FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
--------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number 0-21384
Digital Descriptor Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2770048
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
2150 Highway 35, Sea Girt, New Jersey 08750
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (732) 359-0260
--------------
----------------------------------------------------------------------------
(former, name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock May 14, 2004
--------------------- ------------------
$.001 par value 145,958,423 Shares
Transitional Small Business Disclosure Format Yes ___ No _X_
-1-
FORM 10-QSB
Securities and Exchange Commission
Washington, D.C. 20549
DIGITAL DESCRIPTOR SYSTEMS, INC.
Index
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at March 31, 2004 (Unaudited) and December 31,
2003
Statements of Operations for the three months ended March 31,
2004 and 2003 (Unaudited)
Statements of Cash Flows for the three months ended March 31,
2004 and 2003 (Unaudited)
Notes to Financial Statements - March 31, 2004 (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Control and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
-2-
SIGNATURES
-3-
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DIGITAL DESCRIPTOR SYSTEMS, INC.
BALANCE SHEETS
March 31 December 31
2004 2003
---------- ----------
(Unaudited)
ASSETS
Current assets:
Cash $ 60,973 $ 51,264
Restricted cash 569 593
Accounts receivable, less allowance for uncollectible
accounts of $37,618 (unaudited) and $46,841 in
2004 and 2003, respectively 73,144 136,329
Prepaid expenses 61,240 63,600
Debt discount and deferred financing costs 212,006 300,430
---------- ----------
Total current assets 407,932 552,216
Deposits and other assets 1,730 1,730
---------- ----------
Total assets $ 409,662 $ 553,946
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 223,241 $ 214,771
Accrued expenses 291,521 306,029
Accrued interest 418,415 353,214
Due to officer and director 16,290 55,620
Deferred income 339,597 382,878
Convertible debentures 1,891,337 1,846,837
---------- ----------
Total current liabilities 3,180,401 3,159,349
Total liabilities $3,180,401 $3,159,349
---------- ----------
-4-
DIGITAL DESCRIPTOR SYSTEMS, INC.
BALANCE SHEETS (continued)
March 31 December 31
2004 2003
------------ ------------
(Unaudited)
Shareholders' deficiency:
Preferred Stock, $.01 par value, authorized shares -
1,000,000; issued and outstanding - none -- --
Common Stock, $.001 par value, authorized shares -
150,000,000; issued and outstanding shares - 145,958,423
and 115,958,423 at March 31, 2004 and December 31, 2003,
respectively 145,958 115,958
Additional paid-in capital 17,684,600 17,627,600
Accumulated deficit (20,601,297) (20,348,961)
------------ ------------
Total shareholder's deficiency (2,770,739) (2,605,403)
------------ ------------
Total liabilities and shareholders' deficiency $ 409,662 $ 553,946
============ ============
The accompanying notes are an integral part of these financial statements.
-5-
DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
-------------------------------
March 31 March 31
2004 2003
------------- -------------
Revenues:
Software $ 20,089 $ 52,225
Hardware 3,917 47,401
Maintenance 78,100 96,181
Other 997 14,891
------------- -------------
103,102 210,698
Costs and expenses:
Cost of revenues 4,948 23,226
General and administrative 114,793 164,472
Sales and marketing 18,807 58,947
Research and development 9,318 21,329
Depreciation and amortization -- 3,597
Interest and amortization of
deferred debt costs 211,445 83,260
Other (income) expense, net (3,873) (15,146)
------------- -------------
355,438 339,685
------------- -------------
Net loss $ (252,336) $ (128,987)
============= =============
Net loss per common share $ (0.00) $ (0.01)
============= =============
(basic and diluted)
Weighted average number of common shares outstanding:
Basic and diluted 143,980,401 73,268,847
The accompanying notes are an integral part of these financial statements
-6-
DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
-----------------------
March 31 March 31
2004 2003
--------- ---------
Cash flows from operating activities:
Net loss ($252,336) ($128,987)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization -- 3,597
Amortization of deferred financing costs and debt discounts
related to the issuance of warrants and the beneficial
conversion feature of convertible debentures 146,244 43,070
Changes in operating assets and liabilities:
Accounts receivable 63,185 (107,011)
Inventory -- (10,044)
Prepaid expenses, deposits and other assets 2,360 1,717
Accounts payable 8,469 (86,113)
Accrued expenses (14,508) (75,627)
Accrued interest 65,201 40,143
Deferred income (43,280) 57,539
--------- ---------
Net cash used in operating activities (24,665) (261,714)
--------- ---------
Cash flows from investing activities:
Increase in restricted cash 24 23
--------- ---------
Net cash provided in investing activities 24 23
Cash flows from financing activities:
Proceeds from issuance of convertible debentures 31,680 297,406
Due to officer and director 2,670 --
Repayment of equipment loan -- (1,816)
--------- ---------
Net cash provided by financing activities 34,350 295,590
--------- ---------
Net increase in cash 9,709 33,899
Cash at beginning of period 51,264 15,439
--------- ---------
Cash at end of period $ 60,973 $ 49,338
-7-
DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
-----------------------
March 31 March 31
2004 2003
--------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- $ 46
========= ==========
Income Taxes $ 1,664 $ --
========= ==========
Supplemental disclosure of non-cash investing
and financial activities:
Debt discount relating to the issuance of warrants
and the beneficial conversion features of
convertible debt $ 45,000 $ --
========= ==========
Conversion of debentures $ -- $ 2,600
========= ==========
Conversion of outstanding compensation expense
related to officer and director into common stock $ 42,000 $ --
========= ==========
The accompanying notes are an integral part of these financial statements
-8-
DIGITAL DESCRIPTOR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited) March
31, 2004
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 quarters ended March 31, 2004 and 2003. Substantially all of
the Company's revenues are derived principally from U.S. government agencies.
2. BASIS OF PRESENTATION
The financial statements and disclosures included herein for the three months
ended March 31, 2004 are unaudited. These financial statements and disclosures
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of adjustments of a normal and recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 2004 and 2003 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2004. Our independent auditor has added an explanatory
paragraph to the audit opinion issued in connection with the fiscal year 2003
financial statements, which states that our ability to continue as a going
concern depends upon our ability to resolve liquidity problems, principally by
obtaining capital, commencing sales and generating sufficient revenues to become
profitable. Our ability to obtain additional funding will determine our ability
to continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
3. CONVERTIBLE DEBENTURES
During February 2004, the Company issued two convertible debentures for an
aggregate amount of $45,000 with simple interest at 12%. The debentures are due
February 2005. Interest shall be paid quarterly commencing March 2004. The
holder shall have the right to convert the principal amount and interest due
into common stock. The conversion price in effect on any Conversion Date shall
be the lesser of (1) $.005 and (2) 40% of the average of the lowest three
inter-day sales prices of the common stock during the twenty Trading Days
immediately preceding the applicable Conversion Date.
4. RELATED PARTY TRANSACTIONS
A director to the Company provided consulting services during 2003. For the year
ended December 31, 2003 the services amounted to $51,980. For the period ended
-9-
March 31, 2004 the Company owes the director $1,200 for auto allowance. As of
March 31, 2004, the company owes the director $4,030 with no repayment terms.
The Company also owes the former chief executive officer of the Company $12,260
at March 31, 2004, for back payroll and sundry expenses with no repayment terms.
During the period ended March 31, 2004 the Company paid the former chief
executive officer for consulting services the sum of $13,000.
Issuance of 30,000,000 shares of common stock was executed January 7, 2004, to
satisfy partial payment relating to the outstanding debt for services and
accrued payroll provided and owed to the above mentioned director and officer
from prior years.
5. SUBSEQUENT EVENTS
On May 7, 2004, DDSI issued four convertible debentures for an aggregate amount
of $250,000, with simple interest accruing at the annual rate of 12%. The
debentures are due May 7, 2006. Interest payable on the Debentures shall be paid
quarterly commencing June 30, 2004. The holders shall have the right to convert
the principal amount and interest due under the debentures into shares of DDSI's
common stock. The conversion price in effect on any Conversion Date shall be the
lesser of (1) $.0045 and (2) 40% of the average of the lowest three inter-day
sales prices of the common stock during the twenty Trading Days immediately
preceding the applicable Conversion Date.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that will have affected our financial condition and results of
operations. Certain statements under this section may constitute
"forward-looking statements". The following discussion should be read in
conjunction with our financial statements and notes thereto included in this
report.
Critical Accounting Policies
No material changes have occurred in the disclosure with respect to our critical
accounting policies set forth in our Annual Report form 10-KSB for the fiscal
year ended December 31, 2003.
General
Financial Condition
We had net losses of $252,336 and $128,987 during the three months ended March
31, 2004 and 2003, respectively. As of March 31, 2004, we had a cash balance in
the amount of $60,973 and current liabilities of $3,180,401 including
obligations of $16,290 and $1,891,337 to officers and convertible debenture
holders, respectively. We do not have sufficient cash or other assets to meet
our current liabilities. In order to meet those obligations, we will need to
raise cash from the sale of securities or from borrowings. Our independent
auditors have added an explanatory paragraph to their audit opinions issued in
connection with the fiscal years 2004 and 2003 financial statements, which
states that our ability to continue as a going concern depends upon our ability
to resolve liquidity problems, principally by obtaining capital, commencing
sales and generating sufficient revenues to become profitable. Our ability to
obtain additional funding will determine our ability to continue as a going
concern. Our financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Plan of Operations
The short-term objective of DDSI is the following:
o To continue to expand the sale and acceptance of its core solutions by
upgrading software and offering new synergistic biometric (a
measurable, physical characteristic or personal behavioral trait used
to recognize the identity, or verify the claimed identity, of an
individual) (i.e. FMS) security products to its installed base in the
Public Safety and Security market. DDSI's objective is to expand with
these, and additional products, into much larger commercial and
federal markets.
DDSI is also adding additional product lines as a Value Added Reseller.
Technologies related to DDSI's core business can bring additional cashflow with
relatively small internal development capital outlay.
-11-
DDSI's long-term objective is as follows:
o To seek additional products to sell into its basic business market -
Public Safety and Security - so that DDSI can generate sales adequate
enough to allow for profits. New products include biometric devices
such as FMS (Fingerprint Matching System) and our integrated digital
image and fingerprint package, Identify on Demand.
DDSI believes that it will not reach profitability until the year 2005. Over the
next twelve months, management is of the opinion that sufficient working capital
will be obtained from operations and external financing to meet the Company's
liabilities and commitments as they become payable. The Company has in the past
successfully relied on private placements of common stock securities, bank debt,
loans from private investors and the exercise of common stock warrants in order
to sustain operations.
DDSI is doing the following in its effort to reach profitability:
o Cut costs in areas that add the least value to DDSI.
o Upgrading its present core Compu-Capture(R) products to include a
fully scalable database and ANSI/NIST capability.
o Derive funds through investigating business alliances with other
companies who may wish to license the FMS SDK (software developer's
kit).
o Increase revenues through the introduction of Compu-Capture(R),
specifically towards the education market for the creation of ID
cards.
o Increase revenues through the introduction of a scaled down version of
our Compu-Capture(R) product.
o Increase revenues through the addition of innovative technologies as a
Value Added Reseller.
Results of Operations
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31,
2003
Revenues for the three months ended March 31, 2004, of $103,102 decreased
$107,596 or 51% from the three months ended March 31, 2003. The Company
generates its revenues through software licenses, hardware, post customer
support arrangements and other services. The decrease in the Company's revenue
is attributed to a decrease in software maintenance contract dollar amount, a
loss in client base, a reduction in sales and marketing staff and the lack of
new product offerings to their clients. Cost of goods decreased $18,278 or 79%
and was reduced to 5% of total revenues from 11% in the same period a year
earlier.
Costs and expenses increased $15,754 or 5% during the three months ended March
31, 2004, versus the three months ended March 31, 2003. The increase in interest
and amortization of deferred debt cost of $128,185 was offset by the combined
reduction in expenses for all other areas of ($112,433) for the three months
ended March 31, 2004 as compared to 2003. The expense for the general and
administration department decreased ($49,679), sales and marketing department
decreased ($40,140), research and development decreased ($12,011), depreciation
expense decreased ($3,597) and miscellaneous income decreased ($11,273) for the
-12-
three months ended March 31, 2004 as compared to 2003. In keeping with the goal
to streamline costs yet achieve a working product, the Company is re-evaluating
its' current development strategy and resources resulting in a cutback of
expenses.
General and Administrative expenses for the three month period ending March 31,
2004, was $114,793 versus $164,472 for the same period prior year for a decrease
of $49,679 or 30%. This decrease was mainly attributable to a decrease in
salaries and related payroll expenses of ($18,417), rent of ($14,832), telephone
expense of ($5,736), filing fees ($9,032) and miscellaneous items for ($1,662).
Sales and Marketing expenses decreased $40,140 for the three months period ended
March 31, 2004, from $58,947 (2003) to $18,807 (2004) or a 68% decrease. This
decrease was mainly attributable to a decrease in professional consulting of
($21,700), a decrease in salaries, commissions, benefits and payroll taxes in
the aggregate of ($19,516), and an increase in miscellaneous items for $76.
Research and development for the three months ended March 31, 2004, was $9,318
compared to $22,329 for the same period prior year for a decrease of $12,011.
The decrease was due to the decline in salaries, benefits and payroll taxes in
the aggregate of ($10,739) and a decline in miscellaneous expense ($1,272).
The net loss for the Company increased 96% for the three months ending March 31,
2004, to $252,336 from $128,987 for the three months ending March 31, 2003. This
was principally due to the increase in interest and amortization of deferred
debt cost during the period.
Liquidity and Capital Resources
The Company's revenues have been insufficient to cover the cost of revenues and
operating expenses. Therefore, the Company has been dependent on private
placements of its Common Stock and issuance of convertible notes in order to
sustain operations. In addition, there can be no assurances that the proceeds
from private placements 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.
- ------------------------------------------------------------------------------------------------
Contractual Obligations Total One Year or Less More Than One Year
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Due to Related Parties $ 16,290 $ 16,290 $ 0
- ------------------------------------------------------------------------------------------------
Notes Payable - Related Parties 0 0 0
- ------------------------------------------------------------------------------------------------
Convertible Debentures 1,891,337 1,891,337 0
- ------------------------------------------------------------------------------------------------
Accounts Payable and Accrued Expenses 1,272,774 1,272,774 0
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Total Contractual Obligations $ 3,180,401 $ 3,180,401 $ 0
- ------------------------------------------------------------------------------------------------
Below is a discussion of our sources and uses of funds for the three months
ended March 31, 2004 and 2003.
-13-
Net Cash Used in Operating Activities
Net cash used in operating activities for the three months ended March 31, 2004
and 2003 was ($24,665) and ($261,714), respectively. The decrease in cash used
from operating activities in the three months ended March 31, 2004 versus 2003
of $237,049 was principally due to the decrease in net operating costs for the
three months.
Net Cash Provided By Investing Activities
Net cash provided by investing activities three months ended March 31, 2004 and
2003 was $24 and $23 respectively, reflecting a change of $1. This reflected no
significant change in restricted cash.
Net Cash Provided By Financing Activities
Net cash provided by financing activities was $34,350 and $295,590 for the three
months ended March 31, 2004 and 2003, respectively, reflecting a decrease of
$261,240. This is primarily due to a decrease in receipt of proceeds from
issuance of convertible debentures in the amount of ($330,000) net of issuance
costs of ($64,774).
ITEM 3. CONTROL AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to March 31, 2004, the Company carried out an
evaluation of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. This evaluation
was done under the supervision and with the participation of the Company's
President and Chief Financial Officer. Based upon that evaluation, they
concluded that the Company's disclosure controls and procedures are effective in
gathering, analyzing and disclosing information needed to satisfy the Company's
disclosure obligations under the Exchange Act.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls during the quarter
covered by this Report or from the end of the reporting period to the date of
this Form 10-QSB.
-14-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 16, 2003, in the Court of Common Please of Bucks County,
Pennsylvania, a judgment was entered against the Company by its landlord, BT
Lincoln L.P. for breach of lease in the amount of $184,706.76. The Company
intends to negotiate a settlement. The liability, net of the security deposit,
is included in accrued expense at March 31, 2004.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 7, 2004, we entered into a Securities Purchase Agreement, with four
accredited investors that provides for the issuance of convertible notes payable
up to an aggregate face value of $250,000 with simple interest accruing at the
annual rate of 12% and warrants to acquire up to an aggregate 750,000 shares of
our common stock. The convertible notes are due two years from the date of
issuance. Interest payable on the convertible notes shall be paid quarterly
commencing June 30, 2004. The holders shall have the right to convert the
principal amount and interest due under the convertible notes into shares of
DDS's common stock. The conversion price in effect on any conversion date shall
be the lesser of (1) $.0045 and (2) 40% of the average of the lowest three
inter-day sales prices of the common stock during the twenty trading days
immediately preceding the applicable conversion date. The warrants have an
exercise price of $0.0045 and expire on May 7, 2009.
During February 2004, the Company issued two convertible debentures for an
aggregate amount of $45,000 with simple interest at 12%. The debentures are due
February 2005. Interest shall be paid quarterly commencing March 2004. The
holder shall have the right to convert the principal amount and interest due
into common stock. The conversion price in effect on any Conversion Date shall
be the lesser of (1) $.005 and (2) 40% of the average of the lowest three
inter-day sales prices of the common stock during the twenty Trading Days
immediately preceding the applicable Conversion Date.
On January 10, 2003, DDSI issued three convertible debentures for an aggregate
amount of $250,000, with simple interest accruing at the annual rate of 10%.
These debentures are due January 10, 2004. Interest payable on the Debentures
shall be paid quarterly commencing March 31, 2003. The holders shall have the
right to convert the principal amount and interest due under the debentures into
shares of DDSI's common stock. The conversion price in effect on any Conversion
Date shall be the lesser of (1) $.01 and (2) 50% of the average of the lowest
three inter-day sales prices of the common stock during the twenty Trading Days
immediately preceding the applicable Conversion Date.
During February 2003, $1,000 of the convertible debentures issued in December
2001 was converted into 2,857,142 shares of common stock.
On February 27, 2003, DDSI issued three convertible debentures for an aggregate
amount of $125,000, with simple interest accruing at the annual rate of 10%. The
debentures are due February 27, 2004. Interest payable on the Debentures shall
be paid quarterly commencing March 31, 2003. The holders shall have the right to
-15-
convert the principal amount and interest due under the debentures into shares
of DDSI's common stock. The conversion price in effect on any Conversion Date
shall be the lesser of (1) $.01 and (2) 50% of the average of the lowest three
inter-day sales prices of the common stock during the twenty Trading Days
immediately preceding the applicable Conversion Date.
In March 2003, $1,600 of the convertible debentures issued in December 2001, was
converted into 8,000,000 shares of common stock. Additionally, accrued interest
relating to the note dated May 2001 was converted into an additional 1,820,634
shares of common stock.
On April 2, 2003, DDSI issued three convertible debentures for an aggregate
amount of $125,000, with simple interest accruing at the annual rate of 12%. The
debentures are due March 31, 2004. Interest payable on the Debentures shall be
paid quarterly commencing June 30, 2003. The holders shall have the right to
convert the principal amount and interest due under the debentures into shares
of DDSI's common stock. The conversion price in effect on any Conversion Date
shall be the lesser of (1) $.01 and (2) 50% of the average of the lowest three
inter-day sales prices of the common stock during the twenty Trading Days
immediately preceding the applicable Conversion Date.
In April 2003, $1,130 of the convertible debentures issued in March 2001, was
converted into 5,650,000 shares of common stock. Also in April $470 of the
convertible debentures issued in September 2001, were converted into 2,350,000
of common stock. In addition 6,000,000 shares of common stock were converted for
liquidated damages relating to the notes issued December 2001.
During May 2003, $1,600 of the convertible debentures issued in September 2001,
was converted into 8,000,000 shares of common stock. Additionally, liquidated
damages relating to the notes issued December 2001, were converted into
4,450,000 shares of common stock.
In June 2003, $1,093 of the convertible debentures issued in September 2001, was
converted into 5,468,010 shares of common stock. Additionally, liquidated
damages relating to the notes issued December 2001, were converted into
1,011,250 shares of common stock.
On October 1, 2003, we entered into a Securities Purchase Agreement, with two
accredited investors that provides for the issuance of convertible notes payable
up to an aggregate face value of $300,000 and warrants to acquire up to an
aggregate 2,100,000 shares of our common stock. The agreement provides for the
funding of the notes in three tranches, of which the first, amounting to
$165,000 with 1,115,000 warrants were issued October 1, 2003. On the final
business day of each of the three (3) months beginning in October 2003 and
ending in December 2003, the Company will issue and sell to the investors an
aggregate of $45,000 principal amount of convertible notes and warrants to
purchase an aggregate of 315,000 shares.
The convertible notes are due one year from the date of issuance. Interest
payable on the convertible notes shall be paid quarterly commencing December 30,
2003. The holders shall have the right to convert the principal amount and
interest due under the convertible notes into shares of DDS's common stock. The
conversion price in effect on any conversion date shall be the lesser of (1)
$.01 and (2) 40% of the average of the lowest three inter-day sales prices of
the common stock during the twenty trading days immediately preceding the
-16-
applicable conversion date. The warrants have an exercise price of $0.005 and
expire on September 30, 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During February 2004, the Company filed a Preliminary Proxy Statement with the
U. S. Securities and Exchange Commission in order to increase the authorized
shares of common stock to 10,000,000,000 from 150,000,000.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
Exhibit 31.1 Certification by Chief Executive Officer and Chief Financial
Officer pursuant to Sarbanes-Oxley Section 302:
Exhibit 32.1 Certification by Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C., Section 1350
-17-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIGITAL DESCRIPTOR SYSTEMS, INC.
(Registrant)
Date: May 14, 2004 By: /s/ ANTHONY SHUPIN
------------------------------------
Anthony Shupin
(President, Chief Executive Officer,
Acting Chief Financial Officer
and Director)
Date: May 14, 2004 By: /s/ MICHAEL J. PELLEGRINO
------------------------------------
Michael J. Pellegrino
(Director - Chairman)
Date: May 14, 2004 By: /s/ VINCENT MORENO
------------------------------------
Vincent Moreno.
(Director)
Date: May 14, 2004 By: /s/ ROBERT GOWELL.
------------------------------------
Robert Gowell
(Director)
-18-