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 June 30, 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 August 12, 2004
--------------------- ------------------
$.001 par value 174,180,645 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 June 30, 2004 (Unaudited)
and December 31, 2003
Statements of Operations (Unaudited) for the six months
and three months ended June 30, 2004 and 2003
Statements of Cash Flows (Unaudited) for the six months
ended June 30, 2004 and 2003 (Unaudited)
Notes to Financial Statements - June 30, 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
SIGNATURES
-2-
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DIGITAL DESCRIPTOR SYSTEMS, INC.
BALANCE SHEETS
June 30 December 31
2004 2003
---------- ----------
(Unaudited)
Assets
Current assets:
Cash $ 151,495 $ 51,264
Restricted cash 545 593
Accounts receivable, less allowance for
uncollectible accounts of $34,550
(unaudited) and $46,841 in
2004 and 2003, respectively 58,053 136,329
Prepaid expenses 58,880 63,600
Debt discount and deferred financing costs 380,169 300,430
---------- ----------
Total current assets 649,142 552,216
Deposits 1,730 1,730
---------- ----------
Total assets $ 650,872 $ 553,946
========== ==========
Liabilities and Shareholders' Deficiency
Current liabilities:
Accounts payable $ 232,958 $ 214,771
Accrued expenses 277,717 306,029
Accrued interest 491,425 353,214
Due to officer and director 10,430 55,620
Deferred income 310,889 382,878
Convertible debentures 2,138,337 1,846,837
---------- ----------
Total current liabilities 3,461,756 3,159,349
Total liabilities $3,461,756 $3,159,349
---------- ----------
-3-
DIGITAL DESCRIPTOR SYSTEMS, INC.
BALANCE SHEETS (continued)
June 30 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 -
9,999,000,000; issued and outstanding shares - 145,958,423 at June 30,
2004; authorized shares - 150,000,000; issued and
outstanding shares - 115,958,423, at December 31, 2003 145,958 115,958
Additional paid-in capital 17,934,600 17,627,600
Accumulated deficit (20,891,442) (20,348,961)
------------ ------------
Total shareholder's deficiency (2,810,884) (2,605,403)
------------ ------------
Total liabilities and shareholders' deficiency $ 650,872 $ 553,946
============ ============
The accompanying notes are an integral part of these financial statements.
-4-
DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues:
Software $ 5,000 $ 94,448 $ 25,088 $ 146,673
Hardware -- 7,776 3,917 55,177
Maintenance 69,090 108,961 147,190 205,142
Other -- 49,153 997 64,044
------------- ------------- ------------- -------------
74,090 260,338 177,192 471,036
Costs and expenses:
Cost of revenues 19 95,882 4,967 119,108
General and administrative 132,608 344,208 247,401 508,679
Sales and marketing 18,663 60,230 37,470 119,177
Research and development 2,855 12,309 12,173 33,638
Depreciation and amortization -- 2,150 -- 5,747
Interest and amortization of
deferred debt costs 210,090 270,484 421,535 353,744
Other (income) expense, net -- (46,726) (3,873) (61,872)
------------- ------------- ------------- -------------
364,235 738,537 719,673 1,078,221
------------- ------------- ------------- -------------
Net loss $ (290,145) $ (478,199) $ (542,481) $ (607,185)
============= ============= ============= =============
Net loss per common share $ (0.00) $ (0.01) $ (0.00) $ (0.01)
============= ============= ============= =============
(basic and diluted)
Weighted average number of
common shares outstanding:
Basic and diluted 145,958,423 96,530,244 144,969,412 81,311,081
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements
-5-
DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30 June 30
2004 2003
--------- ---------
Cash flows from operating activities:
Net loss ($542,481) ($607,185)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization -- 5,747
Amortization of deferred financing costs and debt discounts
related to the issuance of warrants and the beneficial
conversion feature of convertible debentures 283,325 269,174
Bad debt expense (12,291) (97,420)
Gain on disposal of fixed asset -- (6,833)
Changes in operating assets and liabilities:
Accounts receivable 90,567 3,109
Inventory -- (12,950)
Prepaid expenses, deposits and other assets 4,720 115,372
Accounts payable 18,187 (11,479)
Accrued expenses (28,312) 119,117
Accrued interest 138,211 84,496
Accrued payroll and related withholdings -- (84,848)
Deferred income (71,988) (126,262)
--------- ---------
Net cash used in operating activities (120,062) (349,962)
Cash flows from investing activities:
Increase in restricted cash 48 39
--------- ---------
Net cash provided by investing activities 48 39
Cash flows from financing activities:
Proceeds from issuance of convertible debentures 226,935 393,042
Repayment of convertible debenture (3,500) --
Due to officer and director (3,190) (39,634)
Repayment of equipment loan -- (3,028)
--------- ---------
Net cash provided by financing activities 220,245 350,380
--------- ---------
Net increase in cash 100,231 457
Cash at beginning of period 51,264 15,439
--------- ---------
Cash at end of period $ 151,495 $ 15,896
-6-
DIGITAL DESCRIPTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30 June 30
2004 2003
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- $ 86
======== ========
Income Taxes $ 3,147 $ --
======== ========
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 $363,065 $393,042
======== ========
Conversion of debentures into common stock $ -- $ 6,895
======== ========
Conversion of outstanding officer and director
compensation Expense into common stock
and additional paid in capital $ 42,000 $ --
======== ========
Conversion of liquidated damages into common stock $ -- $ 3,191
======== ========
The accompanying notes are an integral part of these financial statements
-7-
DIGITAL DESCRIPTOR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 30, 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 June 30, 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 six months
ended June 30, 2004 and 2003 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 six month periods ended June 30, 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 May 2004, the Company issued four convertible debentures for an aggregate
amount of $250,000 with simple interest at 12%. The debentures are due May 2006.
Interest shall be paid quarterly commencing June 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)
$.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.
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.
-8-
4. RELATED PARTY TRANSACTIONS
For the year ended December 31, 2003, a director provided consulting services
amounting to $51,980. As of June 30, 2004, the company owes to the director
$2,430 for back consulting fees and sundry expenses with no repayment terms.
The Company also owes the former chief executive officer, who is presently a
director, $8,000 at June 30, 2004, for back payroll and sundry expenses with no
repayment terms. For the six month period ended June 30, 2004, the director
provided consulting services amounting to $27,000.
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 directors for prior
year's services and expenses.
5. SUBSEQUENT EVENTS
During July 2004, $35,000 of the convertible debentures issued in September
2001, were converted into 7,000,000 shares of common stock and 7,000,000 shares
of common stock were issued for liquidated damages relating to the notes issued
December 2001.
-9-
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 $290,145 and $478,199 during the three months ended June
30, 2004 and 2003, respectively. As of June 30, 2004, we had a cash balance in
the amount of $151,495 and current liabilities of $3,461,756 including
obligations of $10,430 and $2,138,337 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 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.
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, though there is no
certainty that the monies expended on development will add any revenue to the
Company.
-10-
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
Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30, 2003
Revenues for the six months ended June 30, 2004, of $177,192 decreased $293,844
or 62% from the six months ended June 30, 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 revenue decreased $114,141 or 96% and was reduced to
3% of total revenues from 25% in the same period a year earlier.
Costs and expenses decreased $358,548 or 33% during the six months ended June
30, 2004, versus the six months ended June 30, 2003. The increase in interest
and amortization of deferred debt cost of $67,791 was offset by the combined
reduction in expenses for all other areas of $426,339 for the six months ended
June 30, 2004 as compared to 2003. The costs of revenue decreased $114,141,
expenses for the general and administration department decreased $261,278, sales
and marketing department decreased $81,707, research and development decreased
$21,465, depreciation expense decreased $5,747 and miscellaneous income
decreased $57,999 for the six months ended June 30, 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.
-11-
General and Administrative expenses for the six month period ending June 30,
2004, was $247,401 versus $508,679 for the same period prior year for a decrease
of $261,278 or 51%. This decrease was mainly attributable to a decrease in
salaries and related payroll expenses of $20,575, rent of $207,888, telephone
expense of $14,688, filing fees $21,974, vehicle expense 9,966 and miscellaneous
items for $13,187. There was an increase in professional services of $27,000 to
offset the decrease.
Sales and Marketing expenses decreased $81,707 for the six months period ended
June 30, 2004, from $119,177 (2003) to $37,470 (2004) or a 69% decrease. This
decrease was mainly attributable to a decrease in professional consulting of
$42,350, a decrease in salaries, commissions, benefits and payroll taxes in the
aggregate of $39,513, and an increase in miscellaneous items for $157.
Research and development for the six months ended June 30, 2004, was $12,173
compared to $33,638 for the same period prior year for a decrease of $21,465.
The decrease was due to the decline in salaries, benefits and payroll taxes in
the aggregate of $20,601 and a decline in miscellaneous expense $864.
The net loss for the Company decreased 11% for the six months ending June 30,
2004, to $542,481 from $607,185 for the six months ending June 30, 2003. This
was principally due to the decrease in both sales and expenses.
Three Months June 30, 2004 Compared to the Three Months Ended June 30, 2003
Revenues for the three months ended June 30, 2004 were $74,090 versus three
months ended June 30, 2003 of $260,338 decreased $186,248 or 72%. In the three
months ended June 30, 2003, software, hardware and other revenues reflected the
completion of two SI-3000 projects of $151,377. There were no SI-3000 projects
completed during the three months ended June 30, 2004. Costs of revenue for the
three months ended June 30, 2004 were $19 versus the three months ended June 30,
2003 of $95,882 decreased $95,863. This decrease is directly related to the lack
of completed SI-3000 projects. Maintenance revenues decreased $39,871 or 37%
during the three months ended June 30, 2004 from the three months ended June 30,
2003. This is attributable to the decrease in software maintenance contract
dollar amount and loss of customer base in 2004.
Cost of revenue and expenses decreased $95,863 or 100% during the three months
ended June 30, 2004 versus the three months ended June 30, 2003. General and
administrative expenses decreased $211,600 or 61 % to $132,608 for the three
months ended June 30, 2004 from $344,208 for the three months ended June 30,
2003. Research and development costs for the three month period ended June 30,
2004 decreased by $9,454 compared to the prior period. Sales and marketing
decreased $41,567 or 69% during the three months ended June 30, 2004 from the
three months ended June 30, 2003. Depreciation expense decreased $2,150 due to
the lack of asset purchases in 2004. Due to less issuances of debentures during
the three months ended June 30, 2004 compared to June 30, 2003, interest and
amortization of deferred debt cost decreased from $270,484 to $210,090. Other
income decreased $46,726.
-12-
The net loss for the Company decreased $188,054 or 39% for the three months
ended June 30, 2004 to $290,145 from $478,199 for the three months ended June
30, 2003. This was principally due to the decrease in sales and overall costs
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.
The Company has contractual obligations of $3,150,867 as of June 30, 2004. These
contractual obligations, along with the dates on which such payments are due are
described below:
Contractual Obligations Total One Year or Less More Than One Year
- ------------------------------------------------------- --------------------------- ---------------------------
Due to Related Parties $ 10,430 $ 10,430 $ 0
Convertible Debentures 2,138,337 2,138,337 0
Accounts Payable and Accrued Expenses 1,002,100 1,002,100 0
Total Contractual Obligations $ 3,150,867 $ 3,150,867 $ 0
Below is a discussion of our sources and uses of funds for the six months ended
June 30, 2004 and 2003.
Net Cash Used in Operating Activities
Net cash used in operating activities for the six months ended June 30, 2004 and
2003 was $120,062 and $349,962, respectively. The decrease in cash used from
operating activities in the six months ended June 30, 2004 versus 2003 of
$229,899 was principally due to the decrease in net operating costs for the six
months.
Net Cash Provided By Investing Activities
Net cash provided by investing activities six months ended June 30, 2004 and
2003 was $48 and $39 respectively, reflecting a change of $9. This reflected no
significant change in restricted cash.
-13-
Net Cash Provided By Financing Activities
Net cash provided by financing activities was $220,245 and $350,380 for the six
months ended June 30, 2004 and 2003, respectively, reflecting a decrease of
$130,135. This is primarily due to a decrease in receipt of proceeds from
issuance of convertible debentures in the amount of $226,935 net of issuance
costs of $68,063.
Item 3. Control and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and acting Chief Financial Officer have evaluated
the effectiveness of our disclosure controls and procedures (as such term is
defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
quarterly report (the "Evaluation Date"). Based on such evaluation, such
officers have concluded that, as of the Evaluation Date, our disclosure controls
and procedures are effective in alerting them on a timely basis to material
information relating to our Company required to be included in our reports filed
or submitted 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 June 30, 2004.
Item 2. Changes in Securities and Use of Proceeds
During July 2004, $35,000 of the convertible debentures issued in September
2001, were converted into 7,000,000 shares of common stock. and 7,000,000 shares
of common stock were issued for liquidated damages relating to the notes issued
December 2001.
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.
-15-
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
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
applicable conversion date. The warrants have an exercise price of $0.005 and
expire on September 30, 2008.
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Item 3. Defaults Upon Senior Securities:
The Company is in default of $1,591,837 of their outstanding debentures.
Although the debenture holders have not pursued their rights under such
debentures, there can be no assurances that such rights will not be exercised.
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 9,999,000,000 from 150,000,000.
On June 17, 2004, a special shareholder's meeting was held to vote the proxy
approved by the U.S. Securities and Exchange Commission, which asked for the
increase in authorized shares of common stock to 9,999,000,000 from 150,000,000.
The count of shares voted was 128,648,211, over 88% of the outstanding voting
stock of the company. The results of the voting indicated that 114,659,014 voted
FOR the increase versus 13,849,627 AGAINST, with 139,570 ABSTAINING. A
Certificate of Amendment to the Certificate of Incorporation increasing the
authorization of stock available to be issued was filed and accepted by the
State of Delaware on June 24, 2004. A copy of the Certificate of Amendment and
the Certification issued by the Secretary of State for Delaware is included in
Item 6.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit 3.1 Copy of the Certificate of Amendment to the Certificate of
Incorporation, including Certification by State of Delaware.
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
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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: August 13, 2004 By: /s/ ANTHONY SHUPIN
-------------------------------------------
Anthony Shupin
(President, Chief Executive Officer,
Acting Chief Financial Officer and Director)
Date: August 13, 2004 By: /s/ MICHAEL J. PELLEGRINO
-------------------------------------------
Michael J. Pellegrino
(Director - Chairman)
Date: August 13, 2004 By: /s/ VINCENT MORENO
-------------------------------------------
Vincent Moreno.
(Director)
Date: August 13, 2004 By: /s/ ROBERT GOWELL.
-------------------------------------------
Robert Gowell
(Director)
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