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 June 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 May 1, 1997:
Title of Each Class Number of Shares Outstanding
------------------- ----------------------------
Common Stock 2,468,750
($.001 par value)
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
DIGITAL DESCRIPTOR SYSTEMS,INC.
BALANCE SHEETS
31-Dec 30-Jun
ASSETS 1996 1997
----------- -----------
audited (unaudited)
Current assets:
Cash 494,091 309,147
Restricted cash 150,000 82,000
Short-term Investments 120,376 146,639
Accounts receivable, net of allowance for
doubtful accounts $187,019 in 1996
and $153,286 in 1997 408,803 741,195
Accounts receivable - other 2,000 2,000
Inventories 145,036 14,146
Prepaid expenses 85,765 76,387
Other 16,981 20,231
----------- -----------
Total current assets 1,423,052 1,391,745
Accounts receivable-officers 125,000 125,000
Deposits 7,059 7,059
Furniture and equipment, net 274,697 216,608
Intangible Assets 100,000 75,000
----------- -----------
1,929,808 1,815,412
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 202,082 406,101
Notes Payable 50,000 250,000
Deferred income 446,844 421,544
Accrued expenses 84,846 69,815
----------- -----------
Total current liabilities 783,772 1,147,460
Notes Payable (excluding current portion) 37,500 12,500
Shareholders' equity:
Commonstock, $.001 par value, 10,000,000
shares authorized; 2,468,750
issued and outstanding 06/30/97 and 12/31/96 2,469 2,469
Additional paid-in capital 10,148,528 10,148,528
Unearned compensation (86,000) (74,000)
Accumulated deficit (8,956,461) (9,421,545)
Total shareholder's equity 1,108,536 655,452
----------- -----------
1,929,808 1,815,412
=========== ===========
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
30-Jun 30-Jun 30-Jun 30-Jun
1996 1997 1996 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $ 874,272 $ 644,533 1,784,329 1,594,935
Cost of sales $ 338,509 $ 180,568 856,884 495,158
----------- ----------- ----------- -----------
Gross profit $ 535,763 $ 463,965 927,445 1,099,777
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing $ 303,022 $ 222,212 565,363 446,954
Research and development $ 73,063 $ 66,605 239,490 169,516
Depreciation and amortization $ 98,636 $ 52,090 174,195 286,176
General and administrative $ 699,963 $ 454,081 1,290,130 650,840
----------- ----------- ----------- -----------
Total Operating expenses $ 1,174,684 $ 794,988 2,269,178 1,553,486
----------- ----------- ----------- -----------
Loss from operations $ (638,921) $ (331,023) (1,341,733) (453,709)
Interest income $ 30,344 $ 6,750 71,693 16,507
Interest expense $ (2,285) $ (1,456) (4,781) (27,883)
----------- ----------- ----------- -----------
Net loss $ (610,862) $ (325,729) (1,274,821) (465,085)
----------- ----------- ----------- -----------
Net loss per share (unaudited) (0.25) (0.13) (0.52) (0.18)
Weighted average shares outstanding 2,468,750 2,468,750 2,468,750 2,468,750
</TABLE>
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Six Months Ended June 30
30-Jun 30-Jun
1996 1997
---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss (1,274,822) (465,085)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for doubtful accounts receivable (3,326) (33,733)
Depreciation and amortization 154,795 103,201
Amortizaton of unearned compensation 12,000 12,000
Changes in assets and liabilities:
Receivables (469,909) (298,659)
Inventories 57,068 130,890
Prepaid expenses and other 75,251 6,129
Accounts payable (92,928) 204,019
Accrued expenses and other liabilities (181,152) (15,030)
Deferred revenue (160,982) (25,300)
Other noncurrent assets (852) 0
Due to affiliates (71,913) 0
---------- ----------
Net cash provided by (used in) operating activities (1,956,770) (381,569)
---------- ----------
Cash flows from investing activities:
Equipment purchases (80,744) (20,112)
Purchase Software Acquisition (125,000)
Increase in short-term investments, including
restricted cash (194,305) 41,737
---------- ----------
Net cash used in investing activities (400,049) 21,625
---------- ----------
Cash flows from financing activities:
Proceeds from S/T loan 0 200,000
Repayment of note payable (25,000) (25,000)
Common Stock Issued 60 0
Capital contributions 262,740 0
---------- ----------
Net cash used in financing activities 237,800 175,000
---------- ----------
Increase (decrease) in cash (2,119,019) (184,944)
Cash at beginning of period 2,778,185 494,092
---------- ----------
Cash at end of period 659,166 309,147
---------- ----------
<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
six month period ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis or Plan of Operation
The Company develops, assembles and markets computer installations,
consisting of hardware and software for law enforcement agencies, tax assessors
and businesses. The system captures video and scanned images, digitizes the
images and links the digitized images to text to build a computer database. The
data is stored in the computer and can be retrieved on demand and viewed on a
computer or transmitted over a computer network, telephone line or by radio
frequency to remote locations within seconds.
The principal product of the company is the Compu-Capture system, which is
marketed to law enforcement agencies, jails, and correctional facilities. The
Compu-Capture system produces and stores a digitized video image or "mug shot"
of the subject along with the record, physical description and other pertinent
information about the subject. The image can then be produced in the appropriate
format, such as a full-color picture or identification badge or wristband when
the subject is booked.
Since the introduction of Compu-Capture the Company has installed
approximately 250 systems in 46 states in the United States as well as
jurisdictions in Europe, South America, Canada, Mexico and the Bahamas.
Management believes there is significant growth potential for this product since
only a small percentage of the approximately 17,000 law enforcement agencies in
the United States use a digitized computer imaging system. The NCIC requirements
include electronic imaging in all jurisdictions by the year 2006
The Compu-Color system digitizes videotape and photographs of improved
properties (buildings and other property improvements). Compu-Color stores these
images along with the relevant record card information for the local tax
assessors and revaluation companies. The system allows the assessor to access
full-color images of improved properties and related information to compare
properties and to review property assessments within seconds.
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 has filed a Registration statement on
Form S-8 under the Securities Act of 1933 to register the issuance of Shares.
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 are 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 Restated Digital
Descriptor Systems,
<PAGE>
Inc 1994 Stock Option Plan, the 1996 Director Option Plan and the Employee Stock
Purchase Plan were all approved. Each of these had been previously filed on Form
8-K with the SEC
Results of Operations
Sales for the six months ended June 30, 1997 of $1,594,935 decreased by 11%
from sales of $1,784,329 for the six months ended June 30, 1996. This decrease
is attributed to a decrease in the amount of installations mainly due to
backordered items from the Company's vendors. The Company's deferred revenue
decreased $25,300 to $421,544 as of June 30, 1997 from $446,844 as of December
31, 1996. Additionally, the Company's backlog of orders to be installed as of
June 30, 1997 was approximately $950,000. The Company anticipates that both the
deferred revenue and backlog amounts will be recognized as revenue during fiscal
year 1997.
Sales for the second quarter decreased from the prior year period by 26%
($644,533 vs. $874,272), while gross profit for the same period decreased in
overall dollars 13% ($463,965 vs. $535.763). Overall expenses decreased 32% from
$1,174,684 to $794,988. The loss for the period decreased 47% from the prior
year same quarter from $610,862 to $325,729.
The Company's gross profit in absolute dollars for the first half increased
19% 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 69% from an
average of 52% 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 32% for the six months ended June 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 64% for the six
months ending June 30, 1997 to ($465,085) from ($1,274,821) for the six months
ended June 30, 1996.
Liquidity and Capital Resources
The Company's primary source of funds to date has been the proceeds from
the sale of its securities. The Company will require additional funds in the
immediate future to continue its operations. The Company is considering
obtaining such funds through venture capital or other private or public
financing, joint ventures or merger transactions, the sale of certain assets and
research and development partnership financing. The Company has engaged a
consultant to assist in obtaining additional funding.
As of June 30, 1997 the Company had working capital of approximately of
$244,285 which decreased $394,995 from December 31, 1996. During the six month
period ended June 30, 1997 the Company incurred net losses of $465,085.
Net cash used in operating activities was $206,569 for the six months ended
June 30, 1997. The use of cash in operating activities for the quarters ended
March 31, 1997 and 1996, resulted largely from continuing losses
Asset Management
The Company manages its inventory by ordering specific hardware for just in
time delivery for each installation. The hardware is received, checked, modified
and shipped to each jurisdiction for installation within a short period of time.
Therefore, the Company usually maintains in inventory only the equipment needed
for programming and testing. Inventory may also include the hardware needed for
a customer's installation that may already be shipped. During the six months
ending June 30. 1997, inventories decreased $130,890, due to increased control
and better scheduling of installations.
<PAGE>
As of December 31, 1996 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 June 30,
1997 were $894,481 with an allowance for doubtful accounts of $153,286.
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>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this Item is set forth under "Legal
Proceedings" in the Company's Form 10-KSB for the year ended December 31, 1997
filed pursuant to the Securities Exchange Act of 1934 and is incorporated herein
by reference.
Item 6. Exhibits and Reports on Form 8-K
10.26 Employee Stock Purchase Plan adopted by the Board of Directors August
14, 1996 and February 20, 1997 and approved by the stockholders at the
Annual Meeting held on May 21, 1997.
10.27 Restated 1994 Stock Option Plan adopted by the Board of Directors
March 20, 1997 and approved by the stockholders at the Annual Meeting
held on May 21, 1997.
(b) Reports on Form 8-K
The Company did file a Form 8-K during the quarter ended June 30, 1997,
pursuant to the Securities Exchange Act of 1934 and is incorporated herein by
reference.
<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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 309,147
<SECURITIES> 228,639
<RECEIVABLES> 894,481
<ALLOWANCES> 153,286
<INVENTORY> 44,146
<CURRENT-ASSETS> 1,391,745
<PP&E> 843,903
<DEPRECIATION> 627,295
<TOTAL-ASSETS> 1,815,412
<CURRENT-LIABILITIES> 1,147,460
<BONDS> 25,000
0
0
<COMMON> 2,469
<OTHER-SE> 652,983
<TOTAL-LIABILITY-AND-EQUITY> 1,815,412
<SALES> 1,594,935
<TOTAL-REVENUES> 1,594,935
<CGS> 495,158
<TOTAL-COSTS> 446,994
<OTHER-EXPENSES> 1,106,492
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (465,085)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (465,085)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
