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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ________________
Commission File No. 0-20190
BITWISE DESIGNS, INC.
(Name of Small Business Issuer in its charter)
Delaware 14-1673067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Building 50, Rotterdam Industrial Park
Schenectady, N.Y. 12306
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (518) 356-9741
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Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, $.001 par value Pacific Stock Exchange
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Securities registered pursuant to Section 12(g) of the Exchange Act:
NONE
(Title of class)
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(Title of class)
[Cover Page 1 of 2 Pages]
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Check whether the Issuer (1) has 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 _____
Check if there is no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained in this form, and no disclosure will
be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [ ]
The Issuer's revenues for its most recent fiscal ended June 30,
1996 were $30,611,258.
On September 24, 1996, the aggregate market value of the voting
stock of Bitwise Designs, Inc. (consisting of Common Stock, $.001 par value)
held by non-affiliates of the Registrant (approximately 6,494,600 shares) was
approximately $34,096,000 based on the closing price for such Common Stock
($5.25) on said date as reported by the Nasdaq SmallCap Market.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
On September 25, 1996, there were 7,076,609 shares of Common
Stock, $.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Bitwise Designs, Inc. ("Bitwise"), and its wholly-owned subsidiaries,
Electrograph Systems, Inc. ("Electrograph"), System Solutions Technology, Inc.
("SST") and DJS Marketing Group, Inc. ("DJS") (Bitwise, Electrograph, SST and
DJS are sometimes collectively referred to herein as the "Company") is engaged
in the manufacture and distribution of document imaging systems, computer
systems and related peripheral equipment, components and accessories and
advanced technology industrial computers.
In March 1996, the Company acquired DJS Marketing Group, Inc. a system
integrator, computer reseller and personal computer manufacturer in Albany, New
York. DJS is an authorized sales and support provider for Novell, Microsoft
Solutions and Lotus Notes, as well as a member of Microage Infosystems.
In August 1994, the Company acquired Electrograph, a value added
distributor of microcomputer peripherals, components and accessories throughout
the East Coast of the United States. Electrograph distributes products including
nationally recognized brand names such as Mitsubishi, Sony, Hitachi, Magnavox,
NEC, Toshiba, Idek, Nokia and Okidata. Electrograph's products include monitors
(color, large screen, and flat screen), printers, large screen televisions,
CD-ROMS, computer video products, optical storage products, notebook computers
and personal computers. Customers of Electrograph are primarily value-added
resellers, systems integrators, original equipment manufacturers (OEMs), retail
stores, smaller distributors and end-user corporations, including Fortune 500
companies with the in-house sophistication and technical ability to select, use
and maintain computers.
Simultaneously with its acquisition of Electrograph, the Company
acquired SST, a value added distributor of advanced technology industrial
computers and computer peripherals. SST has three separate operating divisions:
Promark Technology ("Promark"), SST Technical Services ("TSD") and Electronic
Marketing Associates ("EMA"). Each of these divisions is designed to address a
specific market segment related to SST's customer base. Promark is a value added
distributor of high technology computer and peripheral products to a customer
base of value added resellers (VARS), systems integrators, commercial and
industrial market OEMs, government agencies, and Fortune 500 companies which
perform their own system integration. TSD provides value added services (such
as, customization and integration of hardware and software systems) for
computers or peripherals sold through Promark including warranty on products
which have been customized or privately labeled. EMA is a manufacturers'
representative selling on a
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commission only basis for approximately 15 small and medium size manufacturers
of high technology products.
The Company was organized in August 1985 and reincorporated under the
laws of the state of Delaware in May 1992. The Company's executive offices are
located at Building 50, Rotterdam Industrial Park, Schenectady, New York 12306,
and its telephone number is (518) 356-9741.
GENERAL BUSINESS DEVELOPMENTS DURING THE LAST FISCAL YEAR
In December 1995, the Company completed a private equity
offering including common stock and warrants of $5,000,000 which
was exempt from registration under the Securities Act of 1933. Net
proceeds were approximately $4,300,000.
In March 1996, the Company acquired all of the capital stock of DJS
Marketing Group, Inc. in exchange for 200,000 shares of restricted common stock
of the Company and $80,000 in cash for the aggregate purchase price of
$1,130,000. The Company's personal computer division was subsequently
transferred to DJS Marketing Group, Inc.
INDUSTRY OVERVIEW
The Company competes in the manufacturing and distribution market for
document imaging, personal computers, workstations and portable personal
computers as well as microcomputer peripherals, networks, components
accessories, Internet/Intranet development and advanced technology industrial
computers. Each of these markets has experienced significant growth over the
last decade, and the Company believes such growth will continue, particularly in
the document imaging market.
.....Document Imaging and Management
A document imaging system enables the user to scan paper documents onto
an optical disk, hard disk drive or other storage medium. The Company's DocStar
product line utilizes a personal computer, proprietary software and a scanner.
Such a system can be utilized as a "stand-alone" system or as part of a network
installation. In January 1996, the Company, on a national level, introduced its
document imaging system under the tradename DocStar, designed and manufactured
by Bitwise.
The Company believes the document imaging market is still developing and
will experience significant growth in the future and that this market has the
potential to provide profitable growth for the Company. There can be no
assurance that the Company's efforts in this emerging market will result in
profits, income or significant revenues to the Company.
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.....Personal Computers
Personal computers or PCs are another principal product offered by the
Company through its DJS subsidiary.
PCs are generally single-task oriented and, as compared with higher
performing workstations, have slower microprocessors, less graphics capabilities
and lower resolution displays. PCs are generally characterized as stationary
(desktop) or portable. Portables include transportables, laptops, notebooks and
handhelds.
The Company believes that the PC market has become less vendor-specific
or brand name oriented due to the standardization of technology and the ease
with which off-the-shelf components and circuit boards can be utilized in almost
any configuration adopted by a manufacturer.
.....Peripheral Computer Products
Peripheral computer products includes printers, monitors, scanners,
modems, software, etc. that operate in conjunction with a computer. Peripheral
products are purchased from a wide assortment of suppliers and come in a variety
of performance speeds, capabilities, features and prices. The market for these
products is directly related to the computer market, however, there is a
significant "after market" opportunity for these products. Customers frequently
add peripheral products after the initial computer purchase. A value added
distributor, such as SST and DJS, configures various computer hardware and
peripheral products such as software together, to meet a specific customer's
needs. The Company believes a significant portion of its business will continue
to be sales of peripheral computer products.
.....Workstations and Advanced Technology Industrial Computers
Workstations are single user, high performance computer systems with
advanced capabilities for computationally intensive scientific, engineering and
industrial applications. Such uses include electronic publishing, business
graphics, financial services, mapping, office automation or other applications
which manipulate large amounts of data.
.....Transportables
Transportables are PCs which offer the functionality of a desktop
computer in a compact, AC-powered case weighing less than 40 pounds.
Transportables typically offer brighter, flat panel displays, higher-powered
microprocessors, larger mass storage devices and more expansion options than are
available in smaller laptop or notebook computers. The Company believes the
transportable PC user is more interested in compatibility with desktop
processing power and display quality than with weight,
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size, or battery life. Notebook and laptop computers cannot offer the expansion
capabilities of transportables. Users with a need for specialized data
acquisition devices, accelerator boards, and truly high capacity mass storage
will continue to require transportable designs to meet their mobile computing
needs. Transportables can also be produced in a ruggedized case for industrial
uses.
.....Notebooks/Laptops
Notebooks and laptops use battery power and are smaller in size and
weight than transportable or desktop designs. These products range in weight
from under six pounds to about fifteen pounds, and in size from the equivalent
of a narrow three-ring notebook binder to a small briefcase. Notebooks now offer
the power and speed of desktop systems, but at a significantly higher cost.
.....Networks
A network installation involves network software installed on a
fileserver computer with less powerful computers sharing information from the
fileserver. Applications include E-mail, accounting systems, word processing,
communication and any other applications requiring the sharing of information.
Management believes that designing and installing network systems may be an area
of growth for the Company, although there can be no assurance that growth in the
network market can be realized.
.....Internet/Intranet Development
The Internet/Intranet is a computer based communication system which has
international applicability. Customers utilize the Internet to advertise
products, provide news and stock market products, provide educational data
bases, as well as one on one and Group Communications. Through its DJS
subsidiary, the Company provides customer Internet services, including
installation of web pages.
BITWISE
PRODUCTS
Document Imaging and Management
In January 1996, Bitwise, on a national level, introduced its document
imaging management system under the tradename DocStar which enables users to
scan paper documents onto an optical disk, hard drive or other storage medium
from which they can be retrieved in seconds. This system allows users to
eliminate or significantly reduce paper filing systems. The Company believes
that the problem of storage and management of paper documents confronts a broad
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spectrum of businesses and governmental agencies. The DocStar product line is
intended to provide a cost effective method to reduce the space necessary to
store documents while providing instantaneous retrieval of any document and
improved security of documents.
The operation of a document management system is similar to the
operation of a facsimile machine. Documents are fed into an optical scanner
which reads the documents and stores the information on one of several
alternative mass storage devices. Documents can also be transmitted from or to
the system via facsimile machine or modem.
The main components of a document management system are a personal
computer, a high speed electronic document scanner, a laser printer capable of
reproducing documents quickly, and a software package which controls scanning,
indexing, storage and reproduction. Bitwise purchases the scanner, laser printer
and other necessary hardware from unaffiliated third parties and manufactures
the PC for the system. The software utilized in DocStar consists of various
versions of existing software from other developers, as well as software
developed by the Company. The Company offers the DocStar System in three models:
System 10, System 20 and System 25. The DocStar System 10 is the base model. The
System 20 and 25 offer faster processors or scanners, and increased storage
capacity. Options and accessories include a jukebox, additional software,
scanner upgrades, monitor upgrades and hardware upgrades.
The Company markets the document management system under the tradename
DocStar through a national dealer network. The Company owns one dealership in
the Albany, New York region, which also serves as a test market for new
applications and software.
BACKLOG
Bitwise normally ships products within 5 days after receipt of an order
and typically has no more than two weeks of sales in backlog at any time.
Accordingly, Bitwise's backlog of orders at any point in time fluctuates and is
not material.
RESEARCH AND DEVELOPMENT
The market for Bitwise's products is characterized by rapid
technological change involving the application of a number of advanced
technologies, including those relating to computer hardware and software, mass
storage devices, and other peripheral components. Bitwise's ability to remain
competitive depends upon its ability to anticipate and effectively react to
technological change, as well as the application requirements of its customers.
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From its inception, Bitwise has devoted continuing efforts to research
and development activities to enhance its current products and introduce new
products. Current development efforts are principally directed toward improving
ease of use, adding system enhancements and increasing performance Product
development expenditures were $129,075 and $29,384 for fiscal years 1996 and
1995, respectively. The Company believes it must continue to enhance its
document imaging products to respond to the needs of an ever changing
marketplace.
QUALITY CONTROL AND SERVICE
Quality control at Bitwise is addressed at three levels of the
production process. First, components considered for use in standard systems are
tested for compatibility by the research staff. Second, incoming components
receive a physical damage inspection on receipt and again at the start of the
production process. Each memory module is electronically tested prior to
assembly. Each complete unit is then functionally tested at the end of the
assembly process to demonstrate that all components are engaged and fully
operational.
Third, each complete unit is "burned-in" for twenty-four hours. This
process involves running a component test program which sequentially tests each
memory bit, processor circuit, and drive memory track to verify correct
operation in a temperature-controlled chamber. This test is repeated
continuously over the burn-in period. Since electronic components have their
greatest failure risk during the first few hours of active operation, management
believes that the burn-in process reveals nearly all faulty components before
they reach the end user.
The Company's dealers provide service to the end users. All dealers
receive service training from the national service staff. The Company provides
the dealer with replacement parts free of charge for 13 months after date of
shipment. The Company's vendors provide a similar warranty for failed
components. The Company offers liberal telephone support service to its dealers.
MANUFACTURING AND SUPPLIERS
Bitwise's products have been designed to enable a wide variety of system
configurations to be assembled from a few basic modules. Bitwise's manufacturing
operations consist primarily of the assembly, test and quality control of all
parts, components, subassemblies and systems.
Bitwise uses standard parts and components in its existing product lines
which it purchases from unaffiliated third parties. The Company believes
adequate alternative suppliers are available.
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Bitwise has no contractual arrangements with any of its suppliers.
Shortages of component parts could occur, which could delay or interrupt
Bitwise's manufacture and delivery of products and thereby adversely affect
Bitwise's operating results. To date, Bitwise has not experienced any material
delays in deliveries from its suppliers. Although Bitwise endeavors to mitigate
the potentially adverse effect of supply interruptions by evaluating alternative
sources of supply, there can be no assurance that such components will be
available as and when needed.
All of the peripherals available through Bitwise are manufactured by
third parties. Bitwise only assembles the computer which is part of the DocStar
system.
PATENTS AND TRADEMARKS
Bitwise has no patents but has registered the logo "BitWise Designs" and
Bitwise's associated trademark, "DocStar". No assurance can be given that
registration will be effective to protect Bitwise's trademarks. The Company
believes the tradename
"BitWise Designs" is material to its business.
SALES AND MARKETING
Currently, Bitwise's products are primarily distributed through a
national dealer network. The Company also sells direct through one dealership it
owns in its local market area. Primarily through national advertising and
favorable reviews in industry publications, newspapers, magazines, press
releases and other periodicals serving the document imaging industry, management
believes that Bitwise has achieved a national, albeit small, sales presence.
Bitwise is still in the early stages of developing its national dealer
network and management hopes to significantly increase the number of dealer
locations during the remainder of the current fiscal year, although there can be
no assurance it will be successful in such efforts.
Bitwise's products are typically sold on credit terms (to qualified
accounts), and are warranted against defects in materials and workmanship for a
period of 13 months from purchase. Bitwise currently employs four regional sales
managers. The regional sales managers employ several district managers to cover
all the significant markets in their region. Currently, Bitwise is continuing to
recruit district sales managers to fill the four regions of the country.
The Company is also pursuing international dealers through agents of
large multi-national firms.
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COMPETITION
The market for Bitwise's products is competitive and rapidly changing,
and Bitwise expects competition to continue to be intense in the foreseeable
future. This competition is direct (i.e., companies that make similar products)
and indirect (i.e., companies that participate in the market, but are not direct
competitors of Bitwise). Bitwise competes with major document imaging
manufacturers such as Canon, Panasonic and Sharp. Many of Bitwise's current and
prospective competitors have significantly greater financial, technical,
manufacturing and marketing resources, and a larger installed base, than
Bitwise.
EMPLOYEES
Bitwise employs 56 full-time employees including its executive officers.
No employees are covered by a collective bargaining agreement, and Bitwise
believes its relations with its employees is satisfactory.
ELECTROGRAPH
Electrograph is a value added distributor of microcomputer peripherals,
components and accessories throughout the United States. The distribution center
and offices of Electrograph are located in Hauppauge, New York from which all of
its products are shipped.
PRODUCTS
The major categories of products presently distributed, and the current
range of suggested list prices by Electrograph are described below.
Printers. Electrograph distributes a broad line of sublimitation and wax
printers and supplies at prices ranging from $3,000 to $20,000.
Monitors. Electrograph distributes Mitsubishi, Hitachi, Nokia, EDL, Eizo
Nanao, NEC and Sony monitors at prices ranging from $400 to $8,000.
Other Products. Other products distributed by Electrograph include:
Multimedia projectors at prices from $2,000 to $18,000; Distribution boxes; RGB,
VGA, at prices of $300 - $2,000; Graphic cards; from $300 - $4,000; Computer and
Printer cables at $5 to $75; and CD-ROM, Multimedia Kits at $150 to $600.
BACKLOG/INVENTORY CONTROL
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Electrograph does not stock significant amounts of inventory relative to
the number of different products it carries. Most products are stocked to
provide a 30-day supply.
CUSTOMER SUPPORT
Electrograph provides technical assistance to customers through its
Hauppauge, New York office. Electrograph will ship returns of other defective
products to the manufacturer or to an authorized repair center. Returns have
historically been approximately 3% of net sales. Electrograph does not believe
that such a breakdown or the dollar amounts of product returns is material,
however, as substantially all of these amounts are reimbursed to Electrograph by
its suppliers through credits and replacements, and also through restocking
charges and resale. As a result, Electrograph's costs charged to operations for
such returns have been minimal.
Electrograph's distribution center is equipped with computer
demonstration facilities that permit customers to observe and learn about new
products and monthly specials available to the customers. This facility also
displays a variety of computer trade publications that keep the reader abreast
of the latest industry developments and are provided free of charge.
Electrograph provides manufacturers product line literature at no charge
to its customers and distributes a quarterly product catalog, at no charge, that
describes Electrograph's products and prices, its payment and shipping policies,
customer support services and manufacturers' warranty policy. Electrograph also
periodically publishes a direct mail flyer on new products and special
offerings.
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SUPPLIERS
Products are selected by Electrograph to minimize competition among
suppliers' products while maintaining some overlap to provide protection against
product shortages and discontinuations and to provide different price points for
certain items. Management believes Electrograph's relationships with its
suppliers are enhanced by providing feedback to suppliers on products, advising
suppliers of customer preferences, working with suppliers to develop marketing
programs, and offering suppliers the opportunity to provide seminars for
Electrograph's customers.
Like most of its competitors, Electrograph distributes products for
manufacturers throughout the United States on a non-exclusive basis without
geographic restrictions. Electrograph has supplier agreements with many of its
suppliers which it believes are in a form customarily used by each manufacturer.
These agreements usually contain provisions which allow termination without
cause, by the supplier generally upon 30 to 60 days notice.
Electrograph's supply agreement with Mitsubishi requires minimum
purchases of $750,000 per year. Otherwise, none of Electrograph's material
supplier agreements require the sale of specified quantities of products or
restrict Electrograph from selling similar products manufactured by competitors.
Electrograph, therefore, has the ability to terminate or curtail sales of one
product line in favor of another product line as a result of technological
change, pricing considerations, customer demand or supplier distribution policy.
Electrograph has never been terminated by any of its suppliers.
Most of Electrograph's major suppliers provide price protection, by way
of credits, against price reductions by the supplier between the time of the
initial sale to Electrograph and the subsequent sale by Electrograph to its
customer. Additionally, most of Electrograph's suppliers accept defective
merchandise returned within 12 to 15 months after shipment to Electrograph. Some
suppliers permit Electrograph to rotate its inventory by returning slow moving
inventory for other inventory. The total amount of advertising expense funded by
suppliers by means of credits has historically been less than 1% of net sales.
Credits, refunds or other payments to which Electrograph was entitled by reason
of price protection, advertising allowances, stock rotations and refunds for
defective merchandise totalled approximately 1% of net sales for fiscal 1996.
While Electrograph distributes products of more than 15 suppliers,
approximately 53% of Electrograph's net sales in fiscal 1995 and 50% of
Electrograph's net sales for fiscal 1996, were derived from products
manufactured by Mitsubishi, Electrograph's largest supplier.
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PATENTS, TRADEMARKS AND LICENSES
Electrograph does not have any patents and does not consider patents
significant to its business. Electrograph has registered its trade names and
service marks "Computers for Less" and "Chip N Byte" with the United States
Patent and Trademark Office.
SALES AND MARKETING
Electrograph's distribution operations are currently conducted from two
distribution centers in Hauppauge, New York and Long Beach, California.
Electrograph also maintains sales offices in Baltimore, Maryland and Northville,
New York and Long Beach, California.
Credit is extended in most circumstances, and is generally limited to
30-day payment terms.
COMPETITION
The microcomputer distribution industry is intensely competitive and is
characterized by constant pricing pressures and rapid product performance,
improvement and technological change resulting in relatively short product lives
and early product obsolescence. Competition is primarily based on product lines
and availability, price, delivery and other support services. Competing
distributors include other national distributors, regional distributors and
manufacturers' direct sale organizations, many of which have substantially
greater technical, financial and other resources than Electrograph. Major
wholesale electronic distribution competitors include Ingram Micro D, Inc.,
Merisel, Inc., Tech Data Corporation, and Gates/FA Distributing, Inc.
Electrograph's ability to compete favorably is, in significant part,
dependent upon its ability to control costs, react timely and appropriately to
short- and long-term trends and competitively price its products while
preventing erosion of its margins, and there is no assurance that Electrograph
will be able to do so.
EMPLOYEES
Electrograph has 14 full-time employees, including five marketing and
sales personnel (including one executive officer), two customer service
personnel, one warehouse employee and six administrative personnel. None of
Electrograph's employees are covered by a collective bargaining agreement.
Electrograph considers relations with its employees to be satisfactory.
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SYSTEM SOLUTIONS TECHNOLOGY, INC.
SST is a value added distributor of advanced technology industrial
computers and computer peripherals. SST's main offices are located in Laurel,
Maryland.
PROMARK TECHNOLOGY DIVISION
Promark distributes a full range of ruggedized computers: hand held,
portable, lugable or rackmounted. Promark also distributes high technology
microcomputer peripherals including document scanners, optical disk drives and
juke boxes, high capacity magnetic tape drives and tape library systems for
imaging and network mass storage applications. These computers are frequently
used as portable work stations and therefore, must have the ability to accept
devices providing additional capabilities. They function in hostile environments
such as, factory floors, outdoor unheated sheds, bright sunlight, and field
service applications.
Although Promark has a broad list of suppliers, nine were responsible
for 80% of its sales in fiscal 1996: Getac Computer, Exabyte, UMAX, Ricoh,
Hitachi, Radius, Maxoptic, GCC Technologies and Storage Technology. None of
these suppliers accounts for 10% or more of Promark's purchases. Promark is
distributor and service
center for several of these companies.
Promark manufacturers its own line of high performance portable and
mobile computers. These computers range in price from $5,000 to $10,000 and
possess workstation capabilities.
TECHNICAL SERVICES DIVISION
TSD provides all value added service to computers or peripherals sold by
Promark. TSD provides all warranty on products that have been customized or
privately labeled. This division also performs on-site and depot service for
many other products sold by SST. TSD is currently authorized to service Ricoh's
laser printers and page scanners, Exabyte and Shugart tape drives, UMAX page
scanners and Kontron computers. On-site contracts are in force with AT&T, Martin
Lockheed and others.
TSD also sells replacement parts for those products which it services,
as well as other related supplies.
ELECTRONIC MARKETING ASSOCIATES DIVISION
EMA is a manufacturers' representative selling on a commission only
basis for 15 small and medium size manufacturers of high technology products.
This sales effort has for the last 20 years been technology driven primarily to
the military electronics markets. In the 1990s with the reduction in defense
spending, a shift to the commercial and industrial market was completed.
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For example, EMA represents four manufacturers, Dranetz Technologies,
Westinghouse Suresine, Westinghouse FTMS and Scientific Atlanta, that assist
power companies in analyzing their power at the generator and at the point of
use to enable these utilities to recommend to their users, or within their own
distribution system, the equipment required for quality improvement and
monitoring. EMA sells equipment used in each of these phases:
generation, distribution and use of power.
In addition, EMA has moved aggressively into the expanding cellular
market. EMA offers products used in the testing of transmitters, phones,
antennas and the location of faults in cable, tower transmitters and receivers.
Manufacturers represented by EMA include: Dranetz Technology,
Marconi Instrument, GenRad, Loral Narda Microwave, Spectracom,
Scientific Atlanta, Westinghouse SureSine, Westinghouse FTMS,
Intercontinental Microwave and TRIQUINT.
PATENTS, TRADEMARKS AND LICENSES
SST does not have any patents, trade names or service marks and does not
consider patents, trade names or service marks significant to its business.
SALES AND MARKETING
SST markets from Maine to Florida and all states east of the Mississippi
River, with offices in Reading, Massachusetts, and Laurel, Maryland.
COMPETITION
In addition to the competitors and competitive factors described above
with respect to Bitwise and Electrograph, SST also competes with numerous small
and local technicians and service companies who provide similar technical
services in SST's area of operation. Further, SST competes with national
distributors such as Ingram Micro D and Tech Data Corporation, and regional
distributors such as Law Cypress and Peak Technologies. There can be no
assurance SST will be able to successfully compete in the future.
EMPLOYEES
SST has 20 full-time employees, including 10 marketing and sales
personnel (including one executive officer), 3 customer service personnel, 1
warehouse employee, and 6 administrative personnel. None of SST's employees are
covered by a collective bargaining agreement. SST considers relations with its
employees to be satisfactory.
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DJS MARKETING GROUP, INC.
DJS (d/b/a Computer Professionals) is a network and systems integrator
of computer and peripheral products to a varied customer base consisting of
individuals, schools, government agencies, large manufacturers and distributors.
DJS is the largest systems integrator in the Albany, New York region.
DJS also produces Bitwise PC's at their Albany, New York production
facility. Additionally, contained within this facility is the DJS Service
Department where factory trained computer technicians diagnose, service and
upgrades all major brands of computer equipment.
DJS services network integration, Internet/Intranet development,
accounting solutions, service and consultation, document management, video
conferencing and application training.
Products
NETWORK INTEGRATION.
DJS' network integration group designs, implements, installs, manages and
supports enterprise networks with products from Novell, Microsoft, UNIX,
Tricord, Synoptics, Compaq and Cisco among others.
Because DJS's clients have custom objectives, DJS designs customer
solutions and its engineers analyze hardware, software, and cabling to ensure
effective and affordable solutions.
INTERNET/INTRANET DEVELOPMENT.
DJS offers services related to the Internet, including Internet
connectivity, web page development, and hardware installation Additionally, DJS
assists its clients through the buying and implementation process with
Internet/Intranet training and ongoing support.
ACCOUNTING SOLUTIONS.
DJS also markets accounting systems from State-of-the-Art and Macola to
various end-users such as distributors, manufacturers and wholesalers. DJS
personnel conduct analyses of each client's requirements and custom design an
accounting system to satisfy these requirements.
SERVICE AND CONSULTATION.
DJS's service department is authorized to repair and maintain all major
brands of the products sold by DJS, including warranty and post-warranty
equipment. DJS generally guarantees a four hour
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response time for all service calls, with an average resolution time of next
day.
DJS's engineers also provide complete system configuration services.
These include installation of all hardware, including memory, disk drives,
network or communication adapters, as well as any associated software or driver.
All units are thoroughly tested after configuration, eliminating malfunctioning
units.
DOCUMENT MANAGEMENT.
DJS also offers document imaging services which it believes offers an
efficient and financially attainable alternative to conventional, costly paper
trails. Management believes Digital documents can be stored, searched, retrieved
and edited in a fraction of the time with complete access to the network and
quality control features. Among other product lines, DJS offers customers
the Company's DocStar line.
VIDEO CONFERENCING.
DJS offers video conferencing services which it believes offers a
cost-effective means of "buying" more hours in a day and eliminating the high
cost of travel while satisfying each customer's communication needs.
DJS provides flexible platform-independent video-conferencing solutions
that can be integrated into a single workstation environment or an enterprise
network.
APPLICATION TRAINING.
DJS provides application training either on-site or in its facility. DJS
has a state of the art multimedia training facility with a wide range of courses
including specialized instruction in Lotus Notes, HTML training, and World Wide
Web page development.
SALES AND MARKETING.
DJS markets its products and services to all of New York State, and
parts of Vermont and Massachusetts with a satellite affiliate in Chicago. DJS
intends to expand its national and international growth of its sales and
marketing departments. Clients include individuals, small office/home office
owners, schools, government agencies, large corporations, manufacturers and
distributors.
COMPETITION.
DJS is one of the oldest and largest network and systems integrators in
the Capital District of Albany, New York, and works on many diverse platforms.
While management believes that no other
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computer company offers the breadth of services of DJS, competitors of computer
sales, service and support in general, would include Computerland, Computers
Etc., CompUSA, Entex and Ameridata.
EMPLOYEES
DJS has 32 full-time staff members, including three (3) executive
officers. None of the employees of DJS are represented by a collective
bargaining agreement. DJS believes that its employee relations are good.
ACQUISITION STRATEGY
The Company intends to pursue a program of growth through the
acquisition of products and technologies that complement and augment its
existing products and customer base. The Company may also purchase the assets
of, or otherwise acquire, merge or combine with, another computer product or
service company or other compatible business enterprises. The Company's strategy
is to consolidate synergistic technologies through such acquisitions and thereby
increase its position in the growing document imaging and computer marketplace.
The Company's long-term plan is to expand Bitwise's sales and income potential
by achieving economies of scale as it expands its revenue base. The Company's
past acquisitions have been funded through public or private offerings of its
securities, or paid through a combination of cash and the issuance of
securities. Future acquisitions will most likely continue to involve similar
funding alternatives.
CAUTIONARY STATEMENTS
As provided for under the Private Securities Litigation Reform Act of
1995, the Company wishes to caution stockholders and investors that the
following important factors, among others discussed throughout this report, in
some cases have affected and in some cases could affect the Company's actual
results of operations and cause such results to differ materially from those
anticipated in forward looking statements made herein.
SIGNIFICANT LOSSES
The Company has incurred losses of $2,961,039, $813,380 and $1,872,819,
respectively, for its fiscal years ended June 30, 1996, 1994 and 1993 and had
only a minimal profit for the fiscal year ended June 30, 1995. Furthermore,
the Company commenced marketing of its DocStar line of document imaging systems
on a national basis in Jaunary 1996. The Company anticipates it will continue
to incur significant losses during the remainder of the fiscal year ending June
30, 1997 primarily due to expenses incurred in the marketing of DocStar.
Moreover, the Company's prospects should be considered in light of the
difficulties frequently encountered in connection with the establishment of a
new business line and the competitive environment in which the Company
operates. There can be no assurance that the Company will be able to achieve
profitable operations in the future operating periods.
UNCERTAINTY OF WIDESPREAD MARKET ACCEPTANCE OF NEW PRODUCTS
The Company introduced the DocStar system on a national level in
January, 1996. As is typical with new products, demand and market acceptance
for the DocStar imaging system is subject to a high level of uncertainty.
Achieving widespread acceptance of this product line will require substantial
marketing efforts and the expenditure of significant funds to create brand
recognition and customer demand for such products. There can be no assurance
that adequate marketing arrangements will be made for such products. Moreover,
there can be no assurance that these products will ever achieve widespread
market acceptance or increased sales or that the sale of such products will be
profitable.
COMPETITION
The Company and its subsidiaries are engaged in the highly competitive
businesses of manufacturing and distributing computer hardware and software as
well as technical support services for such businesses. The computer hardware
industry is highly competitive. The Company competes in the portable computer
market with major computer manufacturers such as International Business
Machines, Inc., Apple Computers, Inc., Compaq Computer Corporation and Dell
Computer, as well as various manufacturers of super portables who are
concentrated in the Company's target market, such as Dolch Computer Systems,
Inc. and Ergo Computing, Inc. All of these companies have substantilly more
experience and greater sales, as well as greater financial and distribution
resources than those of the Company. The Company also competes with many
independent computer companies, smaller than those mentioned, many of
which also have substantially greater sales, financial resources and
experience than those of the Company. The most significant factors which
form the basis upon which the Company competes are the quality of its
products, including advanced capabilities, and price. There can be no
assurance the Company can effectively continue to compete in the future.
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The microcomputer distribution industry, in which the Company is
engaged through Electrograph, is intensely competitive and is characterized
by constant pricing pressures and rapid product performance, improvement and
technological change resulting in relatively short product lives and early
product obsolescence. Competition is primarily based on product lines and
availability, price, delivery and other support services. Competing
distributors include other national distributors, regional distributors and
manufacturers' direct sale organizations, many of which have substantially
greater technical, financial and other resources than the Company. Major
wholesale electronic distribution competitors include Ingram Micoro D, Inc.,
Merisel, Inc., Robec, Inc., Tech Data Corporation, Entertainment Marketing
Inc. and Gates/FA Distributing Inc. The Company's ability to compete favorably
is, in significant part, dependent upon its ability to control costs, react
timely and appropriately to short- and long-term trends and competitively
price its products while preventing erosion of its margins, and there is no
assurance that the Company will be able to do so.
In addition to the competitors and competitive factors described above
with respect to Bitwise and Electrograph, SST also competes with numerous small
and local service companies who provide similar technical services in SST's
area of operation. Further, SST competes with national distributors such as
Ingram and Tech Data Corporation, and regional distributors such as Law Cypress
and Peak Technologies. There can be no assurance SSt will be able to
successfully compete in the future.
The Company's newly acquired subsidiary, DJS Marketing Group, Inc., is
engaged in the highly competitive business of systems integration and computer
reselling. DJS competes with many small and local companies which provide
similar technical services to those offered by DJS. Additionally, DJS must
compete with other computer resellers, many of whom have greater financial and
technical resources. There can be no assurance that DJS will be able to compete
successfully with these competitors.
DJS currently leases 7,990 square feet of office, warehouse
and showroom space in Albany, New York for $70,700 per year. This
lease expires in May 2001.
Management believes that its current facilities are adequate to meet its
present and foreseeable requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to no legal proceedings which may have a material
adverse effect on its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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<PAGE> 21
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Upon the effectiveness of the Company's public offering on May 13, 1992,
its Common Stock commenced trading in the over-the-counter market and was listed
on the SmallCap Market of the Nasdaq Stock Market ("NASDAQ") under the symbol
BTWS. On August 11, 1994, the Common Stock commenced trading on the Boston Stock
Exchange under the symbol BTW. On June 25, 1996, the Company withdrew its
listing on the Boston Stock Exchange. On April 24, 1996, the Company's Common
Stock commenced trading on the Pacific Stock Exchange.
The following is the range of high and low closing prices for the
Company's Common Stock on the Nasdaq SmallCap Market for the periods indicated
below:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Common Stock
- ------------
Fiscal Year 1996
- ----------------
1st Quarter............................. 5-1/4 1-9/16
2nd Quarter............................. 7-3/8 4-3/8
3rd Quarter............................. 7-15/16 5-3/8
4th Quarter............................. 6-7/8 4-5/8
Fiscal Year 1995
- ----------------
1st Quarter............................. 5-1/2 4-1/2
2nd Quarter............................. 5-1/2 5-1/8
3rd Quarter............................. 5-3/16 1-1/4
4th Quarter............................. 2 1-3/8
</TABLE>
The above quotations represent prices between dealers, do not include
retail mark-ups, mark-downs, or commissions, and do not necessarily represent
actual transactions.
There are approximately 660 holders of record of the Company's Common
Stock but the Company believes there are more than 500 beneficial holders of the
Company's Common Stock.
The Company has not paid any dividends upon its Common Stock since its
inception. The Company does not expect to pay any dividends upon its Common
Stock in the foreseeable future and plans to retain earnings, if any, to finance
the development and expansion of its business. Further, the Company's
Certificate of Incorporation authorizes the Company's Board of Directors to
issue Preferred Stock with a preferential right to dividends and at the present
time, only holders of the Series B Convertible Preferred Stock have a
preferential right to dividends. The Series B
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Convertible Preferred Stock bears dividends at 7% (10% with respect to 28,571
shares) per annum.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following analysis of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
financial statements, including the notes thereto, contained elsewhere in this
report.
RESULTS OF OPERATIONS
Fiscal Year 1996 Compared to Fiscal Year 1995
The Company realized a consolidated net loss of $2,961,039 or $.55 per
share, for the fiscal year ended June 30, 1996 compared to a net profit of
$3,681, or $.00 per share, for the fiscal year ended June 30, 1995. Consolidated
net sales totaled $30,611,258 for fiscal year 1996 compared to $23,949,368 for
fiscal year 1995.
The sales increase is partially attributed to the acquisition of DJS
Marketing Group, Inc. in March 1996. Sales increases also reflect the inclusion
of Electrograph and SST as wholly-owned subsidiaries of the Company for
the entire fiscal year 1996 compared to inclusion for only approximately 10 1/2
months in fiscal year 1995. The Company also experienced significant sales
growth in its document imaging product line known as DocStar. Additionally,
Electrograph Systems, Inc., and System Solutions Technology, Inc. ("SST") also
experienced sales growth. The decrease in profits can be attributed to the
introduction of the DocStar product line. During fiscal year 1996, the Company
incurred and expects to continue to incur, significant costs to build a
management and sales team, significantly expand its distribution network and to
advertise and promote DocStar. As a result of these various costs, the Company
has incurred a loss for the year ended June 30, 1996.
Gross profit for fiscal year 1996 was $4,826,693 compared to $3,956,846
for the 1995 fiscal year. The gross profit margin was 15.8% for fiscal 1996
compared to 16.5% for fiscal 1995. The Company's gross profit margin (which is
defined as gross profit as a percentage of sales) decreased slightly due to
aggressive pricing of certain Company products such as personal computers and
peripheral computer products. This was partially offset by the growth in sales
of the Company's DocStar product line which has significantly higher gross
margins than other product lines of the Company. Increases in gross profit also
resulted from inclusion of SST and Electrograph for a full fiscal year as
compared to the previous fiscal year, as well as the acquisition of DJS, as
described above.
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Selling, general and administrative expenses consist of all other
Company expenses, except product development and interest. These costs increased
from $3,993,861 in fiscal 1995 to $7,564,946 in fiscal 1996. The increase in
such expenses is due to the acquisition of DJS as well as the growth of SST and
Electrograph. Additionally, these increased expenses resulted from inclusion of
SST and Electrograph for full fiscal year 1996. In addition, the Company
incurred significant selling, general and administrative costs related to the
DocStar product line in fiscal 1996, including costs associated with the hiring
of a national dealer sales force and related expenses such as salaries, travel
and living expenses, moving expenses, communication costs, equipment costs and
benefits as well as advertising, promotion, sales training, service training,
technical support, production overhead and office overhead. The Company is
continuing to recruit sales, marketing and service personnel for the DocStar
line, and therefore additional costs will be incurred during the next fiscal
year.
As a percentage of sales, selling, general and administrative costs
increased from 16.7% in fiscal 1995 to 24.7% in fiscal 1996. Management believes
that as the DocStar sales volume increases this percentage of selling, general
and administrative costs to sales will decrease. Recently the Company opened its
Central and Western United States dealership territories and expects significant
growth in the future. Prior to June 30, 1996 most sales were limited to dealers
in the Northeastern United States with some minor volume in the Southern United
States.
Interest costs totaled $232,678 in fiscal 1996 compared to $108,239 in
fiscal 1995. The increase in interest cost is related to the increase in sales
volume over the prior year. Additionally, this increase reflects interest costs
associated with the $2.3 million credit facility obtained by the Company's
recently acquired subsidiary, DJS. As sales increased the Company increased its
borrowings to fund inventory and receivables. To a lesser extent the increase is
also due to an increase in interest rates compared to the prior year.
Product development expenses that relate primarily to development of the
Company's DocStar product line, increased from $29,384 in fiscal 1995 to
$129,075 in fiscal 1996. The Company has a policy of capitalizing qualifying
software development costs and amortizing those costs over three years. During
fiscal year 1996, the Company capitalized $29,957 in such costs as compared to
$48,911 in fiscal 1995.
Fiscal Year 1995 Compared to Fiscal Year 1994
Sales for the years ended June 30, 1995 and 1994 were $23,949,368 and
$4,661,377, respectively. The increase of sales for fiscal 1995 of $19,287,991
resulted primarily from the
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<PAGE> 24
acquisitions of Electrograph Systems, Inc. and System Solutions Technology, Inc.
on August 18, 1994. Net income also increased from the prior year as a result of
the acquisitions from a loss of $813,380 for the year ended June 30, 1994 to a
profit of $3,681 for the year ended June 30, 1995.
Gross profit was $3,956,846 in fiscal 1995 compared to $663,450 in
fiscal 1994. The increase was also due to the acquisitions of Electrograph and
SST. Gross margins (defined as a percentage of gross profits to sales) increased
from 14.2% in fiscal 1994 to 16.5% in fiscal 1995. The increase in gross margin
is due to the acquisition of SST, which sells higher margin products and an
increase in sales by Bitwise of portable systems and document imaging systems,
both of which produce higher margins.
Selling, general and administrative expense increased from $1,421,401 in
fiscal 1994 to $3,993,861 in 1995. As a percentage of sales, these costs
decreased from 30.5% in fiscal 1994 to 16.7% in fiscal 1995. As anticipated by
management when it sought to acquire SST and Electrograph, the Company has
achieved significant benefits through the synergy of the three entities and the
elimination of duplication and also through the process of streamlining the
three businesses.
Interest costs totaled $108,239 in fiscal 1995 compared to $37,495 in
fiscal 1994. The increase is due to the acquisitions of SST and Electrograph,
both of which had outstanding debt during fiscal 1995 and which was assumed by
the Company as a result of the acquisitions in August 1994. With respect to
Bitwise, interest rates increased in fiscal 1995 compared to fiscal 1994, but
the increase was offset by lower borrowing.
Product development and research expenses in fiscal 1995 were $29,384
compared to $28,313 in fiscal 1994. During fiscal year 1995, these costs were
incurred for the development of Bitwise's document imaging product line known as
DocStar. Fiscal year 1994 product development and research expenses were
primarily related to Bitwise's portable product line.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds to date have been the issuance of
equity and the incurrence of third party debt. The principal balance of
long-term debt at June 30, 1996 totaled $22,110.
The Company also has two working capital lines-of-credit totaling
$4,800,000 which are collateralized by all accounts receivable, inventory and
all other assets of the Company and its subsidiaries. One of the credit lines,
in the principal amount of $2.3 million, may only be utilized by DJS. The other
line-of-credit may be utilized by Bitwise, Electrograph and SST and under the
terms of this line-of-credit, Bitwise may borrow up to $500,000, Electrograph
may borrow up to $900,000 and SST may borrow up to $1,100,000. The debt
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<PAGE> 25
accrues interest at rates ranging from the prime rate plus 1.75% and 2% per
annum. The line-of-credit agreements include various covenants which require the
Company and the subsidiaries to maintain a minimum tangible net worth and
maximum debt-to-tangible net worth. Additionally, DJS's line of credit requires
that DJS maintain a minimum tangible current ratio. As of June 30, 1996, DJS was
in technical non-compliance with one of its financial covenants. The lending
institution has subsequently waived such non-compliance. They also require
delivery of periodic financial information and quarterly audits conducted by the
respective lender. As of June 30, 1996, DJS had $721,251 outstanding on its
line-of-credit and Bitwise, SST and Electrograph had $2,094,691 outstanding on
their line-of-credit. As of July 31, 1996, DJS had $706,832 outstanding on its
line-of-credit and Bitwise, SST and Electrograph had $2,430,719 outstanding on
their line-of-credit.
The Company completed a private equity offering including common stock
and redeemable common stock purchase warrants, in December 1995 under Regulation
D of the Securities Act of 1933. The Company obtained gross proceeds of
approximately $5,000,000 and net proceeds of approximately $4,300,000. The
Company anticipates using most of the proceeds to fund sales, marketing and
distribution of its DocStar product line on a national basis. These expenditures
have and will continue to include staffing, advertising and promotion, travel,
consulting, office expansion, furniture, equipment and other related costs.
The Company completed its second public offering of common stock on
August 18, 1994. The offering produced $5,000,000 in gross proceeds through the
sale of 1,000,000 shares at an initial offering price of $5.00 per share. Net
proceeds totaled approximately $3,600,000, after expenses.
In March 1996, the Company completed its acquisition of DJS Marketing
Group, Inc. The Company acquired all of the capital stock of DJS in exchange for
200,000 shares of the Company's restricted common Stock and cash of $80,000,
resulting in an aggregate purchase price of approximately $1,130,000. The
principals of DJS have agreed to place 25,000 shares in escrow until September
1997, in order to secure certain indemnification provisions. Additionally,
subsequent to the acquisition, the Company made personal loans in the aggregate
principal amount of $125,000 to certain principals of DJS. These loans are joint
and several and secured by 30,000 shares of Bitwise common stock.
Property, plant and equipment expenditures totaled $565,753 for the year
ended June 30, 1996. There were no purchase commitments outstanding or
contemplated.
The Company anticipates that cash expected to be provided by operations
together with borrowings under its lines-of-credit will
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<PAGE> 26
be sufficient to satisfy normal operating obligations through the fiscal year
ended June 30, 1997. The proceeds from the private equity placement referred to
above should be sufficient to continue the expansion of the sales and marketing
efforts for the DocStar product line.
During the fiscal year ended June 30, 1996, the Company incurred a net
loss of $2,961,039, and cash used by operating activities totaled $5,026,642.
The Company's available cash balance at June 30, 1996 totaled approximately $3
million, and it has available approximately $2 million under existing lines of
credit. To date, the Company has been largely dependent on its ability to sell
additional shares of its common stock to fund its operating deficits. Under its
current operating plan to obtain a national acceptance of the DocStar product
line, the Company's ability to improve operating cash flow is highly dependent
on the market acceptance of its DocStar document imaging system. If the Company
is unable to attain projected sales levels for its DocStar systems, it may be
necessary to raise additional capital to fund operations and meet its
obligations.
EFFECTS OF INFLATION AND CHANGING PRICES
The impact of general inflation on the Company's operations has not been
significant to date and the Company believes inflation will continue to have an
insignificant impact on the Company. However, price deflation in the major
categories of components purchased by the Company has been substantial and is
anticipated to continue through fiscal 1997. Typically, new components such as
new generations of microprocessors and new optical disk drive technologies are
introduced at premium prices, and command high margins and high market prices
for the initial six to twelve months of their availability. During this period,
the Company is able to earn premium margins on its products. As the life cycle
progresses competitive pressures could force prices down and thus lower the
premium margins that existed. The Company does not believe price deflation will
have an impact on the Imaging Systems product line because it serves a niche
market although there can be no assurances that changing prices will not have an
impact in the future on this product line.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" which is effective for the Company in fiscal 1997.
Management of the Company believe that adoption of this standard will not have a
material effect on the Company's consolidated financial statements.
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based Compensation"
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<PAGE> 27
which is effective for the Company in fiscal year 1997. As permitted under SFAS
No. 123, the Company has elected not to adopt the fair value based method of
accounting for its stock-based compensation plans, but will continue to account
for such compensation under the provisions of APB Opinion No. 25. The Company
will comply with the disclosure requirements of SFAS No.
123 in fiscal year 1997.
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements annexed hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On August 19, 1994, the Board of Directors of the Company determined
that it would be in the best interests of the Company to terminate the services
of its independent accountant Coopers & Lybrand, which acted as its independent
accountant with respect to the fiscal years ended June 30, 1992 and June 30,
1993. The Board of Directors also decided to retain the firm of KPMG Peat
Marwick LLP to be its independent accountants for the fiscal year ending June
30, 1994. KPMG Peat Marwick LLP has served as the independent accountant for
Electrograph Systems, Inc., which was acquired by the Company on August 18, 1994
and in connection with such acquisition, the Board of Directors determined that
KPMG Peat Marwick LLP would be the surviving accounting firm. The dismissal of
Coopers & Lybrand was recommended and approved by the Board of Directors of the
Company and is not the result of any disagreement with Coopers & Lybrand on any
matter of accounting principles or practice, financial statement disclosure or
auditing scope or procedure during fiscal periods ended June 30, 1993 and June
30, 1992 and through the date of dismissal.
The audit reports issued by Coopers & Lybrand for the years ended June
30, 1993 and 1992 did not contain an adverse opinion or a disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
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ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS.
MANAGEMENT
The executive officers and directors of the Company are as follows:
NAME AGE OFFICE
John T. Botti 32 President, Chief Executive
Officer and Chairman of the
Board
Ira C. Whitman 33 Senior Vice-President--Research
and Development, Secretary and
Director
Donald J. Payne 63 Chief Operating Officer and
Director
John W. Loofbourrow 58 Director
J. Edward Sheridan 60 Director
Richard F. Clowes 60 Director
William E. Bierlin, Jr. 55 Director
Mr. Barry Steinberg resigned as a director of the Company on
September 19, 1996. Mr. Steinberg had served as a director since
December 1994.
All directors hold office until the next annual meeting of shareholders
or until their successors are elected and qualify. Officers are elected annually
by, and serve at the discretion of, the Board of Directors. There are no
familial relationships between or among any officers or directors of the
Company. In addition, in connection with the Electrograph acquisition, Barry
Steinberg, the former Chairman of the Board of Electrograph, had been granted
the right to designate one member of the Board of Directors until September
1996. Mr. Steinberg had designated himself. The Company has also granted the
principals of SST the right to designate a member of the Board of Directors for
a period of three years and William Bierlin, Jr. has been so designated.
In connection with the Company's private placement through Whale
Securities Co., L.P. ("Whale"), completed in December 1995, the Company granted
Whale the right to nominate one person to the Company's Board of Directors, or
in the alternative, a person to
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<PAGE> 29
attend meetings of the Board of Directors. To date, Whale has not
exercised its right to have a nominee elected to the Board.
John T. Botti, a co-founder, has served as President, Chief Executive
Officer and Director since the incorporation of the Company in August 1985. Mr.
Botti graduated from Rensselaer Polytechnic Institute ("RPI") with a B.S. degree
in electrical engineering in 1994 with a concentration in computer systems
design and in 1996 earned a Master of Business Administration degree from RPI.
Ira C. Whitman, a co-founder, is Senior Vice-President -- Research and
Development and a Director of the Company since the incorporation of the Company
in August 1985. Mr. Whitman graduated from RPI in 1984 with a B.S.--Computer and
Systems Engineering and in 1990 he earned a Masters in Engineering from RPI.
Donald J. Payne joined the Board of Directors in June 1992. Mr. Payne
was hired by the Company in January 1996, as Chief Operating Officer of the
Company and as President of the DocStar Division. Prior to that, Mr. Payne was
President of Federal Armored Express Air Courier Division since 1993. From 1990
to 1993 he was the President and Chief Executive Officer of Enable Software,
Inc. From 1983 to 1990, he was President of Federal Armored Express, Inc. From
1977 to 1983, Mr. Payne was Executive Vice President, North American Operations
for Brinks, Inc. For approximately 22 years prior to 1977, Mr. Payne served in
various investment management capacities within the computer software and
hardware industry, 17 of which were with International Business Machines
Corporation. Mr. Payne holds a B.B.A. degree from Adelphi University.
John W. Loofbourrow has been a Director of the Company since September
of 1987. From June 1979 to the present, Mr. Loofbourrow has been the principal
of John W. Loofbourrow Associates, Inc., a broker-dealer registered with the
National Association of Securities Dealers, Inc. specializing in institutional
private debt financing. Mr. Loofbourrow holds a B.S. degree in engineering from
RPI.
J. Edward Sheridan joined the Board of Directors in June, 1992. From
1985 to the present, Mr. Sheridan served as the President of Sheridan Management
Corp. From 1975 to 1985, Mr. Sheridan served as the Vice President -- Finance
and Chief Financial Officer of AMF. From 1973 to 1975, he was Vice President and
Chief Financial Officer of Fairchild Industries. From 1970 to 1973 he was the
Vice President, Corporate Finance of F.S. Smithers. From 1967 to 1970 Mr.
Sheridan was the Director of Acquisitions of Westinghouse Electric. From 1964 to
1967 he was employed by Corporate Equities, Inc., a venture capital firm. Mr.
Sheridan
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holds an M.B.A. from Harvard University and a B.A. from Dartmouth
College.
Richard F. Clowes joined the Board of Directors in June 1992. Mr. Clowes
is currently Vice President of Nonstop Networks Limited where he is responsible
for sales, marketing and product planning. For approximately twenty years prior
to 1989, Mr. Clowes served in various capacities in the computer industry, 13 of
which with International Business Machines Corporation holding various positions
in sales, technical support and management. He was educated at Rugby and Warwick
University (B.S. Economics) in England, and holds an Associate Professorship at
City University of New York, in Library Information Science.
William E. Bierlin, Jr. joined the Board of Directors in August 1994, as
the nominee for the former Systems Solutions Technology shareholders pursuant to
the terms of the acquisition of SST. Mr. Bierlin has been a Managing Director of
W. H. Newbold's Son & Co. Inc., a division of Fahnestock & Co., Inc., since 1980
and its Chairman since 1991. Prior to 1980, Mr. Bierlin was employed at DeHaven
& Townsend Crouten & Bodine where he was a member of the Executive Committee and
the Board of Directors from 1975 through 1978.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has three (3) Committees: Audit, Compensation and
Executive Committee.
Audit Committee. The members of the Audit Committee are J. Edward
Sheridan, William E. Bierlin, Jr. and John W. Loofbourrow. The Audit Committee
acts to: (i) acquire a complete understanding of the Corporation's audit
functions; (ii) review with management the finances, financial condition and
interim financial statements of the Corporation; (iii) review with the
Corporation's independent auditors the year-end financial statements; and (iv)
review implementation with the independent auditors and management any action
recommended by the independent auditors. During the fiscal year ended June 30,
1996, the Audit Committee did not meet. The Audit Committe did, however, meet in
September 1996.
Executive Committee. The members of the Executive Committee are John
Botti, Ira C. Whitman and Donald Payne. The Executive Committee has all of the
powers of the Board of Directors except it may not; (i) amend the Certificate of
Incorporation or Bylaws; (ii) enter into agreements to borrow money in excess of
$250,000; (iii) to grant security interests to secure obligations of more than
$250,000; (iv) authorize private placements or public offerings of the Company's
securities; (v) authorize the acquisition of any major assets or business or
change the business of the Corporation; or (vi) authorize any employment
agreements in excess of $75,000.
29
<PAGE> 31
During the fiscal year ended June 30, 1996, the Executive Committee held no
meetings.
Compensation Committee. The members of the Compensation Committee are
John W. Loofbourrow, William E. Bierlin, Jr. and J. Edward Sheridan. The
Compensation Committee functions include administration of the Corporation's
1992 Employee Stock Option Plan and Non-Executive Director Stock Option Plan and
negotiation and review of all employment agreements of executive officers of the
Corporation. During the fiscal year ended June 30, 1996, the Compensation
Committee held no meetings.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended June 30, 1996, the Board of Directors of
the Company met on four (4) occasions and voted by unanimous written consent on
1 occasion. No member of the Board of Directors attended less than 75% of the
aggregate number of (i) the total number of meetings of the Board of Directors
or (ii) the total number of meetings held by all Committees of the Board of
Directors.
CERTAIN REPORTS
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's Directors and officers, and persons who own, directly or
indirectly, more than 10% of a registered class of the Corporation's equity
securities, to file with the Securities and Exchange Commission ("SEC") reports
of ownership and reports of changes in ownership of common stock and other
equity securities of the Company. Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms that they file. Based solely on review of the copies
of such reports received by the Company, the Company believes that all Section
16(a) filing requirements applicable to officers, directors and 10% shareholders
were complied with during the 1996 fiscal year.
SIGNIFICANT EMPLOYEES
Dennis H. Bunt has been Chief Financial Officer of the Company
since September 1992. From January to September 1992 Mr. Bunt was
an independent financial consultant. From 1986 to January 1992,
Mr. Bunt was Chief Financial Officer for The Michaels Group Inc.,
a homebuilding/development company. Prior to that, Mr. Bunt was a
Division Controller for Mechanical Technology Inc. a high tech
manufacturing company where he was employed from 1980 to 1986. Mr.
Bunt is a certified public accountant and was employed by Peat,
Marwick, Mitchell & Co. from 1976-1979. He graduated with an
M.B.A. from Babson College in 1979 and a B.S. in Accounting from
Bentley College in 1976.
30
<PAGE> 32
Joseph O. Vartabedian has been associated with SST for the past 27 years
and has been President of SST since September 1993. From 1987-1993, Mr.
Vartabedian was the Vice-President -- General Manager of SST. Mr. Vartabedian
graduated from the University of Maryland in 1963 with a Bachelor of Science
degree in Electrical Engineering.
Samuel E. Taylor has been with Electrograph Systems for ten years. Mr.
Taylor serves as President of Electrograph. For eight years he served as
regional sales manager for the Baltimore office. Mr. Taylor was promoted to
General Manager in 1995. Mr. Taylor graduated from the Johns Hopkins University
in 1980 with a Bachelor of Engineering Sciences Degree. In 1984 Mr. Taylor
graduated from Loyola College with a Masters Degree in Computer Science.
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
to, earned by, paid by the Company during the years ended June 30, 1996, 1995
and 1994 to each of the named executive officers of the Company.
31
<PAGE> 33
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
NO. OF
OTHER SECURITIES
NAME AND ANNUAL RESTRICTED UNDERLYING
PRINCIPAL FISCAL COMPEN- STOCK OPTIONS/
POSITION YEAR SALARY BONUS SATION AWARD(S) SARS
<S> <C> <C> <C> <C> <C> <C>
John Botti 1996 $90,000(1) 0(1) $ 1,472(2) 0(3) 0
Chairman, 1995 $85,962 0 $ 1,179 0 600,000
President and 1994 $39,231 0 $ 1,179 0 0
Chief Executive
Officer
Donald Payne 1996 $43,554 0 $42,729(9) 0 100,000(10)
Chief Operating
Officer,
President-
DocStar Div.-
Director
Samuel Taylor(4) 1996 $44,457 $12,000 $91,536(5) 0 0
President of 1995 $40,752 $ 8,760 $82,483 0 15,000(7)
Electrograph
Systems, Inc.
Joseph 1996 $77,500 $77,480 $ 2,516(6) 0 0
Vartabedian(4) 1995 $67,782 $51,669 $ 2,316 0 80,000(8)
President of
Systems
Solutions
Technology, Inc.
</TABLE>
================================================================================
(1) Pursuant to the terms of his employment agreement dated July 1, 1995,
Mr. Botti is to receive a cash bonus each year during the term of
agreement equal to 3% of the pre-tax profits of the Company, which
criteria was not met in 1996, therefore, no bonuses were issued.
Additionally, Mr. Botti is entitled to receive $100,000 in salary per
year; approximately $10,000 has been accrued for Mr. Botti's salary for
fiscal year 1996 which will be paid in fiscal 1997. See "Employment
Agreements."
(2) Includes: (i) for 1996, an automobile and expenses of $1,213 and the
payment of premiums on a term life insurance policy of $259; (ii) for
1995, an automobile and expenses of $963 and the payment of premiums on
a term life insurance policy of $216 and (iii) for 1994, an automobile
and expenses of $963 and the payment of premiums on a term life
insurance policy of $216. See "Employment Agreements."
32
<PAGE> 34
(3) No restricted stock awards were granted to Mr. Botti in fiscal 1996. Mr.
Botti, however, owned 244,038 restricted shares of the Company's Common
Stock on June 30, 1996, the market value of which was approximately
$1,159,000 on such date, without giving effect to the diminution in
value attributed to the restriction on such shares.
(4) For the period August 18, 1994 through June 30, 1996. Neither Mr. Taylor
nor Mr. Vartabedian were employed by the Company prior to August 18,
1994.
(5) Includes: (i) for fiscal years 1996 and 1995, commissions of $86,436 and
82,023 (ii) for fiscal years 1996 and 1995, personal automobile expenses
of $5,100 and $460, respectively.
(6) Includes for fiscalyears 1995 and 1996 (i) personal automobile expenses
of $2,400 and 2,200 (ii) the payment of premiums on a term life
insurance policy of $116 and $116, respectively.
(7) On June 30, 1995, the Compensation Committee of the Board of Directors
granted to Mr. Taylor options to purchase 15,000 shares of common stock
at an exercise price of $1.5625 per share. The options vest at the rate
of 5,000 per year commencing June 30, 1996 and are exercisable over a
five-year term expiring June 30, 2000.
(8) In connection with the Company's acquisition of SST, and its employment
of Mr. Vartabedian, the Company granted options to Mr. Vartabedian to
acquire 80,000 shares of Common Stock at an exercise price of $5.125 per
share. The options expire on August 22, 1999 and vest at the rate of
20,000 shares per year commencing August 25, 1995. On June 30, 1995, the
Compensation Committee of the Board of Directors cancelled the options
previously granted and issued 80,000 new options with an exercise price
of $3.50 per share.
(9) Includes (i) personal automobile expenses of $1,177, (ii) the payment of
premiums on a term life insurance policy of $84 and (iii) consulting
fees of $41,468 which were paid prior to Mr.
Payne being hired by the Company.
(10) On June 30, 1995, Mr. Payne was granted five-year warrants to purchase
100,000 shares of Common Stock at an exercise price of $1.56 per share.
STOCK OPTION GRANTS
No stock options were granted during the year ended June 30, 1996, under
the Company's 1992 Employees Stock Option Plan to any of the named executive
officers of the Company. Additionally, no Stock Appreciation Rights were granted
to any of the named
33
<PAGE> 35
executive officers during the last fiscal year. On June 30, 1995, Mr. Payne was
granted five year warrants to purchase 100,000 shares of common stock at an
exercise price of $1.56 per share.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table contains information with respect to the named
executive officers concerning options held as of the year ended June 30, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of
Unexercised
In-the-Money
6 Options at
June 30,
Number of Unexercised 1996(1)
Shares Acquired Options as of June 30, 1996 Exercisable/
Name on Exercise Value Realized Exercisable/Unexercisable Unexercisable
- ---- --------------- -------------- --------------------------- --------------------
<S> <C> <C> <C> <C>
John T. Botti 0 -- 385,185/375,000 $1,829,628/1,781,250
Joseph Vartabedian 0 -- 40,000/40,000 $190,000/190,000
Samuel Taylor 0 -- 5,000/10,000 $23,750/47,500
Donald Payne(2) 0 -- 140,000/0 $665,000/0
</TABLE>
- -------------------------
(1) Based upon the closing price ($4.75 per share) of the Company's Common
Stock on June 30, 1996 less the exercise price for the aggregate number
of shares subject to the options.
(2) Includes warrants to purchase 100,000 shares of Common Stock at
an exercise price of $1.56 per share. The warrants were issued on June
30, 1995 and are exercisable over a five-year period.
EMPLOYMENT AGREEMENTS
Effective July 1, 1995, the Company entered into a new employment
agreement with Mr. Botti for a five year term ending June 30, 2000. The
employment agreement provides for (i) annual compensation of $100,000 for the
first year of the agreement, increasing by 10% in each of the second and third
years; (ii) a bonus of 3% of the Company's pre-tax net income, with such
additional bonuses as may be awarded in the discretion of the Board of
Directors; (iii) the award of non-qualified stock options to purchase 600,000
shares of the Company's common stock at an exercise price of $1.5625 per share
of which 100,000 vested in on June 30, 1995, 125,000 vested on June 30, 1996 and
125,000 vest on each of June 30, 1996, 1997, 1998 and 1999; (iv) certain
insurance and severance benefits and (v) automobile and expenses.
34
<PAGE> 36
COMPENSATION OF DIRECTORS
In August 1994 the Company entered into a consulting agreement with
Barry Steinberg pursuant to which Mr. Steinberg agreed to serve as a consultant
to the Company and its subsidiary, Electrograph Systems, Inc. Effective June 30,
1995, the Company and Mr. Steinberg agreed to amend the terms of the award of
options under the consulting agreement. Prior to the acquisition of Electrograph
Systems, Inc, by the Company in August 1994, Mr. Steinberg served as its
Chairman of the Board and was its founder. Under the terms of Mr. Steinberg's
amended consulting agreement, Mr. Steinberg rendered consulting services until
August 1996 and received warrants to purchase up to 75,000 shares of Common
Stock of the Corporation with an exercise price of $1.5625 per share. On
September 19, 1996, Mr. Steinberg resigned as a Director of the Company.
In August 1994, the Company entered into an employment agreement with
Joseph Vartabedian pursuant to which Mr. Vartabedian agreed to serve as the
President of the Company's subsidiary, Systems Solutions Technology, Inc. Prior
to the acquisition of SST by the Company in August, 1994, Mr. Vartabedian served
as its President. Under the terms of the employment agreement, Mr. Vartabedian
receives annual compensation in the amount of $77,500. He is also entitled to
(i) a profit bonus equal to (a) 25% of the first $400,000 of net profit, (b) 20%
of the next $200,000 of profit and (c) 15% of any profit exceeding $600,000 and
(ii) a revenue bonus equal on a sliding scale of between $5,000 and $15,000 if
revenues are at least $9,000,000. The employment agreement is for a term of two
years.
Effective June 30, 1995, the Company entered into a consulting agreement
with Donald Payne pursuant to which Mr. Payne will provide certain services to
the Company with respect to marketing and sales of its DocStar system. Pursuant
to the agreement, Mr. Payne received compensation equal to $700 per diem and
warrants to purchase 100,000 shares of Common Stock at an exercise price of
$1.5625 per share. Subsequently, in January 1996, Mr. Payne was hired as Chief
Operating Officer of the Company and President of the DocStar Division.
Directors were not compensated for their services as such during the
last fiscal year. The Directors receive options to purchase 10,000 shares for
each year of service under the Non- Executive Director Stock Option Plan and are
reimbursed for expenses incurred in order to attend meetings of the Board of
Directors.
STOCK OPTION PLANS
In April 1992, the Company adopted the 1992 Employees Stock Option Plan
(the "1992 Plan") which provided for the grant of
35
<PAGE> 37
options to purchase up to 600,000 shares of the Company's Common Stock. On
January 26, 1995, the stockholders of the Company approved an amendment to the
1992 Plan to increase the number of shares of Common Stock available under the
1992 Plan to 3,000,000 shares. Under the terms of the 1992 Plan, options granted
thereunder may be designated as options which qualify for incentive stock option
treatment ("ISOs") under Section 422A of the Code, or options which do not so
qualify ("Non-ISOs").
The 1992 Plan is administered by a Compensation Committee designated by
the Board of Directors. The Compensation Committee has the discretion to
determine the eligible employees to whom, and the times and the price at which,
options will be granted. Whether such options shall be ISOs or Non-ISOs; the
periods during which each option will be exercisable; and the number of shares
subject to each option, shall be determined by the Committee. The Board or
Committee shall have full authority to interpret the 1992 Plan and to establish
and amend rules and regulations relating thereto.
Under the 1992 Plan, the exercise price of an option designated as an
ISO shall not be less than the fair market value of the Common Stock on the date
the option is granted. However, in the event an option designated as an ISO is
granted to a ten percent stockholder (as defined in the 1992 Plan) such exercise
price shall be at least 110% of such fair market value. Exercise prices of
Non-ISOs options may be less than such fair market value. The aggregate fair
market value of shares subject to options granted to a participant which are
designated as ISOs which become exercisable in any calendar year shall not
exceed $100,000. The "fair market value" will be the closing NASDAQ bid price,
or if the Company's Common Stock is not quoted by NASDAQ, as reported by the
National Quotation Bureau, Inc., or a market maker of the Company's Common
Stock, or if the Common Stock is not quoted by any of the above, by the Board of
Directors acting in good faith.
The Compensation Committee may, in its sole discretion, grant bonuses or
authorize loans to or guarantee loans obtained by an optionee to enable such
optionee to pay any taxes that may arise in connection with the exercise or
cancellation of an option.
Unless sooner terminated, the 1992 Plan will expire in April, 2002.
In April, 1992, the Board of Directors adopted the Non-Executive
Director Stock Option Plan (the "Director Plan") which was approved by the
Company's stockholders in May, 1992. The Director Plan provides for issuance of
a maximum of 400,000 shares of Common Stock upon the exercise of stock options
granted under the Director Plan. Options are granted under the Director Plan
until April, 2002 to (i) non-executive directors as defined and (ii) members of
any advisory board established by the Company who are not full-time employees of
the Company or any of its
36
<PAGE> 38
subsidiaries. The Director Plan provides that each non-executive director will
automatically be granted an option to purchase 10,000 shares, upon joining the
Board of Directors, and on each September 1st thereafter, provided such person
has served as a director for the 12 months immediately prior to such September
1st. Similarly, each eligible director of an advisory board will receive, upon
joining the advisory board, and on each September 1st thereafter, an option to
purchase 5,000 shares of the Company's Common Stock, providing such person has
served as a director of the advisory board for the previous 12 month period.
The exercise price for options granted under the Director Plan shall be
100% of the fair market value of the Common Stock on the date of grant. The
"fair market value" will be the closing NASDAQ bid price, or if the Company's
Common Stock is not quoted by NASDAQ, as reported by the National Quotation
Bureau, Inc., or a market maker of the Company's Common Stock, or if the Common
Stock is not quoted by any of the above by the Board of Directors acting in good
faith. Until otherwise provided in the Stock Option Plan the exercise price of
options granted under the Director Plan must be paid at the time of exercise,
either in cash, by delivery of shares of common Stock of the Company or by a
combination of each. The term of each option commences on the date it is granted
and unless terminated sooner as provided in the Director Plan, expires five
years from the date of grant. The Director Plan is administered by a committee
of the board of directors composed of not fewer than three persons who are
officers of the Company (the "Committee"). The Committee has no discretion to
determine which non-executive director or advisory board member will receive
options or the number of shares subject to the option, the term of the option or
the exercisability of the option. However, the Committee will make all
determinations of the interpretation of the Director Plan. Options granted under
the Director Plan are not qualified for incentive stock option treatment.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 24,
1996 with respect to (i) each director and each executive officer, (ii) all
directors and officers as a group, and (iii) the persons (including any "group"
as that term is used in Section l3(d)(3) of the Securities Exchange Act of
l934), known by the Corporation to be the beneficial owner of more than five
(5%) percent of the Corporation's Common Stock and Series A Preferred Stock.
37
<PAGE> 39
Amount and Nature
Type of Name and Address of of Beneficial Percentage
Class Beneficial Holder Ownership (1) of Class
- ------- ----------------- ----------------- ----------
Common John T. Botti 629,223(2) 8.9%
c/o Bitwise Designs
Rotterdam Industrial Park
Schenectady, NY 12306
Common Ira C. Whitman 536,538(3) 7.6%
c/o Bitwise Designs
Rotterdam Industrial Park
Schenectady, NY 12306
Common John W. Loofbourrow 78,350(4) 1.1%
c/o John W. Loofbourrow
Associates, Inc.
One World Trade Center
Suite 2413
New York, NY 10048
Common Dennis Bunt 70,000(5) 1%
c/o Bitwise Designs, Inc.
Rotterdam Industrial Park
Schenectady, New York 12306
Common Donald J. Payne 147,000(6) 2.1%
c/o Bitwise Designs, Inc.
Rotterdam Industrial Park
Schenectady, New York 12306
Common J. Edward Sheridan 50,000(7) *
Sheridan Management Co.
421 Sasco Hill Rd.
Fairfield, CT 06430
Common Richard F. Clowes 50,000(8) *
Nonstop Networks Ltd.
20 Waterside Plaza #6J
New York, NY 10010
Common William E. Bierlin, Jr. 36,923(9) *
c/o W. H. Newbold's Son & Co.
500 Old York Road
Jenkintown, PA 19046
Series A John T. Botti 100(10) 50%
Preferred Stock c\o Bitwise Designs, Inc.
Rotterdam Industrial Park
Schenectady, N.Y. 12306
Series A Ira C. Whitman 100(11) 50%
Preferred Stock c/o Bitwise Designs, Inc.
Rotterdam Industrial Park
Schenectady, N.Y. 12306
Directors/Officers as a group 1,598,034 21%
(Footnotes appear on next page....)
38
<PAGE> 40
(1) Unless otherwise indicated below, each director, officer and 5%
shareholder has sole voting and sole investment power with respect to
all shares that he beneficially owns.
(2) Includes vested stock options to purchase 385,185 shares of Common
Stock. Does not include non-vested options to purchase 375,000 shares of
Common Stock.
(3) Includes vested stock options to purchase 260,185 shares of Common
Stock. Does not include non-vested options to purchase 150,000 shares of
Common Stock.
(4) Includes shares held by John W. Loofbourrow Associates, Inc. Profit
Sharing Plan and options to purchase 30,000 shares of Common Stock.
(5) Includes vested options to purchase 69,000 shares of Common Stock and
excludes nonvested options to purchase 25,000 shares of Common Stock.
Includes 1,000 shares of Common Stock owned by Mr. Bunt's wife.
(6) Includes options to purchase 40,000 shares of Common Stock. Also
includes warrants to purchase 100,000 shares of Common Stock at an
exercise price of $1.5625 per share.
(7) Includes vested options to purchase 50,000 shares of Common Stock.
(8) Includes vested options to purchase 50,000 shares of Common Stock.
(9) Does not include 9,978 shares of Common Stock owned by Mr. Bierlin's
spouse. Mr. Bierlin disclaims ownership of all shares owned by his wife.
Includes vested options to purchase 30,000 shares of Common Stock.
(10) See footnote (2). Each share of Series A Preferred Stock is entitled to
ten (10) votes per share.
(11) See footnote (3). Each share of Series A Preferred Stock is entitled to
ten (10) votes per share.
* Percentage not significant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Messrs. John T. Botti, the Company's President and Chairman
of the Board, and Ira C. Whitman, the Company's Senior Vice-
President, have guaranteed loans to the Company of $100,000 by the
Schenectady Economic Development Corporation. Mr. Botti has also
personally guaranteed the lease of the Company's facilities from
Rotterdam Ventures, Inc. The Company may attempt to negotiate with
these entities to cancel or limit the personal guarantees.
39
<PAGE> 41
Except as disclosed herein, the Company has not entered into any
material transactions or series of similar transactions with any director,
executive officer or any security holder owning 5% or more of the Company's
Common Stock.
On July 17, 1995, the Company entered into an agreement with Whale
Securities Co., L.P. pursuant to which Whale Securities has been retained as the
Company's financial consultant and investment banker for a one-year period.
Under the terms of the consulting agreement, Whale Securities receives a
consulting fee of $2,500 per month and received five-year warrants to purchase
200,000 shares of Common Stock at an exercise price of $1.50 per share.
In connection with the December 1995 private offering, the Company
issued to Whale Securities Co. L.P. and its designees, for services Whale
provided as placement agent, warrants (the "Placement Agent Warrants") to
purchase (i) 214,884 shares of common Stock and (ii) Warrants to purchase
214,884 Unit Warrants. The terms of the Warrants issued to Whale are similar to
those sold to the investors in the December private offering, in that they are
exercisable for a period of five years, and have an exercise price of $4.50 per
share. The Warrants issued to Whale and its designees are not redeemable by the
Company. The Warrants issued to Whale contain certain anti-dilution provisions.
For information concerning employment agreements with, and compensation
of, the Company's executive officers and directors, see "MANAGEMENT -- Executive
Compensation."
ITEM 13. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statement Schedules
None
(b) Reports on Form 8-K
During the quarter ended June 30, 1996 the Company filed the following
reports:
Form 8-K/A dated May 22, 1996 with respect to Item 2 Acquisition of
DJS Marketing Group Inc., containing financial statements of DJS for
the periods ended June 30, 1995 , December 31, 1994 and the year
ended December 31, 1993, whose reports were dated May 10, 1996
(c) Exhibits
The following exhibits, designated by an asterisk (*), have been
previously filed with the Commission and, pursuant to 17 C.F.R. Section 230.411,
are incorporated by reference to the document referenced in brackets following
the descriptions of such exhibits.
Exhibit No. Description
- ----------- -----------
2.1* Agreement and Plan of Merger between Bitwise Designs, Inc. and
Electrograph Systems, Inc. dated February 7, 1994
40
<PAGE> 42
2.2* Agreement and Plan of Merger between Bitwise Designs, Inc. and
Systems Solutions, Inc. dated April 29, 1994
3.1* Certificate of Incorporation of Bitwise Designs, Inc.-Delaware
(Exhibit 3.3.1 to Registration Statement on Form S-18, File No.
33-46246-NY)
3.1.1* Certificate of Designation of Series B Preferred Stock
3.2* By-Laws (Exhibit 3.2 to Registration Statement on Form S-18,
File No. 33-46246-NY)
4.1* Form of Common Stock Certificate (Exhibit 4.1 to Registration
Statement on Form S-18, File No. 33-46246-NY)
4.2* Form of Series A Preferred Stock Certificate (Exhibit 4.2 to
Registration Statement on Form S-18, File No. 33-46246-NY)
4.3* Form of Warrant issued to Berkeley Securities Corp. (Exhibit 4.3
to Registration Statement on Form S-18, File No. 33-46246-NY)
4.4* Form of Warrant issued to certain individuals in April, 1992
(Exhibit 4.4 to Registration Statement on Form S-18, File No.
33-46246-NY)
4.5* Form of Series B Preferred Stock Certificates (Exhibit 4.5 to the
Registration Statement on form SB-2, File No. 33-76494)
4.6* Form of Warrant to be issued to Berkeley Securities Corp.(Exhibit
4.6 to the Registration Statement on form SB-2, File No.
33-76494)
10.1* Lease agreement with Rotterdam Industrial Park, dated August 7,
1991 (Exhibit 10.1 to Registration Statement on Form S-18, File
No. 33-46246-NY)
10.1.1* Lease warrant waiver agreement (Exhibit 10.1.1 to Registration
Statement on Form S-18, File No. 33-46246-NY)
10.2* Lease with Siemens Credit Corporation for telephone system dated
November 25, 1991 (Exhibit 10.2 to Registration Statement on Form
S-18, File No. 33-46246-NY)
10.3* Lease agreement with Apple Commercial Credit for laser printer,
dated June 23, 1987 (Exhibit 10.3 to Registration Statement on
Form S-18, File No. 33-46246-NY)
41
<PAGE> 43
10.4* Leases with Adirondack Leasing Associates, Ltd. (Exhibit 10.4 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.5* Loan agreement with U.S. Small Business Administration and
Norstar Bank, dated April 4, 1991 (Exhibit 10.5 to Registration
Statement on Form S-18, File No. 33-46246-NY)
10.6* Loan agreement with Schenectady Economic Development Corporation,
dated August 7, 1991 (Exhibit 10.6 to Registration Statement on
Form S-18, File No. 33-46246-NY)
10.8* Employment agreement with John T. Botti, dated April, 1992
(Exhibit 10.8 to Registration Statement on Form S- 18, File No.
33-46246-NY)
10.9* Employment agreement with Ira C. Whitman, dated April, 1992
(Exhibit 10.9 to Registration Statement on Form S- 18, File No.
33-46246-NY)
10.10* 1992 Employee stock option plan (Exhibit 10.10 to Registration
Statement on Form S-18, File No. 33-46246-NY)
10.11* 1992 Nonexecutive Directors stock option plan (Exhibit 10.11 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.13* Loan agreement with Norstar Bank dated February 6, 1992 (Exhibit
10.13 to Registration Statement on Form S-18, File No.
33-46246-NY)
10.13.1* Norstar Bank waiver agreement (Exhibit 10.13.1 to Registration
Statement on Form S-18, File No. 33-46246-NY)
10.14* Agreement with Prime Computer, Inc. (Exhibit 10.14 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.15* Agreement with Mentor Computer Graphics Ltd. (Exhibit 10.15 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.16* Agreement with Robert W. Schwartz, Inc. dated February 10, 1992
(Exhibit 10.16 to Registration Statement on Form S-18, File No.
33-46246-NY)
10.17* Form of Financial Consulting Agreement with the Underwriter
(Exhibit 10.17 to the Registration Statement on form SB-2, File
No. 33-76494)
42
<PAGE> 44
10.18* Financing Agreement by and among Maryland Industrial Development
Financing Authority, JED Associates, State National Bank of
Maryland, Electronic Marketing Associates, Inc. (name was changed
to System Solutions Technology, Inc.), Trimarc Systems
Incorporated and Intermec Mid-Atlantic Corporation dated December
11, 1985 (Exhibit 10.18 to the Registration Statement on form SB-
2, File No. 33-76494)
10.19* Maryland Industrial Development Financing Authority Limited
Obligation Economic Development Revenue Bond (Exhibit 10.19 to
the Registration Statement on form SB-2, File No. 33-76494)
10.20* Cross-Collateral Security Agreement between NationsCredit
Corporation, Bitwise Designs, Electrograph Systems, Inc. and
System Solutions Technology, Inc. dated July 18, 1995.
10.21* Subcontract dated September 28, 1995 between PRC, Inc. and System
Solutions Technology, Inc.
10.22* Financial Consulting Agreement dated July 17, 1995 between the
Company and Whale Securities, Co.
10.23* Agreement and Plan of Merger by and among Bitwise Designs, Inc.,
Bitwise DJS, Inc., certain individuals and DJS Marketing Group,
Inc. dated March 6, 1996 (Exhibit 2 to Form 8-K dated March 22,
1996)
23 Consent of KPMG Peat Marwick, LLP
27 Financial Data Schedule
43
<PAGE> 45
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.
BITWISE DESIGNS, INC.
By /s/ JOHN T. BOTTI
---------------------------
John T. Botti
President, Chairman of the
Board and Chief Executive
Officer
Dated: September 30, 1996
Pursuant to the requirements of the Securities Act of 1933, this Report
has been signed below by the following persons in the capacities and on the
dates indicated:
Signature Capacity Date
--------- -------- ----
/s/ JOHN T. BOTTI President, September 30, 1996
- ------------------------ Chairman of the
John T. Botti Board and Chief
Executive Officer
/s/ DONALD J. PAYNE Chief Operating September 30, 1996
- ------------------------ Officer and Director
Donald J. Payne
/s/ IRA C. WHITMAN Senior Vice September 30, 1996
- ------------------------ President and Director
Ira C. Whitman
/s/ JOOHN W. LOOFBOURROW Director September 30, 1996
- ------------------------
John W. Loofbourrow
/s/ J. EDWARD SHERIDAN Director September 30, 1996
- ------------------------
J. Edward Sheridan
/s/ RICHARD F. CLOWES Director September 30, 1996
- ------------------------
Richard F. Clowes
/s/ WILLIAM BIERLIN, JR. Director September 30, 1996
- ------------------------
William Bierlin, Jr.
/s/ DENNIS H. BUNT Chief Financial September 30, 1996
- ------------------------ Officer and Principal
Dennis H. Bunt Accounting Officer
44
<PAGE> 46
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NO.
23 Consent of KPMG Peat Marwick, LLP
27 Financial Data Schedule
43
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Bitwise Designs, Inc.:
We consent to the incorporation by reference in the registration statements on
Form S-3 (Nos. 33-80917 and 333-05445) of Bitwise Designs, Inc. of our report
dated September 6, 1996, relating to the consolidated balance sheets of Bitwise
Designs, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended, which report appears in the June 30, 1996 annual report
on Form 10-KSB of Bitwise Designs, Inc.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Albany, New York
September 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 3,377,305
<SECURITIES> 0
<RECEIVABLES> 5,271,933
<ALLOWANCES> 215,000
<INVENTORY> 4,061,645
<CURRENT-ASSETS> 13,101,722
<PP&E> 1,495,515
<DEPRECIATION> 548,554
<TOTAL-ASSETS> 19,880,037
<CURRENT-LIABILITIES> 7,234,849
<BONDS> 0
6,755
11,200
<COMMON> 20
<OTHER-SE> 12,609,264
<TOTAL-LIABILITY-AND-EQUITY> 12,627,239
<SALES> 30,611,258
<TOTAL-REVENUES> 30,611,258
<CGS> 25,784,565
<TOTAL-COSTS> 33,478,586
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 93,721
<INTEREST-EXPENSE> 75,460
<INCOME-PRETAX> (2,942,788)
<INCOME-TAX> 18,251
<INCOME-CONTINUING> (2,961,039)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,861,039)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> 0
</TABLE>
