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As filed with the Securities and Exchange Commission on January 3, 2001
Reg. No. 0
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-SB
AMENDMENT NO. 2
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 30, 2000 - 19,806,612
$.001 par value per share
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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 and a Director, 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 both
textual information and visual images. The common problem in imaging technology
is how to record, store, process and retrieve information and images within the
same system. The Company's software programs utilize technology to link the
textual information with the 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. The Company's software also addresses different
information retrieval needs such as reproducing line ups and producing housing
badges (jails), bar coded wristbands for identification which facilitates
movement within jails and courts and storing and retrieving hand written and
computer generated document images within arrest records.
The Company anticipates that in the future it will need to adapt its
imaging technology software to new uses, such as security devices, employee
identification systems and inventory control systems. These potential
applications are currently in the discussion phase and there are no Company
resources budgeted for them at this time.
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. During the year to
date September 30, 2000, and the years ended 1999, 1998 and 1997, 99% of the
Company's revenues have been to domestic customers.
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. The Compu-Color Assessor Program contributed approximately
two percent of the Company's revenues in 1999. The market for this product is
minimal and has negative margins, therefore, the Company will be withdrawing
from this portion of the market place within the next twelve months.
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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.
To date, the Company has installed approximately 350 Compu-Capture(R)
systems.
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 the Company'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. The price range for the
Compu-Capture (R) 2000 is $12,000 to $45,000. The price range varies depending
on the size of the system ordered and the jurisdictions specific requirements.
Compu-Capture(R) 2000/FE
Compu-Capture(R) 2000/FE is the Company'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. The price range for the Compu-Capture (R) 2000/FE $16,000
to $50,000. The price range varies depending on the size of the system ordered
and the jurisdictions specific requirements.
Compu-Capture(R) 2000/API
The Company 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 the Company'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. The price range for
the Compu-Capture(R) 2000/API $16,000 to $50,000. The price range varies
depending on the size of the system ordered and the jurisdictions specific
requirements.
Compu-Capture(R) lite
The Company 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.
The base price for the Compu-Capture(R) lite is $3995.
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 that asks the witness basic questions which are then used to create the
composite face. The application consists of over 40,000 features, that 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. The Compu-Sketch
is presently installed in approximately 500 jurisdictions worldwide. The base
price for the Compu-Sketch(R) $2495.
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. The Company 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
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The Company's management believes that the type and amount of
information a company, agency or jurisdiction collects and generates is growing
at a fast pace. The variety of information collected includes hand written
documents, computer generated reports, mugshots, fingerprints, photographs,
video and digital images. The Company believes that most agencies have their
information stored in multiple formats and locations and is generally maintained
in a stand-alone environment (i.e. in file cabinets and non-networked computer
databases). In order for the information to be useful, it must be accurate and
easily accessible throughout the agency. Without an integrated information
management strategy, data integrity suffers while productivity diminishes. The
Company believes that today's technology trend is moving towards client server
applications in an open environment (i.e. allowing access to information stored
at multiple locations) because system server applications provides agencies with
a method to share data while driving computing costs down.
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. The price for the SI-3000
$45,000 to $285,000. which is reflected by the scalability of the final design
and multi-jurisdictional requirements, ie state or county correctional
locations.
Compu-Color(R) Assessor Program
The Compu-Color(R) Assessor Program has recently been discontinued by
the Company. A lack of a national imaging standard has made this an unprofitable
product to carry. This product 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 an 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 that was provided 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.
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New Products
FMS ("Fingerprint Matching System")
In February of 2000, the Company 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. The Harris agreement provides the Company with a worldwide,
non-exclusive license to use the Power Match Software (FMS). The Company is
subject to a royalty fee amounting to thirty percent (30%) of gross revenue for
each FMS sold, leased, bartered or exchanged by the Company. The royalty fee is
to be paid quarterly. The FMS is a fingerprint matching solution and can be
utilized either as a stand alone unit or in conjunction with the Compu-Scan
Device. (See Exhibit 10.1)
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.
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 entered into in a development contract with ISC/US, an
engineering firm having a specialized background in fingerprint technology, to
develop a computerized inkless fingerprint capture device called the Compu-Scan.
The commercialization of this technology has been the primary focus of the
Company's development activities in 1999. Under this agreement, the Company
granted ISC/US the funds (non reimbursable) to develop the Compu-Scan based on
certain specification requirements provided by the Company. The development
process of the Compu-Scan will not be deemed complete until FBI certification is
achieved. In return, the Company has worldwide rights to sell this product
without a royalty fee. FBI certification will be necessary to sell the
Compu-Scan device to the state, local and federal jurisdictions, but such
certification is not required to sell the device for commercial (non government)
uses. (See Exhibit 10.2).
The Company plans to distribute the Compu-Scan, a non-contact inkless
direct reader fingerprint system in conjunction with its Compu-Capture(R)
products. Additionally, the Company intends to market the non-contact inkless
fingerprint system for commercial applications, such as in the security and
biometric systems industry, which can incorporate the product in access control
devices. The Company's non-contact inkless fingerprint system electronically
reads and creates a digital image of a fingerprint. Competitive contact inkless
fingerprint capture devices record fingerprint images by rolling (contacting)
the fingers of a subject on the surface of an optical assembly, creating an
optical image of the fingerprint. The optical image is then converted into a
digital image by a photo-imaging detector. In contrast, though the Company's
non-contact device operates in a similar manner, there is no direct contact by
the finger to the device. The Compu-Scan captures the fingerprint in the
following manner: the finger is placed over an opening in the Compu-Scan which
projects a light onto the suspended finger upon which a camera captures the
resulting reflected fingerprint image.
Under federal regulation, law enforcement agencies in the United States
may only utilize fingerprint systems that have 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 distributed
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to law enforcement agencies in the United States. The Company can supply an
inkless non-contact fingerprint system prior to FBI certification for commercial
business use, for example, for ATM machines, biometric identification for
Universities, libraries, access control and any such commercial application
which does not require a rolled fingerprint match.
Concerning receiving the above referenced FBI certification; the
Company has completed five of the final seven tests required. Resubmission for
certification is anticipated during the first quarter 2001. 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 "IBM and other Partners" 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.
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 Alliances
Currently approximately one-half of the revenues from the Company's
sales are generated from business alliance relationships. One such business
alliance is with IBM. IBM establishes a business alliance with certain vendors
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that sell software applications that are compatible with IBM hardware. To
increase its sales through these alliances, the Company has directed a portion
of 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 using IBM compatible hardware. The Company believes that
part of its growth will continue to come through these business alliances.
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 making its products available 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, China and has ordered and installed a similar display to demonstrate
the Company's products there.
Greater Penetration of Existing Customers
In addition to seeking new customers, the Company has recently
established a marketing program to focus on the existing customer base, which is
potentially over 1,000 agencies. The Company believes with this addition that it
can now capitalize and generate increased revenues from its existing customers.
Due to the high market penetration by the Company's strategic
alliances, the Company believes that it will be able to eliminate the formal bid
process in many jurisdictions where such strategic alliances are located. 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
Depending on the availability of funds, the Company intends to continue
developing software interfaces to make its products compatible with new and
expanded versions of systems offered by IBM strategic alliances or other vendors
of law enforcement 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 revenues have
been from domestic customers. The only foreign business that has been done in
that time frame was with the government of the Bahamas. The sales for 1999, 1998
and 1997 were $3,040, $23,004 and $91,116 respectively, or an aggregate for the
three years of approximately $117,169.
Competition
The Company has multiple solutions being sold to the Criminal Justice
market with its competitive position varying by product.
The Company's Compu-Capture(R) system (video imaging mug shot solution),
currently has two national competitors, Printrak Inc., Anaheim, CA (recently
purchased by Motorola) which has approximately 200 video mugshot installations,
and ImageWare Systems of San Diego, California, which has approximately 65
installations.
The Compu-Scan 3000 Livescan device is not yet available to the industry
and consequently is behind its two main competitors, Digital Biometrics, Inc.,
and Identix Incorporated market inkless computerized fingerprint capture systems
on a national basis and each have received FBI certification. Both companies are
publicly held corporations and have been marketing their fingerprint systems for
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several years. The Company intends to market its Compu-Scan inkless fingerprint
system in conjunction with its Compu-Capture(R) system as well as in a network
or a stand-alone mode.
The Compu-Sketch is a computerized, non artistic, professional composite
system. Though there is significant competition is this field, the Company
believes that the Compu-Sketch provides an easier system to use plus offers a
larger data base than its competitors.
The Company's Compu-Scene product is not individually marketed. The Company
carries it in order to provide to its customers a more complete package of
products.
The SI-3000 Systems Integration solution has no direct competitors. The
SI3000 is marketed to large multi-jurisdiction counties.
The FMS solution resembles other fingerprint capture, store, retrieve and
compare software, but is different in both the size of the database it can store
and search, and in the scalability of hardware requirements. The Company plans
to sell the FMS as a stand-alone matching solution as well as to integrators,
and intends to package it with its Compu-Scan system.
Motorola's entrance into the Criminal Justice field by the purchase of
Printrak Inc., offers a suite of solutions from data transmission to MDT (patrol
cars) through bookings, fingerprint capture, mugshots and related systems.
Printrak's products are centered around records management, jail management and
AFIS solutions. AFIS is a large computerized installation used generally at the
state level, that compares fingerprints that are entered into the system from
different jurisdictions and identifies those prints within hours versus days and
weeks when done by hand. Printrak's main product by dollar volume is AFIS. The
Company believes that Motorola would most likely specialize in large
installations, where as the Company's target is the small and medium size
markets. Thus, we believe Motorola's entrance into the industry should have a
minimal negative affect on our Company and management believes Motorola's
entrance into the field will help advance product knowledge to the digitized
imaging market.
The Company believes its inkless non-contact technology is a superior
technology compared to the older generation inkless contact method. Our approach
does away with the expensive cost of replacing the glass platen as a result of
wear and tear, and the smearing of oily residue from fingers placed on the
platen and other contact related problems. In addition, the Company's device
provides for officer safety by limiting physical contact (the positioning of
suspects fingers by holding his hand in place) with the suspect in the
fingerprint capture sequence. The Company's inkless non-contact device is
substantially smaller than the inkless contact device (the size of two VCR's for
the non-contact devices compared to the size of a standard refrigerator for the
contact device). Our Compu-Scan 3000 also has no moving parts and therefore does
not need frequent recalibration as do the inkless contact devices. The price of
the Company's device will range between $25,000 and $45,000 depending on the
hardware order.
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.
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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 during the first
quarter of 2001.
ISC/US is a Delaware Corporation located in Ft. Lauderdale, Florida,
and is not related to any government agency. ISC/US also has development offices
in Hamburg, Germany.
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 non-contact inkless fingerprint capture device called the
Compu-Scan. Under this agreement, the Company paid ISC/US $635,000 in funds (non
reimbursable) to develop the Compu-Scan with the Company receiving worldwide
marketing and production rights to this product. The agreement provides that
there is no royalty payment involved. FBI certification will be necessary to
sell the Compu-Scan device to the United States state, local and federal
jurisdictions; however, FBI certification is not required to sell the device for
commercial uses. FBI certification is a seven- step process of which five steps
have been completed.
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 during the first quarter of 2001.
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.
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.
On September 29, 2000, the Company issued 1,000,000 shares of its
common stock for services performed. Such shares were valued at the fair market
value on the issuance date.
10
<PAGE>
Employees
The Company employs a total of 22 full time employees and no part time
employees.
11
<PAGE>
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
Compu-Scan has completed five of the seven necessary steps to gain FBI approval.
The next submission to the FBI should occur during the first quarter of 2001;
however, the Company cannot guarantee a date when the Compu-Scan will receive
certification.
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. Three such new products are the
Compu-Scan 3000, FMS (Fingerprint Matching System), and Compu Capture lite.
As discussed above the Compu-Scan has completed five of the final seven
necessary steps to gain FBI approval and it is estimated that no more than
$75,000 of additional development costs will be required to complete these final
two steps.
The FMS (Fingerprint Matching System) is a product that we recently
licensed from Harris Corporation, Melbourne, FL to sell its product to the
criminal justice field. The Company anticipates additional development costs of
approximately $100,000 which is required to prepare this product for market. The
FMS 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 believes that it will reach profitability during the first
half of year 2002. The Company estimates that it will need to raise $500,000 in
the next 12-18 months to cover its operating costs until it can reach positive
cash flow and profitability. The Company may need to raise funds through the
sale of its common stock, if funds provided by operations fall short. This
estimate considers current operating and marketing dollars plus the remaining
costs required to complete for market both the Compu-Scan and FMS solutions.
There is no guarantee that the Company will be able to raise the required funds
through the sale of its common stock.
One key to the Company reaching profitability is the approval of the
Compu-Scan product by the FBI. Though the Company cannot guarantee a date when
the Compu-Scan will receive certification, we are hopeful that the approval will
be given sometime within the next six months.
In conjunction with bringing the Compu-Scan online, the Company is
doing the following in its effort to reach profitability:
a. Cut costs in areas that add the least value to the Company.
b. Derive funds through investigating business alliances with other
companies who may wish to license the Compu-Scan device.
c. Increase revenues through the introduction of a scaled down version
of our Compu-Capture product. The Compu-Capture is a low cost
product to manufacture and a scaled down version would open up the
up a greater portion of the market place for potential sales.
12
<PAGE>
Results of Operations
Nine Months Ending September 30, 2000 vs. Nine Months Ending September 30, 1999
Revenues for the nine months ended September 30, 2000 were $2,197,007
versus $1,899,765 for the nine months ended September 30, 1999, an increase of
$297,242 or 16%. The Company generates its revenues through software licenses,
hardware, post customer support arrangements and other services. The increase in
the Company's software fees during the period is attributed to the continued
increase in the sales of the SI-3000 product. Maintenance revenues increased
$131,749 or 34% from the prior period primarily due to an increase in the
Company's customer's entering into such arrangements. Other revenues consist of
sales of supplies that the Company makes available to its customers, such as
wristbands, ID cards and print packs. Fewer customers ordered such items in the
nine months ended September 30, 2000 versus 1999, which accounted for the
decrease of $78,051 or 67%. Gross profit as a percentage of revenues decreased
from 67% for the nine months ended September 30, 1999 to 45% for the nine months
ended September 30, 2000 principally due to an increase in sales of the SI-3000
which carries a higher cost.
Costs and expenses increased $1,101,906 or 42% during the nine months
ended September 30, 2000 versus the nine months ended September 30, 1999. This
increase is due to an increase in general and administrative expenses in the
amount of $ $348,382. Additionally, research and development costs increased in
the amount of $154,466 due principally to the continued upgrading of the
Company's core software packages to 32 bit code. Costs of revenues during this
period increased as a result of the corresponding increase in revenues as
described above.
The net loss for the Company increased 90% for the nine months ended
September 30, 2000 to $1,505,156 from $790,492 for the nine months ended
September 30, 1999, principally due to a lower percentage increase of revenues
than the percentage increase of costs and expenses during the period.
Year Ended December 31, 1999 vs. Year Ended December 31, 1998
Revenues for the year ended December 31, 1999 were $2,847,183 versus
$2,659,701 for the year ended December 31, 1998, an increase of $187,482 or 7%.
The Company generates its revenues through software licenses, hardware, post
customer support arrangements and other services. The increase in the Company's
software and hardware revenues fees year over year is attributed to the
continued increase in the sales of the SI-3000 product line and an increase in
revenues relating to an upgrade of Compu-Capture. Maintenance revenues increased
$49,625 or 10% from the prior year primarily from an increase in the Company's
customer's entering into such arrangements. Other revenues consist of sales of
supplies that the Company makes available to its customers, such as wristbands,
ID cards and print packs. Fewer customers ordered such items in the year ended
December 31, 1999 versus the year ended December 31, 1998, which accounted for
the decrease of $204,326 or 56%. Gross profit as a percentage of revenues
modestly increased from 65% to 66% from fiscal year 1998 to fiscal year 1999.
Costs and expenses increased $61,068 or 2% during the year ended
December 31, 1999 versus the year ended December 31, 1998. This increase was
principally due to a modest increase in general and administrative costs of
$150,973, principally due to an increase in professional fees. This increase was
offset by a decrease in research and development costs of $187,386 or 30%.
During 1999, the Company capitalized $413,604 of software development costs
relating to Compu-Scan, as technological feasibility was reached, thus
accounting for the decrease in research and development costs from 1998 to 1999.
Sales and marketing costs increased by $92,412 or 10% from 1998 to 1999
principally due to the hiring of additional sales personnel. Depreciation and
amortization decreased by $59,082 or 43% from 1998 to 1999. This decrease is
principally due to the amortization of intangible assets in the amount of
$50,000 during 1998, which was not recurring in 1999.
13
<PAGE>
Year Ended December 31, 1998 vs. Year Ended December 31, 1997
Revenues for the year ended December 31, 1998 were $2,659,701 versus
$2,988,109 for the year ended December 31,1997, a decrease of $328,408 or 11%.
The Company generates its revenues through software licenses, hardware, post
customer support arrangements and other services. The decrease in the in
revenues during this period is attributed to a decrease in hardware revenues as
the Company continues to continue its trend to sell less hardware. Maintenance
revenues increased $99,894 or 26% from the prior year primarily from an increase
in the Company's customer's entering into such arrangements. Other revenues
consist of sales of supplies that the Company makes available to its customers,
such as wristbands, ID cards and print packs. Fewer customers ordered such items
in the year ended December 31, 1998 versus 1997, which accounted for the
decrease of $194,448 or 35%. Gross profit as a percentage of revenues modestly
changed from 66% for fiscal year 1998 versus 65% for fiscal year 1997.
Costs and expenses decreased $14,994 during the year ended December 31,
1998 versus the year ended December 31, 1997. This decrease was principally due
to a modest decrease in general and administrative costs of $71,919 due to a
decrease in legal and accounting fees and a decrease in sales and marketing of
$57,294. The reduction in sales and marketing is due to lower sales commissions
in 1998 versus 1997. Such decreases were offset by a $278,249 or 82% increase in
research and development costs relating to the development of Compu-Scan prior
to the product reaching technological feasibility.
Liquidity and Capital Resources
During the years ended December 31, 1999 and 1998 and during the nine
months ended September 30, 2000, the Company raised net capital of $1,664,716,
$1,070,319 and $1,164,066, respectively, through the issuance of the Company's
common stock. The Company has been dependent on private placements of its common
stock in order to sustain operations, as the Company's revenues have been
insufficient to cover the cost of revenues and operating expenses. The Company
believes that it will reach profitability during the first half of 2002. The
Company estimates that it will need to raise approximately $500,000 through the
sale of its common stock over the next 12 months to cover its operating costs
until it can reach positive cash flow and profitability. 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.
At September 30, 2000 the Company had assets of $1,659,448 compared to
$2,049,383 at December 31, 1999. Total stockholders' equity was $338,408 at
September 30, 2000 compared to a stockholders' equity of $445,498 at December
31, 1999, a decrease of $107,090. This decrease resulted from the issuance of
the Company's common stock totaling $1,378,640 off set by the net loss for the
nine months ended September 30, 2000 of $1,505,156 plus an adjustment for
amortization of unearned compensation of $14,000. At September 30, 2000, the
Company had a negative working capital of $491,054, versus negative working
capital of $396,500 at December 31, 1999. This change was primarily a result of
a decrease in cash, cash equivalents of $42,051 and a decrease in account
receivable of $389,918 offset by a decrease in current liabilities of $282,845.
Net cash used in operating activities for the nine months ended
September 30, 2000 and 1999 was $1,088,313 and $178,615, respectively. The
change in cash from operating activities of $909,698 was principally due to the
$804,664 increase in the net loss period over period. Net cash used in investing
activities was $33,702 and $517,768 for the nine months ended September 30, 2000
14
<PAGE>
and 1999, respectively, reflecting a change of $484,066. This decrease was a
result of increased software development costs of $373,604 during the 1999
period and the purchase of furniture and equipment resulting in a $110,496
change. Net cash from financing activities was $1,164,066 and $1,305,447 for the
nine months ended September 30, 2000 and 1999 respectively, reflecting a change
of $141,381. This increase was principally due to an increase in proceeds
received from the issuance of the Company's common stock period over period.
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.
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 $479,570 and
$19,210 for the years ended December 31, 1999 and 1998 respectively, reflecting
a change of $460,360. 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.
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.
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(3) Prior to This Offering
------------------- ----------------- ----------------------
Garrett U. Cohn
249 Willow Parkway
Buffalo Grove, IL 60089 1,381,000(1) 9.6%
Michael Pellegrino
33 Maple Lane
Brielle, NJ 08730 185,000 1.2%
15
<PAGE>
Michael Ott
26415 212th Avenue
Delhi, IA 52223 215,000 1.4%
Randolph Hall
505 Northridge Rd.
Collegeville, PA 19426 163,000 1.1%
Myrna Cohn Ph.d.
249 Willow Parkway
Buffalo Grove, IL 60089 31,000 .2%
Norman Cohn
200 Pine Tree Road
Radnor, PA 19087 940,000 6.5%
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).
(3) Includes all options which are exercisable within the next sixty (60) days.
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.
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.
<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ---------------------
<S> <C> <C>
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
</TABLE>
16
<PAGE>
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 Montclair State
University 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 the effective date of this registration statement.
17
<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 0 350,000 0 0
Secretary 1999 0 0 0 0 0 0 0
Michael Ott,
V.P/ Director 1999 110,000 0 0 0 180,000 0 0
Michael J. 1999 110,000 0 0 0 150,000 0 0
Pellegrino
V.P./Director
Randy Hall 1999 75,000 0 0 0 150,000 0 0
V.P.
Total: $455,000 $0 $0 $0 830,000 $0 $0
All Executive Officers
As a Group $455,000 $0 $0 $0 830,000 $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> <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.
18
<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 100%
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 100% 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 100% 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).
19
<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. The note continues to accrue
interest.
The Company's Audit Committee will review any future transactions with
affiliates and make its recommendation to the Board of Directors to ensure such
transactions are at arms length.
The Company's Board will follow the advice of the Audit Committee on
transactions that could have the potential appearance of not being at arms
length transaction.
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.
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 $1.00 per share and expire on August 15, 2002. The Class B Warrants
have an exercise price of $1.50 per share and expire on August 15, 2002. The
Company has reserved an equal amount of shares against these warrants.
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
20
<PAGE>
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 shares 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 19,806,612 on September 30, 2000 excludes the
authorized and unissued Common 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.
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.
21
<PAGE>
Transfer Agent
The Company's transfer agent is Continental Stock Transfer and Trust
Company located at Two Broadway New York, New York, 10004.
22
<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. The source of the
quotes is AOL Ticker.
Common Stock
Bid Price
-------------------------------
Calendar Year 1998 Low High
--------------------------- ----- -----
First Quarter $0.38 $0.38
Second Quarter $1.50 $2.00
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 $0.21 $0.40
Fourth Quarter $0.08 $0.22
As of September 30, 2000, there were approximately 19,806,612 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.
23
<PAGE>
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.
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 8, 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
raise 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.
NAME SHARES
SCOTT LAURENCE 54,625
SCOTT LAURENCE 58,333
STUART BECK 156,493
NATIONAL INVESTMENT RESOURCES 30,000
THE ADVOCACY GROUP 123,716
ALLIANCE EQUITIES, INC 166,666
ALLIANCE EQUITIES, INC 166,666
AJW PARTNERS LLC 166,667
NEW MILLENIUM CAPITAL PARTNERS II 166,667
EQUILIBRIUM EQUITY 166,667
AJW PARTNERS LLC 166,667
NEW MILLENIUM CAPITAL PARTNERS II 166,667
MARVIN WELSCH IRA 33,334
DAVID M. GOODMAN, M.D. 100,000
BLUE CREED VENTURES, LLC 166,670
THE RNR 1999 TRUST 83,335
BALALLAN LIMITED 83,335
THE ADVOCACY GROUP 100,000
AJW PARTNERS LLC 333,333
NEW MILLENIUM CAPITAL PARTNERS II 333,333
ROBERT GOWELL 34,000
ANTHONY VOLLARO 34,000
SANDRA EPSTEIN 33,333
STUART BECK 49,853
ROBERT GOWELL 41,000
AJW PARTNERS LLC 333,333
NEW MILLENIUM CAPITAL PARTNERS II 333,333
DAVID M. GOODMAN, M.D. 500,000
AJW PARTNERS LLC 442,073
NEW MILLENIUM CAPITAL PARTNERS II 442,073
TOTAL 5,066,172
24
<PAGE>
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.
25
<PAGE>
PART F/S:
INDEX TO FINANCIAL STATEMENTS
Contents
Report of Independent Auditors............................................F-
Audited Financial Statements
Balance Sheets............................................................F-
Statements of Operations..................................................F-
Statements of Shareholders' Equity (Deficit)..............................F-
Statements of Cash Flows..................................................F-
Notes to Financial Statements.............................................F-
<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-2
<PAGE>
Digital Descriptor Systems, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31 September 30,
1999 1998 1997 2000
------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 177,223 $ 78,619 $ 145,126 $ 219,274
Restricted cash 110,000 _ _ 110,000
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 $122,000 (unaudited) in 2000,
respectively 856,595 889,183 863,898 466,677
Inventories 48,693 47,724 35,413 29,655
Prepaid expenses 13,874 19,112 18,686 3,378
------------------------------------------------------------------
Total current assets 1,207,385 1,035,638 1,156,665 829,986
Note and interest receivable - Officer 153,650 141,775 133,750 162,556
Software development costs, at cost 413,604 - - 413,604
Furniture and equipment, at cost, net 267,685 179,147 160,055 216,528
Deposits and other assets 7,059 16,345 98,275 36,774
------------------------------------------------------------------
$ 2,049,383 $ 1,372,905 $ 1,548,745 $ 1,659,448
==================================================================
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 121,137 $ 264,675 $ 400,659 $ 165,062
Accrued expenses 164,814 93,114 259,672 37,684
Deferred income 1,317,934 1,052,817 712,012 1,118,294
Note payable - - 37,500 -
------------------------------------------------------------------
Total current liabilities 1,603,885 1,410,606 1,409,843 1,321,040
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
September 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
19,806,612 at September 30, 2000 (unaudited) 14,380 7,891 2,504 19,806
Additional paid-in capital 12,957,544 11,299,317 10,173,376 14,336,184
Unearned compensation (14,000) (38,000) (62,000) -
Accumulated deficit (12,512,426) (11,306,909) (9,974,978) (14,017,582)
------------------------------------------------------------------
Total shareholders' equity (deficit) 445,498 (37,701) 138,902 338,408
------------------------------------------------------------------
Total liabilities and shareholders' equity
(deficit) $ 2,049,383 $ 1,372,905 $ 1,548,745 $ 1,659,448
==================================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Digital Descriptor Systems, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31 September 30
1999 1998 1997 2000 1999
-----------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Software $ 1,189,439 $ 1,002,366 $ 943,580 $ 957,189 $ 771,338
Hardware 722,040 623,712 977,363 451,621 475,251
Maintenance 539,034 489,409 389,515 524,249 392,500
Consulting 236,956 180,174 119,163 224,935 143,612
Other 159,714 364,040 558,488 39,013 117,064
-----------------------------------------------------------------------------------
2,847,183 2,659,701 2,988,109 2,197,007 1,899,765
Costs and expenses:
Cost of revenues 987,931 887,939 1,038,212 1,192,714 622,201
General and administrative 1,593,846 1,442,873 1,514,792 1,421,279 1,072,897
Sales and marketing 984,691 892,279 949,573 656,883 657,869
Research and development 429,599 616,985 338,736 363,433 208,967
Depreciation and amortization 75,553 134,635 189,319 75,953 52,530
Other (income) expense (18,920) 16,921 (24,006) (8,099) (14,207)
-----------------------------------------------------------------------------------
4,052,700 3,991,632 4,006,626 3,702,163 2,600,257
-----------------------------------------------------------------------------------
Net loss $ (1,205,517) $ (1,331,931) $ (1,018,517) $ (1,505,156) (790,492)
===================================================================================
Net loss per common share (basic
and diluted) $ (.11) $ (.32) $ (.41) $ (.08) $ (.07)
===================================================================================
Weighted average number of common shares
outstanding (basic and diluted)
10,934,900 4,161,270 2,492,147 18,083,970 9,761,262
===================================================================================
</TABLE>
See accompanying notes.
F-4
<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
Issuance of common stock for services
(unaudited) 1,000,000 1,000 219,000 220,000
Amortization of unearned compensation
(unaudited) 14,000 14,000
Net loss (unaudited) (1,505,156) (1,505,156)
--------------------------------------------------------------------------------------
Balance at September 30, 2000 (unaudited) 19,806,612 $ 19,806 $ 14,336,184 $ - $(14,017,582) $ 338,408
======================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Digital Descriptor Systems, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31 September 30
1999 1998 1997 2000 1999
--------------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C>
Net loss $(1,205,517) $ (1,331,931) $ (1,018,517) $ (1,505,156) $ (700,492)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 75,553 134,635 189,319 75,953 52,530
Compensation expense in connection with
issuance of common stock - 61,009 24,883 220,000 -
Amortization of unearned compensation 24,000 24,000 24,000 14,000 18,000
Changes in assets and liabilities:
Accounts receivable 32,588 (25,285) (453,094) 389,918 38,790
Inventories (969) (12,311) 109,623 19,038 (25,108)
Prepaid expenses and other assets 14,524 31,504 42,843 (19,221) 21,211
Accounts payable (143,538) (135,984) 198,576 43,925 (144,468)
Accrued expenses 71,700 (166,558) 174,826 (127,130) 200,059
Deferred income 265,117 340,805 265,168 (199,640) 360,863
--------------------------------------------------------------------------------
Net cash used in operating activities (866,542) (1,080,116) (442,373) (1,088,313) (178,615)
Cash flows from investing activities:
Purchase of furniture and equipment (164,091) (103,727) (24,675) (24,796) (135,258)
Increase in software development costs (413,604) - - - (373,604)
Increase in officer note receivable (11,875) (8,025) (8,750) (8,906) (8,906)
Proceeds from sale of short-term investments,
including restricted cash 110,000 92,542 26,833 - -
--------------------------------------------------------------------------------
Net cash used in investing activities (479,570) (19,210) (6,592) (33,702) (517,768)
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,664,716 1,070,319 - 1,164,066 1,305,447
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 1,305,447
Net increase (decrease) in cash and cash
equivalents 208,604 (66,507) (498,965) 42,051 609,064
Cash and cash equivalents at
beginning of year 78,619 145,126 644,091 177,223 78,619
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 177,223 $ 78,619 $ 145,126 $ 219,274 687,683
================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 5,615 $ 26,823 $ 7,577 $ 1,748 $ 5,054
================================================================================
Conversion of debentures and related
accrued interest to common stock $ 229,970 $ - $ - $ - $ 229,970
================================================================================
</TABLE>
See accompanying notes.
F-6
<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 never been profitable and has incurred substantial losses from operations of
approximately $1,206,000, $1,332,000 and $1,019,000 during the years ending
December 31, 1999, 1998 and 1997, respectively, and $1,505,000 (unaudited)
during the nine months ended September 30, 2000. Losses from operations are
continuing through 2000 and the Company anticipates that it will require
additional financing in 2000, which may not be readily avaiable. These factors
raise substantial doubt about the Company's ability to
F-7
<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. The Company is
expanding the sale and acceptance of its core business solutions by hiring
additional sales resources and increased marketing activities. The Company is
also pursuing FBI Certification and introduction to the marketplace of the
Compu-Scan 3000 fingerprint capturing device.
Management is also actively working to raise capital through the sale of its
common stock and the exercise of its common stock purchase warrants and options
in the next twelve months to cover its operating costs. Additionally, the
following plans have been put in place to continue as a going concern: cutting
costs in areas that add the least value to the Company; deriving funds through
the establishment of business alliances with other companies who may wish to
license the Compu-Scan device; and increasing revenues through the introduction
of a scaled down version of the Compu-Capture product. There can be no
assurances that management will be successful in these planned capital raising
efforts or cost-cutting measures.
Interim Financial Information
The financial statements and disclosures included herein for the nine months
ended September 30, 2000 and 1999 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.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
F-8
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
Revenue Recognition
The Company derives revenue from the sale of hardware, software, post customer
support(PCS), and other related services. PCS includes telephone support, bug
fixes, and rights to upgrades on a when-and-if-available basis. Other related
services include basic consulting and training. Included with the hardware is
software that is not considered to be incidental. Revenue from transactions with
customers where the software component is not considered to be incidental is
allocated between the hardware and software components based on the relative
fair value of the respective components.
The Company also derives revenue from the sale of software without a related
hardware component. Revenue allocable to software components is further
allocated to the individual deliverable elements of the software portion of the
arrangement such as PCS and other services. In arrangements that include rights
to PCS for the software and/or other services, the software component
arrangement fee is allocated among each deliverable based on the relative fair
value of each of the deliverables determined using vendor-specific objective
evidence, which has been established by the separate sales of these
deliverables.
The Company recognizes the revenue allocable to hardware and software licenses
upon delivery of the product to the end-user, unless the fee is not fixed or
determinable or collectibility is not probable. If collectibility is not
considered probable, revenue is recognized when the fee is collected. Revenue
allocable to PCS is recognized on a straight-line basis over the period the PCS
is provided. Revenue allocable to other services is recognized as the services
are provided.
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.
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. Technological
feasibility of the Company's software development costs is determined when the
planning, designing, coding, and testing activities are completed, and the
Company has established that the product can be produced to meet its design
specifications. 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. No additional costs were incurred or capitalized during the nine months
ended September 30, 2000 as the product is near completion and is pending FBI
approval.
Amortization of software development costs will be calculated as the greater of
the amount computed using (i) the ratio that current gross revenues for a
product bear to the total of current and anticipated future gross revenues of
that product or (ii) the straight-line method over the remaining estimated
economic life of the product, including the period being reported on.
Amortization of such costs will commence when the software becomes available for
general release to customers, which is anticipated in 2001. The Company reviews
the unamortized software development costs at each balance sheet date and, if
necessary, will write down the balance to net realizable value if the
unamortized costs exceed the net realizable value of the asset.
F-9
<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-10
<PAGE>
Digital Descriptor Systems, Inc.
Notes to Financial Statements (continued)
2. Accounting Policies (continued)
Long-Lived Assets
The Company evaluates impairment of its intangible and other long-lived assets
in accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. In making such determination, management compares the estimated
future cash flows, on an undiscounted basis, of the underlying operations or
assets with their carrying value to determine if any impairment exists. If an
impairment exists, any adjustment is determined by comparing the carrying amount
to the fair value of the impaired asset.
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 September 30,
1999 1998 1997 2000
-----------------------------------------------
(Unaudited)
Furniture and fixtures $ 186,705 $ 185,611 $ 184,059 $ 186,705
Computer equipment 242,289 190,884 181,782 265,922
Vehicles 22,682 80,089 80,089 22,682
Leasehold improvements 33,813 33,813 32,378 34,977
----------------------------------------------
485,489 490,397 478,308 510,286
Less accumulated depreciation 217,804 311,250 318,253 293,758
----------------------------------------------
$ 267,685 $ 179,147 $ 160,055 $ 216,528
==============================================
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-11
<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 nine months ended September 30, 2000.
F-12
<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 September 30, 2000 179,000 33,812 896,500 1,109,312 $ .33-$3.30
------------------------------------------------------------------------------
Exercisable options at December 31,
1999 and September 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-13
<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 September 30,
1999 1998 1997 2000
-----------------------------------------------------------------------
(Unaudited)
Net loss
<S> <C> <C> <C> <C>
As reported $ (1,205,517) $ (1,331,931) $ (1,018,517) $(1,505,156)
Pro forma $ (1,427,271) $ (1,389,866) $ (1,068,002) $(1,671,472)
Net loss per share
As reported $ (.11) $ (.32) $ (.41) $ (.08)
Pro forma $ (.13) $ (.33) $ (.43) $ (.09)
</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-14
<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-15
<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 September 30, 2000 accrued interest,
included in the note receivable in the accompanying balance sheets, was $28,650,
$16,775, $8,750, and $37,556 (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 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-16
<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-17
<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.
On September 29, 2000, the Company issued 1,000,000 shares of its common stock
for services performed. Such shares were valued at the fair market value on the
issuance date.
F-18
<PAGE>
PART III.
Item 1 Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
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.
6.18 * 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.
10.1 ** Software License and Royalty Agreement between Company and Harris Corporation
10.2 ** Agreement for Development of Finger/Slap Scanner Product between the Company and
ISC/U.S., Inc.
16.0 * Letter re change in certifying accountant.
</TABLE>
------
* Previously filed on Form 10-SB September 20, 2000, File No. 0-26604
**Previously filed on Form 10-SB/A November 17, 2000, File No. 0-26604
<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, January 3, 2001
--------------------------- Director - Chairman
Garrett U. Cohn
By: /s/ Michael Pellegrino Chief Financial Officer, January 3, 2001
------------------------ Secretary and Director
Michael Pellegrino
By: /s/ Michael Ott Vice President and Director January 3, 2001
-------------------------
Michael Ott
By: /s/ Myrna L. Cohn Ph.d Director January 3, 2001
-----------------------
Myrna L. Cohn Ph.d
</TABLE>
<PAGE>
DIGITAL DESCRIPTOR SYSTEMS
RESPONSES TO COMMENT LETTER DATED NOVEMBER 30, 2000
FORM 10SB - AMENDMENT 1
General
1. In the next amendment please remove the stock symbols of other companies
that you mention. See, for example, pages 8, 9 and 12.
Stock symbols have been removed.
Compu-Sketch, page 4
2. We note that you estimate there are approximately 100,000 locations where
Compu-Sketch can be placed. Please supplementally provide the basis for this
estimate.
The reference to 100,000 locations was removed. The number of locations was
an internal estimate. Since there is no empirical support, we have removed
that reference.
Compu-Scan 3000, page 6
3. Please disclose the amount of funds granted to ISC/US to develop Compu-Scan
under this subheading or on page 10 under the heading "Research and
Development Costs."
$635,000 has been paid to ISC/US to develop Compu-Scan. This was added to
Research and Development on page 10.
Competition, page 8
4. Please substantiate or delete the disclosure in the second sentence of the
second paragraph.
The second sentence has been deleted.
5. Please confirm that systems competing with Compu-Capture do not interface
with other systems, otherwise delete the last sentence of the second
paragraph.
The last sentence of the second paragraph has been deleted.
Competition, page 9
6. Please substantiate or delete the disclosure that "Compu-Sketch is the first
computerized, non artistic professional composite system offered.
The reference to the term "first" has been deleted.
<PAGE>
7. Please provide a price range for the Compu-Scan 3000 rather than saying its
price will be "competitive."
The price range for Compu-Scan 3000 is $25,000 - $45,000 depending on
Hardware has been added to Paragraph 7, Page 9.
8. Please substantiate or delete the disclosure that "the cost to operate (the
Compu-Scan 3000) will be less expensive due to its simple mechanical
design."
The reference has been deleted.
Management Discussion and Analysis or Plan of Operations, page 12
-----------------------------------------------------------------
9. We note that the safe harbor for forward-looking statements does not apply
to this filing. Therefore you may want to delete the last sentence of the
sixth paragraph.
The last sentence has been deleted.
10. Reference is made to the fifth and sixth paragraphs under this section.
Revise the discussions to state that there is no guarantee that you will be
able to raise approximately $500,000 through the sale of your common stock
in the next 12 months and that there is no guarantee that Compu-Scan will
add one million dollars in revenues in the first twelve months on the
market.
The reference to one million in revenues is deleted; see Page 12, last
sentence in Paragraph 5.
Liquidity and Capital Resources, pages 14 and 15
11. Expand your discussion to include an analysis and quantification of the
reasons for changes in revenues and expenses for the latest interim required
to be presented in the filing. Also, update the liquidity section to include
a discussion for the most interim recent period. See Item 303 of Regulation
S-B.
This section has been modified to include an analysis and quantification of
the reasons for changes in revenues and expenses for the September 30, 2000
and 1999 interim financial statements included in this filing. The liquidity
section has also been updated for the most recent interim period.
Executive Compensation, page 17
12. We reissue comment 20 from our October 12, 2000 letter. Pursuant to Item
402(b)(2)(iv)(B) the sum of the number of securities underlying stock
options granted should be disclosed in column (g).
Information has been added - See Schedule on Page 18.
<PAGE>
Financial Statement
Balance Sheets, page F-2
Statements of Cash Flows, page F-3
Note 2 - Accounting Policies, Cash Equivalents, pages F-7
13. Reference is made to comment 34. We note that the Company includes
certificates of deposit restricted in connection with performance bonds
required on certain contracts as cash equivalents. Regardless of when the
restriction lapsed, the amounts were restricted at year-end; therefore,
revise the balance sheets and the statements of cash flows to present
restricted cash as a separate line item outside of cash and cash equivalents
as previously requested. In addition, revise note 2 as appropriate. See
Financial Reporting Codification 203. If you continue to disagree with us,
advise us of the Accounting literature that supports your treatment.
The balance sheets and statements of cash flow have been revised to present
restricted cash as separate line items outside of cash and cash equivalents
as previously requested. Note 2 has also been revised as appropriate.
Note 2 - Accounting Policies
Basis of Financial Statement Presentation, pages F-6 and F-7
------------------------------------------------------------
14. As previously requested, expand the note to disclose the specifics of
management's viable plan to overcome its financial difficulties as is
required by Section 607.02 of the Financial Reporting Codification.
The note has been expanded to disclose the specifics of management's viable
plan to overcome its financial difficulties.
General
15. Update your financial statements and related information in accordance with
Item 310(g) of Regulation S-B. You are also reminded to include comparative
interim information where required.
The September 30, 2000 and 1999 financial statements and related information
have been provided in accordance with Item 310(g) of Regulation S-B.
<PAGE>
RESPONSES TO COMMENT LETTER DATED NOVEMBER 3, 2000
Revenue Recognition
16. Revise your note to discuss the following:
o How you allocate the total fee to each of the elements included in your
multiple elements arrangements. We note your arrangements include
software, hardware, PCS, and consulting services.
o How you establish vendor-specific objective evidence of fair value for
each of the elements. Refer to Paragraph 10 of SOP 97-2.
The footnote revisions have been provided on Page F-7.
17. Tell us whether you consider the services you provide to be essential to the
functionality of the software or represent significant production,
modification or customization of the software. Provide us a company specific
analysis of the criteria of Paragraph 70 and 71 of SOP 97-2 to support your
conclusion. Tell us the duration of a typical engagement,the number of
people who perform the consultation or installation, and the level of their
technical sophistication.
We have concluded that the services provided are not essential to the
software's functionality nor do they represent significant production,
modification or customization. The Company's software is off-the-shelf and
does not require any alterations to the features and functionality of the
software; complex interfaces are not necessary for the software to be
functional in the customer's environment; timing of payments is not
coincident with performance of services; and milestones or custom-specific
acceptance criteria do not affect the realizabiltiy of the software license
fee. Furthermore, if a customer requires modifications to be made to the
off-the-shelf software, such services are available from other vendors. A
typical engagement lasts for 2-5 days, depending on the size of the
installation with one trained individual to perform the installation. The
individual responsible for the installation is familiar with major
networking software products, (e.g. Novell, Windows-NT).
18. Explain to us why it is appropriate to recognize the hardware revenue prior
to the installation of it and the software. Refer to paragraph 13 of SOP
97-2.
The policy note has been revised to clarify when hardware revenue is
recognized in accordance with Paragraph 13 of SOP 97-2.
<PAGE>
19. Provide us an analysis and examples of the separate sales of each of your
elements that you used to establish VSOE. Tell us if you offer your
customers a discount on any of these elements. If so, tell us how you
determine the discount amount. For example, do all customers receive the
same discount? If not, how does the discount vary by customer? Provide us a
quantitative and qualitative analysis of the discounts offered based upon
distinguishing characteristics of those customers receiving the discount
such as the type, size or prestige of the customer, the size/volume of the
sale, etc. Tell us how these discounts impact your determination of VSOE for
your elements.
A typical sale for our products is described below. Each of the elements is
based on vendor-specific objective evidence of fair value as each of the
elements is priced and sold separately. The Company does not offer any
discounts on any of these elements. During 1999 the Company sold licenses at
varying prices as described under Products and Services in this Form 10SB on
Page 3. Hardware revenues are determinable from outside vendors and the
Company generally charges a mark-up of 7%. Post Customer Support
arrangements are determined based on 15% of the license fee or $1,500,
whichever is greater, and the pricing of such arrangements have been fixed
for the past 5 years.
20. Tell us whether you offer a right of return or price protection to your
customers. If so, tell us how revenue recognition policy is in compliance
with each of the criteria of paragraphs 6 and 8 of SFAS 48.
The Company does not offer a right of return or price protection to its
customers.
21. Tell us the standard payment terms you offer your customers and whether you
offer extended payment terms. If so, explain how your fees are fixed or
determinable in accordance with paragraphs 27 and 28 of SOP 97-2. Also, tell
us the amount of accounts receivable that have been subsequently collected
in cash. Tell us your basis for assuming collectibility for all significant
amounts not collected.
The Company's fees are fixed and determinable. Customers are generally
required to pay one-third at the signing of an agreement, one-third upon the
delivery of the hardware and software and one-third upon acceptance of the
product. Customers are not offered extended payment terms. Accordingly,
revenues are recognized upon the satisfaction of the revenue recognition
criteria of SOP 97-2. Approximately 80% of the Company's gross outstanding
accounts receivable at December 31, 1999 has been collected through
September 30, 2000. The remaining amount was adequately reserved at December
31, 1999.
22. Provide us an analysis of deferred revenue based on the type of revenue
and/or the reason deferred.
The Company's deferred income is comprised of customer deposits and PCS
amounts. Customer deposits represent amounts received from the customers
prior to achieving the Company's revenue recognition criteria as described
in Note 2 on Page F-8. PCS represents amounts paid to the Company in
connection with the Company providing technical support, software upgrades
and updates to its customers Such revenue is recognized ratably over the
term of the underlying contract, generally one year. At December 31, 1999,
approximately 60% of deferred income relates to customer deposits and the
remaining 40% relates to PCS. The Company will consider presenting customer
deposits as a separate line item in its December 31, 2000 financial
statements based on materiality.
