10QSB 1 ddq63.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the transition period from ____ to ____ Commission file number 0-2749 DISTINCTIVE DEVICES, INC. (Name of small business issuer in its charter) New York 13-1999951 (State of incorporation or organization) (IRS Identification No.) One Bridge Plaza, Ste. 100, Fort Lee, NJ 07024 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (201)363-9922 N/A (Issuer's former address) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes(X) No( ) 19,134,824 shares of issuer's common stock, $.05 par value, were outstanding at July 31, 2002. Issuer has no other class of common equity. CONTENTS Page PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheet-- June 30, 2002 3 Condensed Consolidated Statements Of Operations-- Three months and six months ended June 30, 2002 and 2001 February 5, 1998 (Inception) to June 30, 2002 4 Condensed Consolidated Statements Of Changes In Stockholders' Equity-- Inception to June 30, 2002 5 Condensed Consolidated Statements Of Cash Flows-- Six months ended June 30, 2002 and 2001 February 5, 1998 (Inception) to June 30, 2002 6 Notes To The Condensed Consolidated Financial Statements 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 10 PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K 12 SIGNATURES 12 2 PART I - FINANCIAL INFORMATION Item 1. - FINANCIAL STATEMENTS DISTINCTIVE DEVICES, INC. AND SUBSIDIARIES (Development Stage Companies) CONDENSED CONSOLIDATED BALANCE SHEET (unaudited) June 30, 2002 ---- ASSETS Current Assets Cash and cash equivalents $ 40,494 Accounts receivable 645,945 Inventories 12,579 Prepaid Expenses 1,911 Assets of discontinued operations and assets held for sale 88,375 ------- Total Current Assets 789,304 Property and equipment, net 290,091 Goodwill 11,221 Other assets 32,439 ------- $ 1,123,055 ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and accrued liabilities $ 274,415 Accrued professional fees 26,967 ------- Total Current Liabilities 301,382 Convertible subordinated debentures 400,000 ------- Total Liabilities 701,382 ------- Minority interest 2,116 ------- Stockholders' Equity Convertible preferred stock Series C, $1 par; 1,000,000 shares authorized; 10,000 outstanding 10,000 Common stock, $.05 par; 20,000,000 shares authorized; 19,134,824 shares outstanding 956,741 Additional paid-in capital 3,549,680 Deficit accumulated during the development stage (4,096,864) --------- 419,557 -------- Total Stockholders' Equity $ 1,123.055 ========= The accompanying notes are an integral part of these financial statements. 3 DISTINCTIVE DEVICES, INC. AND SUBSIDIARIES (Development Stage Companies) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Period From February 5,1998 Three Months Ended June 30, Six Months Ended June 30, (Inception) to 2002 2001* 2002 2001* June 30, 2002 ---- ---- ---- ---- ------------- Revenue Operating $ 360,805 $ - $ 798,595 $ - $ 798,595 Other - - - - 35,888 Cost of goods sold (335,253) - (719,979) - (719,979) Operating expenses (189,918) (247,235) (395,454) (572,632) (2,461,215) ------- ------- ------- ------- --------- Operating loss (164,366) (247,235) (316,838) (572,632) (2,346,711) ------- ------- ------- Other income (expense): Interest expense (20,000) - (20,000) - (20,000) Interest and other income 276 5,054 2,340 14,417 101,815 Loss on disposal of equipment - - - - (6,500) ------ ------ ------ ------ ------- Other income (expense), net (19,724) 5,054 (17,660) 14,417 75,315 ------ ----- ------ ------ ------- (184,090) (242,181) (334,498) (558,215) (2,271,396) Minority interest - - - - 191,866 ------- ------- ------- ------- --------- Loss from continuing operations (184,090) (242,181) (334,498) (558,215) (2,079,530) ------- ------- ------- ------- --------- Discontinued operations: Loss from discontinued operations, net of tax benefit of $0 after valuation allowance - - - - (1,605,078) Loss on sale and write-down of assets from discontinued operations, net of tax benefit of $0 after valuation allowance (19,543) (48,084) (58,784) (48,084) (412,256) ------ ------ ------ ------ ------- Loss from discontinued operations (19,543) (48,084) (58,784) (48,084) (2,017,334) ------ ------ ------ ------ --------- Net loss $ (203,633) $ (290,265) $ (393,282) $ (606,299) $(4,096,864) ======= ======= ======= ======= ========= Weighted average shares of common stock outstanding (1) 19,134,824 17,355,448 19,134,824 17,335,631 13,082,161 ========== ========== ========== ========== ========== Loss per share - basic and diluted: Loss from continuing operations $ (0.01) $ (0.02) $ (0.02) $ (0.03) $ (0.16) Loss from discontinued operations - - - - (0.15) ---- ---- ---- ---- ---- Net loss per share - basic and diluted $ (0.01) $ (0.02) $ (0.02) $ (0.03) $ (0.31) ==== ==== ==== ==== ====
(1) The weighted average shares of common stock outstanding are not adjusted for potential effects of the Company's convertible preferred stock or its convertible subordinated debentures because of their antidilutive effect. *During the six months ended June 30, 2001, the Company primarily focused its efforts in one segment, developing its wireless ISP business which has been discontinued (Note 11). The accompanying notes are an integral part of these financial statements. 4 DISTINCTIVE DEVICES, INC. AND SUBSIDIARIES (Development Stage Companies) CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
Addi- Deficit Total Preferred tional Shares Accumulated Stock Stock Common Stock Paid-in to be During the Devel- Holders' Shares Amount Shares Amount Capital Issued opment Stage Equity ------ ------ ------- ------ ------ ------ ----------- ------ Initial issuance of shares for cash - $ - 6,000,000 $ 300,000 $ (299,700) $ - $ - $ 300 Net loss - 1998 - - - - - - (195) (195) ------ ------ ---------- ------- --------- ------ -------- ----------- Balance at December 31, 1998 - - 6,000,000 300,000 (299,700) - (195) 105 Issuance of shares for cash - - 2,051,340 102,567 699,597 - - 802,164 Acquisition of net assets on recapitalization - - 4,119,902 205,995 (1,666) - - 204,329 Issuance of shares for finder's fee - - 121,712 6,086 85,198 - - 91,284 Net loss - 1999 - - - - - - (606,764) (606,764) ------ ------ ---------- ------- ------- ------ ------- ------- Balance at December 31, 1999 - - 12,292,954 614,648 483,429 - (606,959) 491,118 Issuance of shares for cash - - 3,156,810 157,841 2,998,969 - - 3,156,810 Issuance of shares for acquisition of minority interest - - 1,713,640 85,681 (85,681) - - - Shares to be issued for finder's fee - - - - - 73,034 - 73,034 Reduction of minority interest - - - - - - 21,193 21,193 Net loss - 2000 - - - - - - (1,783,914) (1,783,914) ------ ------ ---------- ------ ------ ------ --------- --------- Balance at December 31, 2000 - - 17,163,404 858,170 3,396,717 73,034 (2,369,680) 1,958,241 Issuance of shares for acquisition of minority interest - - 182,460 9,123 (9,123) - - - Issuance of shares for finder's fee - - 18,960 948 72,086 (73,034) - - Issuance of shares for acquisition of shares of subsidiary - - 1,770,000 88,500 - - - 88,500 Exchange of common for preferred shares 10,000 10,000 (1,250,000) (62,500) 52,500 - - - Issuance of shares for cash - - 1,250,000 62,500 37,500 - - 100,000 Net loss - 2001 - - - - - - (1,333,902) (1,333,902) ------ ------ ---------- ------ ------ ------- --------- --------- Balance at December 31, 2001 10,000 10,000 19,134,824 956,741 3,549,680 - (3,703,582) 812,839 Net loss - - - - - - (393,282) (393,282) ------ ------ ---------- ------- --------- ------- ------- Balance at June 30, 2002 10,000 $10,000 19,134,824 $ 956,741 $3,549,680 $ - $(4,096,864) $(419,557) ====== ====== ========== ======= ========= ====== =========
The accompanying notes are an integral part of these financial statements. 5 DISTINCTIVE DEVICES, INC. AND SUBSIDIARIES (Development Stage Companies) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Period From February 5, 1998 Six Months Ended June 30, (Inception) to 2002 2001 June 30, 2002 Cash flows from operating activities $ (717,404) $ (469,878) $(2,627,913) ------- ------- --------- Cash flows from investing activities: Acquisition of equipment (57,316) (12,256) (922,673) Proceeds from sale of equipment - - 2,500 Issuance of notes receivable - (8,000) (20,000) Payments received on notes receivable - - 20,000 Cash received on acquiring Webpulse - - 13,117 Cash effect of recapitalization - - 398,904 -------- ------ ------- Net cash used in investing activities (57,316) (20,256) (508,152) ------- ------- ------- Cash flows from financing activities: Issuance of convertible debentures - - 400,000 Minority interest - - 2,116 Issuance of common stock - - 4,254,265 -------- ------- --------- Net cash provided by financing activities - - 4,656,381 -------- ------- --------- Increase (decrease) in cash from continuing operations (774,720) (490,134) 1,520,316 ------- ------- --------- Net cash provided by (used in) discontinued operations 125,256 - (1,479,822) ------- ------ --------- Cash - Beginning of period 689,958 985,032 - ------- ------- --------- End of period $ 40,494 $494,898 $ 40,494 ====== ======= ====== The accompanying notes are an integral part of these financial statements. 6 DISTINCTIVE DEVICES, INC. AND SUBSIDIARIES (Development Stage Companies) NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF CONSOLIDATION The accompanying unaudited condensed consolidated financial statements include the accounts of Distinctive Devices, Inc. and its subsidiaries, Webpulse Consulting, Inc., Distinctive Devices (India), PLC (96.6% owned), International Gemsource, Inc. and EagleView Industries, Inc. EagleView is inactive. NOTE 2: INTERIM FINANCIAL DATA In the opinion of management, the accompanying unaudited financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and generally accepted accounting principles for interim financial information. These financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The annual financial statements of the Company as of December 31, 2001 should be read in conjunction with these statements. The financial information included herein has not been audited. However, management believes the accompanying unaudited interim financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the consolidated financial position of the Company as of June 30, 2002 and the results of operations for the three months and six months and the period from February 5, 1998 (inception) to June 30, 2002, and cash flows for the six months ended June 30, 2002 and 2001 and the period from February 5, 1998 (inception) to June 30, 2002. The results of operations and cash flows for the six-month period are not necessarily indicative of the results of operations or cash flows for the year ending December 31, 2002. NOTE 3: REVENUE RECOGNITION Product sales are recognized when an agreement of sale exists, product delivery has occurred, pricing is final or determinable, and collection is reasonably assured. NOTE 4. INVENTORIES Inventories consist primarily of gemstones, held by a subsidiary. Inventories are stated at cost, which approximates market, on the first-in, first-out, basis. NOTE 5. ASSETS HELD FOR SALE Assets held for sale represent equipment and inventories related to the Company's discontinued wireless ISP operations which have been segregated and written down to their net realizable value. During the six months ended June 30, 2002, certain assets held for sale were sold resulting in a loss of $58,784. NOTE 6. CONVERTIBLE SUBORDINATED DEBENTURES The Company has $400,000 principal amount of 10% convertible subordinated debentures outstanding (the "Debentures") which mature in 2006. The Debentures are convertible into common stock at the holder's option at conversion prices ranging from $0.25 in 2002 to $0.75 in 7 DISTINCTIVE DEVICES, INC. AND SUBSIDIARIES (Development Stage Companies) NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 6. CONVERTIBLE SUBORDINATED DEBENTURES (continued) 2006, subject to an increase in the authorized common share capital. The Debentures may be redeemed by the Company, in whole or in part, at percentages of principal amount ranging from 105% in 2002 to 101.25% in 2006. The Debentures are subordinated to obligations for money borrowed from financial institutions. NOTE 7. CAPITAL STRUCTURE Convertible Preferred Stock -------------------------- The Company has 1,000,000 shares of preferred stock, par value $1, authorized. The Board has authority to issue the shares in one or more series and to fix the designation preferences, powers and other rights as it deems appropriate. The Company has designated 60,000 shares as Series C convertible preferred stock of which 10,000 shares are outstanding. Each such share is convertible into 125 shares of common stock and all such shares outstanding will be automatically converted, on that basis, to common stock following shareholder approval of an increase in common share capital to a number of common shares sufficient for conversion of all outstanding shares of Series C preferred stock. Until such approval, each Series C preferred share has voting, dividend and liquidation rights equivalent to 125 shares of common stock. Common Stock ----------- The Company has 20,000,000 authorized shares of common stock, par value $.05. Common stock has one vote per share for election of directors and all other matters submitted to a vote of stockholders. Shares of common stock do not have cumulative voting, preemptive, redemption or conversion rights. NOTE 8. NEW SUBSIDIARY In January 2002, the Company organized International Gemsource, Inc., a Delaware corporation, based in the Company's offices in Fort Lee, New Jersey. The subsidiary is engaged in trading rough and polished gemstones. NOTE 9. GOING CONCERN As shown in the accompanying financial statements, the Company incurred net losses of $203,633, $393,282 and $4,096,864 during the three months and six months ended June 30, 2002, and the period from February 5, 1998 (inception) to June 30, 2002, respectively. The Company's working capital at June 30, 2002 of approximately $488,000 is not sufficient to fund operations at the current level. These factors raise a substantial doubt about the Company's ability to continue as a going concern. Management of the Company is considering acquiring or merging with an operating company, commencing new operations and obtaining financing through the issuance of debt and stock. The ability of the Company to continue as a going concern is dependent on management's ability to continue to obtain financing, to successfully implement its business plan and to establish profitable operations. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. 8 DISTINCTIVE DEVICES, INC. AND SUBSIDIARIES (Development Stage Companies) NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 10. SEGMENT INFORMATION The Company reports segments based upon the management approach. The management approach designates the internal reporting that is used by management for making operating decisions and assessing performance. For the three months and six months ended June 30, 2002, the Company operated three segments, Distribution of RTA Equipment, Gemstone Trading and Software Development.
Distribution of RTA Gemstone Software Equipment Trading Development Corporate Consolidated --------- ------- ----------- --------- ------------ For the three months ended June 30, 2002: Revenue $157,796 $201,767 $ 1,242 $ - $ 360,805 Operating income (loss) 19,311 16* (49,246) (134,447) (164,366) Other income (expense) - - 41 (19,765) (19,724) Income (loss) from continuing operations 19,311 16* (49,205) (154,212) (184,090) For the six months ended June 30, 2002: Revenue 374,614 422,739 1,242 - 798,595 Operating income (loss) 44,698 56* (95,854) (265,738) (316,838) Other income (expense) - - 345 (18,005) (17,660) Income (loss) from continuing operations 44,698 56* (95,509) (283,743) (334,498) Assets 212,905 454,024 195,688** 260,438*** 1,123,055
*Operating income and income from continuing operations have been reduced by a parent company charge for sales and office services of $5,000 in the three months, and $32,500 in the six months, ended June 30, 2002. **Includes assets of DDI-India, located in India, of $96,854. ***Includes assets held for sale of $88,375. 9 DISTINCTIVE DEVICES, INC. AND SUBSIDIARIES (Development Stage Companies) NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 11. DISCONTINUED OPERATIONS On July 2, 2001, the Board of Directors of the Company approved the discontinuation of its wireless ISP business operations. Accordingly, the Company segregated the assets, liabilities and operating expenses as of September 30, 2001. NOTE 12. SUBSEQUENT EVENTS On August 1, 2002, the Company designated 250,000 shares as Series D Convertible Preferred Stock, par value $1. On August 6, 2002, 173,333 such shares were sold for $650,000 cash. At such time as stockholders approve an increase in, and/or a reverse split of, the Company's common share capital, sufficient in amount to provide for conversion of all preferred shares outstanding (including a revision in par value per common share), each Series D preferred share will be automatically converted into 125 shares of common stock. Until such approval, each Series D share has voting and dividend rights equivalent to 125 shares of common stock and a preference of $3.75 per share in the event of liquidation. The Company recently filed preliminary proxy materials with the Securities and Exchange Commission with respect to a Special Meeting of Shareholders to consider the foregoing recapitalization, and other matters. The date for the meeting will be established, and all shareholders will be notified, following clearance of this filing. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Plan of Operation ----------------- Efforts continue to further develop markets for Company products and services, in three principal segments: hardware and software solutions, gemstone trading and sales of DSL telephone equipment. While markets for software, servers and telephonic equipment are currently severely depressed in North America and Western Europe, this does not appear to be true in India and Russia, where our efforts are primarily directed. Our subsidiary in India is in negotiations with several substantial customer prospects regarding the sale of hardware and software solutions involving equipment provided under our reseller agreements with Sun Microsystems, Citrix Systems and Baan (of Germany). In another development, arrangements were recently completed with Hughes Escort Communications to receive educational classroom courses provided, via satellite, by the University of Phoenix, a leading provider of such courses which lead to the granting of B.S. and advanced degrees. Classrooms in Bombay will be managed by our subsidiary. 10 Gemstone trading activity continues. We are considering participation, with a major mining firm, in a Russian joint venture to produce cut and polished diamonds. Through the Company's contacts in India, experienced personnel would be recruited for this activity. India is the world's leading producer of cut and polished gemstones. Sales of telephonic DSL equipment continue. We are considering the purchase of assets from creditors of an Indian company that manufactures such equipment. The company was formerly affiliated with Real Time Access, Inc ("RTA"), of Livermore, California, now in Chapter 11 bankruptcy proceedings. We have had an agreement to distribute RTA products in four countries in Eastern Europe since September 2001. The purchase would assure the Company of an ongoing production source for DSL equipment. If concluded, the purchase would be undertaken by our Indian subsidiary with funds provided by the Company from its recent private placement (see Note 12 to the within financial statements). Operating Results ----------------- Sales for the six months ended June 30, 2002 approximated $799,000 and were somewhat lower in the June quarter ($361,000) than in the preceding March quarter ($438,000). For the six month period, the loss from continuing operations amounted to $334,498 and the net loss, including losses from discontinued operations, amounted to $393,282. This compares to a net loss of $606,299 incurred in the prior year six-month period. Among other factors, lowered losses reflect, in large part, a substantial reduction in operating expenses to $395,454 in the latest six-month period from $572,632 a year earlier. Cash realized from the disposal of equipment intended for use in our discontinued ISP wireless operation amounted to $125,256 in the six month period ended June 30, 2002. During the same period, a $58,784 loss was recognized with respect to the disposal of this ISP equipment, of which $4,125 was a write-down of equipment to its net realizable value. Liquidity --------- Working capital at June 30, 2002. approximated $488,000. This amount was subsequently increased by $650,000 following the private placement of preferred stock (see Note 12 to the within financial statements). Even so, unless sales increase markedly, and profits are realized, additional working capital will be needed. If so, the Company will seek to place additional amounts of debentures or capital stock. No assurance can be given, however, that a future placement of securities can be accomplished, or would not be dilutive to current shareholders. Risks and Uncertainties ----------------------- The Company is subject to all the risks inherent in an early stage company in the software, systems, telecommunications and Internet industries. These risks include, but are not limited to, a limited operating history, limited resources, dependence upon consumer and business acceptance of the products and services, the changes taking place in the electronic commerce industry and the general economic climate. The Company's operating results may be materially affected by the foregoing factors. 11 STATEMENTS CONTAINED HEREIN AND ELSEWHERE IN THIS REPORT CONCERNING FUTURE ACTIVITIES, PERFORMANCE OR INTENTIONS ARE FORWARD-LOOKING STATEMENTS WHICH, BY THEIR NATURE, INVOLVE RISK AND UNCERTAINTY BECAUSE THEY RELATE TO EVENTS, AND DEPEND ON CIRCUMSTANCES, THAT WILL OCCUR IN THE FUTURE, MANY OF WHICH ARE NOT WITHIN THE COMPANY'S CONTROL. ACTUAL RESULTS AND EVENTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH STATEMENTS AS THE RESULT OF KNOWN OR UNKNOWN RISKS, UNCERTAINTIES AND/OR OTHER FACTORS AND THERE CAN BE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE CORRECT. PART II OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1* Certificate of Amendment to the Certificate of Incorporation dated August 1, 2002. 10.1* Stock Purchase Agreement, dated as of July 31, 2002, between Registrant and Shrikant C. Mehta with respect to the purchase of Series D Convertible Preferred Stock. 99* Statement Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *filed herewith (b) A Report on Form 8-K was filed for an event of April 16, 2002, reporting in Item 4 a change in the Company's independent accountants. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DISTINCTIVE DEVICES, INC. (Registrant) Dated: August 12, 2002 By: /s/ SANJAY MODY ---------------------- Sanjay Mody President and CEO Treasurer and CFO 12