U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1996
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ___________________ to ___________________
Commission file number 0-26604
DIGITAL DESCRIPTOR SYSTEMS, INC.
(Name of Small Business Issuer 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)
Securities registered under Section 12(b) of the Exchange Act:
Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Units, each Unit consisting of one share common stock, $0.001 par value,
one Redeemable Class A Warrant and one Redeemable Class B Warrant
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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 ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year. $2,728,368
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The number of shares outstanding of each of the issuer's classes of common
equity, as of March 17, 1997.
Title of Each Class Number of Shares Outstanding
------------------- ----------------------------
Common Stock 2,468,750
($.001 par value)
The aggregate market value on such date of the voting stock of the
Registrant held by non-affiliates was an estimated $2,468,750 based on the
average of the high and low bid price for the Company's Common Stock on March
17, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for the 1997 Annual Meeting of Stockholders,
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, is
incorporated by reference in Part III.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
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TABLE OF CONTENTS
Item No. Page No.
PART I ................................................................... 1
1. Business................................................................ 1
Products and Services................................................... 1
Law Enforcement Programs................................................ 1
Compu-Color(R)Assessor Program.......................................... 2
Compu-Capture(R)ID Program.............................................. 3
Maintenance and Support................................................. 3
New Products............................................................ 3
Marketing............................................................... 4
Compu-Capture(R)........................................................ 4
Compu-Color(R).......................................................... 4
Customers............................................................... 4
Competition............................................................. 5
Suppliers............................................................... 5
Government Regulation or Government Approval............................ 5
Intellectual Property Rights............................................ 6
Employees............................................................... 6
2. Description of Property................................................. 6
3. Legal Proceedings....................................................... 6
4. Submission of Matters to a Vote of Security Holders..................... 6
PART II ................................................................... 7
5. Market for Common Equity and Related Stockholders Matters............... 7
6. Management's Discussion and Analysis or Plan of Operation............... 7
Results of Operations.................................................. 8
Liquidity and Capital Resources......................................... 9
Asset Management........................................................ 9
General Risk Factors Affecting Results.................................. 9
7. Financial Statements.................................................... 10
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................ 10
PART III ................................................................... 10
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act....................... 10
10. Executive Compensation.................................................. 10
11. Security Ownership of Certain Beneficial Owners and Management.......... 10
12. Certain Relationships and Related Transactions.......................... 10
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PART IV ................................................................... 11
13. Exhibits, Financial Statements and Reports on Form 8-K.................. 11
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PART I
Item 1. Business.
The Company develops, assembles and markets computer installations,
consisting of hardware and software, which utilize imaging technology to capture
video and scanned images, digitize the image, link the digitized images to text
and store image and text. The Company's software programs record, store, process
and retrieve visual images and link textual information with the images so that
customers can record and retrieve related text and images in the future. Once
recorded, the image and text can be transmitted by computer or over telephone
transmission lines to remote locations.
From the Company's base software program, which integrates textual
information with images, the Company has developed and marketed several core
products modifications to diverse customer bases. The Company anticipates that
it will continue to adapt its base digital software program into new uses both
for government agencies and private industry.
The operations of the Company were started as a division of ASI Computer
Systems, Inc. of Waterloo, Iowa in 1986. Compu-Color, Inc. was formed in July,
1989 and as of July 1, 1989 purchased the assets of the Compu-Color division of
ASI Computer Systems, Inc. for a purchase price of $253,689.22. The Company is
the successor to Compu- Color, Inc., an Iowa corporation.
The Company's principal offices and facilities are located at 2010-F Cabot
Boulevard West, Langhorne, Pennsylvania 19047 and its telephone number is (215)
752-0963.
Products and Services
The Company has adapted its digital imaging technology and software into
several core products: Compu-Capture(R), an image system to be combined with
records management agreement for booking suspects by law enforcement agencies
and tracking inmates by correctional facilities, Compu-Color(R), a software
program for recording images of real estate together with property tax history
and underlying information for tax assessors, and Compu-Capture(R)ID, a program
to produce identification cards and security devices for governments or private
industry. Although the uses for the Company's core products are diverse, the
products are adaptations of the Company's base product which uses imaging
technology to link digitized images and text so that the related image and text
can be recorded, stored, processed and retrieved individually or together.
Law Enforcement Programs
Compu-Capture(R) is the law enforcement application of the Company's system
for combined digitized image and textual information. The system has been
developed primarily for law enforcement and jail and correctional facilities.
The Company has installed more than 250 Compu-Capture(R) systems in 46 states as
well as jurisdictions in Europe, South America, Canada, Mexico and the Bahamas.
Information is entered into the Compu-Capture(R) system at the time a
subject is booked or enters the facility. Using the Compu-Capture(R) system, a
law enforcement officer can complete more than one stage in the booking process,
such as entering booking information and taking a mug shot, at one location. A
video image of the subject, a "mug shot", is taken by the booking officer. The
booking officer can preview each mug shot image on the computer screen to insure
accuracy and clarity before processing and storing the image. Once an acceptable
image is obtained, the booking officer can rapidly store the image through the
computer application, along with the relevant textual information.
The information entered into the Compu-Capture(R) system can include
booking record, names, aliases, physical characteristics, such as size, hair
color, facial scars or physical deformities, and fingerprint codes. The
Compu-Capture(R)
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system allows the officer conducting a search to assign priorities or values to
physical characteristics for the computer's search of the database of existing
subjects. Features that are difficult to disguise or alter, such as facial
scars, can be assigned higher values than other characteristics such as hair
color or facial hair. In the requested search, the Compu-Capture(R) system
automatically sorts based on the highest valued characteristic first. The
sorting feature enables the system to streamline the process of identifying
potential suspects from witness descriptions by permitting searches by various
identifying characteristics of a suspect. The Compu-Capture(R) system can also
sort on the basis of characteristics to create line-ups. Sophisticated line-ups
can be created without the need for time consuming viewing of individual mug
shots. Only those mug shots which the system identifies as close matches are
assembled by the system for viewing.
The Compu-Capture(R) system produces images that meet or exceed the
suggested requirements of the Department of Justice National Crime Information
Commission ("NCIC"), including the NCIC 2000, the standard adopted by the
Federal Bureau of Investigation for the quality of mug shots. The NCIC does not
certify or otherwise approve any mug shot systems.
Once entered into the Compu-Capture(R) system, the visual image and textual
material can be utilized in a variety of ways. Mug shots can be retrieved on the
computer screen or printed individually, with or without text information, or as
part of a line-up. The digitized mug shot and information can be transmitted to
remote locations by telephone line or radio frequency or through computer
networks and can be retrieved rapidly from central or remote locations. The
ability to transmit clear images with related text allows law enforcement
agencies to quickly disseminate all necessary information concerning suspects.
During 1996, the Company acquired the assets of VISATEX Corporation,
including the proprietary rights to VISATEX products, Compu-Sketch, Compu-Scene
and FotoFile. Compu-Sketch is a comprehensive program to generate composites and
provide for touch up and enhancement of the composites. Compu-Scene is a
computer-aided drafting program specifically selected for drawing crime and
accident scenes. FotoFile is a mug-shot system similar to Compu-Capture(R). The
Company believes that these additional products will enhance its offerings to
law enforcement agencies. These products are compatible with the Company's core
product, Compu-Capture(R).
Compu-Color(R) Assessor Program
The Compu-Color(R) Assessor Program applies imaging technology to produce
digitized images of property and related textual information for use in tax
assessment jurisdictions. Tax assessors generally maintain pictures of all
improved properties within their jurisdictions. The Compu-Color(R) Assessor
Program allows each assessor's office to electronically maintain this picture as
part of a computer system that links the image with relevant text about the
property. The image and text can be retrieved and viewed individually or
together on the computer screen or printed out on an attached printer along with
comparable properties.
The Compu-Color(R) system processes a videotape or photographic image of
improved properties and stores the images to a computerized record, together
with relevant information from the assessor's records with respect to the
improved property. The programs allow the assessor to rapidly access a full
color image of each improved property and the information available, as well as
images and information related to comparable properties. The program provides
for side-by-side visualization of comparable improved properties. The program
can create a hard copy picture of the image, including images of any comparable
improved properties.
As an additional service for assessor's offices interested in purchasing
the Compu-Color(R) system, the Company will process and store the assessor's
existing files on a Compu-Color(R) system. This service enables assessors to
have all deeds and records on the same computerized system.
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Compu-Capture(R)ID Program
The Company has begun marketing the Compu-Capture(R)ID Program, a version
of the Compu-Capture(R) system, for commercial applications. The
Compu-Capture(R)ID Program produces photograph identification cards with
pictures of the individual and related information. The Company has sold the
Compu-Capture(R)ID system to private industry to produce employee identification
cards. A version of the Compu-Capture(R)ID system was installed by the Company
in Belgium in 1995 as a National Alien Registration card system and is awaiting
approval and payment from the government of Belgium. The card includes the
picture, fingerprint and signature of each person registered. The Company is
also exploring the market for the Compu-Capture(R)ID identification badge system
in connection with voter registration, drivers' license and other identification
card applications.
Maintenance and Support
In addition to the installation of a Compu-Capture(R), Compu-Color(R) or
Compu-Capture(R)ID system, the Company trains the personnel of the customer in
the use and operation of the system. After installation, the Company provides
maintenance and support for a limited period of time. The Company offers to
customers ongoing maintenance and support and updates of the software for an
annual fee. Over ninety percent (90%) of customers purchase ongoing maintenance
and support at the time of installation of the system.
New Products
The VISATEX products, Compu-Sketch, and Compu-Serve, expand the Company's
offerings to law enforcement agencies. These offerings are logical extensions of
the Company's core product and core distribution, Compu-Capture(R), and expand
the Company's relationship with its customers. Compu-Sketch is installed in
nearly 700 jurisdictions. The Company expects that the acquisition of
Compu-Sketch will increase its access and sales to these jurisdictions.
The Company has announced plans to develop and distribute an inkless live
scan fingerprint system in conjunction with its Compu-Capture(R) product. An
inkless fingerprint system electronically reads and creates a digital image of a
fingerprint. Fingerprints are recorded by rolling the fingers of a subject on
the contact surface of an optical assembly to create an optical image of the
fingerprint. The optical image is converted into a digital image by a
photo-imaging detector. The fingerprint system is expected to be a compatible
addition to the Compu-Capture(R) product which is frequently requested by law
enforcement agencies. When these products have been developed and tested, the
Company intends to distribute the inkless fingerprint system in commercial
applications, including as a security device or an access control device, as
part of the Compu-Capture(R) ID product. There can be no assurance that the
Company will be successful in the development of the products, nor that the
products can be priced and marketed competitively.
The Company has undertaken a research study in Norway in conjunction with
NORDIC SVA on the feasibility of production or licensing of a patented portable
fingerprint verification product. The product is the size of a credit card. The
study is being pursued with the intent by the Company to license the technology
in 1998 if it becomes feasible. There can be no assurance that the product can
be developed and marketed commercially.
The Company is offering CPC 2000/FE, a program which enables a customer to
digitize images compatible with any software without additional code writing by
the customer. This solution is an extension of Compu-Capture(R) and
Compu-Color(R) products which have been proven in over 50 public sector
installations.
The Company introduced a new software solution-SI 3000 - which allows
jurisdictions to retain their legacy data and yet be able to be compliant to the
new National Incident Based Reporting System (NIBRS) at a reduced cost from
other options. This solution is marketed by the Compu-Capture(R) sales force to
larger jurisdictions and features a Graphical User Interface which allows the
end user to retrieve data from multiple applications regardless of where the
date resides -- across Wide Area Networks or locally.
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Marketing
Compu-Capture(R)
The Company markets its Compu-Capture(R) products through an internal sales
force and vendors of compatible software applications. The Company markets
products related to the Compu-Capture(R) system in the same way.
The Company employs 6 full-time employees in sales or sales management.
These salesmen market directly to customers and to sales leads developed by the
Company. The employees also work with sales employees of other vendors in making
sales calls and proposals.
In addition, the Company has marketed the Compu-Capture(R) products through
vendors of compatible software applications such as IBM Business Partners and
other hardware suppliers. IBM Business Partners is a designation used by IBM for
certain vendors that sell products which are compatible with IBM products. The
Company is an IBM Business Partner. Through the IBM Business Partner program,
the Company has been introduced to other IBM Business Partners with compatible
products which have marketed the Compu-Capture(R) program. To increase its sales
through IBM Business Partners, the Company has directed its research and
development efforts in the last five years to developing software interfaces
which enable the Compu-Capture(R) program to operate in conjunction with various
jail management and other law enforcement programs of IBM Business Partners. The
Company believes that its growth will come, in part, by expanding the number and
size of sales in conjunction with systems of existing and additional IBM
Business Partners and other software suppliers. Currently more than one-half of
the revenues from the Company's sales are generated from outside vendors.
The Company has recently begun exploring the market for its products in the
European, South and Central American and other international markets. The
Company has been working in conjunction with IBM to develop some of these
markets and has opened sales representative offices in Sweden and Belgium.
The Company anticipates that its future marketing strategy for
Compu-Capture(R) will focus on expanding the quantity and size of sales to law
enforcement agencies and jail facilities of its existing Compu-Capture(R)
program and new compatible products in the same field, such as Compu-Sketch and
Compu-Scene. A 1990 survey conducted by The Law Enforcement Management and
Administrative Statistics (LEMAS) program of the Bureau of Justice Statistics of
the United States Department of Justice (the "LEMAS Survey") of a nationally
representative sample of state and local police departments indicated that there
are approximately 17,000 state and local law enforcement agencies. Of those
agencies, 52% of the agencies surveyed, employing 90% of all sworn officers,
were using one or more types of computers. Of local police departments surveyed,
30% use computers for criminal investigations, criminal histories and Uniform
Crime Reports. The Company believes that as law enforcement agencies become more
familiar with available technology, the market for products using computer
technology, such as Compu-Capture(R), will increase.
Compu-Color(R)
The Company has marketed the Compu-Color(R) system to tax assessors through
its own employees and through companies which consult with tax assessors in
connection with the revaluation of improved properties. The consultants market
the Compu-Color(R) system as part of a package of revaluation systems and
services. The Company's sales personnel market both the Compu-Color(R) and
Compu-Capture(R) systems.
The Company intends to continue marketing the Compu-Color(R) program
through its own employees, and, when available, through other vendors and
consultants.
Customers
The Company maintains a continuing relationship with its customers based
upon support services and periodic upgrades of the Compu-Capture(R) and
Compu-Color(R) software. The major revenue generating event is the initial
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installation and any significant expansion of that installation. The sales of
maintenance support services which the Company performs subsequent to the
installation do not generate sufficient revenue to sustain the operations of the
Company. The Company must rely on new business to sustain and grow the Company.
The Company also relies on maintaining ongoing relationships with vendors,
especially IBM Business Partners, for continuing sales introductions to new
customers. The Company has concentrated on expanding the compatibility of its
Compu-Capture(R) and Compu-Capture(R)ID system with more computer software
applications in order to expand the number of vendors which may recommend the
Company's products.
Competition
The Company currently has two national competitors to the Compu-Capture(R)
system. TFP, Inc. of Greenville, South Carolina, is a privately-held company
with approximately 150 installations of a system competitive with the
Compu-Capture(R) system. X-Image of San Jose, California has approximately 65
installations of a competitive system and is also a privately-held company.
Various regional software companies market services or software programs to
tax assessors which are in competition with the Compu-Color(R) system.
The Company intends to continue to develop software interfaces to make its
products, including new products introduced by the Company, compatible with new
and expanded versions of systems offered by IBM Business Partners or other
vendors of law enforcement and tax assessor related software. The Company
believes that expanding the number of computer systems with which the
Compu-Capture(R) and Compu-Color(R) systems are compatible will assist the
Company in maintaining its competitiveness.
In the event that the Company is successful in developing the inkless
fingerprint system in a commercially acceptable form, the Company will face
significant competition in the market from long-established companies such as
Identix, Inc. and Digital Biometric Systems, Inc. Each company currently sells
similar products; each has expended significant capital in the development and
marketing of those products and neither has yet to achieve significant and
consistent profitability.
Suppliers
The Company has sold most of its systems for use on IBM personal computers.
However, the Company's programs are compatible with the IBM AS400 or IBM clones
and also products of other computer manufacturers. The peripheral equipment used
in connection with the Company's systems, such as videotape equipment, can be
provided by a wide range of manufacturers. As a result the Company is not
dependent on any particular supplier of raw material.
Government Regulation or Government Approval
Most law enforcement agencies purchasing new or upgraded or expanded
systems require that the system meet the requirements of NCIC 2000, a standard
issued by the National Crime Information Commission and specified by the FBI for
the size, quality and type of mug shots produced by a mug shot system.
Compu-Capture(R) currently meets or exceeds this standard.
The FBI has developed an extensive certifying process which an inkless
fingerprint system must pass before the FBI will accept cards produced by that
system. If the Company develops an inkless fingerprint system, the Company will
need to submit the inkless fingerprint system to the FBI for certification.
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Intellectual Property Rights
The Company owns the proprietary rights to the software used in the
Compu-Color(R) and Compu-Capture(R) programs.
In addition, the Company owns the rights to the trademarks
"Compu-Capture(R)", "Compu-Color(R)", "Compu-Sketch(R)". These trademarks have
been registered with the United States Patent and Trademark Office.
Employees
The Company employs 22 full-time employees. None of the employees are
represented by a labor organization and the Company is not a party to any
collective bargaining agreements.
Research and Development Expenditures
The Company expended $134,951 in 1995 and $446,776 in 1996 on research and
development.
Item 2. Description of Property
On July 1, 1995, the Company entered into a lease of 6,000 square feet of
office space from Advent Realty Limited Partnership, at 2010-F Cabot Boulevard
West, Langhorne, Pennsylvania 19047, its current location, at an annual rental
of $70,380 per year with certain escalations. The lease has a 5 year term
beginning July 1, 1995. The Company uses the space for its offices, sales
offices and research and development facilities.
Item 3. Legal Proceedings
The Company is not a party to any pending legal proceeding and the Company
is not aware of any contemplated proceeding by a government authority, with the
exception of a law suit which has been filed against the Company alleging that
the plaintiff in that matter rendered services to the Company for which he seeks
compensation by the issuance of 15,000 shares of the Company's common stock or
the payment of $100,000. The Company has denied this claim and is vigorously
defending this litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to the vote of security holders during the fourth
quarter of 1996.
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PART II
Item 5. Market for Common Equity and Related Stockholders Matters.
Market Information
The Common Stock of the Company is traded on the over-the-counter market
and is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation System SmallCap Market ("NASDAQ") under the symbol DDSI. Additionally,
the Company has two classes of warrants to purchase common stock outstanding.
Current and future warrant holders may not be able to exercise their warrants
until the Company files an amendment to update its registration statement.
The following table presents the range of high and low bid information for
the Company's Common Stock for each quarter since the Company's Common Stock was
publicly traded. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
1995 1996
----------------- -----------------
Quarter High Low High Low
------- ---- --- ---- ---
First Quarter n/a n/a 5.125 3.375
Second Quarter n/a n/a 5.625 3.000
Third Quarter 5.625 4.750 3.625 1.75
Fourth Quarter 4.750 3.500 2.375 .406
(a) Security Holders
The Company had approximately 19 holders of record of Common Stock on March
17, 1997.
(b) Dividends
The Company has not paid any dividends in the last two years. The Board of
Directors of the Company anticipates the retention of all available earnings to
support expected growth and does not anticipate payment of dividends in the
foreseeable future.
Item 6. 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(R) system, which
is marketed to law enforcement agencies, jails, and correctional facilities. The
Compu-Capture(R) system produces and stores a digitized video image or
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"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(R) 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 Compu-Color(R) system digitizes videotape and photographs of improved
properties (buildings and other property improvements). Compu-Color(R) 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.
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.
If funds are available, management will increase funds for research and
development of an inkless fingerprint imaging storing and retrieval system
which, if successfully developed, is expected to enhance the law enforcement and
business products of the Company.
Results of Operations
Sales for the twelve months ended December 31, 1996 of $2,728,368 increased
by 22% from sales of $2,229,691 for the twelve months ended December 31, 1995.
This increase is attributed to an increase in the amount of installations and
contracts awarded to the Company. The Company's deferred revenue decreased
$80,496 to $446,844 as of December 31, 1996 from $527,340 as of December 31,
1995. Additionally, the Company's backlog of orders to be installed as of
December 31, 1996 was approximately $900,000. 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 increased 30% from 1995 to
1996 due to an increase in total revenue generated by the Company. Overall the
gross profit percentage per sale increased 3% to an average of 50% from an
average of 47% in 1995.
Operating expenses increased 33% for the twelve months ended December 31,
1996 due to increases in all areas except general and administrative costs which
declined by 4%. The increases were due primarily to an increase in personnel to
support the larger client base, to expand sales volume and geographic reach and
the number of development projects that the Company has undertaken.
The net loss from operations for the Company increased 34% for the twelve
months ending December 31, 1996 to ($2,796,064) from ($2,084,047) for the twelve
months ended December 31, 1995.
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Liquidity and Capital Resources
The Company is currently funding its business principally from the
remaining proceeds of its initial public offering. However, the Company is
operating on a negative cash flow basis and anticipates it will require
additional financing during the second quarter of 1997. To achieve and sustain
financial stability over a longer period, the Company requires additional
amounts of capital. There is no assurance that the Company can obtain any such
financing on terms that will enable the Company to implement a long-term growth
strategy. Accordingly, the Company's viability for the foreseeable future is
questionable if additional funding is not obtained. The Company is attempting to
obtain 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. There can be no assurance that such
funds will be available, or if available, the cost to the Company.
As of December 31, 1996 the Company had working capital of approximately of
$639,280 which decreased $2,634,986 from December 31, 1995. During the year
ended December 31, 1996 the Company incurred net loss of $2,706,521.
Net cash used in operating activities was $2,124,715 and $2,292,063 for the
years ended December 31, 1996 and 1995. The use of cash in operating activities
for the years ended December 31, 1996 and 1995, 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 twelve months
ending December 31, 1996, inventories decreased $72,476 due to increased control
and better scheduling of installations.
As of December 31, 1996 most of the Company's receivables are due under
contracts with county and city jurisdictions. The balance are 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 December
31, 1996 were $408,803, net of an allowance for doubtful accounts of $187,019.
General Risk Factors Affecting 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 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 and on its continued listing on the NASDAQ small cap system.
9
<PAGE>
Item 7. Financial Statements
The Financial Statements are included in this Annual Report under Item 13.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information required by this Item is set forth under "Election of
Directors" and "Executive Officers" in the Company's Proxy Statement for the
1997 Annual Meeting of Stockholders filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 (the "Exchange Act") and is incorporated herein
by reference.
Item 10. Executive Compensation
The information required by this Item is set forth under "Compensation of
Directors and Executive Officers" in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders filed pursuant to Regulation 14A under the
Exchange Act and is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is set forth under "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders filed pursuant to
Regulation 14A under the Exchange Act and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
The information required by this Item is set forth under "Election of
Directors" in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders filed pursuant to Regulation 14A under the Exchange Act and is
incorporated herein by reference.
10
<PAGE>
PART IV
Item 13. Exhibits, Financial Statements and Reports on Form 8-K
Exhibit
Number Description of Document
- ------ -----------------------
(a) Exhibits
3.1 Certificate of Incorporation of the Company.
3.2 By-Laws of the Company.
4.1 Specimen Common Stock Certificate.
4.2 Warrant Agreement.
4.3 Specimen Warrant Certificate.
(a) Redeemable Class A Warrant.
(b) Redeemable Class B Warrant.
4.4 Warrant Agreement dated April 19, 1995 between the Company and Jay
Teitlebaum.
4.5 Warrant Agreement dated June 16, 1995 between the Company and Norman
Cohn.
9.0 Form of Voting Trust Agreement between Norman Cohn and Garrett U. Cohn.
10.1 Cohn Employment and NonCompetition Agreement of Garrett U. Cohn dated
July 7, 1994.
10.2 Restricted Stock Agreement between the Company and Garrett U. Cohn dated
July 7, 1994.
10.3 Stock Option Agreement between Norman Cohn and Garrett U. Cohn dated July
10, 1995.
10.4 1994 Stock Option plan of the Company as Approved by the Stockholders on
May 8, 1995.
10.6 Lease for Company Premises dated July 1, 1995.
10.7 Monthly Rental Agreement for Company Premises, dated February 1, 1994.
10.8 IBM Business Partner Agreement dated May 1, 1993.
10.9 Sony Corporation of America Value Added Reseller Certification January 1,
1993.
10.10 Letter from Tekbilt, Inc. dated June 23, 1994 confirming commitment to
appoint the Company as exclusive distributor.
10.11 Contribution Agreement between the Company and Norman Cohn dated February
7, 1995.
10.12 Loan and Warrant Purchase Agreement dated April 19, 1995 between the
Company and Jay Teitlebaum.
11
<PAGE>
10.13 Loan and Security Agreement dated June 16, 1995 between the Company and
National Business Services, Inc.
10.14 Warrant Purchase Agreement dated June 16, 1995 between the Company and
Norman Cohn.
10.15 Marketing Agreement dated August 24, 1995 between A.L. Roark and
Associates, Inc., IBM de Mexico, S.A. and the Company (under the
Company's former name Compu-Color, Inc.).
10.16 Agreement dated September 19, 1995 between Nordic VLSI AS and the
Company.
10.17 Consulting Agreement dated August 30, 1995 between the Company and
XLdynamics.
10.18 Loan Agreement dated September 1, 1995 between the Company and First
Valley Bank.
10.19 Loan Agreement - See Annual Report and March 31, 1996 10-QSB
10.20 Agreement for the Sale of Assets between the Company and Visatex
Corporation
10.21 Consultants and Advisors Compensation Plan adopted February 8, 1996.
10.22 Demand Note dated March 3, 1996 in principal amount of $45,500 made by
Garrett U. Cohn in favor of the Company (superseded by subsequent Note -
see Exhibit 10.24)
10.23 1996 Director Option Plan adopted by Board of Directors August 14, 1996
and subject to stockholder ratification
10.24* Security Agreement and Note dated as of August 14, 1996 in the principal
amount of $125,000 made by Garrett U. Cohn in favor of the Company
10.25* Joint Venture Agreement between Information Technology Solutions, Inc.
and the Company
10.26* Employee Stock Purchase Plan adopted by the Board of Directors August 14,
1996 and February 20, 1997 and subject to stockholder ratification.
10.27* Restated 1994 Stock Option Plan adopted by the Board of Directors March
20, 1997 and subject to stockholder ratification
23.2* Consent of KPMG Peat Marwick LLP.
*Filed herewith
(b) Reports on Form 8-K
None
(c) Financial Statements
12
<PAGE>
SIGNATURES
In accordance Section 13 or 15(d) 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.
By: /s/ Garrett U. Cohn
----------------------------
Title: President
Date: March 28, 1997
In accordance with the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Garrett U. Cohn President, Chief Executive Officer, March 28, 1997
- -------------------------- Treasurer and Director
Garrett U. Cohn (principal executive officer)
/s/ Michael Ott Vice President, Secretary March 28, 1997
- -------------------------- and Director
Michael Ott
/s/ Michael Pellegrino Vice President, Finance and March 28, 1997
- -------------------------- Administration and Chief
Michael Pellegrino Financial Officer (principal
financial officer and
accounting officer
/s/ Myrna L. Cohn Ph.D. Director March 28, 1997
- --------------------------
Myrna L. Cohn, Ph.D.
/s/ Bartlett R. Rhoades Director March 28, 1997
- --------------------------
Bartlett R. Rhoades
/s/ Stephen Bright Director March 28, 1997
- --------------------------
Stephen Bright Esq.
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Table of Contents
December 31, 1996 and 1995
================================================================================
Page
----
Independent Auditors' Report............................................... 2
Financial Statements:
Balance Sheets as of December 31, 1996 and 1995...................... 3
Statements of Operations for the years ended December 31,
1996 and 1995...................................................... 4
Statements of Shareholders' Equity (Deficit) for the years ended
December 31, 1996 and 1995........................................ 5
Statements of Cash Flows for the years ended December 31,
1996 and 1995..................................................... 6
Notes to Financial Statements.............................................. 7
================================================================================
1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Digital Descriptor Systems, Inc.:
We have audited the accompanying balance sheets of Digital Descriptor Systems,
Inc. (successor to Compu-Color, Inc. - see note 1) as of December 31, 1996 and
1995, and the related statements of operations, shareholders' equity (deficit),
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digital Descriptor Systems,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that Digital
Descriptor Systems, Inc. will continue as a going concern. As discussed in note
3 to the financial statements, the Company has incurred recurring losses from
operations and anticipates that it will require additional financing in 1997,
which may not be readily available, which raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans relating to
these matters are described in note 3. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
March 12, 1997
2
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Balance Sheets
December 31, 1996 and 1995
=============================================================================
Assets 1996 1995
- -----------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 494,091 2,778,185
Short-term investments 120,376 389,343
Restricted cash 150,000 150,000
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $187,019 and $138,085 in
1996 and 1995 408,803 689,240
Unbilled -- 113,172
Other 2,000 1,000
Inventories 145,036 217,512
Prepaid expenses 85,765 84,536
Other current assets 16,981 79,122
- -----------------------------------------------------------------------------
Total current assets 1,423,052 4,502,110
Deposits 7,059 7,590
Officer note receivable (note 11) 125,000 --
Furniture and equipment, net 274,697 333,901
Intangible assets, net 100,000 --
- -----------------------------------------------------------------------------
$ 1,929,808 4,843,601
=============================================================================
Liabilities and Shareholders' Equity (Deficit)
- -----------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 202,082 329,559
Accrued expenses 84,846 249,032
Deferred income 446,844 527,340
Due to affiliates -- 71,913
Current portion of note payable 50,000 50,000
- -----------------------------------------------------------------------------
Total current liabilities 783,772 1,227,844
- -----------------------------------------------------------------------------
Note payable, excluding current portion 37,500 87,500
Commitments and contingencies (notes 4, 7, 11,
and 14)
Shareholders' equity:
Common stock, $.001 par value, 10,000,000
shares authorized; 2,468,750 and 2,408,750
shares issued and outstanding as of
December 31, 1996 and 1995 2,469 2,409
Additional paid-in capital 10,148,528 9,885,788
Unearned compensation (86,000) (110,000)
Accumulated deficit (8,956,461) (6,249,940)
- -----------------------------------------------------------------------------
Total shareholders' equity 1,108,536 3,528,257
- -----------------------------------------------------------------------------
$ 1,929,808 4,843,601
=============================================================================
See accompanying notes to financial statements
3
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Statements of Operations
December 31, 1996 and 1995
================================================================================
1996 1995
- --------------------------------------------------------------------------------
Revenues $ 2,728,368 2,229,691
Cost of revenues 1,366,107 1,178,454
- --------------------------------------------------------------------------------
Gross profit 1,362,261 1,051,237
- --------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 1,166,509 472,131
Research and development 446,776 134,951
Depreciation and amortization 223,154 111,107
General and administrative 2,321,886 2,417,095
- --------------------------------------------------------------------------------
Total operating expenses 4,158,325 3,135,284
- --------------------------------------------------------------------------------
Loss from operations (2,796,064) (2,084,047)
Other income (expense):
Interest income 98,164 45,377
Interest expense (8,621) (15,189)
- --------------------------------------------------------------------------------
Net loss $(2,706,521) (2,053,859)
================================================================================
Net loss per share $ (1.10) (1.33)
Weighted average shares outstanding 2,452,476 1,542,860
================================================================================
See accompanying notes to financial statements.
4
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Statements of Shareholders' Equity (Deficit)
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
========================================================================================================
Common stock Additional
------------------- paid-in Unearned Accumulated
Shares Amount capital compensation deficit Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995 1,000,000 $1,000 3,709,630 (120,000) (4,196,081) (605,451)
Conversion of affiliate debt
to equity (note 10) -- -- 700,000 -- -- 700,000
Initial public offering proceeds,
net of issuance costs of
$1,567,592 (note 11) 1,408,750 1,409 5,476,158 -- -- 5,477,567
Amortization of unearned
compensation -- -- -- 10,000 -- 10,000
Net loss -- -- -- -- (2,053,859) (2,053,859)
- --------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 2,408,750 $2,409 9,885,788 (110,000) (6,249,940) 3,528,257
========================================================================================================
Stock granted to consultants 60,000 60 262,740 -- -- 262,800
(note 8)
Amortization of unearned
compensation -- -- -- 24,000 -- 24,000
Net loss -- -- -- -- (2,706,521) (2,706,521)
- --------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 2,468,750 $2,469 10,148,528 (86,000) (8,956,461) 1,108,536
========================================================================================================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Statements of Cash Flows
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
=============================================================================================
1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,706,521) (2,053,859)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 243,154 111,107
Amortization of unearned compensation 24,000 10,000
Changes in assets and liabilities:
Receivables 392,609 (526,332)
Inventories 41,872 (126,671)
Prepaid expenses and other current assets 60,912 (138,730)
Accounts payable (127,477) (73,894)
Accrued expenses and other liabilities 98,614 216,121
Deferred income (80,496) 348,759
Other noncurrent assets 531 (3,490)
Due to affiliates (71,913) (55,074)
- ---------------------------------------------------------------------------------------------
Net cash used in operating activities (2,124,715) (2,292,063)
- ---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Equipment purchases (93,346) (319,672)
Increase in officer note receivable (125,000) --
Acquisition of Visatex, including prepaid royalty (note 4) (160,000) --
Increase (decrease) in short-term investments,
including restricted cash 268,967 (539,343)
- ---------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (109,379) (859,015)
- ---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from initial public offering, net of offering costs
disbursed in 1995 of $1,314,561 -- 5,730,598
Proceeds from (repayment of) note payable (50,000) 137,500
Proceeds from bridge financings -- 500,000
Repayment of bridge financings -- (450,000)
- ---------------------------------------------------------------------------------------------
Net cash provided by financing activities (50,000) 5,918,098
- ---------------------------------------------------------------------------------------------
Increase (decrease) in cash (2,284,094) 2,767,020
Cash at beginning of year 2,778,185 11,165
- ---------------------------------------------------------------------------------------------
Cash at end of year $ 494,091 2,778,185
=============================================================================================
Supplemental disclosure of cash flow information:
Cash payments made during the year for interest $ 8,621 15,189
Supplemental schedule of noncash financing activities:
Conversion of affiliate debt to equity -- 700,000
Common stock granted to consultants 262,800 --
Conversion of inventory to fixed assets 30,604 --
=============================================================================================
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Financial Statements
December 31, 1996 and 1995
================================================================================
(1) Basis of Presentation
Digital Descriptor Systems, Inc. (DDSI or the Company) was incorporated
in Delaware in June of 1994 but had no substantive operations prior to
its merger with Compu-Color, Inc. (CCI) on August 10, 1995. The merger,
which was consummated concurrent with the Company's initial public
offering (IPO) described in note 12, was effected by the exchange of
all of the issued and outstanding CCI shares for 1,000,000 DDSI shares.
The merger was accounted for in a manner similar to a pooling of
interests since the companies were under common control and DDSI had
been formed solely to continue the business of CCI and to facilitate
the IPO. The accompanying financial statements reflect the historical
results of CCI through the merger date and the operations of DDSI, as
successor to CCI, thereafter, and include appropriate adjustments to
shareholders' equity accounts to incorporate the capital structure of
DDSI, on a retroactive basis, as if the merger had occurred on January
1, 1995.
(2) Nature of Operations and Summary of Significant Accounting Policies
Description of Business
The Company develops and markets computer software products which
capture video and scanned images, digitize the information, link the
digitized images to text, store the images and text and transmit this
information to required locations. The principal product of the Company
is the Compu-Capture Law Enforcement Program, which is marketed to law
enforcement agencies and jail facilities and generated the majority of
the Company's revenues in the years ended December 31, 1996 and 1995.
The Company also markets the Compu-Color Assessor Program, which
combines digitized images of videotaped properties with relevant tax
assessment information.
Substantially all of the Company's revenues are derived from government
agencies. For years ended December 31, 1996 and 1995, 12% and 11% of
total revenues were derived from foreign sales.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the recorded amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
(Continued)
7
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Notes to Financial Statements
================================================================================
(2) Continued
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a
maturity of three months or less to be cash equivalents for purposes of
the statement of cash flows.
Short-term Investments
Short-term investments consist of U.S. Treasury Bills maturing from
April 1997 to June 1997. Such investments are considered held to
maturity. As of December 31, 1996, the market value of these
investments exceeds their carrying value by $2,337.
Revenue Recognition
The Company recognizes revenue in accordance with the guidelines of
Statement of Position 91-1 of the American Institute of Certified
Public Accountants, 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 customer support (PCS or
maintenance) agreements is recognized ratably over the term of the
agreements.
Inventories
Inventories are stated at cost, using the first-in, first-out method,
which is not in excess of market value.
Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is determined
using straight line method over the estimated useful life of the
related assets, as follows:
Furniture and fittings 5 years
Vehicles 3 years
Computer equipment 2 years
Leasehold improvements 5 years
------------------------------------------------------------
Intangible Assets
Intangible assets include purchased software/technology and are being
amortized over three years. Amortization expense was $30,000 for the
year ended December 31, 1996.
(Continued)
8
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Notes to Financial Statements
================================================================================
(2) Continued
The Company periodically reviews the intangible assets to assess
recoverability and any impairment would be charged to operations in the
period in which such impairment becomes evident.
Research and Development
All research and development costs are expensed as incurred. To date,
the Company has not capitalized any software development costs since
the amount of such costs qualifying for capitalization under Statement
of Financial Accounting Standards No. 86 (SFAS No. 86), Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, has not been significant.
Net Loss Per Share
Net loss per share is computed using the weighted average number of
outstanding shares of common stock. Common stock equivalent shares have
been excluded from the computation as their effect is anti-dilutive.
The computation also gives retroactive effect to the merger of DDSI and
CCI by assuming that the DDSI shares issued as consideration in the
merger were outstanding for all periods presented.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and notes payable approximates fair value due to the
short maturity of these instruments.
Translation of Foreign Currencies
Foreign currency transaction gains and losses are included in
determining net income.
Recently Adopted Accounting Standards
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Adoption of
this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
(Continued)
9
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Notes to Financial Statements
================================================================================
(2) Continued
The Company has adopted the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation on January 1, 1996. SFAS 123 defines a fair
value based method of accounting for stock based compensation plans,
however it allows the continued use of the intrinsic value method under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees. The Company has elected to continue to use the intrinsic
value method with pro forma disclosures of net income as if the fair
value method had been applied, as discussed in note 9.
(3) Liquidity
The financial statements have been presented on the basis that the
Company is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company has incurred net losses in each year of its
existence, aggregating $8,956,461, including $2,706,521 for the year
ended December 31, 1996. Also, the Company has received correspondence
from NASDAQ warning of possible delisting if the closing bid price of
the Company's common stock did not remain over $1 for more than ten
days or if certain other criteria were not met. The closing bid of the
Company's common stock has subsequently remained over $1 for more than
ten days and the Company is currently in compliance with NASDAQ
requirements.
The Company is currently funding its business principally from the
remaining proceeds of its initial public offering. However, the Company
is operating on a negative cash flow basis and anticipates it will
require additional financing during the second quarter of 1997. To
achieve and sustain financial stability over a longer period, the
Company may require additional amounts of capital. There is no
assurance that the Company can obtain any such financing on terms that
will enable the Company to implement a long-term growth strategy.
Accordingly, the Company's viability for the foreseeable future is
questionable if additional funding is not obtained.
The Company is in the process of attempting to raise additional capital
as of March 12, 1997. In addition, management is continuing its efforts
to reduce overhead costs and identify new business opportunities.
(4) Acquisition
In January 1996 the Company acquired certain assets of Visatex
Corporation for $100,000 in cash and potential additional payments
equal to the greater of a royalty calculated as 10% of revenues for the
three years ended December 31, 1998 or a commission based on certain
agreed upon rates for a similar three year period. Such royalties or
commissions are to be determined based on the licensing or maintenance
of the software products of Visatex, a California corporation. The
purchase price was allocated principally to purchased
software/technology.
(Continued)
10
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Notes to Financial Statements
================================================================================
(4) Continued
The Company made an advance payment of $60,000 against the
royalty/commission obligations in February 1996. Royalty expense
related to the acquired technology was $20,000 during 1996.
(5) Furniture and Equipment
Furniture and equipment at December 31, 1996 and 1995 consist of:
1996 1995
-----------------------------------------------------------------------
Furniture and fixtures $ 180,159 136,687
Vehicles 80,089 80,089
Computer equipment 533,456 445,109
Leasehold improvements 30,086 27,956
-----------------------------------------------------------------------
823,790 689,841
Accumulated depreciation (549,093) (355,940)
-----------------------------------------------------------------------
$ 274,697 333,901
========================================================================
(6) Note Payable
In December of 1995, the Company entered into a $137,500 bank loan,
repayable in monthly installments through September 1998 of $4,167 plus
interest. Interest accrues at 2% above the Bank's variable commercial
deposit rate (7.4% at December 31, 1995). The note is collateralized by
a $150,000 certificate of deposit which is classified as restricted
cash. At December 31, 1996 the remaining balance outstanding was
$87,500.
Interest expense on this note payable totaled $8,621 and $2,574 for
the years ended December 31, 1996 and 1995.
(7) Commitments
The Company leases certain facilities under operating lease agreements
that expire through June 30, 2000. The Company also leases vehicles and
office equipment under operating lease agreements.
(Continued)
11
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Notes to Financial Statements
================================================================================
(7) Continued
Future minimum lease payments under these agreements are as follows:
1997 102,662
1998 75,556
1999 75,556
2000 37,998
======================================================
Rent expense related to operating leases was $75,447 and $59,874 for
the years ended December 31, 1996 and 1995.
In 1996 the Company entered into an agreement pursuant to which the
Company is committed to pay $15,400 in February 1997 for technical
services during 1997. Also the Company has committed to making $30,000
available in the form of a loan. Interest on this loan will be payable
at prime plus one percent.
As of December 31, 1996, the Company has also committed to fund
$135,000 for three phases of a research and development agreement.
(8) Consultants and Advisors Compensation Plan
In February 1996, the Company adopted the Consultants and Advisors
Compensation Plan (the Plan). Persons eligible under this Plan include
any consultant or advisory of the Company who has provided bona fide
services to the Company, except for services provided in connection
with the offer or sale of securities in a capital raising transaction.
The Company has reserved 300,000 shares of common stock for issuance
under this Plan. Awards may be granted in the form of stock options or
stock grants. No awards shall be made after December 31, 2001. In
February 1996, the Company granted 60,000 shares of common stock to
three consultants under this Plan. No amounts were required to be paid
by such consultants for the shares awarded. Accordingly, compensation
expense of $262,800 based on the fair market value of the Company's
stock as of the award date, was recorded in general and administrative
expenses in connection with this grant.
(9) Stock Option Plans
In May 1995, the Company adopted the 1994 Stock Option Plan (the 1994
Plan) pursuant to which the Company reserved 200,000 shares of common
stock. Under the 1994 Plan, each outside director is entitled to
receive an option to purchase 1,000 shares of common stock for each
year served on the Board of Directors commencing in 1995. With the
exception of the stock options to outside directors under the 1994 Plan
which vest on the first anniversary of the grant date, options vest
over a four year period and have a term of ten years. There were 93,000
and 3,000 shares granted in 1996 and 1995, respectively, under the 1994
Plan, 2,000 of which were exercisable at December 31, 1996.
(Continued)
12
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Notes to Financial Statements
================================================================================
(9) Continued
In August 1996, the Company adopted the 1996 Director Option Plan (the
Director Plan) pursuant to which the Company reserved 200,000 shares of
common stock. Under the Director Plan, each outside director is
automatically granted an option to purchase 15,000 shares of common
stock (first option) upon adoption of the Director Plan or the date
such person becomes a director. Every year thereafter, each outside
director is automatically granted an option to purchase 1,000 shares
(subsequent option) on each date of the annual meeting if a minimum of
six months were served on the Board of Directors. The exercise price of
options granted under the Director Plan is to be the fair market value
on the date of the grant. A portion of the first option vests at the
six month anniversary of the date of the grant and continues over a
four year period. Subsequent options vest on the first anniversary of
the date of grant. Options may not be exercised more than five years
from the date of the grant. In 1996 there were 45,000 options granted
under the Director Plan, none of which are vested at December 31, 1996.
In addition, the Company granted a former director the option to
purchase 3,812 shares of common stock at an exercise price of $3.81,
the fair market value of the Company's common stock at the date of the
grant. A portion of the option vests on December 31, 1996 and ratably
thereafter for a 41 month period. The option has a term of ten years.
At December 31, 1996, there were 476 options vested and exercisable.
Following is a summary of option activity under all plans:
Number of Weighted average
shares exercise price
-----------------------------------------------------------------------
Options outstanding at December 31, 1994 $ -- --
Granted 3,000 5.13
Exercised -- --
Canceled -- --
------------------------------------------------------------------------
Options outstanding at December 31, 1995 3,000 5.13
Granted 141,812 3.26
Exercised -- --
Canceled (1,000) 3.30
------------------------------------------------------------------------
Options outstanding at December 31, 1996 143,812 3.30
========================================================================
(Continued)
13
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Notes to Financial Statements
================================================================================
(9) Continued
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.19 - $5.25 and
9.37 years, respectively.
At December 31, 1996, the number of options exercisable was 2,476, and
the weighted-average exercise price of those options was 4.82.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's Plan been
determined consistent with FASB Statement No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
1996 1995
----------------------------------------------------------------------
Net loss As reported $(2,706,521) (2,053,859)
Pro forma (2,769,480) (2,057,641)
Loss per share As reported (1.10) (1.33)
Pro forma $ (1.13) (1.33)
=======================================================================
The per share weighted-average fair value of stock options granted
during 1996 and 1995 was $2.22 and $3.50 on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 1995 - expected dividend yield 0%, expected volatility of
80%, risk-free interest rate of 6.12% to 6.36%, and an expected life of
five years; 1996 - expected dividend yield 0%, expected volatility of
80%, risk-free interest rate of 6.04% to 6.44%, and an expected life of
five years.
(Continued)
14
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Notes to Financial Statements
================================================================================
(10) Income Taxes
CCI had historically operated as a subchapter "S" corporation and its
operating losses were passed through to its sole shareholder. Effective
with the date of the merger described in note 1, results of operations
are subject to tax at the corporate level.
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1996 consist
primarily of net operating loss carryforwards as well as differences
related to fixed asset depreciation and certain reserves and accruals
for book and tax purposes. The Company is in a net deferred tax asset
position at December 31, 1996 (before consideration of a valuation
allowance) due to the net operating loss carryforwards described below.
However, due principally to the uncertainty of the Company realizing
this carryforward benefit through future taxable income, the net
deferred tax asset is fully reserved and no benefit has been recognized
in the statement of operations.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below:
1996 1995
-----------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards 1,428,282 403,984
Bad debt reserve 71,197 50,009
Inventory reserves 11,421 --
Depreciation expense -- 3,807
Accrued expense 116 27,862
Deferred income 36,354 --
Unearned compensation 12,944 --
----------------------------------------------------------------------
Total gross deferred tax assets 1,560,314 485,662
Less: valuation allowance (1,551,186) (485,662)
----------------------------------------------------------------------
Deferred tax liability:
Depreciation expense (9,128) --
----------------------------------------------------------------------
Net deferred tax assets $ -- --
======================================================================
(Continued)
15
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Notes to Financial Statements
================================================================================
(10) Continued
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which temporary differences
representing future deductible amounts become deductible. The Company
will periodically assess and reevaluate the status of its recorded
deferred tax asset. The valuation allowance for deferred tax assets as
of December 31, 1995 was $485,662. The net change in the valuation
allowance for the year ended December 31, 1996 was a decrease of
$1,065,524.
As of December 31, 1996, the Company had approximately $3,751,866 of
net operating loss carryforwards for tax purposes which may be
available to offset future federal taxable income, if any, through
2010.
(11) Related Party Transactions
Prior to the DDSI's IPO (see note 12), CCI was wholly owned by Norman
Cohn, the brother of DDSI's President, Garrett Cohn. CCI had
historically conducted business with certain entities which were also
wholly owned by Norman Cohn, including National Business Services, Inc.
(NBS), Medical Data Institute, Inc. (MDI) and ASI Computer Systems,
Inc. (ASI). In 1994, CCI incurred costs of approximately $324,600 for
certain technical services, inventory purchases and administrative
expenses billed by these affiliated companies. As of December 31, 1994,
CCI was indebted to these affiliates in the amount of $776,987. This
obligation was noninterest-bearing and included certain cash advances
made by NBS to fund the Company's operations and costs associated with
the IPO. On February 7, 1995, $700,000 of this affiliated company
obligation was converted to additional paid-in capital. During 1996 and
1995, the Company was billed an additional $136,021 and $352,630,
respectively, for goods or services provided by companies owned by
Norman Cohn. In addition, during 1995, NBS and Norman Cohn provided
financing to the Company in the form of a bridge loan which is further
described in note 12.
In July 1994, the Company entered into a five-year employment agreement
with Garrett Cohn, which provides for a base salary of $150,000 per
year plus benefits. Pursuant to the agreement, Mr. Cohn was also
granted the right to purchase 119,999 shares of common stock of DDSI
for $.001 per share. Mr. Cohn exercised that right, but subsequently
adjusted his ownership to 60,000 shares of common stock at the time of
the merger of CCI into the Company. Mr. Cohn has agreed not to transfer
his stock for the period of his employment and for a period of 3 years
following the termination or expiration of the employment agreement.
DDSI has recorded $120,000 in unearned compensation, based on the fair
value of the restricted stock at the date of issuance. Such unearned
compensation is amortized to expense in the operating statement over
the period of the employment agreement. The related amortization
(Continued)
16
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Notes to Financial Statements
================================================================================
(11) Continued
expense, which commenced upon the effective date of the DDSI-CCI
merger, was $24,000 and $10,000 for the years ended December 31, 1996
and 1995, respectively.
In the third quarter of 1995, following the consummation of the IPO,
the Company entered into a consulting contract with XLdynamics, which
subsequently changed its name to Nova Temps, a sole proprietorship
owned by Myrna Cohn, a director of the Company and the spouse of the
Company's President. The contract is for personnel testing,
organizational development, and human resource services. The Company
paid XLdynamics $22,500 upon contract signing and has committed to pay
an additional $3,500 per month for a period of 24 months ending in
August of 1997. In 1996 the Company paid $46,606 under this agreement,
which is classified as general and administrative expense, leaving a
remaining commitment of $28,000 as of December 31, 1996.
During 1996 an officer of the Company borrowed $125,000 which is
evidenced by a promissory note. The note bears interest at prime plus
one and is payable together with the principal on August 13, 1999. The
note is collateralized by a pledge of certain assets held in trust
totaling $102,500.
(12) Financing Transactions and Outstanding Warrants
In April of 1995, the Company borrowed $200,000 from Jay Teitlebaum, an
individual investor (the Teitlebaum bridge financing). In June and July
of 1995, the Company borrowed $300,000 from NBS (the Norman Cohn bridge
financing). Both of these bridge loans carried interest at prime plus
2% and provided warrant coverage, as further detailed below. No value
was assigned to the warrants granted in these transactions since their
exercise prices were greater than the initial public offering price of
the DDSI units described in the following paragraph. All amounts
borrowed were repaid from the proceeds of the IPO, with the exception
of $50,000 which was repaid in April 1996. Interest expense on the
bridge loans totaled $12,058 in 1995.
In August 1995, the Company issued 1,408,750 units at $5 per unit in
the IPO, resulting in proceeds, net of issuance costs of $5,477,567.
Each unit consists of one share of common stock, $.001 par value, one
Redeemable Class A Warrant and one Redeemable Class B Warrant. The
securities comprising the units were immediately detachable and
separately transferable. Each Class A Warrant entitles the holder to
purchase one share of common stock for 120% of the initial offering
price of the unit ($6.00), subject to adjustment, during the four-year
period commencing one year from the date of the offering. Each Class B
Warrant entitles the holder to purchase one share of common stock for
145% of the initial offering price of the units ($7.25) subject to
adjustment, during the four-year period commencing one year from the
(Continued)
17
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Notes to Financial Statements
================================================================================
(12) Continued
date of the offering. The Class A Warrants are subject to redemption by
the Company under certain circumstances after one year from the
offering and the Class B Warrants are subject to redemption by the
Company under certain circumstances after two years.
A summary of common stock purchase warrants outstanding at December 31,
1996 is as follows:
Description Outstanding Exercise price
-----------------------------------------------------------------------
Redeemable Class A Warrants 1,408,750 $6.00
Redeemable Class B Warrants 1,408,750 $7.25
Redeemable Class A-1 Warrants 95,000 $6.00
Redeemable Class B-1 Warrants 95,000 $7.25
=======================================================================
All warrants expire in August 2000 and may be redeemed by the Company,
at its option, under certain circumstances commencing in August of
1996. The Class A-1 and B-1 warrants were issued in connection with the
Teitlebaum (75,000 each) and Norman Cohn (20,000 each) bridge
financings described above and provide the holders with certain
registration rights.
(13) Retirement Plan
Effective February 1, 1996, the Company implemented a 401(k) Savings
Plan which permits employees to make contributions to the Savings Plan
on a pretax salary reduction basis in accordance with the Internal
Revenue Code. Under the Savings Plan, the employer has the option to
match 25% of the employee contributions up to 6% of the employee's
eligible salary or 50% of the employee contributions up to 6% of the
employee's eligible salary for those participants who are fully vested.
Participants vest over a period of 6 years. The Company did not make
any contributions to the Savings Plan during 1996.
(Continued)
18
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
Notes to Financial Statements
================================================================================
(14) Litigation
A lawsuit has been filed against the Company in the New York Supreme
Court in which the plaintiff alleges that he rendered services,
including investment banking services, for which the plaintiff alleges
that he was promised 15,000 shares of the Company's common stock. The
plaintiff seeks 15,000 shares of the Company's common stock or $100,000
in damages. The Company intends to vigorously contest the matter in the
belief that the plaintiff has been fully paid pursuant to the terms of
the written contract between the parties, and that material allegations
of the complaint are false. Management does not believe the resolution
of this matter will materially impact the Company's financial
statements.
================================================================================
19
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Document
- ------ -----------------------
10.24 Security Agreement and Note dated as of August 14, 1996 in the
principal amount of $125,000 made by Garrett U. Cohn in favor of the
Company
10.25 Joint Venture Agreement between Information Technology Solutions,
Inc. and the Company
10.26 Employee Stock Purchase Plan adopted by the Board of Directors
August 14, 1996 and February 20, 1997 and subject to stockholder
ratification.
10.27 Restated 1994 Stock Option Plan adopted by the Board of Directors
March 20, 1997 and subject to stockholder ratification
Exhibit 10.24
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (hereinafter referred to as the "Agreement") is
made as of the 14th day of August, 1996, by GARRETT U. COHN ("Debtor"), and
DIGITAL DESCRIPTOR SYSTEMS, INC., a Delaware corporation ("Secured Party").
RECITALS:
1. The Secured Party has agreed to make a loan ("Loan") to Debtor of up to
ONE HUNDRED TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($125,000.00).
2. The Loan is evidenced by a Secured Promissory Note ("Note") of even date
herewith made by the Debtor, to Secured Party in the maximum amount of the Loan.
3. Pursuant to agreement, Debtor has agreed to grant to Secured Party a
security interest in that certain promissory note described as the "Collateral"
in Exhibit A attached hereto.
4. The Collateral will be held by the Secured Party.
NOW, THEREFORE, with reference to the above recitals, and in reliance
thereon, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Creation of Security Interest.
Debtor hereby grants to Secured Party a security interest in, and does
hereby collaterally assign, pledge, convey and set over unto the Secured Party,
the Collateral and all of Debtor's present and hereafter acquired right, title
and interest in and to the Collateral, for the purpose of securing payment of
all indebtedness, obligations and liabilities of Debtor to Secured Party arising
under or in connection with the Note, and performance of all agreements,
covenants, terms and conditions contained in the foregoing document.
2. Warranties, Representations and Covenants of Debtor.
Debtor hereby warrants, represents and covenants to the Secured Party as
follows:
(a) Debtor is and will be the sole owner of the Collateral, free from
any lien, security interest, encumbrance or adverse claim of any kind.
Debtor will not permit any financing statement to be filed with respect to
the Collateral or any portion thereof except in favor of Secured Party.
Debtor will notify Secured Party of, and will defend the Collateral
against, all claims and demands of all persons at any time claiming the
same or any interest therein.
(b) Subject to the terms of subparagraph 2.(d) hereof, the Collateral
will be kept in the possession of the Secured Party, and the Collateral
will not be removed from the Premises without the prior written consent of
Secured Party.
(c) At the request of Secured Party, Debtor has or will join Secured
Party in executing one or more financing statements identifying the
Collateral and evidencing the security interest of Secured Party in the
Collateral pursuant to the requirements of Uniform Commercial Code and in
-15-
<PAGE>
form satisfactory to Secured Party. Debtor will pay the cost of filing the
same in all public offices wherever filing is deemed by Secured Party to be
necessary or desirable.
(d) Except as otherwise expressly permitted in writing, without the
prior written consent of Secured Party, Debtor will not sell, exchange,
dispose of, offer to sell or otherwise transfer or otherwise deal with the
Collateral or any portion or interest therein, unless simultaneously
therewith new items of Collateral, which items may be similar to those
proposed to be disposed of and which shall be of equal or greater value,
are substituted therefore. If the Collateral or any part thereof is sold,
transferred, exchanged, paid or otherwise disposed of, the security
interest of Secured Party shall extend to the proceeds of such sale,
transfer, exchange, payment or other disposition.
(e) Debtor will keep the Collateral free from any lien, security
interest or encumbrance. Debtor will not use the Collateral in violation of
any statute or governmental rule, regulation or ordinance.
(f) At the Secured Party's request, Debtor will execute any document,
will procure any document and will do all other acts which from the
character or use of the Collateral may be reasonably necessary to protect
the Collateral against the rights, claims or interests of third persons,
and will otherwise preserve the Collateral as security hereunder.
3. Preservation of Collateral by Secured Party.
Should Debtor fail or refuse to make any payment, perform or observe any
other covenant, condition or obligation, or take any other action required by
the terms of this Agreement or the Note at the time or in the manner provided,
then Secured Party may, at Secured Party's sole discretion, without notice to or
demand upon Debtor, and without releasing Debtor from any obligation, covenant
or condition hereof, make, perform, observe, take or do the same in such manner
and to such extent as Secured Party may deem necessary to protect its security
interest in or the value of the Collateral. Furthermore, Secured Party may
commence, defend, appeal or otherwise participate in any action or proceeding
purporting to affect its security interest in or the value of the Collateral.
Debtor hereby agrees to reimburse Secured Party on demand for any payment made,
or any expense incurred by Secured Party pursuant to the foregoing authorization
(including court costs and reasonable attorneys' fees and disbursements), and
agrees further to pay interest thereon from the date of said payment or
expenditure at the rate specified in the Note as the Default Rate.
4. Default.
The occurrence of any of the following shall constitute a default
("Default") hereunder:
(a) If a Default shall occur under the Note and be continuing or if
Debtor fails to observe or perform any term, covenant or condition of the
Note, and such default is not cured within the time period expressly
established therefor, if any; or
(b) If any writ or any distress warrant shall be issued against or
levied on the Collateral, or any part thereof; or if the Debtor shall sell
or assign or attempt to sell or assign the Collateral, or any interest
therein in violation of subparagraph 2.(d) hereof, which events shall not
be corrected or cured by Debtor within ten (10) days after notice thereof
by Secured Party; or
-16-
<PAGE>
(c) If Debtor defaults under this Agreement, which default is not
corrected or cured by Debtor within ten (10) days after notice thereof by
Secured Party; or
(d) If the Collateral or any part thereof is removed or transferred,
or attempted to be removed or transferred, from the Premises, or sold or
disposed of, in violation of the terms of subparagraphs 2.(b) and 2.(d),
and substitute Collateral is not provided within ten (10) days thereafter;
or
(e) If any representation or warranty made by Debtor herein, or in any
other instrument, agreement or written statement in any way related hereto,
to the Collateral or any portion thereof, or to the Loan, shall prove to
have been false or incorrect in any material respect on or after the date
when made.
5. Remedies upon Default.
Upon the occurrence of Default, Secured Party may, in addition to
exercising those remedies specified in the Notes, at any time, at its election,
without further notice, and to the extent permitted by law pursue any one or
more of the following remedies concurrently or successively, it being the intent
hereof that none of such remedies shall be to the exclusion of any others:
(a) Foreclose this Agreement and the security interest granted hereby,
as provided herein, or in any manner permitted by law, either personally,
through agents or by means of a court appointed receiver, and exclude
therefrom Debtor and all others claiming through or under Debtor, and
exercise any and all of the rights and remedies conferred upon Secured
Party by the Note or by applicable law, either concurrently or in such
order as Secured Party may determine. Secured Party may sell or otherwise
dispose of, or cause to be sold or otherwise disposed of the Collateral, as
a whole or in such parcels as Secured Party may determine without affecting
in any way the rights or remedies to which Secured Party may be entitled
under the Note or applicable law;
(b) Publicly or privately sell or otherwise dispose of the Collateral,
without necessarily having the Collateral at the place of sale or
disposition, and upon terms and in such manner as Secured Party may
determine. Secured Party may be a purchaser of the Collateral at any public
sale. Secured Party will give Debtor reasonable notice of the time and
place of any public sale thereof or of the time after which any private
sale or any other intended disposition thereof is to be made, and such
notice, if given to the Debtor pursuant to the provisions of Paragraph 6
hereof at least twenty (20) days prior to the date of any public sale or
disposition or the date after which any private sale or disposition may
occur, shall constitute reasonable notice of such sale or other
disposition; and
(c) Exercise any remedies of a Secured Party under the Uniform
Commercial Code or any other applicable law.
Debtor hereby agrees to indemnity, defend, protect and hold harmless
Secured Party and its employees, officers and agents from and against an and all
damages, liabilities, claims and obligations which may be incurred, asserted or
imposed upon them or any of them as a result of or in connection with any use,
operation, or consumption of any of the Collateral or as a result of Secured
Party's seeking to obtain performance of any of the obligations due with respect
to the Collateral, except from such damages, liabilities, claims or obligations
as result from gross negligence or intentional misconduct of Secured Party, its
employees, officers or agents.
-17-
<PAGE>
The proceeds of any sale under this Paragraph 5 shall be applied first to
the payment of any sums owing to Secured Party pursuant to the provisions of the
Note, this Agreement in such manner as Secured Party may elect, with any funds
remaining after payment of the foregoing to be paid to Debtor
Secured Party shall have the right to enforce one or more remedies
hereunder, successively or concurrently, and such action shall not operate to
estop or prevent Secured Party from pursuing any further remedy which it may
have, and any repossession or retaking or sale of the Collateral pursuant to the
terms hereof shall not operate to release Debtor until full payment of any
deficiency has been made in cash.
6. Notices.
Any notice, demand or other communication which any party hereto may desire
or may be required to give to any other party shall be in writing, and shall be
deemed given' if and when personally delivered, or on the second business day
after being deposited in United States registered or certified mail, postage
prepaid, addressed to a party at its address set forth below, or to such other
address as such party may have designated to all other parties by written notice
in accordance herewith:
If to Secured Party:
Michael Pellegrino, Chief Financial Officer
Digital Descriptor Systems, Inc.
2010-F Cabot Blvd. West
Langhorne, PA 19047
If to Debtor:
Garrett U. Cohn
177 Ash Way
Doylestown, PA 18901
Except as otherwise specifically required herein, notice of the exercise of any
right, option or power granted to Secured Party by this Assignment is not
required to be given.
7. Waiver.
By exercising or failing to exercise any of its rights, options or
elections hereunder, Secured Party shall not be deemed to have waived any breach
or default on the part of Debtor or to have released Debtor from any of its
obligations hereunder, unless such waiver or release is in writing and signed by
Secured Party. In addition, the waiver by Secured Party of any breach hereof or
default in payment of any amounts due under the Note or this Agreement shall not
be deemed to constitute a waiver of any succeeding breach or default.
8. Binding Agreement.
This Agreement and all provisions hereof shall be binding upon Debtor, its
successors, assigns, executors, administrators and legal representatives and all
other persons or entities claiming under or through Debtor, and the word
"Debtor," when used herein, shall include all such persons or entities and any
others liable for the payment of the indebtedness secured hereby or any part
thereof, whether or not they have executed the Note or this Agreement. The word
"Secured Party," when used herein, shall include Secured
-18-
<PAGE>
Party's successors, assigns, and legal representatives, including all other
holders, from time to time, of the Note.
9. Governing Law; Interpretation.
This Security Agreement shall be governed by the laws of the State the Note
and this Security Agreement were executed and delivered, the proceeds of the
Loan were disbursed by Secured Party and the principal and interest due under
the Note are to be paid. Wherever possible each provision of this Security
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Security Agreement shall be
prohibited by or invalid under such law, such provision shall be ineffective to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Security Agreement. Time
is of the essence in this Security Agreement.
10. Miscellaneous.
Neither this Security Agreement nor any provision hereof may amended,
modified, waived, discharged or terminated nor may any of the Collateral be
released, except by an instrument in writing duly signed by or on behalf of
Secured Party hereunder. The Section headings are used herein for convenience of
reference only and shall not define or limit the provisions of this Security
Agreement. As used in this Security Agreement, the singular shall include the
plural, and the plural shall include the singular, and masculine, feminine, and
neuter pronouns shall be fully interchangeable, where the context so requires.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
DEBTOR: SECURED PARTY:
DIGITAL DESCRIPTOR SYSTEMS, INC.
/s/ Garrett U. Cohn
- -----------------------
GARRETT U. COHN By: /s/ Michael Pellegrino
--------------------------------
Michael Pellegrino, Chief Financial Officer
-19-
<PAGE>
EXHIBIT A
DEBTOR: GARRETT U. COHN
SECURED PARTY: DIGITAL DESCRIPTOR SYSTEMS, INC.
DESCRIPTION OF COLLATERAL
<PAGE>
SECURED PROMISSORY NOTE
$125,000.00 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 Twenty-Five Thousand and No/100 Dollars ($125,000.00), in lawful money
of the United States of America, together with all accrued and unpaid interest,
on August 13, 1999.
This Secured Promissory Note (the "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 accrue from even date herewith until this Note is paid, at
which time all such accrued interest shall be due and payable together with the
principal due hereunder.
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 August 14, 1996 in the principal amount of
$148,000.00, 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
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.
-1-
<PAGE>
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. Secured Note. This Note and the principal and interest due hereunder are
secured by a security agreement entered into as of even date herewith.
6. 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 Commonwealth 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
-2-
Exhibit 10.25
Digital Descriptor Systems, Inc.
and
Information Technology Solutions, Inc.
JOINT VENTURE AGREEMENT
September 16, 1996
This letter of intent outlines the terms and conditions for creating a strategic
joint venture relationship between Digital Descriptor Systems, Inc. ("DDSI") and
I/tx information technology solutions, Inc. ("I/tx").
1. Business Intent
The business intent is to combine the system integration expertise and product
development efforts of I/tx with the marketing and sales strengths of DDSI to
create and deliver new products and services on an exclusive basis for the
public sector.
2. Commitments
(a) I/tx will provide its I/tx products, both currently available and
as developed, from time to time.
(b) I/tx will provide ongoing product development and systems
integration services.
(c) I/tx will include all revenues generated via its relationship with
ET Software, Inc. into this joint venture.
(d) Any additional sales and marketing support services over and above
that of the product manager's will be provided at I/tx's normal hourly rate
(One Hundred Twenty Five Dollars ($125) per hour), upon prior approval by
DDSI.
(e) DDSI will be responsible for all sales and marketing efforts.
(f) Upon prior approval, DDSI will pay all travel and out-of-pocket
expenses incurred during sales and marketing activities, in accordance with
DDSI's usual travel and accommodation guidelines.
(g) DDSI will pay I/tx Fifteen Thousand Four Hundred Dollars ($15,400)
upon execution of this agreement and the same amount during thirty (30)
days thereafter. These two (2) payments which total Thirty Thousand Eight
Hundred Dollars ($30,800 shall be expanded to provide the services of a
full time product manager resources for a period of one (1) year from the
date hereof. If necessary, as deemed by I/tx, DDSI shall advance Ten
Thousand Dollars ($10,000) in months three (3), four (4) and five (5) for a
total of Thirty Thousand Dollars ($30,000). This advanced amount shall be
considered a debt due to DDSI by I/tx payable at an interest rate of one
percent (1%) over prime until paid in accordance herewith. The debt will be
repaid by DDSI receiving an additional ten percent (10%) of the net
revenues produced by each sale until the debt and any accrued interest
therein is paid in full.
<PAGE>
(h) DDSI and I/tx will mutually agree upon business plans, product
packaging and pricing strategies of this joint venture as business markets
permit.
(i) DDSI and I/tx will honor mutual confidentiality on their own
developed software.
3. Revenue Sharing
(a) DDSI and I/tx will share equally in the net revenues produced by
each sale.
(b) The party(ies) providing the installation and support fees will be
entitled to a fair and equitable distribution of the fees so generated.
(c) Annual license renewal fees will got the party developing and
supporting the products on the same basis as 3.a above.
4. Term of Agreement
(a) The financial terms of this Agreement will be reviewed by the
parties ninety (90) days from even date herewith.
(b) This Agreement shall remain in full force and effect for eighteen
(18) months from date herewith and shall remain in effect for successive
one (1) year periods unless canceled by either party upon ninety (90) days
written notice prior to the expiration of such one (1) year term.
Through the signature of this agreement DDSI and I/tx agree to the terms
and conditions specified herein and commit to apply their best efforts to
maximize the results of this joint venture agreement.
Garret U. Cohn (DDSI) Robert T. Barnett (I/tx )
/s/ Garrett U. Cohn /s/ Robert T. Barnett
- ------------------------ --------------------------
Exhibit 10.26
DIGITAL DESCRIPTOR SYSTEMS, INC.
EMPLOYEE STOCK PURCHASE PLAN
ARTICLE
PURPOSE
1. Purpose. The purpose of the Digital Descriptor Systems, Inc. Employee
Stock Purchase Plan (the "Plan") is to provide eligible employees of Digital
Descriptor Systems, Inc. (the "Company") who wish to become shareholders of the
Company an opportunity to purchase common stock ($.001 par value) of the Company
("Stock"). The Board of Directors of the Company believes that employee
participation in the ownership of the Company will be to the mutual benefit of
both the employees and the Company. The Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended (the "Code"). The provisions of the Plan shall be construed so
as to extend and limit participation in a manner consistent with the
requirements of that section of the Code.
ARTICLE
DEFINITIONS
1. Board. Board shall mean the Board of Directors of the Company or a
committee appointed by the Board of Directors of the Company to administer the
Plan. The Board shall have complete discretion to interpret and construe any and
all provisions of the Plan, to adopt rules and regulations for administering the
Plan and to make all other determinations deemed necessary or advisable for the
administering of the Plan. The Board's determination of the foregoing matters
shall be conclusive.
<PAGE>
2. Compensation. Compensation shall mean regular straight-time earnings or
salary, excluding payments for overtime, shift premium, bonuses and other
special payments, commissions or incentive payments.
3. Employee. Employee shall mean any person who is customarily employed on
a full-time or part-time basis by the Company and is regularly scheduled to work
more than 20 hours per week.
4. Plan Administrator. Plan Administrator shall mean the person designated
by the Board to receive notices and supervise the operation of the Plan. In the
absence of a designation of a Plan Administrator by the Board, the Treasurer of
the Company shall be the Plan Administrator.
ARTICLE
ELIGIBILITY AND PARTICIPATION
1. Initial Eligibility. Any employee who shall have completed six
consecutive months of employment and shall be employed by the Company on the
date his participation in the Plan is to become effective shall be eligible to
participate in Offerings under the Plan which commence on or after such six
month period has concluded.
2. Leave of Absence. For purposes of participation in the Plan, a person on
leave of absence shall be deemed to be an employee for the first 90 days of such
leave of absence and such employee's employment shall be deemed to have
terminated at the close of business on the 90th day of such leave of absence
unless such employee shall have returned to regular full-time or part-time
employment (as applicable) prior to the close of business on such 90th day.
Termination by the Company of any employee's leave of absence, other than
termination of such leave of absence
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<PAGE>
by return to full-time or part-time employment (as applicable) shall terminate
an employee's employment for all purposes of the Plan and shall terminate such
employee's participation in the Plan and right to exercise any option.
3. Restrictions on Participation. Notwithstanding any provisions of the
Plan to the contrary, no employee shall be granted any rights to purchase shares
under the Plan:
a. If, immediately after such grant, such employee would own Stock,
and/or hold outstanding options to acquire Stock, possessing 5 percent or
more of the total combined voting power or value of all classes of stock of
the Company (for the purposes of this paragraph, the rules of Section
424(d) of the Code shall apply in determining Stock ownership); or
b. Which would permit such employee's rights to purchase Stock under
all employee stock purchase plans of the Company to accrue at a rate which
exceeds $25,000 in fair market value of the Stock (determined at the time
such rights are granted) for each calendar year in which such rights are
outstanding.
4. Restrictions on Grants. No more than 100,000 shares of Stock may be sold
pursuant to options granted under the Plan. If for any reason any option under
the Plan terminates in whole or in part, shares of Stock subject to such
terminated options may be again subject to an option under the Plan.
5. Commencement of Participation. An eligible employee may become a
participant with respect to a particular Offering (defined below) by completing
an authorization for a payroll deduction on the form provided by the Company and
filing it with the personnel office on or before the Offering Commencement Date
(defined below). Payroll deductions for a participant
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<PAGE>
shall commence on the applicable Offering Commencement Date when his
authorization for a payroll deduction becomes effective and shall end on the
Offering Termination Date, unless sooner terminated by the participant as
provided in Article 7.
ARTICLE
OFFERINGS
1. Offerings. From time to time, but not more frequently than once during
any six month period, the Board may fix a date ("Offering Commencement Date"),
on which the Company will make an offer ("Offering"), to all employees then
eligible to participate, of options to purchase Stock. Each Offering
Commencement Date shall be at least 60 days after the date on which the Board
makes the employees aware of the Offering. The Offering Termination Date shall
be the date which is six months after the Offering Commencement Date.
ARTICLE
GRANTING OF OPTIONS
1. Number of Shares of Option Stock. On each Offering Commencement Date,
each participating employee shall be deemed to have been granted an option to
purchase a maximum number of shares of Stock determined as follows:
a. The percentage of the employee's Compensation which he has elected
to have withheld, but in no event exceeding five percent of Compensation;
multiplied by
b. The employee's Compensation during the period of the Offering;
divided by
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<PAGE>
c. 85 percent of the market value of the Stock on the applicable
Offering Commencement Date, determined as provided in Section 5.2 below.
2. Option Price. The option price of Stock under this Plan shall be the
lower of:
a. 85 percent of the market value of the Stock on the Offering
Commencement Date; or
b. 85 percent of the market value of the Stock on the Offering
Termination Date.
The market value of the Stock shall be its closing price on the applicable date,
or the nearest prior business day on which trading occurred, on NASDAQ. If the
Stock is not admitted to trading on the Offering Commencement Date or the
Offering Termination Date, then the market value on such dates shall be 85
percent of the fair market value of the Stock as determined by the Board.
ARTICLE
EXERCISE OF OPTIONS
1. Automatic Exercise. Unless a participant gives written notice to the
Company as provided herein, his option for the purchase of Stock with payroll
deductions made during any Offering will be deemed to have been exercised
automatically on the Offering Termination Date applicable to such Offering, for
the purchase of the number of full shares of Stock which the accumulated payroll
deductions in his account at that time will purchase at the applicable option
price (but not in excess of the number of shares of Stock for which options have
been granted to the employee pursuant to Section 5.1) and any excess in his
account at that time will be returned to him.
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<PAGE>
2. Withdrawal of Account. By written notice to the Plan Administrator, at
any time prior to the Offering Termination Date applicable to any Offering, a
participant may elect to withdraw all accumulated payroll deductions in his
account at such time.
3. Fractional Shares. Fractional shares of Stock will not be issued under
the Plan and any accumulated payroll deductions which would have been used to
purchase fractional shares will be returned to any employee promptly following
the termination of an Offering, without interest.
4. Transferability of Options. During a participant's lifetime, options
held by such participant shall be exercisable only by that participant.
5. Delivery of Stock. As promptly as practicable after the Offering
Termination Date of each Offering, the Company will deliver to each participant,
as appropriate, the stock purchased upon exercise of his option.
ARTICLE
WITHDRAWAL
1. In General. A participant may withdraw payroll deductions credited to
his account under the Plan at any time by giving written notice to the Plan
Administrator. All of the employee's payroll deductions credited to his account
will be paid to him promptly after receipt of his notice of withdrawal, and no
further payroll deductions will be made from his pay during such Offering.
2. Effect on Subsequent Participant. A participant's withdrawal from any
Offering will not have any effect upon his eligibility to participate in any
succeeding Offering or in any similar plan which may hereafter be adopted by the
Company.
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<PAGE>
3. Termination of Employment. Upon termination of the participant's
employment for any reason, including retirement but excluding death while in the
employ of the Company, the payroll deductions credited to his account will be
returned to him.
4. Death. Upon termination of the participant's employment because of his
death, his beneficiary (as defined in Section 10.1) shall have the right to
elect by written notice given to the Plan Administrator prior to the earlier of
the Offering Termination Date or the expiration of a period of 60 days
commencing with the date of the death of the participant, either:
a. To withdraw all of the payroll deductions credited to the
participant's account under the Plan; or
b. To exercise the participant's option for the purchase of Stock on
the Offering Termination Date next following the date of the participant's
death for the purchase of the number of full shares of Stock which the
accumulated payroll deductions in the participant's account at the date of
the participant's death will purchase at the applicable option price, and
any excess in such account will be returned to the beneficiary.
In the event that no such written notice of election shall be duly received by
the Plan Administrator, the beneficiary shall automatically be deemed to have
elected, pursuant to subsection 7.4(b), to exercise the participant's option.
5. Leave of Absence. A participant on leave of absence shall, subject to
the election made by such participant pursuant to Section 3.2, continue to be a
participant in the Plan so long as such participant is on continuous leave of
absence. A participant who has been on leave of absence for more than 90 days
and who therefore is not an employee for the purpose of the Plan shall not be
entitled to participate in any Offering commencing after the 90th day of such
leave
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<PAGE>
of absence. Notwithstanding any other provisions of the Plan, unless a
participant on leave of absence returns to regular full time or part time
employment with the Company at the earlier of: a. the termination of such leave
of absence; or b. three months from the 90th day of such leave of absence, such
participant's participation in the Plan shall terminate on whichever of such
dates occurs first.
ARTICLE
INTEREST
1. Payment of Interest. No interest will be paid or allowed on any money
paid into the Plan or credited to the account of any participant employee;
except that interest shall be paid on any and all money which is distributed to
an employee or his beneficiary pursuant to Sections 6.1, 6.2, 7.1, 7.3, 7.4 and
9.1. Such distributions shall bear simple interest during the period from the
date of withholding to the date of return at the regular passbook savings
account rates per annum in effect at Summit Bank during the applicable offering
period or, if such rates are not published or otherwise available for such
purpose, at the regular passbook savings account rates per annum in effect
during such period at another major commercial bank in Philadelphia,
Pennsylvania selected by the Board. Where the amount returned represents an
excess amount in an employee's account after such account has been applied to
the purchase of stock, the employee's withholding account shall be deemed to
have been applied first toward purchase of stock under the Plan, so that
interest shall be paid only on the last withholdings during the period which
result in the excess amount.
ARTICLE
STOCK
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<PAGE>
1. Maximum Shares. The maximum number of shares which shall be issued under
the Plan, subject to adjustment upon changes in capitalization of the Company as
provided in Section 10.4, shall be 100,000 shares for all Offerings. The maximum
number of shares of Stock which shall be issued in each Offering shall be
determined by the Board at the time the Offering is made. If the total number of
shares for which options are exercised on any Offering Termination Date in
accordance with Section 6.1 exceeds the maximum number of shares for the
applicable offering, the Company shall make a pro rata allocation of the shares
available for delivery and distribution in as nearly a uniform manner as shall
be practicable and as it shall determine to be equitable, and the balance of
payroll deductions credited to the account of each participant under the Plan
shall be returned to him as promptly as possible.
2. Participant's Interest in Option Stock. The participant will have no
interest in Stock covered by his option until such option has been exercised on
the Offering Termination Date.
3. Registration of Stock. Stock to be delivered to a participant under the
Plan will be registered in the name of the participant, or, if the participant
so directs by written notice to the Plan Administrator prior to the Offering
Termination Date applicable thereto, in the names of the participant and one
such other person as may be designated by the participant, as joint tenants with
rights of survivorship or as tenants by the entireties, to the extent permitted
by applicable law.
ARTICLE
MISCELLANEOUS
1. Designation of Beneficiary. A participant may file a written designation
of a beneficiary who is to receive any Stock and/or cash under the Plan. Such
designation of beneficiary may be changed by the participant at any time by
written notice to the Plan
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<PAGE>
Administrator. Upon the death of a participant and upon receipt by the Company
of proof of identity and existence at the participant's death of a beneficiary
validly designated by him under the Plan, the Company shall deliver such Stock
and/or cash to such beneficiary. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such participant's death, the Company shall deliver such Stock
and/or cash to the personal representative of the estate of the participant, or
if no such personal representative has been appointed (to the knowledge of the
Company), the Company, in its discretion, may deliver such Stock and/or cash to
the spouse or, if none, per stirpes to the descendants of the participant. No
beneficiary shall, prior to the death of the participant by whom he has been
designated, acquire any interest in the Stock or cash credited to the
participant under the Plan.
2. Transferability. Neither payroll deductions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
Stock under the Plan may be assigned, transferred, pledged, or otherwise
disposed of in any way by the participant other than by will or the laws of
descent and distribution. Any such attempted assignment, transfer, pledge or
other disposition shall be without effect, except that the Company may treat
such act as an election to withdraw funds in accordance with Section 6.2.
3. Use of Funds. All payroll deductions received or held by the Company
under this Plan may be used by the Company for any corporate purpose and the
Company shall not be obligated to segregate such payroll deductions.
4. Adjustment Upon Changes in Capitalization.
a. If, while any options are outstanding, the outstanding shares of
Common Stock of the Company have increased, decreased, changed into, or
been exchanged for a
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<PAGE>
different number or kind of shares or securities of the Company through
reorganization, merger, recapitalization, reclassification, stock split,
reverse stock split or similar transaction, appropriate and proportionate
adjustments may be made by the Board in the number and/or kind of shares
which are subject to purchase under outstanding options and on the option
exercise price or prices applicable to such outstanding options. In
addition, in any such event, the number and/or kind of shares which may be
offered in the Offerings described in Article 4 hereof shall also be
proportionately adjusted. No adjustments shall be made for stock dividends.
b. Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving
corporation, or upon a sale of substantially all of the property or stock
of the Company to another corporation, the holder of each option then
outstanding under the Plan will thereafter be entitled to receive at the
next Offering Termination Date upon the exercise of such option for each
share as to which such option shall be exercised, as nearly as reasonably
may be determined, the cash, securities and/or property which a holder of
one share of the Stock was entitled to receive upon and at the time of such
transaction. The Board shall take such steps in connection with the
transactions as the Board shall deem necessary to assure that the
provisions of this Section 10.4 shall thereafter be applicable, as nearly
as reasonably may be determined, in relation to the cash, securities and/or
property as to which the holder of such option might thereafter be entitled
to receive.
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<PAGE>
5. Amendment and Termination. The Board shall have complete power and
authority to terminate or amend the Plan; provided, however, that the Board
shall not, without the approval of the stockholders of the Company (i) increase
the maximum number of shares which may be issued under any Offering (except
pursuant to Section 10.4); (ii) amend the requirements as to the class of
employees eligible to purchase stock under the Plan. No termination,
modification, or amendment of the Plan may, without the consent of an employee
then having an option under the Plan to purchase stock, adversely affect the
rights of such employee under such option.
6. Effective Date. The Plan shall become effective as of February 1, 1997,
subject to approval by the holders of the majority of the Stock.
7. No Employment Rights. The Plan does not, directly or indirectly, create
any right for the benefit of any employee or class of employees to purchase any
shares under the Plan, or create in any employee or class of employees any right
with respect to continuation of employment by the Company, and it shall not be
deemed to interfere in any way with the Company's right to terminate, or
otherwise modify, an employee's employment at any time.
8. Effect of Plan. The provisions of the Plan shall, in accordance with its
terms, be binding upon, and inure to the benefit of, all successors of each
employee participating in the Plan, including, without limitation, such
employee's estate and the personal representatives thereof, heirs and legatees,
and any receiver, trustee in bankruptcy or representative of creditors of such
employee.
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Exhibit 10.27
RESTATED
DIGITAL DESCRIPTOR SYSTEMS, INC.
1994 STOCK OPTION PLAN
(As Amended Through March 20, 1997)
1. Purpose of the Plan
This Stock Option Plan (the "Plan") is intended as an incentive to key
employees of Digital Descriptor Systems, Inc. (the "Company"). Its purposes are
to retain employees with a high degree of training, experience and ability, to
attract new employees whose services are considered unusually valuable, to
encourage the sense of proprietorship of such persons and to stimulate the
active interest of such persons in the development and financial success of the
Company.
2. Administration of the Plan
(a) Stock Option Committee. The Board of Directors shall appoint and
maintain a Stock Option Committee (the "Committee") which shall consist of at
least two (2) members of the Board of Directors, none of whom is an officer or
employee of the Company, who shall serve at the pleasure of the Board. The
Committee may from time to time grant incentive stock options and non-qualified
stock options ("Stock Options") under the Plan to the persons described in
Section 3 hereof. No member of such Committee shall be eligible to receive Stock
Options under this Plan during his or her tenure on the Committee. Members of
the Committee shall be subject to any additional restrictions necessary to
satisfy the disinterested administration of the Plan as required in Rule 16b-3
under the United States Securities Exchange Act of 1934 (the "Act") as it may be
amended from time to time.
(b) Powers of Committee. The Committee shall have full power and authority
to interpret the provisions of the Plan and supervise its administration. All
decisions and selections made by the Committee pursuant to the provisions of the
Plan shall be made by a majority of its members. Any decision reduced to writing
and signed by a majority of the members shall be fully effective as if adopted
by a majority at a meeting duly held. The Committee shall have full and final
authority to determine (i) the persons to whom Stock Options hereunder shall be
granted, (ii) the number of shares to be covered by each Stock Option except
that no optionee may be granted Stock Options for more than 300,000 Shares
during the life of the Plan, and (iii) whether such Stock Option shall be
designated an "incentive stock option" or a "non-qualified stock option."
(c) Limitation of Committee Member Liability. No member of the Committee
shall be liable for anything done or omitted to be done by him or by her or any
other member of the Committee in
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connection with the Plan, except for his or her own willful misconduct or as
expressly provided by statute.
(d) Forfeiture of Options For Detrimental Activity. If the exercise period
of an outstanding Stock Option is continued following a holder's termination of
employment due to retirement as provided in Section 5(c)(v), the Committee shall
have the authority in its discretion to cause such Stock Option to be forfeited
in the event that such holder engages in "detrimental activity" as described in
Section 5(c)(v).
3. Grants of Stock Options
(a) Eligibility. The persons eligible for participation in the Plan as
recipients of Stock Options shall include only employees of the Company or its
subsidiary corporations as defined in Section 424(f) of the Internal Revenue
Code of 1986, as amended from time to time (the "Code") and hereinafter referred
to as "subsidiaries", who are executive, administrative, professional or
technical personnel who have responsibilities affecting the management,
direction, development and financial success of the Company or its subsidiaries.
An employee may receive more than one grant of Stock Options at the Committee's
discretion including simultaneous grants of different forms of Stock Options.
(b) Committee Determines Terms and Conditions of Options. The Committee in
granting Stock Options hereunder shall have discretion to determine the terms
and conditions upon which such Stock Options may be exercisable, including a
designation of Stock Options as "incentive stock options" under Section 422 of
the Code, and shall so designate at the time of any grant if the Stock Option is
to be an incentive stock option. Each grant of a Stock Option shall be confirmed
by an Agreement consistent with this Plan which shall be executed by the Company
and by the person to whom such Stock Option is granted. The Committee shall have
the right to determine the period of time, if any, during which the recipient
must remain in the employment of the Company or a subsidiary as a condition to
the exercise of any Stock Option. Any Stock Option may provide that the
exercisablity thereof, or of any installment or portion thereof, is subject to
the satisfaction of any other terms and conditions as the Committee may
determine, such as, but not limited to, the market price of the Shares,
satisfaction of goals for the employee or performance of the Company.
(c) Employment Includes Employment With Subsidiaries. For purposes of this
Plan, employment with the Company shall include employment with any subsidiary
of the Company, and the Stock Options granted under this Plan shall not be
affected by an employee's transfer of employment from the Company to a
subsidiary, from a subsidiary to the Company or between subsidiaries.
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<PAGE>
(d) Method of Exercise. Subject to the provisions of this Plan, an optionee
may exercise Stock Options, in whole or in part, at any time when the Stock
Option is exercisable by written notice of exercise to the Company on a form
provided by the Committee specifying the number of Shares subject to the Stock
Option to be purchased. Except where waived by the Committee, such notice shall
be accompanied by payment in full of the purchase price by cash or check or such
other form of payment as the Company may accept. If approved by the Committee,
payment in full or in part may also be made (i) by delivering Shares already
owned by the optionee (which Shares shall have been owned by the optionee for
not less than 6 months if the optionee is subject to Section 16 of Act) having a
total Fair Market Value on the date of such delivery equal to the purchase
price; (ii) by the execution and delivery of a note or other evidence of
indebtedness (and any security agreement thereunder) satisfactory to the
Committee; (iii) by authorizing the Company to retain Shares which would
otherwise be issuable upon exercise of the Stock Option having a total Fair
Market Value on the date of delivery equal to the purchase price; (iv) by the
delivery of cash or the extension of credit by a broker-dealer to whom the
optionee has submitted a notice of exercise or otherwise indicated an intent to
exercise a Stock Option (in accordance with applicable regulations of the board
of governors of the Federal Reserve System, and any other requirement of law, a
so-called "cashless" exercise); (v) by certifying ownership of Shares to the
satisfaction of the Committee for later delivery to the Company as specified by
the Committee; or (vi) by any combination of the foregoing.
4. Shares Subject to the Plan
Subject to adjustment as provided in Section 8 hereof, there shall be
subject to the Plan 300,000 shares of Common Stock, par value $0.001 per share,
of the Company (the "Shares"). The Shares subject to the Plan shall consist of
authorized and unissued Shares or previously issued Shares reacquired and held
by the Company or any subsidiary. Should any Stock Option expire or be
terminated prior to its exercise in full and prior to the termination of the
Plan, the Shares theretofore subject to such Stock Option shall be available for
further grants under the Plan. Until termination of the Plan, the Company and/or
one or more subsidiaries shall at all times make available a sufficient number
of Shares to meet the requirements of the Plan. After termination of the Plan,
the number of Shares reserved for purposes of the Plan from time to time shall
be only such number of Shares as are issuable under then outstanding Stock
Options.
5. Terms of Stock Options
(a) Incentive Stock Options. Stock Options granted under this Plan which
are designated as incentive stock options may be granted with respect to any
numbers of Shares, subject to the
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limitation that the aggregate "Fair Market Value" of such Shares (determined in
accordance with Section 5(b) of the Plan at the time the Stock Option is
granted) with respect to which such Stock Options are exercisable for the first
time by an employee during any one calendar year (under all such plans of the
Company and any subsidiary of the Company) shall not exceed $100,000. To the
extent that the aggregate Fair Market Value of Shares with respect to which
incentive stock options (determined without regard to this subsection) are
exercisable for the first time by any employee during any calendar year (under
all plans of the employer corporation and its parent and subsidiary
corporations) exceeds $100,000, such Stock Options shall be treated as Stock
Options which are not incentive stock options.
(b) Purchase Price For Shares Subject to Stock Options. The purchase price
of each Share subject to a Stock Option shall be determined by the Committee
prior to granting a Stock Option. The Committee shall set the purchase price for
each Share at such price as the Committee in its sole discretion shall
determine. If such Stock Option is an incentive stock option, the purchase price
shall be not less than the fair market value (the "Fair Market Value") of each
Share on the date the Stock Option is granted, or where granted to an individual
who owns or who is deemed to own stock possessing more than ten percent (10%) of
the combined voting power of all classes of stock of the Company, not less than
one hundred ten percent (110%) of such Fair Market Value per Share. The Fair
Market Value of a Share on a particular date shall be deemed to be the mean
between the highest and lowest composite sales price per share of the Common
Stock in the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), as reported for that date, or, if there shall have been no
such reported prices for that date, the reported mean price on the last
preceding date on which a sale or sales were effected on NASDAQ.
(c) Installments
(i) Exercisable in Installments. Each Stock Option granted hereunder
shall be exercisable in one or more installments (annual or other) on such
date or dates as the Committee may in its sole discretion determine, and
the terms of such exercise shall be set forth in the Stock Option Agreement
covering the grant of the Stock Option, provided that no Stock Option may
be exercised after the expiration of ten (10) years from the date such
Stock Option is granted.
(ii) Installments are Cumulative. Except as provided in paragraph (e)
below, the right to purchase Shares pursuant to a Stock Option shall be
cumulative so that when the right to purchase any Shares has accrued such
Shares or any part thereof may be purchased at any time thereafter until
the expiration or termination of the Stock Option.
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(d) Amendment of Options. At any time at or after the granting of any Stock
Option, the Committee shall have the right to amend any provision thereof,
including, without limitation, to change the exercise price and the installment
exercise dates, subject, however, to any applicable limitations concerning
options designated as incentive stock options and to any limitations provided by
the Act, by Rule 16b-3 and by any other rule issued under the Act; provided,
however, that no Stock Option shall be amended to increase the exercise price,
extend the date on which such Stock Option or any installment thereof shall
become exercisable or shorten the term of the Stock Option without the consent
of the optionee.
(i) Termination of Employment.
(A) If the optionee's employment with the Company is terminated
with the consent of the Company and provided such employment is not
terminated for cause (of which the Committee shall be the sole judge),
the Committee may permit such Stock Option to be exercised by such
optionee at any time during the period of three (3) months after such
termination, provided that such Stock Option may be exercised before
expiration and within such three-month period only to the extent it
was exercisable on the date of such termination.
(B) In the event an optionee dies while in the employ of the
Company or dies after termination of employment but prior to the
exercise in full of any Stock Option which was exercisable on the date
of such termination, such Stock Option may be exercised before
expiration by the optionee's personal representative during the period
of twelve (12) months after the date of death to the extent
exercisable by the optionee at the date of death.
(C) If the optionee's employment with the Company is terminated
without the consent of the Company for any reason other than the death
of the optionee, or if the optionee's employment with the Company is
terminated for cause, his rights under any then outstanding Stock
Option shall terminate immediately. The Committee shall be the sole
judge of whether the optionee's employment is terminated without the
consent of the Company or for cause.
(ii) Termination at Retirement.
(A) If the optionee's employment with the Company is terminated
due to retirement in the Committee's sole discretion, such Stock
Option shall be exercisable by such optionee at any time during the
period of sixty (60)
-5-
<PAGE>
months after such termination or the remainder of the option period,
whichever is less, provided that such Stock Option may be exercisable
after such termination and before expiration only to the extent that
it is exercisable on the date of such termination.
(B) In the event an optionee dies during such extended exercise
period, such Stock Option may be exercised by the optionee's personal
representative during the period of twelve (12) months after the date
of death to the extent exercisable by the optionee at the date of
death and to the extent the Stock Option does not expire within such
twelve (12) months.
(C) Notwithstanding the foregoing, if at any time after
termination due to retirement the optionee engages in "detrimental
activity" (as hereinafter defined), the Committee in its discretion
may cause the optionee's right to exercise such Stock Option to be
forfeited. Such forfeiture may occur at any time subsequent to the
date that is three (3) months after the optionee's termination of
employment and prior to the exercise of such Stock Option. If an
allegation of detrimental activity by an optionee is made to the
Committee, the exercisability of the optionee's Stock Options will be
suspended for up to two months to permit the investigation of such
allegation. For purposes of this Section 5(c)(v), "detrimental
activity" means activity that is determined by the Committee in its
sole and absolute discretion to be detrimental to the interests of the
Company or any of its subsidiaries, including but not limited to
situations where such optionee: (1) divulges trade secrets of the
company, proprietary data or other confidential information relating
to the Company or to the business of the Company and any subsidiaries,
(2) enters into employment with a competitor under circumstances
suggesting that such optionee will be using unique or special
knowledge gained as a Company employee to compete with the Company,
(3) is convicted by a court of competent jurisdiction of any felony or
a crime involving moral turpitude, (4) uses information obtained
during the course of his or her prior employment for his or her own
purposes, such as for the solicitation of business, (5) is determined
to have engaged (whether or not prior to termination due to
retirement) in either gross misconduct or criminal activity harmful to
the Company, or (6) takes any action that harms the business
interests, reputation, or goodwill of the Company and/or its
subsidiaries.
(iii) Ten Year Term Limitation on Options. Notwithstanding the other
provisions of this paragraph (d), in
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<PAGE>
no event may a Stock Option be exercised after the expiration of ten (10)
years from the date such Stock Option is granted.
(e) Restrictions on Transfer of Shares. At the time of the grant of a Stock
Option, the Committee may determine that the Shares covered by such Stock Option
shall be restricted as to transferability. If so restricted, such Shares shall
not be sold, transferred or disposed of in any manner, and such Shares shall not
be pledged or otherwise hypothecated until the restriction expires by its terms.
The circumstances under which any such restriction shall expire shall be
determined by the Committee and shall be set forth in the Stock Option Agreement
covering the grant of the Stock Option to purchase such Shares.
6. Assignability of Stock Options
Stock Options granted under the Plan shall not be assignable or otherwise
transferable by the recipient except by will or the laws of descent and
distribution, subject to the provisions of Sections 5(c)(iv)(B) and 5(c)(v)(B).
Otherwise, Stock Options granted under this Plan shall be exercisable during the
lifetime of the recipient (except as otherwise provided in the Plan or the
applicable Agreement for Stock Options other than incentive stock options) only
by the recipient for his or her individual account, and no purported assignment
or transfer of such Stock Options thereunder, whether voluntary or involuntary,
by operation of law or otherwise, shall vest in the purported assignee or
transferee any interest or right therein whatsoever but immediately upon any
such purported assignment or transfer, or any attempt to make the same, such
Stock Options thereunder shall terminate and become of no further effect.
7. Taxes
The Committee may make such provisions and rules as it may deem appropriate
for the withholding of taxes in connection with any Stock Options granted under
the Plan. An optionee, in the discretion of the Committee, may elect to satisfy
all or any portion of the United States tax required to be withheld by the
Company in connection with the exercise of such Stock Option by electing to have
the Company withhold a number of Shares having a Fair Market Value on the date
of exercise equal to or less than the amount required to be withheld. An
optionee's election pursuant to the preceding sentence must be made on or before
the date of exercise and must be irrevocable.
8. Reorganizations and Recapitalization of the Company
(a) Plan Does Not Limit Company Actions. The existence of this Plan and
Stock Options granted hereunder shall not affect in any way the right or power
of the Company or its stockholders to make or authorize any or all adjustments,
recapitalization,
-7-
<PAGE>
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidated of the Company, or any issue of bonds,
debentures, preferred or prior preference stocks ahead of or affecting the
Shares or the rights thereof, or the dissolution or liquidation of the Company,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or otherwise.
(b) No Adjustment for Future Issuances of Shares. Except as hereinafter
provided, the issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or property,
or for labor or services, either upon direct sale or upon exercise of rights or
warrants to subscribe therefor, or upon conversion of shares or obligations of
the Company convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the number of
Shares subject to Stock Options granted hereunder.
(c) Antidilution For Certain Capital Adjustments. The Shares with respect
to which Stock Options may be granted hereunder are shares of the Common Stock
of the Company as presently constituted, but if, and whenever, prior to the
delivery by the Company or a subsidiary of all of the Shares which are subject
to the Stock Options or rights granted hereunder, the Company shall effect a
subdivision or consolidation of shares or other capital readjustments, the
payment of a stock dividend or other increase or reduction of the number of
shares of the Common Stock outstanding without receiving compensation therefor
in money, services or property, the number of Shares subject to the Plan shall
be proportionately adjusted and the number of Shares with respect to which Stock
Options granted hereunder may thereafter be exercised shall:
(i) in the event of an increase in the number of outstanding Shares,
be proportionately increased, and the cash consideration (if any) payable
per Share shall be proportionately reduced; and
(ii) in the event of a reduction in the number of outstanding Shares,
be proportionately reduced, and the cash consideration (if any) payable per
Share shall be proportionately increased.
(d) Mergers and Consolidations. If the Company merges with one or more
corporations, or consolidates with one or more corporations and the Company
shall be the surviving corporation, thereafter, upon any exercise of Stock
Options granted hereunder, the recipient shall, at no additional cost (other
than the option price, if any) be entitled to receive (subject to any required
action by stockholders) in lieu of the number of Shares as to which
-8-
<PAGE>
such Stock Options shall then be exercisable the number and class of shares of
stock or other securities to which the recipient would have been entitled
pursuant to the terms of the agreement of merger or consolidation, if
immediately prior to such merger or consolidation the recipient had been the
holder of record of the number of shares of Common Stock of the Company equal to
the number of Shares as to which such Stock Options shall be exercisable. Upon
any reorganization, merger or consolidation where the Company is not the
surviving corporation or upon liquidation or dissolution of the Company, all
outstanding Stock Options shall, unless provisions are made in connection with
such reorganization, merger or consolidation for the assumption of such Stock
Options, be canceled by the Company as of the effective date of any such
reorganization, merger or consolidation, or of any dissolution or liquidation of
the Company, by giving notice to each holder thereof or his or her personal
representative of its intention to do so and by permitting the exercise during
the thirty-day period next preceding such effective date of all Stock Options
which are outstanding as of such date, whether or not otherwise exercisable.
9. Plan Term
The Plan shall be effective July 13, 1994. No Stock Options shall be
granted pursuant to this Plan after June 30, 2004.
10. Stock Appreciation Rights
(a) General. The Committee shall have authority to grant Stock Appreciation
Rights under the Plan at any time or from time to time. Subject to the
employee's satisfaction in full of any conditions, restrictions or limitations
imposed in accordance with the Plan or an Agreement, a Stock Appreciation Right
shall entitle the employee to surrender to the Company the Stock Appreciation
Right and to be paid therefor in Shares, cash or a combination thereof as herein
provided, the amount described in Section 10(c)(ii) below.
(b) Grant. Stock Appreciation Rights may be granted in conjunction with all
or part of any Stock Option granted under the Plan and the exercise of such a
Stock Appreciation Right shall require the cancellation of a corresponding
portion of the Stock Option (and the exercise of a Stock Option shall result in
a corresponding cancellation of the Stock Appreciation Right). In the case of a
Stock Option other than an incentive stock option, such rights may be granted
either at or after the time of grant of such Stock Option. In the case of an
incentive stock option, such rights may be granted only at the time of grant of
such Stock Option. A Stock Appreciation Right may also be granted on a stand
alone basis. The grant of a Stock Appreciation Right shall occur as of the date
the Committee determines. Each Stock Appreciation Right granted under the Plan
shall be evidenced by an Agreement, which shall embody the terms and conditions
of such Stock Appreciation
-9-
<PAGE>
Right and which shall be subject to the terms and conditions set forth in the
Plan.
(c) Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions as shall be determined by the Committee, including the
following:
(i) Period and Exercise. The term of a Stock Appreciation Right shall
be established by the Committee. If granted in conjunction with a Stock
Option, the Stock Appreciation Right shall have a term which is the same as
the period for the Stock Option and shall be exercisable only at such time
or times and to the extent the related Stock Options would be exercisable.
A Stock Appreciation Right which is granted on a stand alone basis shall be
for such period and shall be exercisable at such times and to the extent
provided in an Agreement. Stock Appreciation Rights shall be exercised by
the employee's giving written notice of exercise on a form provided by the
Committee (if available) to the Company specifying the portion of the Stock
Appreciation Right to be exercised.
(ii) Amount. Upon the exercise of a Stock Appreciation Right, an
employee shall be entitled to receive an amount in cash, Shares or both as
determined by the Committee or as otherwise permitted in an Agreement equal
in value to the excess of the Fair Market Value per Share over the price
per Share of Common Stock specified in the related Agreement multiplied by
the number of Shares in respect of which the Stock Appreciation Right is
exercised. In the case of a Stock Appreciation Right granted on a
stand-alone basis, the Agreement shall specify the value to be used in lieu
of the price per Share. The aggregate Fair Market Value per Share shall be
determined as of the date of exercise of such Stock Appreciation Right.
(iii) Special Rules. In the case of Stock Appreciation Rights relating
to Stock Options held by employees who are actually or potentially subject
to Section 16(b) of the Act:
(A) The Committee may require that such Stock Appreciation Rights
be exercised only in accordance with the applicable "window period"
provisions of Rule 16b-3;
(B) The Committee may provide that the amount to be paid upon
exercise of such Stock Appreciation Rights (other than those relating
to incentive stock options) during a Rule 16b-3 "window period" shall
be based on the highest mean sales price of the Shares on the
principal exchange on which the Shares are traded, NASDAQ or other
relevant market for determining value on any day during such "window
period"; and
-10-
<PAGE>
(C) no Stock Appreciation Right shall be exercisable during the
first six months of its term, except that this limitation shall not
apply in the event of death of the employee prior to the expiration of
the six-month period.
(iv) Non-transferability of Stock Appreciation Rights. Stock
Appreciation Rights shall be transferable only when and to the extent that
a Stock Option would be transferable under the Plan unless otherwise
provided in an Agreement.
(v) Termination. A Stock Appreciation Right shall terminate at such
time as a Stock Option would terminate under the Plan, unless otherwise
provided in an Agreement.
(vi) Effect on Shares Under the Plan. To the extent required by Rule
16b-3, upon the exercise of a Stock Appreciation Right, the Stock Option or
part thereof to which such Stock Appreciation Right is related shall be
deemed to have been exercised for the purpose of the limitation set forth
in Section 4 on the number of Shares to be issued under the Plan, but only
to the extent of the number of Shares covered by the Stock Appreciation
Right at the time of exercise based on the value of the Stock Appreciation
Right at such time.
(vii) Incentive Stock Option. A Stock Appreciation Right granted in
tandem with an incentive stock option shall not be exercisable unless the
Fair Market Value of the Shares on the date of exercise exceeds the
exercise price. In no event shall any amount paid pursuant to the Stock
Appreciation Right exceed the difference between the Fair Market Value on
the date of exercise and the exercise price.
11. Amendment or Termination
The Board of Directors may amend, alter or discontinue the Plan at any time
insofar as permitted by law, but no amendment or alteration shall be made
without the approval of the stockholders:
(a) if and to the extent such amendment is required to be approved by
stockholders to continue the exemption provided for in Rule 16b-3 (or any
successor provision) under the Act; or
(b) if and to the extent such amendment requires stockholder approval under
Section 422 of the Code (or any successor provision).
-11-
<PAGE>
12. Government Regulations
Notwithstanding any of the provisions hereof, or of any Stock Option
granted hereunder, the obligation of the Company or any subsidiary to sell and
deliver Shares under such Stock Option or to make cash payments in respect
thereto shall be subject to all applicable laws, rules and regulations and to
such approvals by any governmental agencies or national securities exchanges as
may be required, and the recipient shall agrees that he will not exercise or
convert any Stock Option granted hereunder, and that the Company or any
subsidiary will not be obligated to issue any Shares or make Amendment or
Termination any payments under any such Stock Option if the exercise thereof or
if the issuance of such Shares or if the payment made shall constitute a
violation by the recipient or the Company or any subsidiary of any provision of
any applicable law or regulation of any governmental authority.
-12-
Exhibit 23.2
Consent of Independent Auditors
The Board of Directors
Digital Descriptor Systems, Inc.
We consent to incorporation by reference in the registration statement (No.
333-3420) on Form S-8, of Digital Descriptor Systems, Inc. of our report dated
March 12, 1997, relating to the balance sheets of Digital Descriptor Systems,
Inc. as of December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity (deficit) and cash flows for each of the years in the two
year period ended December 31, 1996, which report appears in the December 31,
1996 annual report on Form 10-KSB of Digital Descriptor Systems, Inc.
Our report dated March 12, 1997 contains an explanatory paragraph that states
that the Company has incurred recurring losses from operations and anticipates
that it will require additional financing in 1997, which may not be readily
available, which raises substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
March 26, 1997
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 644,091
<SECURITIES> 120,376
<RECEIVABLES> 595,822
<ALLOWANCES> 187,019
<INVENTORY> 145,036
<CURRENT-ASSETS> 1,423,052
<PP&E> 723,791
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<TOTAL-COSTS> 1,166,509
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