equipment purchases (45,190) (16,443)
Purchase Software Acquisition (137,500) 0
Increase in short term investments, including
restricted cash 0 (82,414)
---------- ----------
Net cash used in investing activities (182,690) (98,857)
---------- ----------
Cash flows from financing activities:
Repayment of note payable (12,500) (12,500)
---------- ----------
Net cash used in financing activities (12,500) (12,500)
---------- ----------
Decrease in cash (1,050,705) (363,842)
Cash at beginning of period 2,778,185 494,091
---------- ----------
Cash at end of period 1,727,480 130,249
---------- ----------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE A-BASIS OF PRESENTATIONS
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis or Plan of Operation
The Company develops, assembles and markets computer installations,
consisting of hardware and software for law enforcement agencies, tax assessors
and businesses. The system captures video and scanned images, digitizes the
images and links the digitized images to text to build a computer database. The
data is stored in the computer and can be retrieved on demand and viewed on a
computer or transmitted over a computer network, telephone line or by radio
frequency to remote locations within seconds.
The principal product of the company is the Compu-Capture system, which is
marketed to law enforcement agencies, jails, and correctional facilities. The
Compu-Capture system produces and stores a digitized video image or "mug shot"
of the subject along with the record, physical description and other pertinent
information about the subject. The image can then be produced in the appropriate
format, such as a full-color picture or identification badge or wristband when
the subject is booked.
Since the introduction of Compu-Capture the Company has installed
approximately 250 systems in 46 states in the United States as well as
jurisdictions in Europe, South America, Canada, Mexico and the Bahamas.
Management believes there is significant growth potential for this product since
only a small percentage of the approximately 17,000 law enforcement agencies in
the United States use a digitized computer imaging system. The NCIC requirements
include electronic imaging in all jurisdictions by the year 2006
The Compu-Color system digitizes videotape and photographs of improved
properties (buildings and other property improvements). Compu-Color stores these
images along with the relevant record card information for the local tax
assessors and revaluation companies. The system allows the assessor to access
full-color images of improved properties and related information to compare
properties and to review property assessments within seconds. During 1996 and
1995, the system accounted for approximately 16.2% and 7.7% of sales,
respectively. For the first quarter of 1997 Compu-Color (assessor) sales were
11.2% of total revenue.
The Company recognizes revenue in accordance with the guidelines of
Statement of Position 91-1 of the American Institute of Certified Public
Accounts, Software Revenue Recognition (SOP 91-1). Revenue from software
licenses is recognized when the Company has satisfied all significant contract
obligations, which generally occurs when installation of the system is complete.
Revenue from consulting or other software-related services is recognized as the
services are rendered. Revenue from post-contract support (PCS or maintenance)
agreements is recognized ratably over the term of the agreements.
Management is committed to raising funds for research and development of an
inkless fingerprint imaging storing and retrieval system that is expected to
enhance in particular the law enforcement and business products.
Results of Operations
Sales for the three months ended March 31, 1997 of $950,202 increased by 4%
from sales of $910,057 for the three months ended March 31, 1996. This increase
is attributed to an increase in the amount of installations and contracts
awarded to the Company. The Company's deferred revenue increased $98,049 to
$439,801 as of March 31, 1997 from $341,752 as of March 31, 1996. Additionally,
the Company's backlog of orders to be installed as of March 31, 1997 was
approximately $1,100,000. The Company anticipates that both the deferred revenue
and backlog amounts will be recognized as revenue during fiscal year 1997.
The Company's gross profit in absolute dollars for the first quarter
increased 62% from 1996 to 1997 due to an increase in total revenue and a higher
gross margin per sale generated by the Company. Overall the gross profit
percentage per sale increased to 67% from an average of 43% in 1996. This
<PAGE>
increase is attributed to the fact that the Company had a higher percentage of
software sales, which are extremely high margin.
Operating expenses decreased 31% for the three months ended March 31, 1997
from the prior year same quarter due to the cost cutting and containment
measures implemented by the Company in the last quarter of 1996. The primary
decreases were due to a decrease in personnel and strict control on all
operating expenses incurred by the Company.
The net loss from operations for the Company decreased 83% for the three
months ending March 31, 1997 to ($114,472) from ($663,959) for the three months
ended March 31, 1996.
Liquidity and Capital Resources
The Company's primary source of funds to date has been the proceeds from
the sale of its securities. The Company will require additional funds in the
immediate future to continue its operations. The Company is considering
obtaining such funds through venture capital or other private or public
financing, joint ventures or merger transactions, the sale of certain assets and
research and development partnership financing. The Company has engaged a
consultant to assist in obtaining additional funding.
As of March 31, 1997 the Company had working capital of approximately
$565,476 which decreased $639,280 from March 31, 1996. During the quarter ended
March 31, 1997 the Company incurred net losses of $114,472.
Net cash used in operating activities was $252,485 and $855,515 for the
quarters ended March 31, 1997 and 1996. The use of cash in operating activities
for the quarters ended March 31, 1997 and 1996, resulted largely from continuing
losses
Asset Management
The Company manages its inventory by ordering specific hardware for just in
time delivery for each installation. The hardware is received, checked, modified
and shipped to each jurisdiction for installation within a short period of time.
Therefore, the Company usually maintains in inventory only the equipment needed
for programming and testing. Inventory may also include the hardware needed for
a customer's installation that may already be shipped. During the three months
ending March 31, 1997, inventories decreased $104,625, due to increased control
and better scheduling of installations.
As of March 31, 1997 most of the Company's receivables are due under
contracts with county and city jurisdictions. The balance is with third party
vendors. Once the contract has been awarded and the purchase order issued by a
jurisdiction, the jurisdiction must encumber the funds for payment of the
purchase order. The encumbered funds are typically paid to the Company after the
satisfactory completion of the installation. Accounts receivable as of March 31,
1997 were $939,442, with an allowance for doubtful accounts of $183,353.
General Risk Factors Affecting Results
Rapid technological change as well as changes in customer requirements and
preferences characterizes the software industry The Company believes that it's
future quarterly results will depend in large part upon its ability to offer
products that compete favorably 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.
<PAGE>
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 1. Legal Proceedings
The information required by this Item is set forth under "Legal
Proceedings" in the Company's Form 10-KSB for the year ended December 31, 1997
filed pursuant to the Securities Exchange Act of 1934 and is incorporated herein
by reference.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
The Company was not required to and did not file a Form 8-K during the
quarter ended March 31, 1997.
<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: May 9, 1997 By: /s/ Garrett U. Cohn
-----------------------------------
Garrett U. Cohn, President and
Chief Executive Officer
Date: May 9, 1997 By: /s/ Michael Pellegrino
-----------------------------------
Michael Pellegrino, Vice President
Finance and Chief Financial Officer
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 483,039
<SECURITIES> 0
<RECEIVABLES> 939,442
<ALLOWANCES> 756,089
<INVENTORY> 40,411
<CURRENT-ASSETS> 1,376,284
<PP&E> 840,234
<DEPRECIATION> 587,705
<TOTAL-ASSETS> 1,848,372
<CURRENT-LIABILITIES> 823,308
<BONDS> 25,000
0
0
<COMMON> 2,469
<OTHER-SE> 997,595
<TOTAL-LIABILITY-AND-EQUITY> 1,848,372
<SALES> 950,202
<TOTAL-REVENUES> 950,202
<CGS> 314,590
<TOTAL-COSTS> 314,590
<OTHER-EXPENSES> 758,297
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (114,472)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (114,472)
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
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