U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1997
Commission file number 0-26604
DIGITAL DESCRIPTOR SYSTEMS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 23-2770048
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2010-F Cabot Boulevard, Langhorne, Pennsylvania 19047
(Address of Principal Executive Offices)
(215) 752-0963
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes _X_ No ___
The number of shares outstanding of each of the issuer's classes of common
equity as of October 1, 1997:
Title of Each Class Number of Shares Outstanding
------------------- ----------------------------
Common Stock 2,468,750
($.001 par value)
Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
DIGITAL DESCRIPTOR SYSTEMS, INC.
BALANCE SHEETS
Period Ending
31-Dec 30-Sep
ASSETS 1996 1997
(audited) (unaudited)
------------ ------------
Current assets:
Cash $ 494,091 $ 162,161
Restricted cash $ 150,000 $ 29,534
Short-term investments $ 120,376 $ 92,543
Accounts receivable, net of allowance for
doubtful accounts $187,019 in 1996 and $ 408,803 $ 951,516
$41,711 in 1997
Accounts receivable - other $ 2,000 $ 2,000
Inventories $ 145,036 $ 20,737
Prepaid expenses $ 85,765 $ 25,451
Other $ 16,981 $ 53,225
------------ ------------
Total current assets $ 1,423,052 $ 1,337,167
Deposits $ 7,059 $ 7,059
Officer note receivable $ 125,000 $ 125,000
Furniture and equipment, net $ 274,697 $ 177,473
Intangible assets, net $ 100,000 $ 62,500
------------ ------------
$ 1,929,808 $ 1,709,199
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 202,082 $ 468,408
Notes payable $ 50,000 $ 50,000
Deferred income $ 446,844 $ 748,765
Accrued expenses $ 84,846 $ 89,552
------------ ------------
Total current liabilities $ 783,772 $ 1,356,725
Notes payable (excluding current portion) $ 37,500 $ --
Shareholders' equity:
Common stock, $.001 par value, 10,000,000
shares authorized; 2,468,750
issued and outstanding 12/31/96 and 09/30/97 $ 2,469 $ 2,469
Additional paid-in capital $ 10,148,528 $ 10,148,528
Unearned compensation $ (86,000) $ (68,000)
Accumulated deficit $ (8,956,461) $ (9,730,523)
------------ ------------
Total shareholders, equity $ 1,108,536 $ 352,474
------------ ------------
$ 1,929,808 $ 1,709,199
============ ============
See accompanying notes to financial statements
<PAGE>
DIGITAL DESCRIPTOR SYTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period Ending Period Ending
Three months ended Nine months ended
30-Sep 30-Sep 30-Sep 30-Sep
1996 1997 1996 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 441,038 643,884 $ 2,225,367 $ 2,238,819
Cost of sales $ 259,298 289,561 $ 1,116,182 $ 784,719
----------- ----------- ----------- -----------
Gross profit $ 181,740 354,323 $ 1,109,185 $ 1,454,100
Operating expenses:
Sales and marketing $ 340,703 214,703 $ 906,066 $ 661,657
Research and development $ 120,452 66,290 $ 358,942 $ 235,806
Depreciation and amortization $ 62,269 52,260 $ 177,709 $ 155,410
General and administrative $ 441,417 333,441 $ 1,790,302 $ 1,167,307
----------- ----------- ----------- -----------
Total operating expenses $ 964,841 666,694 $ 3,233,019 $ 2,220,180
----------- ----------- ----------- -----------
Loss from operations $ (783,101) (312,371) $(2,123,834) $ (766,080)
Interest income $ 14,332 4,516 $ 86,025 $ 21,023
Interest expense $ (2,048) (1,122) $ (6,829) $ (29,005)
Net loss $ (770,817) $ (308,977) $(2,044,638) $ (774,062)
----------- ----------- ----------- -----------
Net loss per share $ (0.31) $ (0.13) $ (0.84) $ (0.31)
Weighted average shares outstanding 2,468,750 2,468,750 2,446,852 2,468,750
</TABLE>
See accompanying notes to financial statements
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30 1997
30-Sep 30-Sep
1996 1997
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $(2,044,638) $ (774,062)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for inventory obsolescence $ 30,000 $ --
Provision for doubtful accounts receivable $ 62,227 $ (145,308)
Depreciation and amortization $ 177,709 $ 155,411
Amortizaton of unearned compensation $ 18,000 $ 18,000
Changes in assets and liabilities:
Stock awards to consultants $ 262,800 $ --
Receivables $ 136,425 $ (397,405)
Inventories $ 64,401 $ 124,299
Prepaid expenses and other $ 75,617 $ 24,070
Accounts payable $ (218,021) $ 266,326
Accrued expenses and other liabilities $ (174,885) $ 4,706
Deferred revenue $ (98,198) $ 301,921
Other noncurrent assets $ (853) $ --
Due to affiliates $ (71,913) $ --
----------- -----------
Net cash used in operating activities $(1,781,129) $ (422,042)
----------- -----------
Cash flows from investing activities:
Equipment purchases $ (109,337) $ (20,687)
Purchase software acquisition $ (150,000) $ --
Decrease (increase) in short-term investments,
including restricted cash $ 196,023 $ 148,299
Officer note receivable $ (148,000) $ --
----------- -----------
Net cash provided by (used in) investing activities $ (211,314) $ 127,612
----------- -----------
Cash flows from financing activities:
Repayment of note payable $ (37,500) $ (37,500)
Common stock issued $ 60 $ --
Capital contributions $ -- $ --
----------- -----------
Net cash provided by (used in) financing activities $ (37,500) $ (37,500)
----------- -----------
Decrease in cash $(2,029,943) $ (331,930)
Cash at beginning of period $ 2,778,185 $ 494,091
----------- -----------
Cash at end of period $ 748,242 $ 162,161
----------- -----------
See accompanying notes to financial statements
<PAGE>
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis or Plan of Operation
The Company develops, assembles and markets computer installations,
consisting of hardware and software for law enforcement agencies, tax assessors
and businesses. The system captures video and scanned images, digitizes the
images and links the digitized images to text to build a computer database. The
data is stored in the computer and can be retrieved on demand and viewed on a
computer or transmitted over a computer network, telephone line or by radio
frequency to remote locations within seconds.
The principal product of the company is the Compu-Capture system, which
is marketed to law enforcement agencies, jails, and correctional facilities. The
Compu-Capture system produces and stores a digitized video image or "mug shot"
of the subject along with the record, physical description and other pertinent
information about the subject. The image can then be produced in the appropriate
format, such as a full-color picture or identification badge or wristband when
the subject is booked.
Since the introduction of Compu-Capture the Company has installed
approximately 250 systems in 46 states in the United States as well as
jurisdictions in Europe, South America, Canada, Mexico and the Bahamas.
Management believes there is significant growth potential for this product since
only a small percentage of the approximately 17,000 law enforcement agencies in
the United States use a digitized computer imaging system. The NCIC requirements
include electronic imaging in all jurisdictions by the year 2006
The Compu-Color system digitizes videotape and photographs of improved
properties (buildings and other property improvements). Compu-Color stores these
images along with the relevant record card information for the local tax
assessors and revaluation companies. The system allows the assessor to access
full-color images of improved properties and related information to compare
properties and to review property assessments within seconds.
The Company recognizes revenue in accordance with the guidelines of
Statement of Position 91-I 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 form post-contract support (PCS or maintenance)
agreements is recognized ratably over the term of the agreements.
Management is committed to raising funds for research and development
of an inkless fingerprint imaging storing and retrieval system that is expected
to enhance in particular the law enforcement and business products.
During the second quarter the Company entered into a consulting
agreement with Jay Teitlebaum to advise the company on the terms and conditions
of any loans, mergers, acquisitions or other transactions that the Company may
need assistance. The Company has agreed to pay the Consultant a fee of 35,000
shares of the Company's stock under the Advisors Compensation Plan, as
established effective February 8, 1996.
The Company was notified by NASDAQ Stock market, Inc. that the Company
did not meet the maintenance standards to continue to be listed on the Nasdaq
SmallCap Market. Effective at the close of business on Friday, May 23, 1997, the
Company's securities were delisted. Trading in the Company's securities is now
taking place in the over-the-counter market through the OTC Bulletin Board. The
delisting of the Company's Securities could have a material adverse effect on
the ability of holders of the Company's Common Stock, Redeemable Class A
Warrants and Redeemable Class B Warrants to trade such securities and
consequently on the prices of those securities.
At the Annual Shareholder Meeting held on May 2, 1997 the Amended and
Restated Digital Descriptor Systems, Inc 1994 Stock Option Plan, the 1996
Director Option Plan and the Employee Stock
<PAGE>
Purchase Plan were all approved. Each of these had been previously filed on Form
S-8 with the SEC.
Results of Operations
Sales for the nine months ended September 30, 1997 of $2,238,819 showed
an insignificant increase of $13,452 from sales of $2,225,367 for the nine
months ended September 30, 1996. The Company's deferred revenue increased
$301,921 to $748,765 as of September 30, 1997 from $446,844 as of December 31,
1996. This increase is due to the Company's change in policy whereas it now
requires a deposit with the customer's initial order. Additionally, the
Company's backlog of orders to be installed as of September 30, 1997 was
approximately $1,100,000. The Company anticipates that only about 50% of both
the deferred revenue and backlog amounts will be recognized as revenue during
the remainder of fiscal year 1997.
Sales for the third quarter increased from the prior year period by 46%
($643,884 vs. $441,038), while gross profit for the same period increased in
overall dollars 95% ($354,323 vs. $181,740). Overall expenses decreased 31% from
$3,233,019 to $2,220,180 for the nine-month period and 31% for the same period
from $964,841 to $666,694. The operating loss for the period decreased 60% from
the prior year same quarter from $770,817 to $308,977.
The Company's gross profit in absolute dollars for the first nine
months increased 31% from 1996 to 1997 due to a higher gross margin per sale
generated by the Company. Overall the gross profit percentage per sale increased
to 65% from an average of 50% in 1996. This increase is attributed to the fact
that the Company had a higher percentage of software sales, which are extremely
high margin.
Operating expenses decreased 31% for the nine months ended September
30, 1997 from the prior year due to the cost cutting and containment measures
implemented by the Company in the last quarter of 1996. The primary decreases
were due to a decrease in personnel and strict control on all operating expenses
incurred by the Company.
The net loss from operations for the Company decreased 62% for the nine
months ending September 30, 1997 to ($774,062) from ($2,044,638).
Liquidity and Capital Resources
The Company's primary source of funds to date has been the proceeds
from the sale of its securities. The Company will require additional funds in
the immediate future to continue its operations. The Company is considering
obtaining such funds through venture capital or other private or public
financing, joint ventures or merger transactions, the sale of certain assets and
research and development partnership financing. The Company has engaged a
consultant to assist in obtaining additional funding. There can be no assurances
that such financing will be available or terms of the financing will be
satisfactory to management of the Company.
As of September 30, 1997 the Company had negative working capital of
approximately of ($19,558) which decreased $658,838 from December 31, 1996.
During the nine-month period ended September 30, 1997 the Company incurred net
losses of $774,062.
Net cash used in operating activities was $422,042 for the nine months
ended September 30, 1997. The use of cash in operating activities for the
quarters ended September 30, 1997 and 1996, resulted largely from continuing
losses
The Company has entered into an agreement with United Capital Funding
Inc. whereby the Company will factor certain of it Accounts Receivable.
Asset Management
<PAGE>
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 nine months ending September 30. 1997, inventories decreased
$124,299, due to increased control and better scheduling of installations.
As of September 30, 1997 most of the Company's receivables are due
under contracts with county and city jurisdictions. The balance is with third
party vendors. Once the contract has been awarded and the purchase order issued
by a jurisdiction, the jurisdiction must encumber the funds for payment of the
purchase order. The encumbered funds are typically paid to the Company after the
satisfactory completion of the installation. Accounts receivable as of September
30, 1997 were $993,227 with an allowance for doubtful accounts of $41,711.
General Risk Factors Affecting Results
Rapid technological change as well as changes in customer requirements
and preferences characterizes the software industry The Company believes that
it's future quarterly results will depend in large part upon its ability to
offer products that compete favorably with respect to price, product
reliability, performance, range of useful features, ease-of-use, continuing
product enhancements, reputation, support and training. Further, increased
competition in the market for digital imaging could have a negative effect on
the Company's results of operations.
Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenues or earnings could have an immediate and
significant adverse effect on the trading price of the Company's stock and
warrants.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE A-BASIS OF PRESENTATIONS
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Accordingly they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine month period ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997.
NOTE B- NEW ACCOUNTING PROCEDURES
In February 1997, the Financial /accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 128, Earnings per Share (SFAS
128). This Statement introduces new methods for calculating earnings per share.
The adoption of this Statement will not affect results from operations,
financial condition, or long-term liquidity, but will require the Company to
restate earnings per share reported in prior periods. Compliance with this
Statement, which will be effective for periods ending after December 31, 1997,
is not expected to have a material effect on the Company's earnings per share.
In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income. This
Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company plans to adopt this Statement on January 2,
1998, as required. The adoption of this statement will not affect results of
operations, financial condition, or long term liquidity, but will require the
Company to classify items of other comprehensive income in a financial statement
and display the accumulated balance of other comprehensive income separately in
the equity section of the balance sheet.
In June 1997, the FASB issued SFAS 131, Disclosures About Segments of an
Enterprise and Related Information. This Statement established standards for
reporting information about operating segments in annual financial statements
and requires selected information in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company plans
to adopt this Statement on January 1, 1008 as required. The adoption of this
Statement will not affect results from operations, financial condition or
long-term liquidity.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this Item is set forth under "Legal
Proceedings" in the Company's Form 10-KSB for the year ended December 31, 1996
filed pursuant to the Securities Exchange Act of 1934 and is incorporated herein
by reference.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
<PAGE>
SIGNATURE PAGE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGITAL DESCRIPTOR SYSTEMS, INC.
Date: August 12, 1997 By: /s/ Garrett U. Cohn
--------------------------
Garrett U. Cohn
President and Chief Executive Officer
Date: August 12, 1997 By: /s/ Michael J. Pellegrino
--------------------------
Michael J. Pellegrino
Vice President Finance and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Digital Descriptor Systems, Inc. and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 191,695
<SECURITIES> 92,543
<RECEIVABLES> 993,227
<ALLOWANCES> 41,711
<INVENTORY> 20,737
<CURRENT-ASSETS> 1,337,167
<PP&E> 844,478
<DEPRECIATION> 667,005
<TOTAL-ASSETS> 1,709,199
<CURRENT-LIABILITIES> 1,369,225
<BONDS> 0
0
0
<COMMON> 2,469
<OTHER-SE> 418,005
<TOTAL-LIABILITY-AND-EQUITY> 1,709,199
<SALES> 2,238,819
<TOTAL-REVENUES> 2,238,819
<CGS> 784,719
<TOTAL-COSTS> 661,657
<OTHER-EXPENSES> 1,558,523
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (774,062)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (774,062)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
