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As filed with the Securities and Exchange Commission on September 20, 2000
Reg. No. 000-00000
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Digital Descriptor Systems, Inc.
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(Name of Small Business Issuer in its charter)
Delaware 23-2770048
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
446 Lincoln Highway, Fairless Hills, Pa. 19030
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(Address of principal executive offices) (Zip code)
Registrant's telephone number: (267) 580-1075
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares issued and outstanding as of September 1, 2000 -- 18,973,279
($.001 par value)
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PART I.
ITEM 1. Description of Business
(a) Business Development:
Digital Descriptor Systems, Inc., a Delaware corporation incorporated
in 1994, is the successor to Compu-Color, Inc., an Iowa corporation. 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.
The Company's management team includes Garrett U. Cohn, the Company's
President and a Director, Michael Pellegrino, Vice President and Chief Financial
Officer, Michael Robert Ott, Vice President of Sales and a Director and Randolph
W. Hall, Vice President of Operations.
The Company's principal offices and facilities are located at 446
Lincoln Highway , Fairless Hill, Pa. 19030 and its telephone number is (267)
580-1075.
(b) Business of Registrant:
The Company develops, assembles and markets computer installations,
consisting of hardware and software, which capture video and scanned images,
digitize the image, link the digitized images to text and store the image and
text on a computer database which allows for transmitting the image and text by
computer or over telephone transmission lines to remote locations.
Imaging technology enables computers to record, store and retrieve not
only textual information, but visual images as well. The Company's software
programs utilize technology to link textual information with images so that
customers can record and retrieve related text and images. The Company
originally developed the software to address the information retrieval problems
of tax assessors. The Company subsequently adapted the software for use by law
enforcement agencies and management of jail facilities. Although the
applications address different information retrieval needs, the common solution
is software that can integrate textual information with images. The Company
anticipates that it will continue to adapt imaging technology and the Company's
software to new uses, such as security devices, employee identification systems
and inventory control systems. By designing software programs that integrate
textual information with images, the company has developed products to provide
solutions to information retrieval problems of such diverse customers as tax
assessors and law enforcement agencies. The common problem is how to record,
store, process and retrieve information and images within the same system.
The principal product of the Company is the Compu-Capture(R) Law
Enforcement Program, which is marketed to law enforcement agencies and jail
facilities. The program captures a video or scanned image (mug shot) of a
subject that is stored by computer application along with the booking record,
physical description and other pertinent information about the subject.
Compu-Capture(R) was introduced into the market in 1989. Since that time, the
Company has installed approximately 350 systems in 46 states in the United
States, Europe, South America, Canada, Mexico and Bahamas.
The Company also markets the Compu-Color(R) Assessor Program
that combines digitized images from videotapes or photographs of real estate
with buildings or other improvements, together with relevant tax assessment
information. Compu-Color(R) was introduced in 1986. The program was designed for
use by local tax assessors as a method of maintaining a visual record of all
assessed improved properties that can be rapidly accessed with the relevant
textual information.
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Product and Services
Digital Descriptor Systems, Inc. ("DDSI") provides hardware and
software computer installations to law enforcement agencies and tax assessors,
which installations utilize digitized video and scanned images and text in order
to record and retrieve information. The Company has developed and utilizes
computer programs that digitize videotaped or scanned images to a computer
program medium and provide for rapid retrieval of the information together with
related textual information pertaining to the property or subject.
Compu-Capture(R)
Compu-Capture(R) is the law enforcement application of the Company's
system which combines digitized image and textual information. The system has
been developed primarily for the criminal justice market, including law
enforcement, jail and correctional facilities.
Information is entered into the Compu-Capture(R) system at the time a
subject is booked or enters the facility. A video image of the subject, a "mug
shot", is taken by the booking officer. One problem experienced by law
enforcement agencies in booking subjects is the risk to officers as a result of
the physical movement and transportation of subjects during the booking process.
The Compu-Capture(R) system allows the law enforcement agency to complete more
than one stage in the booking process, such as entering booking information and
taking a mug shot, at one location. In addition, the Compu-Capture(R) system
reduces the time needed to take and process mug shots and improves the quality
of the mug shot. The booking officer can preview each mug shot image on the
computer screen before processing and storing the image to insure accuracy and
clarity. Once an acceptable image is obtained, the booking officer can rapidly
store the image through the computer application, along with the booking record,
physical characteristics and other pertinent text material.
The information entered into the Compu-Capture(R) system can include
names, aliases, physical characteristics, such as size, hair color, facial scars
or physical deformities, and fingerprint codes. The Compu-Capture(R) systems
allow 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 produces images that
meet or exceed the suggested requirements of the Department of Justice National
Crime Information Commission 2000 ("NCIC" 2000), the standard adopted by Federal
Bureau of Investigation for the quality of mug shots and their transmission. 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 computer generated 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 and/or remote locations.
The Company has installed approximately 350 Compu-Capture(R) systems.
The Company believes that these systems represent more than one-third of all
installed computerized "mugshot" systems that use video imaging technology,
The Compu-Capture(R) system's technology can be used in commercial
applications that are unrelated to law enforcement. The Company believes that
versions of this system are suitable for security or access control,
identification cards with photographs for employee identification, voter
registration cards, national welfare identification cards, drivers' licenses,
all with or without the use of fingerprints and/or signatures. This technology
can also be applied to inventory control systems and bar-coding or RF
technology. The various products that the Company currently provides are as
follows:
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Compu-Capture(R) 2000
Compu-Capture(R)2000 (CPC2000) is DDSI's stand alone application. This
version of the Compu-Capture(R) product line contains its own database and can
function on its own without integration to an existing records or jail
management system. The database allows for the capture of basic demographic
system. The database allows physical characteristics. This information can then
be sorted for quick and easy retrieval of a particular record or various records
with similar characteristics. CPC2000 can be used on a stand alone Personal
Computer or networked together.
Compu-Capture(R) 2000/FE
Compu-Capture(R) 2000/FE is DDSI's "front end" product that
image-enables any host based records or jail management system. The advantage to
this product is it eliminates multiple databases and duplicate data entry from
one system to another.
Compu-Capture(R) 2000/API
DDSI is the only company to offer its API's to system integrators with
client server applications. A systems integrator can make calls to these API's
and build a seamless interface from their records or jail management system to
DDSI's imaging system. The benefit for the end user is a self contained product.
That has a consistent look and feel, eliminating the need to learn the
functionality of two separate systems.
Compu-Capture(R) lite
DDSI has developed a "lite" version of its software to address the
needs of smaller agencies of the arresting market. The "lite" version will
provide an entry-level system that the jurisdictions can build upon. It is
anticipated that this system will be launched about the fourth quarter of 2000.
Compu-Sketch
The Compu-Sketch product is a composite sketching program, that allows
an individual with little to no artistic ability to draw a sketch of a persons
face as described by the witness. The program contains an interactive witness
module. This module asks basic questions of the witness, which are then used to
create the composite face. The application consists of over 40,000 features when
combined can create millions of different looking suspects. The user simply
selects a description of each face part from a menu and the system will then
assemble the parts to complete the composite. The user can manipulate each part
and/or add accessories, such as hats, jewelry and facial hair. It is installed
in approximately 500 jurisdictions worldwide that the Company believes
represents nearly one-half of the computerized composite market.
Compu-Scene
The Compu-Scene program makes accident and crime scene drawings easy.
The application uses a computer aided drafting program to compose the drawings
with simple drag-n-drop technology to place the specialized drawings or
templates. DDSI has created hundreds of templates including; weapons, body
parts, furniture, vehicles, shrubs, street signs, etc. The user simply draws a
room or intersection to scale with the CAD program and then simply drops in the
pre-drawn templates to complete the scene.
SI-3000
The Company's management has found that the type and amount of
information a company or agency collects and generates is growing at a fast
pace. The variety of information includes hand written documents, computer
generated reports, mugshots, fingerprints, photographs, video, digital images
and multiple database. In order for the information to be useful, it must be
accurate and easily accessible throughout the agency. Most companies and
agencies have information stored in multiple formats and locations. This
information is generally stored and maintained in a stand-alone environment.
Without an integrated information management strategy, data integrity suffers
while productivity diminishes. This environment also prohibits the sharing of
valuable data amongst departments and across agencies system. Today's technology
trend is moving towards client server applications in an open environment. This
movement will provide companies and agencies with a method to share data while
driving computing costs down.
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SI-3000 is an information management strategy that capitalized on the
above referenced technology trend. The SI-3000 provides companies and agencies
the opportunity to purchase products and services that will move them in the
direction of "paperless environment".
The SI-3000 product creates an "Electronic file folder", that
integrates hand written documents, computer reports, photos, fingerprints,
signatures and data into a central repository. Once the information is indexed,
it becomes accessible to the end user in a multitude of ways, all with a single
easy to use interface. In addition, SI-3000 can be easily customized by
non-programming personnel. This provides a significant competitive advantage in
the labor-intensive systems integration business.
Compu-Color(R) Assessor Program
The Compu-Color(R) Assessor Program applies imaging technology to
produce digitized images related to textual information for use in tax
assessment jurisdictions. Tax assessors generally maintain picture of all
properties with buildings or other improvements 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
together on the computer screen or printed out on an attached printer.
The Compu-Color(R) system processes a video or photographic image of
improved properties and stores the image to a computerized record, together with
relevant information from the assessor's records with respect to the 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 will enable
assessors to have all records on the same computerized system.
Maintenance and Support
In addition to the installation of the Company's systems in an agency
(tax assessor or law enforcement), the Company trains the personnel of the
agency in the use and operation of the system. After installation, the Company
provides maintenance and support for a limited period of time. The Company also
offers its customers ongoing maintenance and support plus updates of the
software, for an annual fee. Over ninety percent (90%) of the Company's
customers purchase ongoing maintenance and support at the time of installation
of the system.
New Products
FMS ("Fingerprint Matching System")
In February of 2000, DDSI secured a royalty license from Harris
Corporation, Melbourne, Florida for a software suite called PowerMatch(TM) that
enables the end user to capture, digitize, store, retrieve and/or match or sort
fingerprints. DDSI renamed the software FMS ("Fingerprint Matching System").
DDSI has the license for the systems use in the criminal justice field. The
license calls for the Company to pay a sliding scale royalty fee to Harris
Corporation on FMS gross sales. To date no FMS sales have occurred.
The current Compu-Capture(R), Compu-Scan 3000 and SI 3000 can be
integrated with this software. It performs its matching, storage and capturing
functions under the FBI approved AINSI-NIST and NCIC 2000 regulations. This
software has several superior features that allows it to be installed on NT
servers as well as PCs, for example and thus is very flexible in jurisdiction's
size. Since it is completely scalable, DDSI can offer it for large national
databases such as voter registration, drivers license or national security
identification systems. Many of the current installed jurisdictions of DDSI can
use a positive ID system integrated to their mugshot and records management
modules.
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The Company's current sales force will offer FMS along with the current
products. Additional sale personnel will be added as sales acceptance warrants.
Compu-Scan 3000
The Company plans to distribute Compu-Scan, an inkless direct reader
fingerprint system. It will be offered in conjunction with its Compu-Capture(R)
products. Additionally, the company intends to distribute an inkless fingerprint
system in commercial applications, including as a security device biometric
system or an access control device.
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.
Under federal regulation, law enforcement agencies in the United States
may only utilize any fingerprint systems that passed an extensive FBI
certification process. As a result any inkless fingerprint system developed by
the Company must pass the FBI certification process before it can be
successfully distributed to law enforcement agencies in the United States. For
some commercial uses, the Company would be able to supply its inkless
fingerprint technology prior to FBI certification.
Concerning receiving the above referenced FBI certification; the
Company has completed five of the final seven tests required. Resubmission for
certification is anticipated by September 15, 2000. There are no assurances by
the Company that the FBI will certify this technology and device.
Marketing
Law Enforcement Applications
The Company markets and sells its Law enforcement product line through
an internal sales force, an independent dealer network and vendors of compatible
software applications.
The Company employs eight full-time regional employees in sales,
marketing or sales management. Leads are generated by the company's marketing
department and followed up by the salesmen, who sell directly to the end user.
The employees also work with sales employees of other vendors in making sales
calls and proposals.
Additionally, the Company markets its Law Enforcement products through
vendors of compatible software application such as IBM Business Partners and
other hardware suppliers. See below for more detail.
The Company anticipates that its future marketing strategy for its Law
Enforcement products will focus on expanding the quality 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 and the new LiveScan (Compu-Scan 3000) device. In its latest 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, and agencies like the FBI continue to
require certain standards of reporting crimes (NCIC2000), the market for
products using computer technology, such as Compu-Capture(R), Compu-Scan and
Compu-Capture(R) lite will increase.
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Customers
The Company maintains a continuing relationship with its customers
based upon support services and periodic upgrades of the Compu-Capture(R),
Compu-Color(R) and Compu-Sketch software. Although the major revenue-generating
event is the initial installation and any significant expansion of that
installation, the annual sales of maintenance support services, which the
Company performs subsequent to the installation, generates approximately 15% of
the installed software license fee.
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) system with more computer software applications in order to
expand the number of vendors that may recommend the Company's products.
Business Partners
Currently, approximately one-half of the revenues from the Company's
sales are generated from business partner relationships. One such business
partner is IBM. IBM Business Partners is a designation used by IBM for certain
vendors that sell software applications that are compatible with IBM hardware.
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 records and jail management applications and other law
enforcement programs of IBM Business Partners. The Company believes that part of
its growth will come by expanding the number and size of sales in conjunction
with systems of existing and additional IBM Partners and other software
suppliers.
The Company has recently begun exploring the market for its products in
the European, South and Central American and other international markets. The
Company is also working in conjunction with IBM to develop some of these
countries by displaying and makings its products available exclusively by IBM at
their Electronic Institute for Government, located in Washington D.C. This
facility brings in IBM sales personnel and end users from around the world to
preview IBM's entire Public Sector offerings. IBM has duplicated this facility
in Shanghai, and has ordered and installed a similar display to demonstrate it's
the DDSI's products there.
IBM permits its business partners to establish and maintain marketing
partnerships with other hardware vendors. Capitalizing on this, the Company has
established its products on various Unisys platforms for state and local
contracts.
Greater Penetration of Existing Customers
In addition to seeking new customers, the Company established a
marketing department to focus on the existing customer base which is currently
over 1,000 agencies and as a result, the Company feels it can now capitalize and
generate increased revenues from its existing customers.
Due to the high market penetration by the Company's Business Partners,
the Company is able to eliminate the formal bid process in many business partner
jurisdictions. In these cases, add-on or complimentary products can be purchased
directly through the incumbent vendor. This will help to expedite the normally
long sales cycle and to eliminate the costly and time consuming proposal
process.
Strategic Acquisitions and Alliances
The Company intends to continue developing software interfaces to make
its products 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.
Sales by Geographic Area
During the last three fiscal years, 99% of the Company's business has
been done domestically.
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Competition
The Company currently has two national competitors to the
Compu-Capture(R)system. Printrak Inc., Anaheim, CA (NASDAQ: "AFIS" with
approximately 200 video mugshot installations. ImageWare Systems (AMEX "IW") of
San Diego, California has approximately 65 installations of a competitive
system.
Various regional software companies market services or software
programs to tax assessors that are in competition with the Compu-Color(R)
system.
Digital Biometrics, Inc. (NASDAQ: "DBII"), and Identix Incorporated
(AMEX: "IDX"), market inkless computerized fingerprint capture systems on a
national basis. Both companies are publicly held corporations and have been
marketing their fingerprint systems for several years. The Company intends to
market an inkless fingerprint system with the Compu-Capture(R) system as well as
in a network or a stand-alone mode. The Company believes that the customers
interested in purchasing the Compu-Capture(R) system will also be interested in
purchasing other computer systems that increase efficiency, such as an inkless
fingerprint system. As a result, the Company will be able to use its existing
marketing strategy to market the inkless fingerprint system.
Suppliers
The Company has sold most of its systems for use on IBM or other
manufacturers' 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
system, such as video equipment, can be provided by a wide range of
manufacturers. As a result the Company is not dependent on any particular
supplier or 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 NCIC2000, ANSI-NIST
standards and standards issued by the National Crime Information Commission and
by the FBI. All DDSI products and solutions meet these requirements.
The FBI has developed an extensive certifying process that an inkless
fingerprint system must pass before the FBI will accept cards produced by that
system. ISC/US, has agreed to grant the Company the right to distribute an
inkless fingerprint system that has not been certified by the FBI. While there
is no assurance that the Compu-Scan inkless fingerprint system will successfully
complete the FBI certification process, the system produces fingerprint cards
similar in quality and type to other fingerprint systems that have been approved
by the FBI. The Company believes that its Compu-Scan inkless fingerprint system
will successfully complete the FBI certification process before the end of the
fiscal year 2000.
Research and Development
The Company is currently engaged in a development contract with ISC/US,
an engineering firm with a specialized background in fingerprint technology, to
develop a computerized inkless fingerprint capture device called the Compu-Scan.
The Company has incurred substantial costs in connection with the development of
this technology and has been the primary focus of the Company's development
activities in 1999. Under this agreement, the Company will have worldwide
exclusive non-royalty rights to this product. FBI certification will be
necessary to sell the Compu-Scan device to the state, local and federal
jurisdictions; however, FBI certification is not required to sell the device for
commercial uses. This device has been submitted for FBI certification and is
anticipating the results shortly.
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While there are current products that deploy inkless technology, none
have the capabilities or the footprint (approximately one-tenth the size of
current competitive products) that the DDSI LiveScan will have upon
introduction.
Patents, Trademarks and Licenses
The Company has one patent application, number 09/08/800, for a "Device
and Method for Scanning and Mapping a Surface", which was filed in October 1998.
The primary use of the device is a contactless fingerprinting system.
The Company owns the proprietary rights to the software used in the
Compu-Capture(R) and Compu-Color(R) programs.
In addition, the Company owns the rights to the trademarks "Compu-Capture(R)",
"Compu-Color(R)" and "Compu-Scan(R)" both trademarks have been registered with
the United States Patent and Trademark Office.
The following names are trademarked by the Company and are nationally
recognized by our marketplace and associated with the company: Compu-Capture
2000, Compu-Scan, Compu-Scene, Compu-Color, Compu-Sketch, SI3000, Compu-Capture
2000 FE and Compu-Capture Activex32.
Other Events
On April 18, 2000, the Company announced that the Washington County,
Oregon Sheriff's award DDSI a contract for its Systems Integration System
(SI-2000). This systems common interface for accessing data and/or images across
the County's entire hardware and software environment.
On June 15, 2000, the Company announced that the Compu-Scan 3000 ten
print capture device was officially submitted to the FBI for certification. The
submission process is expected to be completed before the end of fiscal year
2000.
On July 12, 2000, the Company announced that the Royal Bahamian Police
Force is upgrading its original Compu-Capture 2000 imaging system to the
Company's new SI-3000 application. This will expand implementation to 32
workstations including mobile imaging from police cars.
Employees
The company employs a total of 22 full time employees and no part time
employees.
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ITEM 2. Management Discussion and Analysis or Plan of Operation
Plan of Operations
The short term objective of the Company is to continue to expand the
sale and acceptance of its core business solutions by adding more sales
personnel and demonstrating at more trade exhibits. The Company also is pursuing
the FBI certification and roll out of the Compu Scan 3000 fingerprint capturing
device in order to capitalize on its unique patent pending technology.
The new FMS (Fingerprint Matching System) will need to be integrated as
part of the Company's software offerings and will also be introduced to
large-project integrators. On February 15, 2000, the Company introduced the FMS
to the criminal justice industry. The Company also plans to develop a sales
channel into the Federal government
The Company's long term objectives are to obtain enough products to
sell into its basic business market--Criminal Justice -- so that sales will
expand adequately to allow for profits. The Company believes that to bring the
Compu Scan 3000 and FMS (Fingerprint Matching System) to market will increase
the company's marketing and development expenses less than 25%. The Company
anticipates that the potential sales from these two new product lines will more
than offset the added marketing and development expense.
The Company will be selling into new markets in the commercial,
biometric and identification market sectors, thus expanding distribution of its
basic software technology to these new sales areas.
Over the next year, management is of the opinion that sufficient
working capital will be obtained from operations and external financing to meet
the Company's liabilities and commitments as they become payable. The Company
has in the past successfully relied on private placements of common stock
securities and the exercise of common warrants in order to sustain operations.
Although there is no guarantee that future funds will be available, it is
anticipated that these same financing methods can be utilized on as needed basis
for any future cash needs. The Company's independent auditors have included an
explanatory paragraph in their report which raises substantial doubt about the
Company's ability to continue as a going concern. However, the Company's
management believes that it is taking the necessary steps to assure the
Company's continued existence. These plans are discussed in Note 2 to the
Company's financial statements.
Results of Operations
Interim Financials Six Months Ending June 30, 2000 vs. Six Months Ending
June 30, 1999
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Sales for the six months ended June 30, 2000 of $ 1,407,338 increased
by 42% from 1999. The Company attributes this to the continued increase in the
SI-3000 product.
The Company's gross profit decreased 15% from 2000 to 1999 due to an
increase of $519,704 in cost of sales. Overall the gross profit percentage per
sale decreased 25%.
Costs and expenses increased $132,261 for the six months ended June 30,
2000 versus June 30, 1999 due to principally the increases in Research and
Development expenses.
The net loss from operations for the Company increased 51% for the six
months ended June 30, 2000 to ($898,229) from ($595,395) for the six months
ended June 30, 1999.
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December 31, 1999 vs. December 31, 1998
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Revenues for the year ended December 31, 1999 of $2,847,183 increased
by 7% from 1998. The Company attributes this to the fact that the SI-3000
product line had an increase in sales and the upgrade to Compu-Capture was
completed.
The Company's gross profit increased 3.8% from 1999 to 1998 due to an
increase in total revenues generated by the Company. Overall the gross profit
percentage per sale increased 1.8%.
Costs and expenses increased $61,063 for the year ended December 31,
1999 due principally to the increases in Sales and Marketing expenses.
The net loss for the Company decreased 9% for the year ending December
31, 1999 to ($1,205,517) from ($1,331,931) for the year ending December 31,
1998.
Net cash used in operating activities for the years ended December 31,
1999 and 1998 was ($866,542) and ($1,080,116), respectively. The change in cash
from operating activities of $213,574 was principally due to the change in the
net loss year over year.
Net cash used in investing activities was $589,570 and $19,210 for the
years ended December 31, 1999 and 1998 respectively, reflecting a change of
$570,360. This increase was a result of increased software development costs of
$413,604, the purchase of furniture and equipment resulting in a net change of
$60,364 and a decrease of $92,542 from the sale of short-term investments in
1999.
Net cash from financing activities was $1,664,716 and $1,032,819 for
the years ended December 31, 1999 and 1998 respectively, reflecting a change of
$631,897. This increase was principally due to proceeds received from the
issuance of the Company's common stock.
December 31, 1998 vs. December 31, 1997
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Sales for the year ended December 31, 1998 of $2,659,701 decreased by
11% from 1997. The Company attributes this to the long sales cycle of its new
SI-3000 product and the fact that its main product, Compu-Capture was being
upgraded to a 32-bit version.
The Company's gross profit decreased 10% from 1998 to 1997 due to a
decrease in total revenues generated by the Company. Overall the gross profit
percentage per sale increased 1%.
Costs and expenses decreased $240,698 for the year ended December 31,
1998 due to the decreases in General Administrative, Sales and marketing and
Research and Development expenses.
The net loss for the Company increased 31% for the year ending December
31, 1998 to ($1,331,931) from ($1,018,517) for the year ending December 31,
1997.
Net cash used in operating activities for the years ended December 31,
1998 and 1997 was ($1,080,116) and ($442,373), respectively. The change in cash
from operating activities was $637,743 due to continuing losses by the Company.
Net cash used in investing activities was ($19,210) and ($6,592) for
the years ended December 31, 1998 and 1997 respectively, reflecting a change of
($12,618). This increase was a result of purchase of furniture and equipment
resulting in a net change of $79,052 offset $65,709 from the sale of short-term
investments.
Net cash used in financing activities was ($1,032,819) and ($50,000)
for the years ended December 31, 1998 and 1997 respectively, reflecting a change
of $1,082,819. The increase is due to proceeds received in 1999 from the
issuance of the Company's common stock.
11
<PAGE>
Liquidity and Capital Resources
The Company's revenues have been insufficient to cover the cost of
revenues and operating expenses. Therefore, the Company has been dependent on
private placements of its common stock in order to sustain operations. In
addition, there can be no assurances that the proceeds from private or other
capital will continue to be available, or that revenues will increase to meet
the Company's cash needs, or that a sufficient amount of the Company's common
stock or other securities can or will be sold or that any common stock purchase
options/warrants will be exercised to fund the operating needs of the Company.
December 31, 1999
At December 31, 1999 the Company had assets of $2,049,383 compared to
$1,372,905 on December 31, 1998. Total stockholders' equity of $445,498 on
December 31, 1999 compared to a stockholders deficit of $37,701 on December 31,
1998, an increase of $483,199. This increase for the year ended December 31,
1999 resulted from the issuance of the Company's common stock totaling
$1,664,716 off set by the 1999 net loss of $1,205,517.
As of December 31, 1999 the Company had a negative working capital of
$396,500, a decrease of $21,532 from a negative working capital of $374,968 at
December 31, 1998, which was primarily a result of an increase in accrued
expenses of $71,700, an increase in cash of $208,604, and an increase in
deferred income of $265,117.
December 31, 1998
On December 31, 1998 the Company had assets of $1,372,905 compared to
$1,548,745 on December 31, 1997. The Company had a total stockholders' deficit
of ($37,701) on December 31, 1998 compared to stockholders' equity of $138,902
on December 31, 1997, a decrease of $176,603. This decrease for the year ended
December 31, 1998 resulted from the 1998 net loss of ($1,331,931).
As of December 31, 1998 the Company's working capital position
increased $374,968 from a negative $253,178 at December 31, 1997 to a negative
$374,968 at December 31, 1998, which was primarily a result of a decrease in
cash of $66,507, and an increase in deferred income of $340,805.
ITEM 3. Description of Property
The Company operates from a single location. During May 2000, the Company
entered into a new five-year operating lease for its office facility. The office
facility is located at 446 Lincoln Highway, Fairless Hills, PA. 19030, and
contains approximately 5,900 square feet of office space. Future minimum lease
commitments in connection with this lease are approximately $49,000 in 2000,
$99,000 in 2001, $102,000 in 2002, $105,000 in 2003, $108,000 in 2004 and
$55,000 in 2005.
12
<PAGE>
ITEM 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth current information relating to the beneficial
ownership of the Common Stock of the Company by (i) each person owning
beneficially more than 5 percent of the outstanding shares of Common Stock, (ii)
each Director of the Company and (iii) all Executive Officers and directors of
the Company as a group: Percentage of beneficial ownership is based upon
14,380,127 shares of common stock outstanding at December 31, 1999.
Beneficial Ownership
Name and Address of Common Stock
Of Beneficial Owner No. of Shares Prior to This Offering
------------------- -------------- ----------------------
Garrett U. Cohn
446 Lincoln Highway
Fairless Hills, PA 19030 1,381,000 (1) 9.6%
Michael Pellegrino
446 Lincoln Highway
Fairless Hills, PA 19030 185,000 1.2%
Michael Ott
446 Lincoln Highway
Fairless Hills, PA 19030 215,000 1.4%
Randolph Hall
446 Lincoln Highway
Fairless Hills, PA 19030 163,000 1.1%
Myrna Cohn Ph.d.
249 Willow Parkway
Buffalo Grove, IL 60089 31,000 .2%
All Officers & Directors
As a Group 1,944,000 (2) 13.5%
--------------------------
(1) Garrett U. Cohn owns 142,000 shares of stock. In addition, Mr. Cohn has
the right to vote 940,000 shares of stock held of record by Norman Cohn
pursuant to a Voting Trust Agreement described below, and, as a result
of such voting rights, such shares are included in the shares shown as
beneficially owned by Garrett U. Cohn.
(2) Of the total Officers and Director's shares, 178,000 shares are options
which are 10 year options with a three-year vesting period, vesting 1/3
each year with a strike price of thirty-three cents ($0.33). Also
included is a ten-year option for 15,000 shares that vest over four
years at a strike price of three dollars and eighty-three cents
($3.30).
Under the terms of the Voting Trust Agreement dated April 19, 1995,
between Norman Cohn and Garrett U. Cohn, as Trustee, Norman Cohn has transferred
to the trust 940,000 shares of Common Stock of the Company, representing all of
the shares of Common Stock owned by him. Under the terms of the Voting Trust
Agreement, Garrett U. Cohn, as the Trustee, has the right to vote the stock in
the Voting Trust, except as to certain actions, including, but not limited to,
any amendment to the certification of incorporation of the company, merger or
sale of substantially all of the assets of the company or any action which will
cause a dilution in the outstanding shares of Common Stock. The term of the
Voting Trust is 10 years and shall terminate in April, 2005.
There are no arrangements known to the Company that at a later date may
result in a change in control of the Company.
13
<PAGE>
ITEM 5. Directors, Executive Officers, Promoters and Control Persons
Directors and Executive Officers
The following table sets forth the names, ages and positions of the
directors and executive officers of the Company.
Name Age Position with Company
---- --- ---------------------
Garrett U. Cohn 62 President, Chief Executive Officer,
Treasurer and Director
Michael Ott 48 Vice President and Director
Myrna L. Cohn Ph.d. 61 Director
Michael Pellegrino 51 Chief Financial Officer, Secretary
and Director
Randolph W. Hall 41 Vice President
Garrett U. Cohn has been President, Chief Executive Officer, Treasurer
and a Director of the Company since July, 1994. Garrett Cohn graduated from the
University of Iowa, Iowa City, Iowa in 1961. His degrees were in Philosophy with
a minor in Business. He went into in the merchandise promotion business and
designed many national programs for Playboy, Shell Oil Company, Standard Oil
Company, American Express, Polaroid Corporation, Fingerhut Manufacturing and
many other clients. He was awarded national recognition by developing the
largest selling single piece of promotional luggage during the years 1983 to
1986 and was featured in Money Magazine. Following his successful direct
merchandising activities, he became President of Rockford Tool Company,
Hillside, Illinois which he rescued from bankruptcy and later sold to an
investment group. He then returned to his family's business and developed the
computer imaging ability into a national video imaging division of ASI Computers
called Compu-Color Inc. In 1995 a public company named Digital Descriptors
Systems Inc was formed.
Michael Ott has been a Vice President of Sales for the Company since
July, 1994 and a Director of the Company since August, 1994. Mr. Ott was
previously employed by Compu-Color, Inc. as sales manager since its
incorporation in 1989. Prior to that time he was sales manager for the
Compu-Color division of ASI Computer Systems, Inc. since 1986.
Myrna L. Cohn, Ph.d. has been President of Cohn Management Systems,
Inc. since 1986. Cohn Management Systems, Inc. is a consulting company wholly
owned by Dr. Cohn that specializes in the management of organizational
transition and change in mid-sized corporations. Dr. Cohn is the sole employee
and in 1997 performed consulting services on behalf of the Company. Prior to
organizing Cohn Management Systems, Inc., Dr. Cohn was a management consultant
for various companies and was a professor a Loyola University, Chicago, IL.. Dr.
Cohn has been a Director of the company since August, 1994.
Michael Pellegrino joined the Company in 1995. He is the Vice
President, Chief Financial Officer, Secretary and a Director of the Company. For
eleven years prior, Mr. Pellegrino was vice president and CFO of Software Shop
Systems, Inc. and for six years earlier as Director of Financial Systems for
ADP. Mr. Pellegrino has a Bachelors degree in accounting from MSU and a Masters
in Finance from Rutgers University, after which he worked at Touche Ross for 3
years.
Randolph W. Hall joined the Company as the Vice President of Operations
in 1996. Prior to joining the Company, Mr. Hall successfully launched and
subsequently sold his ownership share of a company that marketed a records
management system for law enforcement agencies called Protocal. Mr. Hall has a
degree in Computer Science plus five years of programming experience as well as
being the Regional and Training Manager for a software provider servicing a 10
state region.
Audit Committee
The Company is in the process of forming an audit committee. Once the
members of the audit committee are selected, an audit committee charter will be
drafted. It is anticipated that the audit committee will consist of three
individuals and that the selection process should be completed within thirty
days of the filing of this registration statement.
14
<PAGE>
ITEM 6. Executive compensation
The following table summarizes the compensation earned and paid by the Company
to each Officer and to all Executive Officers as a group for services rendered
in all capacities during the year ended December 31, 1999:
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------------------------
Annual Compensation Awards Payouts__________
------------------------------------------------------ ------------------------ ---------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (I)
Name Other Securities All
and Annual Restricted Underlying Other
Principal Compen Stock Options/ LTIP Compen
Position Year Salary Bonus sation($) Award($) Sar ($) Payouts($) sation ($)
------------- ------ -------- ----- --------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Garrett Cohn
President/CEO 1999 $160,000 0 0 0 0 0 0
Secretary 1999 0 0 0 0 0 0 0
Michael Ott,
V.P/ Director 1999 110,000 0 0 0 0 0 0
Michael J.
Pellegrino
V.P/ Director 1999 110,000 0 0 0 0 0 0
Randy Hall
V.P/ Director 1999 75,000 0 0 0 0 0 0
Total: $455,000 $0 $0 $0 $0 $0 $0
All Executive Officers
As a Group $455,000 $0 $0 $0 $0 $0 $0
</TABLE>
Options/Sar Grants in Last Fiscal Year
--------------------------------------
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARS
Underlying Granted to
Options/SARS Employees in Exercise or Base
Name Granted Fiscal Year Price ($/Sh) Expiration Date
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Garrett U. Cohn, CEO 350,000 38.78% $0.37 8/31/09
Michael J. Pellegrino, CFO 150,000 16.62% 0.37 8/31/09
Michael Ott, VP Sales 180,000 19.94% 0.37 8/31/09
Randy Hall, VP Operations 150,000 16.62% 0.37 8/31/09
Deb Ott, Sales assistant 5,000 0.55% 0.37 8/31/09
</TABLE>
Aggregated Option/Sar Exercises
-------------------------------
None exercised
Employment Agreements
---------------------
Garrett U. Cohn, President, Chief Executive Officer and Director. In July, 1994
the Company entered into a 5 year employment agreement with Mr. Cohn which
entitled him to a base salary of $150,000 per year which may at the Board of
Directors discretion adjust his base salary (but not below $150,000 per year) or
grant a bonus. Though past the five-year period, the present employment
agreement is to remain in affect until a new employment agreement is drafted. In
the interim, Mr. Cohn was granted an increase in his annual base salary of
$10,000, making his new base salary $160,000. The Company shall also furnish Mr.
Cohn with an automobile and automobile expenses. In addition, Mr. Cohn has
received non accountable expense allowances of $49,713, $81,450 , $27,950 and
$8,000 in 1999, 1998 , 1997 and 2000 respectively.
15
<PAGE>
Michael J. Pellegrino, Vice President, Chief Financial and Director. In
July, 1998, the Company entered into a two year employment agreement with Mr.
Pellegrino, which entitled him to a base salary of $110,000 per year which may
at the Board of Directors discretion adjust his base salary (but not below
$110,000 per year). Though past the two-year period, this employment agreement
is to remain in affect until a new employment agreement is drafted. Mr.
Pellegrino is also entitled to participate in the Annual Management Bonus Plan.
As a participant in the Annual Management Bonus Plan, Mr. Pellegrino will be
eligible to receive bonuses, based on performance, in any amount from 0% to 50%
of the Base Salary. In addition, Mr. Pellegrino shall participate in the
Management Equity Incentive Plan. As a participant in the Management Equity
Incentive Plan, Mr. Pellegrino will be eligible to receive options, which vest
over a period of time from the date of the option's issue, to purchase common
shares of the Company. The Company shall grant to Mr. Pellegrino, within ninety
days of the date of the Agreement, options to purchase such number of common
shares of the Company equal to 1% of the number of common shares of the Company
outstanding on the date of the Agreement (subject to the vesting and the
satisfaction of the other terms and conditions of such options). The Company may
also grant to the Employee, following the first anniversary of the date of the
Agreement and at the sole discretion of the Board of Directors, options to
purchase such number of common shares of the Company equal to 0.25% of the
number of common shares of the Company outstanding on the date of the Agreement
(subject to the vesting and the satisfaction of the other terms and conditions
of such options).
Michael Ott, Vice President of Sales and Director. In July, 1998, the
Company entered into a two year employment agreement with Mr. Ott, which
entitled him to a base salary of $110,000 per year which may at the Board of
Directors discretion adjust his base salary (but not below $110,000 per year).
Though past the two-year period, this employment agreement is to remain in
affect until a new employment agreement is drafted. Mr. Ott is also entitled to
participate in the Annual Management Bonus Plan. As a participant in the Annual
Management Bonus Plan, Mr. Ott will be eligible to receive bonuses, based on
performance, in any amount from 0% to 50% of the Base Salary. In addition, Mr.
Ott shall participate in the Management Equity Incentive Plan. As a participant
in the Management Equity Incentive Plan, Mr. Ott will be eligible to receive
options, which vest over a period of time from the date of the option's issue,
to purchase common shares of the Company. The Company shall grant to Mr. Ott,
within ninety days of the date of the Agreement, options to purchase such number
of common shares of the Company equal to 1% of the number of common shares of
the Company outstanding on the date of the Agreement (subject to the vesting and
the satisfaction of the other terms and conditions of such options). The Company
may also grant to the Employee, following the first anniversary of the date of
the Agreement and at the sole discretion of the Board of Directors, options to
purchase such number of common shares of the Company equal to 0.25% of the
number of common shares of the Company outstanding on the date of the Agreement
(subject to the vesting and the satisfaction of the other terms and conditions
of such options).
Randolph Hall, Vice President of Operations. In July, 1998, the
Company entered into a two year employment agreement with Mr. Hall, which
entitled him to a base salary of $75,000 per year which may at the Board of
Directors discretion adjust his base salary (but not below $75,000 per year).
Though past the two-year period, this employment agreement is to remain in
affect until a new employment agreement is drafted. Mr. Hall is also entitled to
participate in the Annual Management Bonus Plan. As a participant in the Annual
Management Bonus Plan, Mr. Hall will be eligible to receive bonuses, based on
performance, in any amount from 0% to 50% of the Base Salary. In addition, Mr.
Hall shall participate in the Management Equity Incentive Plan. As a participant
in the Management Equity Incentive Plan, Mr. hall will be eligible to receive
options, which vest over a period of time from the date of the option's issue,
to purchase common shares of the Company. The Company shall grant to Mr. Hall,
within ninety days of the date of the Agreement, options to purchase such number
of common shares of the Company equal to 1% of the number of common shares of
the Company outstanding on the date of the Agreement (subject to the vesting and
the satisfaction of the other terms and conditions of such options). The Company
may also grant to the Employee, following the first anniversary of the date of
the Agreement and at the sole discretion of the Board of Directors, options to
purchase such number of common shares of the Company equal to 0.25% of the
number of common shares of the Company outstanding on the date of the Agreement
(subject to the vesting and the satisfaction of the other terms and conditions
of such options).
16
<PAGE>
Employee and Director Stock Option Plans
----------------------------------------
The Company adopted the 1994 Stock Option Plan, (restated in 1997) ( the "Plan")
in order to attract and retain qualified personnel. In October 1998, the Board
of Directors voted to amend the plan but has not formally established the
amended plan to date and will not do so this fiscal year. However, under the
proposed 1998 Plan, the Compensation Committee of the Board of Directors in its
discretion may grant stock options (either incentive or non-qualified stock
options) to officers and employees. The terms and conditions upon which the
options may be exercised will be set out in the Plan. The Plan is intended to
provide a method whereby employees of the Company and others who are making and
are expected to make substantial contributions to the successful management and
growth of the Company are offered an opportunity to acquire Common Stock as an
incentive to remain with the Company and advance its interests. Therefore, to
date, no options have been granted under the 1998 plan and none will be until
the plan is formalized some time during the next fiscal year. On August 31,
1999, the Company granted bonuses to various officers and employees in the form
of 902,500 options for shares of the Company's Common Stock, fully vested, with
an exercise price of $0.37 per share.
Compensation of Directors
-------------------------
The Directors who are employees of the Company receive no compensation for their
services as Directors, either on an annual basis or for each meeting. Directors
are not reimbursed for any expenses they may incur in attending meetings of the
Board of Directors. Directors who are not an employee of the Company, receive
$1,000 for each Board of Directors meeting attended.
ITEM 7. Certain Relationships and Related Transactions
During April, 1996 the Company loaned Mr. Cohn $125,000. Interest is
accrued on this amount at one point over prime and was payable together with the
principal on August 13, 1999. Accrued interest on this loan was $34,588 at
December 31, 1999. Subsequently, the Company's Board of Directors agreed to
extend the maturity date of this note indefinitely.
Dr. Myrna Cohn Ph.D., as an outside Director of the Company, was
compensated at the rate of one thousand ($1,000) dollars for each board meeting
attended. During 1997 Dr. Cohn was compensated thirty five thousand dollars
($35,000) for management consulting in the areas of human resource planning,
strategic planning and executive coaching.
17
<PAGE>
ITEM 8. Description of Securities
The Company was incorporated on June 13, 1994 in Delaware. The Company
has authorized common stock of 50,000,000 shares at $.001 par value per share,
14,380,127 shares outstanding at December 31, 1999, plus 1,000,000 authorized
shares of $.01 par value per share Preferred Stock and no shares are outstanding
at December 31, 1999. The Company has authorized outstanding Class A and Class B
Warrants numbering one million four hundred eighty-three thousand and seven
hundred fifty (1,483,750) of each class. The Class A Warrants have an exercise
price of $6.00 per share and expire on August 15, 2000. The Class B Warrants
have an exercise price of $7.25 per share and expire on August 15, 2000. The
Company has reserved an equal amount of shares against these warrants. During
July 2000, the Company's Board of Directors reduced the exercise price of the
Class A warrants from $6.00 to $1.00 with an expiration date extended to August
15, 2002. The Class B warrants exercise price was also reduced from $7.25 to
$1.50 with an expiration date extended to August 15, 2002.
Each holder of Common Stock is entitled to receive ratable dividends,
if any, as may be declared by the Board of Directors out of funds legally
available for the payment of dividends. As of the date of this Offering
Circular, the Company has not paid any dividends on its Common Stock, and none
are contemplated in the foreseeable future. It is anticipated any earnings that
may be generated from operations of the Company will be used to finance the
growth of the Company.
Holders of Common Stock are entitled to one vote for each share held of
record. There are no cumulative voting rights in the election of directors. Thus
the holders of more than 50% of the outstanding shares of Common Stock can elect
all of the directors of the Company if they choose to do so. No one shareholder
beneficially owns more than 50% of the Company's Common Stock. A total of
14,380,127 share of Common Stock are outstanding as of December 31, 1999.
The holders of Common Stock will have no preemptive, subscription,
conversion or redemption rights. Upon liquidation, dissolution or winding-up of
the Company, the holders of the Common Stock are entitled to receive pro rata
the assets of the Company.
Redeemable Class A Warrants and Redeemable Class B Warrants
The outstanding shares of 18,973,279 on September 1, 2000 excludes the
authorized and unissued Redeemable Class A and Class B Warrants numbering one
million four hundred eighty-three thousand and seven hundred fifty (1,483,750)
of each class. These warrants are publicly traded with the price generally
holding steady at $.06 per warrant.
Redeemable Class A Warrants
Each Class A Warrant entitles the holder to purchase one share of
Common Stock for a period of four years commencing August 15, 1996, subject to
earlier redemption, and will be exercisable at a price of $1.00 a unit. During
July 2000 the Class A Warrants' expiration date was extended to August 15, 2002.
The Class A Warrants are subject to redemption by the Company at any time on not
less then 30 days written notice, at a price of $0.10 per Warrant, provided that
the per share closing bid price of the Common Stock exceeds 175% of the exercise
price for at least 20 consecutive trading days. For these purposes, the closing
bid price of the Common Stock shall be determined by the closing bid price as
reported by NASDAQ so long as the Common Stock is quoted on NASDAQ and if the
Common Stock is listed on a national securities exchange, shall be determined by
the last reported sale price on the primary exchange on which the Common Stock
is traded. Holders of Class A Warrants will automatically forfeit all rights
thereunder except the right to receive the $0.10 redemption per Warrant unless
the Warrants are exercised before they are redeemed.
Redeemable Class B Warrants
Each Class B Warrant entitles the holder to purchase one share of
Common Stock for a period of four years commencing August 15, 1996, subject to
earlier redemption, and will be exercisable at a price of $1.50 a unit. During
July 2000, the Class B Warrants' expiration date was extended to August 15,
2002. The Class B Warrants are subject to redemption by the Company at any time
on not less then 30 days written notice, at a price of $0.10 per Warrant,
provided that the per share closing bid price of the Common Stock exceeds 200%
of the exercise price for at least 20 consecutive trading days. For these
purposes, the closing bid price of the Common Stock shall be determined by the
closing bid price as reported by NASDAQ so long as the Common Stock is quoted on
NASDAQ and if the Common Stock is listed on a national securities exchange,
shall be determined by the last reported sale price on the primary exchange on
which the Common Stock is traded. Holders of Class A Warrants will automatically
forfeit all rights thereunder except the right to receive the $0.10 redemption
per Warrant unless the Warrants are exercised before they are redeemed.
18
<PAGE>
The holders of Warrants ("Warrantholders") are not entitled to vote,
receive dividends, or exercise any of the rights of holders of shares of Common
Stock for any purpose. In addition, the Company has a right to increase the
Warrant Exercise Price upon not less than 20 days' prior notice to the
Warrantholders if the Company extends the exercise period of the Warrants beyond
the four year period.
Transfer Agent
The Company's transfer agent is Continental Stock Transfer and Trust
Company located at Two Broadway New York, New York, 10004.
19
<PAGE>
PART II.
ITEM 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
Market Price
------------
The Company's Common Stock has been quoted on the OTC:BB since July 7, 1997
under the symbol "DDSI". However, as of November 4, 1999 the Company's shares
trade only on the pink sheets. The following table set forth, the high and low
bid prices for the Common stock for the quarters indicated. As of December 31,
1999 there were 1,853 shareholders of record.
Common Stock
Bid Price
--------------------
Calendar Year 1998 Low High
--------------------------- ----- -----
Third Quarter $0.33 $0.40
Fourth Quarter $0.38 $0.43
Calendar Year 1999 Low High
--------------------------- ----- -----
First Quarter $0.50 $1.25
Second Quarter $0.39 $0.93
Third Quarter $0.26 $0.42
Fourth Quarter $0.12 $0.30
Calendar Year 2000 Low High
--------------------------- ----- -----
First Quarter $0.21 $0.48
Second Quarter $0.25 $0.38
Third Quarter (through September 10, 2000) $0.25 $0.37
As of December 31, 1999, there were 14,380,127 shares of Common Stock
issued and outstanding.
Dividends
---------
The Company has not paid or declared any dividends with respect to the
Common Stock, nor does it anticipate paying any cash dividends or other
distributions on the Common Stock in the foreseeable future. Any future
dividends will be declared at the discretion of the Board of Directors and will
depend, among other things, on the Company's earnings, if any, its financial
requirements for future operations and growth and such other facts as the
Company may then deem appropriate.
ITEM 2. Legal Proceedings
The Company is not a party to any material pending legal proceedings
and, to the best of its knowledge, no such action by or against the Company has
been threatened.
20
<PAGE>
ITEM 3. Recent Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Changes in Registrant's Certifying Accountant.
1. (i) KPMG LLP was previously the principal accountants for the
Registrant. On October 4, 1999, that firm resigned and Ernst & Young, LLP was
engaged as principal accountants. The decision to change accountants was
approved by the Registrant's Board of Directors. In connection with the audits
of the two years ended December 31, 1996, there were no disagreements with KPMG
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements, if not
resolved to KPMG LLP's satisfaction, would have caused them to make reference in
connection with their opinion to the subject matter of the disagreement.
The audit report of KPMG LLP on the financial statements of the Registrant as of
an for the years ended December 31, 1996 and 1995 contained a separate paragraph
stating that the Company had suffered recurring losses from operations which
raised substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. A letter from KPMG LLP is attached as Exhibit 16.0.
(ii) The report by Ernst & Young, LLP as included on the financial
statements of the Registrant for the fiscal periods ended December 31, 1999,
1998 and 1997 was modified as to the uncertainty regarding the Company's ability
to continue as a going concern.
2. The Registrant engaged Ernst & Young, LLP as its new independent
accountant on October 4, 1999. Registrant did not consult with Ernst & Young,
LLP or any other accounting firm regarding the application of accounting
principles to a specified transaction , either contemplated or proposed, or the
type of opinion that might be rendered regarding Registrant's financial
statements.
ITEM 4. Recent Sales of Unregistered Securities
A total of 5,066,172 shares of common stock, par value $.001 (the "Shares"),
have been issued by the Company within one year prior to the filing of this Form
10-SB for cash or services rendered to the Company, absent registration under
the Securities Act of 1933, as amended (the "Securities Act"). These shares were
offered pursuant to the exemption provided by Regulation A (11,000,000 Shares)
where such offering price was valued at $.30 per share.
ITEM 5. Indemnification of Directors and Officers
The Company's Certificate of Incorporation provides that a director of
the Company shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director.
The Company's Certificate of Incorporation provides that the Company
shall indemnify to the fullest extent permitted by law any person made or
threatened to be made a party to any action, suit or proceeding, whether
criminal, civil, administrative or investigative (a "legal action"), whether
such legal Action be by or in the right of the corporation or otherwise, by
reason of the fact that such person is or was a director or officer of the
company, or serves or served at the request of the Company as a director or
officer, of another corporation, partnership, joint venture, trust or any other
enterprise. In addition, the Company's Certificate of Incorporation provides for
indemnification of any person made or threatened to be made a party to any Legal
Action by reason of the fact that such person is or was a director or officer of
the Company and is or was serving as a fiduciary of, or otherwise rendering to,
any employee benefit plan of or relating to the Company. The indemnification
obligation of the Company in the Certificate of Incorporation is permitted under
Section 145 of the General Corporation Law of the State of Delaware.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore unenforceable.
21
<PAGE>
Digital Descriptor Systems, Inc.
Index to Financial Statements
Contents
Report of Independent Auditors................................... F-1
Audited Financial Statements
Balance Sheets................................................... F-2
Statements of Operations......................................... F-3
Statements of Shareholders' Equity (Deficit)..................... F-4
Statements of Cash Flows......................................... F-5
Notes to Financial Statements.................................... F-6
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Digital Descriptor Systems, Inc.
We have audited the accompanying balance sheets of Digital Descriptor Systems,
Inc. as of December 31, 1999, 1998 and 1997, and the related statements of
operations, shareholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that Digital
Descriptor Systems, Inc. will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has never been profitable and
continues to incur losses from operations and anticipates that it will require
additional financing in 2000, which may not be readily available. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans relating to these matters are described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 29, 2000
F-1
<PAGE>
Digital Descriptor Systems, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31 June 30,
1999 1998 1997 2000
------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 287,223 $ 78,619 $ 145,126 $ 594,351
Investments 1,000 1,000 93,542 1,000
Accounts receivable, less allowance for
uncollectible accounts of $213,000,
$132,000 and $129,000 in 1999, 1998 and
1997 and $131,000 (unaudited) in 2000,
respectively 856,595 889,183 863,898 704,062
Inventories 48,693 47,724 35,413 48,762
Prepaid expenses 13,874 19,112 18,686 12,344
------------------------------------------------------------------
Total current assets 1,207,385 1,035,638 1,156,665 1,360,519
Note and interest receivable - Officer 153,650 141,775 133,750 159,588
Software development costs, at cost 413,604 - - 413,604
Furniture and equipment, at cost, net 267,685 179,147 160,055 239,861
Deposits and other assets 7,059 16,345 98,275 36,744
------------------------------------------------------------------
$ 2,049,383 $ 1,372,905 $ 1,548,745 $ 2,210,346
==================================================================
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 121,137 $ 264,675 $ 400,659 $ 166,762
Accrued expenses 164,814 93,114 259,672 62,732
Deferred income 1,317,934 1,052,817 712,012 1,257,517
Note payable - - 37,500 -
------------------------------------------------------------------
Total current liabilities 1,603,885 1,410,606 1,409,843 1,487,011
Shareholders' equity (deficit):
Preferred stock, $.01 par value:
Authorized shares - 1,000,000
Issued and outstanding shares - none
Common stock, $.001 par value:
Authorized shares - 50,000,000 at
December 31, 1999 and 1998, 10,000,000 at
December 31, 1997, and 50,000,000 at
June 30, 2000 (unaudited)
Issued and outstanding shares - 14,380,127,
7,891,128, and 2,503,750 at December 31,
1999, 1998 and 1997, respectively, and
18,806,612 at June 30, 2000 (unaudited) 14,380 7,891 2,504 18,806
Additional paid-in capital 12,957,544 11,299,317 10,173,376 14,117,184
Unearned compensation (14,000) (38,000) (62,000) (2,000)
Accumulated deficit (12,512,426) (11,306,909) (9,974,978) (13,410,655)
------------------------------------------------------------------
Total shareholders' equity (deficit) 445,498 (37,701) 138,902 723,335
------------------------------------------------------------------
Total liabilities and shareholders' equity
(deficit) $ 2,049,383 $ 1,372,905 $ 1,548,745 $ 2,210,346
==================================================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
Digital Descriptor Systems, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Six months ended
Year ended December 31 June 30
1999 1998 1997 2000
-------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Software $ 1,189,439 $ 1,002,366 $ 943,580 $ 590,224
Hardware 722,040 623,712 977,363 371,578
Maintenance 539,034 489,409 389,515 304,737
Consulting 236,956 180,174 119,163 -
Other 159,714 364,040 558,488 27,562
-------------------------------------------------------------------------
2,847,183 2,659,701 2,988,109 1,407,338
Costs and expenses:
Cost of revenues 987,931 887,939 1,038,212 803,177
General and administrative 1,593,846 1,442,873 1,514,792 790,886
Sales and marketing 984,691 892,279 949,573 417,420
Research and development 429,599 616,985 338,736 248,420
Depreciation and amortization 75,553 134,635 189,319 50,595
Other (income) expense (18,920) 16,921 (24,006) (4,931)
-------------------------------------------------------------------------
4,052,700 3,991,632 4,006,626 2,305,567
-------------------------------------------------------------------------
Net loss $ (1,205,517) $ (1,331,931) $ (1,018,517) $ (898,229)
=========================================================================
Net loss per common share (basic
and diluted) $ (.11) $ (.32) $ (.41) $ (.05)
=========================================================================
Weighted average number of common shares
outstanding (basic and diluted)
10,934,900 4,161,270 2,492,147 17,722,649
=========================================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Digital Descriptor Systems, Inc.
Statements of Shareholders' Equity (Deficit)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additional
Common Paid-In Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 2,468,750 $ 2,469 $ 10,148,528 $ (86,000) $ (8,956,461) $ 1,108,536
Stock granted to consultants 35,000 35 24,848 24,883
Amortization of unearned compensation 24,000 24,000
Net loss (1,018,517) (1,018,517)
--------------------------------------------------------------------------------------
Balance at December 31, 1997 2,503,750 2,504 10,173,376 (62,000) (9,974,978) 138,902
Issuance of common shares in connection
with a Reg D Offering, net of
offering costs 5,145,075 5,145 1,044,566 1,049,711
Stock granted to consultants 176,357 176 60,833 61,009
Common stock warrants exercised 65,946 66 20,542 20,608
Amortization of unearned compensation 24,000 24,000
Net loss (1,331,931) (1,331,931)
--------------------------------------------------------------------------------------
Balance at December 31, 1998 7,891,128 7,891 11,299,317 (38,000) (11,306,909) (37,701)
Issuance of common shares in connection
with a Reg A Offering, net of
offering costs 6,488,999 6,489 1,658,227 1,664,716
Cost amortization of unearned compensation 24,000 24,000
Net loss (1,205,517) (1,205,517)
--------------------------------------------------------------------------------------
Balance at December 31, 1999 14,380,127 14,380 12,957,544 (14,000) (12,512,426) 445,498
Issuance of common shares in connection
with a Reg A Offering, net of offering
costs (unaudited) 4,426,485 4,426 1,159,640 1,164,066
Amortization of unearned compensation
(unaudited) 12,000 12,000
Net loss (unaudited) (898,229) (898,229)
--------------------------------------------------------------------------------------
Balance at June 30, 2000 (unaudited) 18,806,612 $ 18,806 $ 14,117,184 $ (2,000) $(13,410,655) $ 723,335
======================================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Digital Descriptor Systems, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended
Year ended December 31 June 30
1999 1998 1997 2000
------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss $(1,205,517) $ (1,331,931) $ (1,018,517) $ (898,229)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 75,553 134,635 189,319 50,595
Compensation expense in connection with
issuance of common stock - 61,009 24,883 -
Amortization of unearned compensation 24,000 24,000 24,000 12,000
Changes in assets and liabilities:
Accounts receivable 32,588 (25,285) (453,094) 152,533
Inventories (969) (12,311) 109,623 (69)
Prepaid expenses and other assets 14,524 31,504 42,843 (28,185)
Accounts payable (143,538) (135,984) 198,576 45,625
Accrued expenses 71,700 (166,558) 174,826 (102,082)
Deferred income 265,117 340,805 265,168 (60,417)
------------------------------------------------------------------------
Net cash used in operating activities (866,542) (1,080,116) (442,373) (828,229)
Cash flows from investing activities:
Purchase of furniture and equipment (164,091) (103,727) (24,675) (22,771)
Increase in software development costs (413,604) - -
Increase in officer note receivable (11,875) (8,025) (8,750) (5,938)
Proceeds from sale of short-term investments - 92,542 26,833 -
------------------------------------------------------------------------
Net cash used in investing activities (589,570) (19,210) (6,592) (28,709)
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,664,716 1,070,319 - 1,164,066
Repayment of note payable - (37,500) (50,000) -
------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 1,664,716 1,032,819 (50,000) 1,164,066
Net increase (decrease) in cash and cash
equivalents 208,604 (66,507) (498,965) 307,128
Cash and cash equivalents at
beginning of year 78,619 145,126 644,091 287,223
------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 287,223 $ 78,619 $ 145,126 $ 594,351
========================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 5,615 $ 26,823 $ 7,577 $ 1,748
========================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements
December 31, 1999
1. Business
Digital Descriptor Systems, Inc. incorporated in Delaware in 1994, develops,
assembles and markets computer installations consisting of hardware and
software, which capture video and scanned images, link the digitized images to
text and store the images and text on a computer database and transmit this
information to remote 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 during the years ended December 31, 1999, 1998 and 1997. Substantially
all of the Company's revenues are derived from government agencies.
On July 7, 1997, the Company commenced trading over-the-counter market for OTC
Bulletin Board Stocks as a result of the Company's stocks being delisted from
the NASDAQ Small Cap Market. The delisting was due to the Company's failure to
meet the maintenance standards to continue to be listed on the NASDAQ Small Cap
Market. On May 11, 1998, the Company terminated its certification under section
12(g) of the Securities Exchange Act of 1933 and suspended its duty to file
reports under Section 13 and 15(d) of the Securities and Exchange Act of 1934.
The Company intends to comply with the listing requirements of NASDAQ with the
filing of the financial statements contained herein.
2. Accounting Policies
Basis of Financial Statement Presentation
The financial statements of the Company have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the financial statements do not include any adjustments that might
be necessary should the Company be unable to continue in existence. The Company
has incurred substantial losses of approximately $1,206,000, $1,332,000 and
$1,019,000 during the years ending December 31, 1999, 1998 and 1997,
respectively, and $898,000 (unaudited) during the six months ended June 30,
2000. Losses are continuing through 2000. The Company's ability to meet its
future obligations is dependent upon the success of its products in the
marketplace and its ability to raise capital until the Company's products can
generate sufficient operating revenues. These factors raise doubt about the
Company's ability to
F-6
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
continue as a going concern. Management believes that actions presently being
taken will allow for the Company to continue as a going concern. Such actions
include the increasing revenues from operations, raising funds through
additional private placement offerings, generating funds from the exercise of
common stock purchase warrants and options, and continued efforts to reduce
costs.
Interim Financial Information
The financial statements and disclosures included herein for the six months
ended June 30, 2000 are unaudited. These financial statements and disclosures
have been prepared by the Company in accordance with generally accepted
accounting principles and include all adjustments, consisting of adjustments of
a normal and recurring nature, which in the opinion of management, are necessary
for a fair presentation of the Company's financial position and the results of
its operations and cash flows for this period.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents include highly liquid investments with original maturities of
three months or less. Cash equivalents are comprised of certificates of deposit
which have been restricted in connection with performance bonds required in
connection with certain contracts.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
F-7
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
Revenue Recognition
The Company licenses software under noncancelable license agreements. Revenues
from sale of software licenses to end users is recognized upon persuasive
evidence of an arrangement, delivery of the software to a customer,
determination that there are no significant post-delivery obligations and
collection of a fixed or determinable license fee is considered probable.
Equipment revenue is recognized upon delivery of the hardware. Maintenance
contracts require the Company to provide technical support and software updates
and upgrades to customer. Maintenance revenue is recognized ratably over the
term of the maintenance contract, typically one year.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets
ranging from 2 to 5 years.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, note
receivable, accounts payable and accrued expenses approximates their fair value
based on the liquidity of these financial instruments or based on their
short-term nature. becomes evident.
Software Development Costs
The Company capitalizes software development costs after technological
feasibility of the software is established and through the product's
availability for general release to the Company's customers. All costs incurred
in the research and development of new software products and costs incurred
prior to the establishment of technological feasibility are expensed as
incurred. During the year ended December 31, 1999, $413,604 was capitalized as
software development costs in connection with the Company's new product entitled
Compu-Scan, a computerized inkless fingerprint device. Amortization of such
costs will commence when the software becomes available for general release to
customers, which is anticipated in 2001.
F-8
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
Income Taxes
The Company provides for income taxes under the liability method. Deferred
income taxes reflect the net tax effects of temporary differences between
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Such differences result from
differences in the timing of recognition by the Company of certain expenses, and
the periods of amortization and depreciation of certain assets.
Accounting for Stock Options
Financial Accounting Standards Board issued Statement No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation. SFAS 123 provides companies with a
choice to follow the provisions of SFAS 123 in determination of stock-based
compensation expense or to continue with the provisions of Accounting Principles
Board Opinion No. 25 ("APB 25"). The Company has elected to follow the
provisions of APB 25. Under APB 25, if the exercise price of the Company's stock
options equals or exceeds the market price of the underlying Common Stock on the
date of grant, no compensation expense is recognized. The effect of applying
SFAS 123 to the Company's stock-based awards results in net loss and net loss
per common share that are disclosed on a pro forma basis in Note 7.
Net Loss Per Common Share
Basic loss per share is calculated by dividing the net loss by the weighted
average common shares outstanding for the period. Diluted loss per share is
calculated by dividing the net loss by the weighted average common shares
outstanding of the period plus the dilutive effect of common stock equivalents.
No exercise of common stock equivalents were assumed during any period because
the assumed exercise of these securities would be antidilutive.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a concentration
of credit risk principally consist of cash and cash equivalents, accounts
receivable and note receivable. Concentration of credit risk, with respect to
accounts and note receivable, is limited due to the Company's credit evaluation
process. The Company does not require collateral from its customers. The Company
sells its principal products to end users and distributors in the industry
principally in the United States.
F-9
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
Comprehensive Income (Loss)
The Company has adopted the Financial Accounting Standards Board Statement No.
130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 established standards
for reporting and presentation of comprehensive income (loss) and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. SFAS 130 was effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS 130 did not have a material impact on
the Company's results of operations or financial position.
3. Furniture and Equipment
Furniture and equipment consists of the following:
December 31 June 30,
1999 1998 1997 2000
----------------------------------------------
(Unaudited)
Furniture and fixtures $ 186,705 $ 185,611 $ 184,059 $ 186,705
Computer equipment 242,289 190,884 181,782 263,897
Vehicles 22,682 80,089 80,089 22,682
Leasehold improvements 33,813 33,813 32,378 34,977
----------------------------------------------
485,489 490,397 478,308 508,261
Less accumulated depreciation 217,804 311,250 318,253 268,400
----------------------------------------------
$ 267,685 $ 179,147 $ 160,055 $ 239,861
==============================================
4. Debt
During February 1999 through April 1999, the Company issued $225,000 of
convertible debentures to 12 investors. These short-term debentures required
interest at 12% per annum. The holder had the option of receiving payment at the
end of a 50-day period or to convert the debenture to common shares of the
Company at a specified conversion price. The $225,000 of debentures plus accrued
interest of $4,970 were converted to 766,567 common shares in connection with a
Reg A Offering (Note 10).
F-10
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements (continued)
4. Debt (continued)
During 1995 the Company entered into a $137,500 bank loan which matured in
September 1998. The loan required monthly installments of $4,167, plus interest
at 2% above the bank's variable commercial deposit rate. The note was
collateralized by a certificate of deposit. The note was repaid to the bank
during 1998. Interest expense in connection with this loan was approximately
$1,200 and $4,800 during the years ended December 31, 1998 and 1997,
respectively.
5. Commitments
The Company leases certain facilities, vehicles and office equipment under
operating lease agreements that expire through various dates through 2004.
Rental expense under such operating leases was approximately $108,000, $79,000
and $78,000 during the years ended December 31, 1999, 1998 and 1997,
respectively, and $35,000 (unaudited) during the six months ended June 30, 2000.
Future minimum lease payments subsequent to December 31, 1999 are as follows:
2000 $ 69,500
2001 177,800
2002 2,800
2003 2,800
2004 900
6. Consultants and Advisors Compensation Plan
During 1997, the Company adopted the Consultants and Advisors Compensation Plan
(the Plan). Persons eligible under this Plan include any consultant or advisor
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 an
equity transaction. The Company reserved 300,000 shares of common stock for
issuance under this Plan of which 211,357 shares have been awarded through
December 31, 1999. Awards may be granted in the form of stock options or stock
grants. No awards shall be made after December 31, 2001. During the years ended
December 31, 1999, 1998 and 1997, respectively, the Company granted 0, 176,357
and 35,000, respectively, of common shares to various consultants under this
Plan, and accordingly, compensation expense of $0, $61,009 and $24,883,
respectively, was recorded in connection with these grants based on the fair
market value of the Company's stock as of the award date. There were no grants
during the six months ended June 30, 2000.
F-11
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements (continued)
7. Stock Option Plans
The Company maintains the 1994 Restated Stock Option Plan (the 1994 Plan)
pursuant to which the Company reserved 300,000 shares of common stock. The
options granted have a term of ten years and are issued at or above the fair
market value of the underlying shares on the grant date. The Company also
maintains 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. Options granted under the Director Plan are
issued at or above the fair market value of the underlying shares on the grant
date. 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 grant date. The options expire ten years from
the date of the grant.
There were no stock options granted or canceled in 1997. The following is a
summary of option activity under all plans:
<TABLE>
<CAPTION>
Weighted
1996 Total Number Average
1994 Director of Exercise
Plan Plan Other Options Price
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996
and 1997 110,000 33,812 - 143,812 $3.30
Granted 90,000 - - 90,000 .33
Canceled (18,000) - - (18,000) .33
------------------------------------------------------------------------------
Outstanding at December 31, 1998 182,000 33,812 - 215,812 $ .33-$3.30
Granted - - 902,500 902,500 .37
Canceled (3,000) - (6,000) (9,000) $ .33-$ .37
------------------------------------------------------------------------------
Outstanding at December 31, 1999
and June 30, 2000 179,000 33,812 896,500 1,109,312 $ .33-$3.30
------------------------------------------------------------------------------
Exercisable options at December 31,
1999 and June 30, 2000 77,999 33,812 896,500 1,008,312
===============================================================
</TABLE>
At December 31, 1999, the remaining contractual life of outstanding options was
9.2 years.
F-12
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements (continued)
7. Stock Option Plans (continued)
Pro forma information regarding net loss and net loss per common shares
determined as if the Company accounted for stock options granted under the fair
value method of SFAS 123 is as follows:
<TABLE>
<CAPTION>
December 31 June 30,
1999 1998 1997 2000
-------------------------------------------------------------------------
(Unaudited)
Net loss
<S> <C> <C> <C> <C>
As reported $ (1,205,517) $ (1,331,931) $ (1,018,517) $ (898,229)
Pro forma $ (1,427,271) $ (1,389,866) $ (1,068,002) $ (921,082)
Net loss per share
As reported $ (.11) $ (.32) $ (.41) $ (.05)
Pro forma $ (.13) $ (.33) $ (.43) $ (.05)
</TABLE>
The Company estimated the fair value of stock options at the date of grant by
using a Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 1999, 1998 and 1997, as follows: risk-free interest
rate of 5.5% for all years; expected life of the option of 5 years; no expected
cash dividend payments on common stock, and volatility factors of the expected
market price of the Company's common stock of: .879, 1.478 and 1.972,
respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. As noted above, the Company's stock options are vested over an
extended period. In addition, option models require the input of highly
subjective assumptions including future stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in management's opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the fair
value of the Company's stock options.
F-13
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements (continued)
8. Income Taxes
At December 31, 1999, 1998 and 1997, the Company had federal net operating loss
carryforwards of approximately $7,633,000, $6,101,000 and $4,766,000,
respectively, to offset future federal taxable income expiring in various years
through 2019. The Company also has state net operating loss carryforwards of
$409,000, $312,000 and $194,000, respectively, to offset future state taxable
income expiring in various years through 2019. At December 31, 1999, 1998 and
1997, the Company recorded deferred tax assets of $3,005,120, $2,514,932 and
$1,950,655, respectively, which were reduced by a valuation allowance in the
same amount as the realization of these deferred tax assets are not certain.
The timing and extent in which the Company can utilize future tax deductions in
any year may be limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations due to certain ownership changes of the
Company.
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31
1999 1998 1997
-----------------------------------------------------
Deferred tax assets:
<S> <C> <C> <C>
Net operating loss carryforwards $ 3,003,756 $ 2,386,423 $ 1,814,118
Bad debt reserves 81,455 50,124 49,064
Inventory reserves 1,454 5,710 5,710
Depreciation 35,066 36,871 35,218
Accrued expenses - 4,590 24,365
Unearned compensation 40,830 31,214 22,180
-----------------------------------------------------
Total deferred tax assets 3,162,561 2,514,932 1,950,655
Deferred tax liabilities - - -
Software development (157,441) - -
-----------------------------------------------------
Total deferred tax asset 3,005,120 2,514,932 1,950,655
-----------------------------------------------------
Valuation allowance (3,005,120) (2,514,932) (1,950,655)
-----------------------------------------------------
Net deferred tax asset $ - $ - $ -
=====================================================
</TABLE>
F-14
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements (continued)
9. Related Party Transactions
During 1996 the Company loaned the President of the Company $125,000 evidenced
by a promissory note. The note bore interest at the prime rate plus 1%, and was
payable together with the principal on August 13, 1999. The Company's Board of
Directors agreed to extend the maturity date of this note indefinitely. At
December 31, 1999, 1998 and 1997 and June 30, 2000 accrued interest, included in
the note receivable in the accompanying balance sheets, was $28,650, $16,775,
$8,750, and $34,588 (unaudited), respectively.
10. Equity Transactions
During 1999, the Company offered up to 11,000,000 shares of its Common Stock at
an offering price of $.30 per share for a total proceeds of $3,300,000 in a Reg
A Offering. The minimum subscription was $10,000 for 33,344 shares. Through
December 31, 1999, 6,488,999 shares were sold generating net proceeds of
$1,664,716 ($1,946,699 less offering costs of $281,963) (Note 12).
During 1998 the Company sold 5,145,075 shares of its Common Stock in a Reg D
Offering generating net proceeds of $1,049,711.
During October 1998, the Company's Board of Directors approved the increase in
its authorized shares of its Common Stock from 10,000,000 to 50,000,000 shares.
During May 1997, the Company's shareholders approved the amended and restated
Certificate of Incorporation providing for the authorization of 1,000,000 shares
of Preferred Stock, par value $.01.
During 1997, in connection with a financing, the Company granted 120,000
warrants to a consultant at an exercise price of $.3125 per warrant. During
1998, 65,946 of such options were exercised generating gross proceeds of
$20,608. The remaining warrants expire in August 15, 2000.
F-15
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements (continued)
10. Equity Transactions (continued)
In connection with the Company's initial public offering in 1995, the Company
issued to each unit holder one Redeemable Class A Warrant and one Redeemable
Class B Warrant. The Warrants were immediately detachable and separately
transferable. Each Class A Warrant entitled the holder to purchase one share of
common stock for $6.00 subject to adjustment, during the four-year period
commencing one year from the date of the offering. Each Class B Warrant entitled
the holder to purchase one share of common stock for $7.25 subject to
adjustment, during the four-year period commencing one year from the date of the
offering. The Class A and Class B Warrants are subject to redemption by the
Company at any time, (within 30 days notice) at $.10 per warrant provided that
the per share closing bid price of the common stock exceeds 175% of the exercise
price for the Class A Warrant, and 200% of the exercise price for the Class B
Warrant, for at least 20 consecutive trading days. At December 31, 1999 there
are 1,483,750 Redeemable Class A Warrants outstanding and 1,483,750 Redeemable
Class B Warrants outstanding all of which expire on August 15, 2000 (Note 12).
During July 1994, the Chairman was granted the right to purchase 119,999 shares
of Common Stock at $.001 per share in connection with an employment agreement.
The Company recorded $120,000 in unearned compensation, based on the fair value
of the restricted stock at the date of issuance. Such unearned compensation has
amortized to expense in the statement of operations over the period of the
employment agreement. Amortization expense of $24,000 was recorded in each of
the years ended December 31, 1999, 1998 and 1997, respectively.
During May 1997, the Company's Board of Directors approved an Employee Stock
Purchase Plan whereby 100,000 shares of common stock were reserved.
11. Retirement Plan
The Company maintains a 401(k) Savings Plan (Plan) which permits employees to
make contributions to 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
six-year period. The Company did not make any contributions to the Savings Plan
during 2000, 1999, 1998 or 1997.
F-16
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements (continued)
12. Events "Unaudited" Subsequent to Date of Independent Auditors' Report
Subsequent to December 31, 1999, the Company sold an additional 4,426,485 shares
of common stock in connection with the Reg A Offering, generating additional
gross proceeds of $1,327,946.
During May 2000, the Company entered into a new five-year operating lease for
its office facility. Future minimum lease commitments in connection with this
lease are approximately $49,000 in 2000, $99,000 in 2001, $102,000 in 2002,
$105,000 in 2003, $108,000 in 2004 and $55,000 in 2005.
During July 2000, the Company's Board of Directors reduced the exercise price of
the Class A Warrants from $6.00 to $1.00, and reduced the exercise price of the
Class B Warrants from $7.50 to $1.50. The expiration date for the Class A and
Class B Warrants was extended to August 15, 2002.
F-17
<PAGE>
PART III.
Item 1 Index to Exhibits
Exhibit
Number Description
------ -----------
2.1 Certificate of Incorporation of the Company. Incorporated June 13, 1994.
2.2 Restated Articles of Incorporation of the Issuer, May 21, 1997.
2.3 Amended Articles of Incorporation.
2.4 By-Laws of the Company.
5.1 Form of Voting Trust Agreement between Norman Cohn and Garrett U. Cohn.
6.1 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.
6.2 Resolution to Security Agreement between Norman Cohn and Garrett U.
Cohn.
6.3 Employee 1997 Stock Option Plan adopted by the Board of Directors
February 24, 1998 and subject to stockholder ratification.
6.5 Warrant Agreement dated April 19, 1995 between the Company and Jay
Teitlebaum.
6.6 Warrant Agreement dated June 16, 1995 between the Company and Norman
Cohn. Incorporated by reference: Form 10-KSB, period December 31, 1996,
File No. 0-26604, Exhibit 4.4.
6.7 Lease for the Premises dated May 16, 2000.
6.8 Cohn Employment and Non-competition Agreement of Garrett U. Cohn dated
July 7, 1994. Incorporated by reference: Form 10-KSB, period December
31, 1996, File No. 0-26604, Exhibit 10.1.
6.9 Employment Agreement for Michael Pellegrino.
6.9.1 Employment Agreement for Robert Ott.
6.9.2 Employment Agreement for Randolph Hall.
16.0 Letter re change in certifying accountant.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Registrant: Digital Descriptor Systems, Inc.
<TABLE>
<CAPTION>
Signature Title Date
------------------ ------------------ ------------
<S> <C> <C>
By: /s/ Garrett U. Cohn Chief Executive Officer, September 20, 2000
------------------------ Director - Chairman
Garrett U. Cohn
By: /s/ Michael Pellegrino Chief Financial Officer, September 20, 2000
------------------------ Secretary and Director
Michael Pellegrino
By: /s/ Michael Ott Vice President and Director September 20, 2000
------------------------
Michael Ott
By: /s/ Myrna L. Cohn Ph.d Director September 20, 2000
------------------------
Myrna L. Cohn Ph.d
By: /s/ Randolph W. Hall Director September 20, 2000
------------------------
Randolph W. Hall
</TABLE>
