<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-KSB/A
AMENDMENT NO. 1
(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, 1997
/ / 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
Securities registered pursuant to Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ------------------------
<S> <C>
Common Stock, $.001 par value Pacific Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Exchange Act:
NONE
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
[Cover Page 1 of 2 Pages]
<PAGE> 2
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, 1997 were $53,109,469.
On September 22, 1997, 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 6,610,009 shares)
was approximately $24,374,408 based on the closing price for such Common Stock
($3.6875) on said date as reported by the Nasdaq SmallCap Market.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
On September 22, 1997, there were 7,367,720 shares of Common
Stock, $.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
--------------------------
[Cover Page 2 of 2 Pages]
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements and Notes annexed hereto.
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, 1997 the Company filed the following
reports:
Form 8K/A dated June 27, 1997, relating to the termination of KPMG Peat
Marwick, LLP as its independent auditor.
(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. Those exhibits designated by a double
asterisk (**) were filed with the original Form 10KSB filing filed on September
29, 1997.
Exhibit No. Description
2.1* Agreement and Plan of Merger between Bitwise Designs, Inc. and
Electrograph Systems, Inc. dated February 7, 1994
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)
3
<PAGE> 4
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)
4.7** Form of Note and Warrant Purchase, Paying and
Conversion/Exercise agency agreement dated as of August 8,
1997 between the Company and Banca del Gottardo.
4.8** Terms of 8% Convertible Notes due August 11, 2002.
4.9** Terms of Warrants and Global Warrant expiring August 11, 2002.
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)
10.4* Leases with Adirondack Leasing Associates, Ltd. (Exhibit 10.4
to Registration Statement on Form S-18, File No. 33-46246-NY)
4
<PAGE> 5
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)
10.18* Financing Agreement by and among Maryland Industrial
Development Financing Authority, JED Associates, State
5
<PAGE> 6
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)
10.24** Form of Conversion Agency Agreement between the Company and
Banca del Gottardo dated as of August 8, 1997.
10.25** Form of Warrant Agency Agreement between the Company and Banca
del Gottardo dated as of August 8, 1997.
11** Statement re: Computation of Per Share Earnings
21** Subsidiaries of Registrant
23 Consent of KPMG PEAT MARWICK LLP
23.1** Consent of Coopers & Lybrand LLP
27** Financial Data Schedule
6
<PAGE> 7
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, as amended, the Registrant has duly caused this Report
on Form 10KSB Amendment No. 1 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: October 3, 1997
Pursuant to the requirements of the Securities and Exchange Act of
1934, as amended this Report on Form 10KSB Amendment No. 1 has been signed below
by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/John T. Botti President, October 3, 1997
- ------------------------ Chairman of the
John T. Botti Board and Chief
Executive Officer
/s/Dennis H. Bunt Chief Financial October 3, 1997
- ------------------------ Officer and Principal
Dennis H. Bunt Accounting Officer
</TABLE>
7
<PAGE> 8
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(AND REPORTS OF INDEPENDENT ACCOUNTANTS)
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<PAGE> 9
TABLE OF CONTENTS
Page
----
REPORTS OF INDEPENDENT ACCOUNTANTS 1-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 3
Statements of operations 4
Statements of shareholders' equity 5
Statements of cash flows 6
Notes to consolidated financial statements 7-21
<PAGE> 10
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Board of Directors
Bitwise Designs, Inc.
We have audited the accompanying consolidated balance sheet of Bitwise Designs,
Inc. and Subsidiaries as of June 30, 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bitwise Designs,
Inc. and Subsidiaries as of June 30, 1997, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Albany, New York
September 4, 1997
1
<PAGE> 11
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To Shareholders and Board of Directors
Bitwise Designs, Inc.:
We have audited the accompanying consolidated balance sheet of Bitwise, Inc. and
subsidiaries as of June 30, 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bitwise Designs,
Inc. and subsidiaries as of June 30, 1996, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Albany, New York
September 6, 1996
2
<PAGE> 12
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,863,847 $ 3,377,305
Accounts receivable, net of allowance for doubtful accounts of
$189,126 in 1997 and $215,000 in 1996 7,219,539 5,271,933
Due from related parties (Note 12) 216,465 124,136
Inventories (Note 2) 3,137,332 4,061,645
Income taxes receivable 8,650 16,810
Prepaid expenses and other current assets 176,338 249,893
------------ ------------
Total current assets 13,622,171 13,101,722
Property and equipment, net (Notes 3 and 4) 998,781 946,931
Other assets:
Due from related parties (Note 12) 128,123
Software development costs, net of accumulated amortization of
$115,758 in 1997 and $50,153 in 1996 81,059 36,275
Excess of cost over net assets of companies acquired, net 4,182,932 5,609,055
Other assets 39,822 57,931
------------ ------------
Total assets (Notes 4 and 5) $ 18,924,765 $ 19,880,037
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under lines of credit (Note 4) $ 4,219,877 $ 2,815,942
Accounts payable 2,956,270 3,968,248
Current portion of long-term debt (Note 5) 1,601 20,205
Current portion of obligations under capital leases (Note 7) 10,200 26,885
Accrued expenses and other current liabilities 542,550 403,569
------------ ------------
Total current liabilities 7,730,498 7,234,849
Long-term debt, net of current portion (Note 5) 1,905
Obligations under capital leases, net of current portion (Note 7) 1,297 9,268
Other liabilities 6,776
------------ ------------
Total liabilities 7,731,795 7,252,798
------------ ------------
Commitments (Notes 7 and 10)
Shareholders' equity (Notes 8 and 9):
Preferred stock - $.10 par value, 5,000,000 shares authorized:
Series A - 200 shares issued and outstanding ($1.00 liquidation value) 20 20
Series B convertible preferred - 0 and 112,003 shares issued and
outstanding in 1997 and 1996, respectively 11,200
Common stock, $.001 par value; authorized 20,000,000 shares; issued
7,367,720 and 6,754,606 shares in 1997 and 1996, respectively 7,368 6,755
Additional paid-in capital 18,996,591 18,277,114
Accumulated deficit (7,810,586) (5,667,427)
------------ ------------
11,193,393 12,627,662
Less cost of common shares in treasury (338 shares) (423) (423)
------------ ------------
Total shareholders' equity 11,192,970 12,627,239
------------ ------------
Total liabilities and shareholders' equity $ 18,924,765 $ 19,880,037
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 13
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net sales $ 53,109,469 $ 30,611,258
Cost of goods sold 43,102,733 25,784,565
------------ ------------
Gross profit 10,006,736 4,826,693
------------ ------------
Selling, general and administrative expenses 11,834,173 7,564,946
Product development expenses 176,539 129,075
------------ ------------
Total operating expenses 12,010,712 7,694,021
------------ ------------
Loss from operations (2,003,976) (2,867,328)
------------ ------------
Other income (expense):
Interest and other income 116,565 157,218
Gain on sale of subsidiary 214,989
Interest expense (444,918) (232,678)
------------ ------------
(113,364) (75,460)
------------ ------------
Loss before income taxes (2,117,340) (2,942,788)
Income tax expense (Note 6) 25,819 18,251
------------ ------------
Net loss $ (2,143,159) $ (2,961,039)
============ ============
Per share amounts:
Net loss per common share $ (.30) $ (.55)
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 14
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------ -------------------------
NUMBER OF $.10 PAR NUMBER OF $.001 PAR PAID-IN
SHARES VALUE SHARES VALUE CAPITAL
----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1995 112,203 $ 11,220 4,473,661 $ 4,473 $ 11,537,690
Issuance of common stock pursuant to private
placement under Regulation D, net (Note 9) 1,428,565 1,429 4,242,218
Issuance of stock pursuant to acquisition, net 200,000 200 1,049,800
(Note 14)
Compensation expense 25,000
Stock warrants exercised (Note 9) 652,380 653 1,452,847
Preferred stock dividends
7% Class B shares ($.25 per share) (20,441)
10% Class B shares ($.35 per share) (10,000)
Net loss - 1996
----------- ----------- ------------ ----------- -------------
Balances at June 30, 1996 112,203 11,220 6,754,606 6,755 18,277,114
Stock options exercised (Note 9) 30,527 30 26,532
Stock warrants exercised (Note 9) 358,142 358 724,969
Conversion of preferred shares to common (Note 8) (112,003) (11,200) 112,003 112 11,088
Issuance of shares pursuant to dissolution of
subsidiary Employee Stock Ownership Plan (Note 112,442 113 (113)
12)
Cost of filing stock registration statement (35,389)
Preferred stock dividends
7% Class B shares ($.25 per share) (5,110)
10% Class B shares ($.35 per share) (2,500)
Net loss - 1997
----------- ----------- ------------ ----------- -------------
Balances at June 30, 1997 200 $ 20 7,367,720 $ 7,368 $ 18,996,591
=========== =========== ============ =========== =============
</TABLE>
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED TREASURY SHAREHOLDERS'
DEFICIT STOCK EQUITY
------------- ----------- -------------
<S> <C> <C> <C>
Balances at June 30, 1995 $ (2,706,388) $ (423) $ 8,846,572
Issuance of common stock pursuant to private
placement under Regulation D, net (Note 9) 4,243,647
Issuance of stock pursuant to acquisition, net 1,050,000
(Note 14)
Compensation expense 25,000
Stock warrants exercised (Note 9) 1,453,500
Preferred stock dividends
7% Class B shares ($.25 per share) (20,441)
10% Class B shares ($.35 per share) (10,000)
Net loss - 1996 (2,961,039) (2,961,039)
------------- ----------- -------------
Balances at June 30, 1996 (5,667,427) (423) 12,627,239
Stock options exercised (Note 9) 26,562
Stock warrants exercised (Note 9) 725,327
Conversion of preferred shares to common (Note 8)
Issuance of shares pursuant to dissolution of
subsidiary Employee Stock Ownership Plan (Note
12)
Cost of filing stock registration statement (35,389)
Preferred stock dividends
7% Class B shares ($.25 per share) (5,110)
10% Class B shares ($.35 per share) (2,500)
Net loss - 1997 (2,143,159) (2,143,159)
------------- ----------- -------------
Balances at June 30, 1997 $ (7,810,586) $ (423) $ 11,192,970
============= =========== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 15
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (2,143,159) $ (2,961,039)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 671,440 549,547
Provision for doubtful accounts receivable 118,710 93,721
Gain on sale of subsidiary (214,989)
Non-cash compensation expense 25,000
Loss on disposals of equipment 87,235
Changes in operating assets and liabilities:
Accounts receivable and due from related parties (3,801,719) (1,817,346)
Inventories (785,305) (1,137,804)
Prepaid expenses and other current assets 69,234 31,694
Accounts payable and accrued expenses 956,948 103,110
Other (11,476)
Income taxes receivable 8,160 (760)
--------------- ----------------
Net cash used in operating activities (5,132,156) (5,026,642)
--------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (425,739) (565,753)
Trademarks acquired (25,000)
Proceeds from sale of equipment 6,000
Deferred licensing costs (6,190)
Software development costs (110,390) (29,957)
Increase in notes receivable (175,000)
Proceeds from sale of business (Note 14) 1,855,636
Acquisition of business, net of cash acquired (Note 14) (34,179)
Other (7,187)
--------------- ----------------
Net cash provided by (used in) investing activities 1,287,320 (805,079)
--------------- ----------------
Cash flows from financing activities:
Increase in borrowings under line of credit, net (Note 4) 2,667,653 1,650,267
Principal payments on long-term debt (Note 5) (20,509) (134,664)
Principal payments on capital lease obligations (Note 7) (24,656) (31,781)
Dividends paid (7,610) (30,441)
Stock options exercised 26,562
Stock warrants exercised 725,327 1,453,500
Proceeds from issuance of common stock, net 4,243,647
Payment of deferred offering costs (35,389)
--------------- ----------------
Net cash provided by financing activities 3,331,378 7,150,528
--------------- ----------------
Net (decrease) increase in cash and cash equivalents (513,458) 1,318,807
Cash and cash equivalents, beginning of year 3,377,305 2,058,498
--------------- ----------------
Cash and cash equivalents, end of year $ 2,863,847 $ 3,377,305
=============== ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 16
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business:
Bitwise Designs, Inc. (Bitwise) and its subsidiaries, System Solutions
Technology, Inc. (SST) and DJS Marketing Group, Inc. (DJS), collectively
referred to as the "Company", are engaged in the manufacture and
distribution of document imaging systems, personal computers and related
peripheral equipment, components and accessories as well as network and
Internet services. Bitwise has introduced a line of document imaging
systems which it markets under the tradename "DocStar" on a national
level.
In August 1994, Bitwise acquired Electrograph, a value-added distributor
of microcomputer peripherals, components and accessories throughout the
East Coast of the United States. In April 1997, Bitwise sold
Electrograph, which was structured as an asset sale with all liabilities
assumed by the purchaser. Simultaneously with its acquisition of
Electrograph in 1994, Bitwise acquired SST, a value-added distributor of
advanced technology industrial computers and computer peripherals (see
also Note 14).
In March 1996, Bitwise acquired DJS Marketing Group, Inc. DJS distributes
personal computer systems, workstations and peripheral equipment. In
addition, DJS offers training programs for the use of computer software,
as well as systems integration, network, Internet and hardware repair
services. Subsequent to the acquisition of DJS, Bitwise transferred its
personal computer division to DJS.
During the fiscal year ended June 30, 1997 the Company incurred a net
loss of $2,143,159, and cash used by operating activities totaled
$5,132,156. The Company's available cash balance at June 30, 1997 totaled
approximately $3 million, and it has available approximately $1 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. There is no assurance that such funding will be available,
if needed.
Principles of consolidation:
The consolidated financial statements include the accounts of Bitwise
Designs, Inc. and its subsidiaries, all of which are wholly-owned. The
accounts of the subsidiaries have been consolidated since their
respective acquisition dates. All intercompany balances and transactions
have been eliminated in consolidation.
Cash equivalents:
The Company considers all highly liquid debt instruments with
original maturities not exceeding three months to be cash equivalents. At
June 30, 1997 and 1996, cash equivalents were composed primarily of
investments in commercial paper and overnight deposits (see also Note
16).
Inventories:
Inventories are stated at the lower of average cost or market.
7
<PAGE> 17
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Property and equipment:
Property and equipment are stated at cost. Depreciation and amortization
are determined using the straight-line method. Estimated useful lives of
the assets range from three to seven years.
Repairs and maintenance are charged to expense as incurred. Renewals and
betterments are capitalized. When assets are sold, retired or otherwise
disposed of, the applicable costs and accumulated depreciation or
amortization are removed from the accounts and the resulting gain or
loss, if any, is recognized.
Deferred licensing costs:
Costs incurred in connection with the licensing of the Company's products
by the Federal Communications Commission are reported net of accumulated
amortization and are amortized using the straight-line method over the
products' estimated life of three years.
Software development costs:
Software development and modification costs incurred subsequent to
establishing technological feasibility are capitalized and amortized
based on anticipated revenue for the related product with an annual
minimum equal to the straight-line amortization over the remaining
economic life of the related products (generally three years). Software
development costs capitalized during 1997 and 1996 amounted to $110,390
and $29,957, respectively. Amortization expense related to software
development costs for the years ended June 30, 1997 and 1996 was $65,606
and $28,810, respectively.
Excess of cost over net assets of companies acquired:
Excess of cost over net assets of companies acquired (goodwill) is being
amortized on a straight-line basis over 20 years.
The Company periodically reviews goodwill to assess recoverability, and
impairments would be recognized in operating results if a permanent
diminution in value were to occur. The amortization charged against
earnings in 1997 and 1996 was $282,520 and $256,551, respectively.
Accumulated amortization at June 30, 1997 and 1996 was $502,159 and
$365,514, respectively.
Income taxes:
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Revenue recognition and warranty provisions:
Revenue from the sale of products is recognized when the products are
shipped to customers. The Company provides a one year warranty on
products it manufactures. On products distributed for other
manufacturers, the original manufacturer warranties the product. Warranty
expense was not significant to any of the years presented.
8
<PAGE> 18
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Advertising expenses:
The Company recognizes advertising expenses as incurred. Advertising and
promotion expense for 1997 and 1996 was approximately $1,361,000 and
$968,000, respectively.
Earnings per common share:
Earnings per share of common stock are based on the weighted average
number of common shares outstanding during each year. There were no
dilutive common equivalent shares for the years ended June 30, 1997 and
1996. The weighted average number of common shares outstanding was
7,194,096 and 5,479,237 for the years ended June 30, 1997 and 1996,
respectively.
Use of estimates:
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
New Accounting Pronouncements:
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share." SFAS No. 128 amends the requirements of
APB Opinion No. 15, "Earnings per Share" by replacing the presentation of
primary earnings per share with basic earnings per share. It also
requires dual presentation of basic and diluted earnings per share on the
face of the income statement and requires a reconciliation of the
numerator and the denominator of the diluted earnings per share
computation. This statement will be effective for the interim periods of
and the fiscal year ended June 30, 1998, and will require restatement of
previously issued per share data. The adoption of this standard is not
expected to have a significant impact on the Company's consolidated
financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 requires reporting
and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. This statement will be effective for annual and interim
financial statements beginning the fiscal year ending 1999, and will
require reclassifications of prior periods. The adoption of this standard
is not expected to have a significant impact on the Company's
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board also issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 requires expanded reporting of information
about operating segments in interim and annual financial statements,
including certain descriptive information about products and services,
geographic areas, and major customers. This statement will be effective
for annual financial statements beginning the fiscal year ending 1999,
and for interim periods beginning the fiscal year ending 1999. The
adoption of this standard is not expected to have a significant impact on
the Company's consolidated financial statements.
Reclassifications:
It is the Company's policy to reclassify, where appropriate, prior year
financial statements to conform to the current year presentation.
9
<PAGE> 19
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVENTORIES
Inventories at June 30, 1997 and 1996 consist of:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Purchased components and raw materials $1,301,871 $1,175,088
Finished goods 1,835,461 2,886,557
---------- ----------
$3,137,332 $4,061,645
========== ==========
</TABLE>
Inventories are pledged as collateral for borrowings under the lines of
credit, long-term debt and to certain suppliers as described in Notes 4 and
5.
3. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
1997 1996 IN YEARS
---- ---- -----------
<S> <C> <C> <C>
Machinery and equipment $ 1,245,668 $ 965,535 3-6
Demonstration and rental computers 293,336 183,123 5-6
Furniture and fixtures 241,907 242,513 5-7
Leasehold improvements 80,699 76,182 6
Vehicles 7,804 28,162 5
-------------- --------------
1,869,414 1,495,515
Less accumulated depreciation and amortization (870,633) (548,584)
-------------- --------------
$ 998,781 $ 946,931
============== ==============
</TABLE>
Depreciation and amortization expense on property and equipment for the
years ended June 30, 1997 and 1996 was $319,543 and $258,043,
respectively. Assets under capital lease arrangements included in the
above amounts are $28,938 and $123,550 of machinery and equipment, and
$7,172 and $76,638 of furniture and fixtures, before related accumulated
amortization totaling $18,053 and $103,627, at June 30, 1997 and 1996,
respectively.
Property and equipment are pledged as collateral for borrowings under the
lines of credit and long-term debt as described in Notes 4 and 5.
4. CREDIT FACILITIES
Lines of credit:
The Company has two lines of credit totaling $5,300,000, as described
further below, of which $1,080,123 was available at June 30, 1997.
One line of credit may be utilized by SST and Bitwise for $3 million
($2.7 and $1.6 million outstanding in 1997 and 1996) and is
collateralized by acounts receivable, inventory and all other assets.
The interest rate on this line of credit is based on the prime rate
plus 2% per annum (10.25% at June 30, 1997). The line of credit
agreement includes covenants which require the Company to maintain a
minimum tangible net worth, a maximum debt-to-tangible net worth and a
certain profitability level on a consolidated basis, as well as
requiring delivery of periodic financial information and quarterly
audits conducted by the lender. Bitwise was not in compliance with the
minimum profitability level for the fiscal year ended June 30, 1997
and subsequent to June 30, 1997, the Company received a waiver of the
covenant violation.
10
<PAGE> 20
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. CREDIT FACILITIES, CONTINUED
Lines of credit, continued:
DJS has a $2.3 million credit facility ($1.5 and $1.2 million
outstanding in 1997 and 1996) from a financial institution. Under
the revolving accounts receivable credit line portion of this
agreement, DJS may receive advances of up to $1.0 million based on
85% of eligible accounts receivable. In addition, DJS may receive up
to $1.3 million for vendor-subsidized inventory purchases. The
revolving accounts receivable credit line bears interest at prime
plus 1.75% (10% at June 30, 1997), subject to a minimum prime rate of
6%, and transaction fees of .10% on each advance. No finance charges
are assessed on borrowings for vendor-subsidized inventory purchases
if repayment complies with vendor specified criteria. The $2.3
million credit facility is collateralized by a first priority lien
on accounts receivable, inventory, fixed assets, other assets and
general intangibles of DJS.
The $2.3 million credit facility includes covenants which require DJS
to maintain a minimum tangible net worth, maximum debt-to-tangible net
worth and a minimum tangible current ratio. Subsequent to June 30,
1997, the total credit facility for DJS was increased to $3.5 million.
5. LONG-TERM DEBT
Long-term debt at June 30, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Notes payable, Schenectady Economic Development Corporation and
Schenectady Employment Training Development Corporation, interest
accrues at 9% per annum. Monthly payments of interest and principal of
$2,716 are due through January 1997. Collateralized by all assets of
the Company subject to the rights of the holders of the line of credit
as described in Note 4. $ $ 18,474
Other 1,601 3,636
---------------- ----------------
1,601 22,110
Less current portion 1,601 20,205
---------------- ----------------
Long-term debt, net of current portion $ -0- $ 1,905
================ ================
</TABLE>
Subsequent to year end in August 1997 the Company completed a financing
with an offshore bank with gross proceeds of $4,000,000 (net proceeds of
about $3,600,000 after expenses) in the form of unsecured, convertible,
bearer notes with 400,000 detachable Common Stock purchase warrants. The
notes accrue interest at 8%, payable semiannually in arrears. Each note
is in the denomination of $5,000. The holder of 10 or more notes may
convert the notes into common stock commencing November 1, 1997 until
August 11, 2002 at the rate of $3.25 per share. The warrants may be
exercised at $3.25 per share of common stock from November 1, 1997 until
August 11, 2002.
11
<PAGE> 21
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. INCOME TAXES
Income tax expense (benefit) for the years ended June 30, 1997 and 1996
consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------------- --------------- ---------------
<S> <C> <C> <C>
Year ended June 30, 1997
Federal $ $ $
State and local 25,819 25,819
-------------- --------------- ---------------
$ 25,819 $ $ 25,819
============== =============== ===============
Year ended June 30, 1996
Federal $ $ $
State and local 18,251 18,251
-------------- --------------- ---------------
$ 18,251 $ $ 18,251
============== =============== ===============
</TABLE>
At June 30, 1997, the Company has federal net operating loss
carryforwards for tax purposes approximating $7,997,000. The years in
which the net operating loss carryforwards expire are as follows:
2000-$224,000; 2001-$684,000; 2002-$48,000; 2003-$3,000; 2004-$6,000;
2005-$48,000; 2006-$32,000; 2007-$430,000; 2008-$1,557,000;
2009-$1,740,000; 2010-$10,000; 2011-$2,665,000; and 2012-$550,000.
Through the acquisitions of Electrograph and SST, the Company acquired
approximately $1,066,000 and $1,544,000 of federal net operating loss
carryforwards for tax purposes, subject to certain annual limitations on
the use of the net operating loss carryforwards arising prior to the
acquisition in accordance with Internal Revenue Code Section 382. At June
30, 1997, the remaining federal net operating loss carryforwards were
$966,000 and $1,383,000 for Electrograph and SST, respectively.
The following table reconciles the expected tax benefit at the federal
statutory rate of 34% to the effective tax rate.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computed expected tax benefit $ (719,896) $(1,000,548)
Increase in valuation allowance 210,211 914,153
Additional tax gain on sale of assets 381,464
Nondeductible goodwill amortization 96,057 87,227
Adjustment to prior years' taxes (17,911)
State income taxes, net of federal benefit 25,819 18,251
Other nondeductible expenses 32,164 17,079
----------- -----------
$ 25,819 $ 18,251
=========== ===========
</TABLE>
12
<PAGE> 22
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. INCOME TAXES, CONTINUED
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of June 30, 1997 and 1996 are presented
below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred income taxes:
Allowance for doubtful accounts $ 70,136 $ 73,209
Inventories, principally due to additional costs inventoried
for tax purposes pursuant to the Tax Reform Act of 1986
and inventory reserves 177,206 186,198
Deferred rent and other liabilities 134,120 82,864
Net operating loss carryforward 2,719,117 2,532,117
--------------- ---------------
Total gross deferred tax assets 3,100,579 2,874,388
Less valuation allowance (3,029,021) (2,818,810)
--------------- ---------------
Net deferred tax asset 71,558 55,578
Deferred income tax liability:
Equipment, principally due to differences in
depreciation methods (71,558) (55,578)
--------------- ---------------
Net deferred income taxes $ -0- $ -0-
=============== ===============
</TABLE>
The valuation allowance for deferred tax assets as of July 1, 1996 and
1995 was $2,818,810 and $1,946,505, respectively. The net change in the
total valuation allowance for the years ended June 30, 1997 and 1996 was
an increase of $210,211 and $872,305, respectively.
7. LEASE COMMITMENTS
The Company is obligated under operating and capital leases for certain
equipment and facilities expiring at various dates through the year 2001.
As of June 30, 1997, future minimum payments by year, and in the
aggregate, under capital and noncancelable operating leases with initial
terms of one year or more consist of the following:
<TABLE>
<CAPTION>
OPERATING
CAPITAL LEASES
LEASES RELATED PARTY OTHER
------------- --------------- -------------
<S> <C> <C> <C>
Fiscal year ending June 30:
1998 $ 11,055 $ 147,200 $ 148,632
1999 1,333 147,200 71,469
2000 24,533 64,299
2001 58,593
2002
------------ ------------ -------------
12,388 $ 318,933 $ 342,993
============ =============
Amount representing interest (891)
------------
Present value of net minimum lease payments 11,497
Less current portion (10,200)
------------
Long-term portion $ 1,297
============
</TABLE>
Rental expense was approximately $277,000 and $317,000 for the years
ended June 30, 1997 and 1996, respectively (see also Note 12).
13
<PAGE> 23
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. PREFERRED STOCK
The Board of Directors is authorized to issue shares of preferred stock,
$.10 par value per share, from time to time in one or more series. The
Board may issue a series of preferred stock having the right to vote on
any matter submitted to shareholders including, without limitation, the
right to vote by itself as a series, or as a class together with any
other or all series of preferred stock. The Board of Directors may
determine that the holders of preferred stock voting as a class will have
the right to elect one or more additional members of the Board of
Directors, or the majority of the members of the Board of Directors. The
Board of Directors has designated a series of preferred stock which has
the right to elect a majority of the Board of Directors. The holders of
preferred stock which have the right to elect a majority of the Board of
Directors are therefore able to control the Company's policies and
affairs.
The Board of Directors may also grant to holders of any series of
preferred stock, preferential rights to dividends and amounts payable in
liquidation. Furthermore, the Board of Directors may determine whether
the shares of any series of preferred stock may be convertible into
common stock or any other series of preferred stock of the Company at a
specified conversion price or rate, and upon other terms and conditions
as determined by the Board of Directors.
The Board of Directors has designated 200 shares of preferred stock as
Series A Preferred stock, of which 100 shares have been issued to each of
the chairman/chief executive officer and senior vice president of the
Company. The holders of the Series A Preferred Stock have the right to
elect a majority of the Board of Directors as long as each holder
remains, subject to certain conditions, an officer, director and at least
5% shareholder of the Company. During such time as the Series A Preferred
Stock is outstanding, the holders have the right to elect a majority of
the Board of Directors. To date, the holders of the Series A Preferred
Stock have not exercised such right. The Series A Preferred Stock is
entitled to vote as a group. The holders of the Series A Preferred Stock
have a preference on liquidation of $1.00 per share and no dividend or
conversion rights.
In connection with the Company's acquisition of SST, 112,003 shares of
preferred stock designated as Series B Convertible Preferred Stock were
issued. The holders of the Series B Convertible Stock were entitled to
quarterly dividends at 7% and 10%. The Series B Convertible Preferred
Stock was convertible into common stock at the rate of $3.50 per share.
In August 1996, all of the Series B shareholders elected to convert their
shares into common stock (see also Note 14).
9. STOCK OPTION PLANS AND STOCK WARRANTS
A) 1992 Employees Stock Option Plan:
In May 1992, the shareholders approved the 1992 Employees Stock Option
Plan (the "1992 Plan"). The Plan provided for the grant of options to
purchase 600,000 shares of the Company's common stock. In January
1995, the shareholders approved an amendment to the Plan to increase
the number of shares of common stock available under the 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 ("ISO") under Section 422A of the Internal
Revenue Code, or options which do not so qualify ("non-ISOs"). In
1997, the Company filed a registration statement with the SEC to
register the shares issued under the 1992 Plan.
14
<PAGE> 24
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
A) 1992 Employees Stock Option Plan, Continued:
The 1992 Plan is administered by a Compensation Committee designated
by the Board of Directors. The Board or the Committee, as the case may
be, has the discretion to determine eligible employees and the times
and the prices at which options will be granted, whether such options
shall be ISOs or non-ISOs, the period during which each option will be
exercisable and the number of shares subject to each option. Options
generally vest one year after the date of grant. The Board or the
Committee has 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 may
not be less than the fair market value of the Company's 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 shareholder, the
exercise price shall be at least 110% of such fair market value. The
aggregate fair market value of shares subject to options which are
designated as ISOs which become exercisable in any calendar year shall
not exceed $100,000.
The Board or the 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 the year 2002.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE
SHARES PER SHARE
------------ ------------
<S> <C> <C>
Outstanding at June 30, 1995 1,503,880 $ 1.98
Options granted:
Equal to market price 692,500 5.78
Exceeding market price 75,000 7.13
Options canceled or surrendered (95,000) 2.29
------------ ---------
Outstanding at June 30, 1996 2,176,380 3.37
Options granted equal to market price 226,500 4.26
Options exercised (33,825) 1.37
Options canceled or surrendered (429,685) 3.10
------------
Outstanding at June 30, 1997 1,939,370 3.53
============
</TABLE>
The following is a summary of the status of employee stock options at
June 30, 1997:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
Exercise Price Range NUMBER LIFE PRICE NUMBER PRICE
-------------------- ------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
$ .34 - 2.00 884,370 3.0 $ 1.53 563,037 $ 1.52
2.01 - 4.00 225,500 2.9 3.35 84,500 3.23
4.01 - 6.00 394,000 3.7 4.98 101,165 5.04
6.01 - 8.00 435,500 3.8 6.35 141,830 6.36
</TABLE>
As of June 30, 1997 and 1996, 890,537 shares and 770,722 shares,
respectively, were exercisable under the 1992 Employees Stock Option
Plan.
15
<PAGE> 25
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
B) Non-Executive Director Stock Option Plan:
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 shareholders on May 6, 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 can
be 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 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 1 thereafter, provided such person has served as
a director for the previous twelve-month period. Similarly, each
eligible director of an advisory board will receive, upon joining the
advisory board and on each September 1 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
twelve-month period. Options vest immediately on the date of grant.
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. Until otherwise provided, 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.
As of June 30, 1997, options to purchase up to 220,000 shares have
been granted to non-executive directors. Options to purchase 40,000
and 50,000 shares were granted in 1997 and 1996, respectively, and
10,000 shares were canceled or surrendered in 1997. These options are
exercisable at prices between $3.375 and $5.125 per share. During 1997
and 1996, none of the options were exercised or canceled.
C) Common Stock Warrants:
A schedule of common stock warrant activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER WARRANT
OF PRICE
SHARES PER SHARE
--------- ---------
<S> <C> <C>
Outstanding June 30, 1995 1,312,000 $ 2.36
Warrants granted:
Equal to market price 22,000 6.21
Less than market price 1,957,137 4.39
Warrants exercised (652,380) 2.23
Adjustments for antidilution 36,380 3.59
---------
Outstanding June 30, 1996 2,675,137 3.75
Warrants granted 10,000 4.44
Warrants exercised (358,142) 2.03
---------
Outstanding June 30, 1997 2,326,995 4.23
=========
</TABLE>
16
<PAGE> 26
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
C) Common Stock Warrants, Continued:
In December 1995, the Company issued 1,528,569 redeemable common stock
warrants in connection with the Company's private placement under
Regulation D. Other warrants issued during 1997 and 1996 were to
various firms providing services to the Company.
The following is a summary of the status of common stock warrants at
June 30, 1997:
<TABLE>
<CAPTION>
OUTSTANDING WARRANTS EXERCISABLE WARRANTS
------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
Exercise Price Range NUMBER LIFE PRICE NUMBER PRICE
-------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$1.50 - 2.00 250,000 3.00 $ 1.53 250,000 1.53
2.01 - 4.00 229,284 3.43 3.47 229,284 3.43
4.01 - 6.00 1,722,711 3.47 4.51 1,722,711 3.47
6.01 - 8.00 125,000 2.58 7.15 120,000 7.26
</TABLE>
D) SFAS No. 123:
The per share weighted average fair value of stock options and common
stock warrants granted during fiscal 1997 and 1996 was $1.00 and
$3.88, respectively. These amounts were determined using the Black
Scholes option-pricing model which values options and warrants based
on the stock price at the grant date, the expected life of the option
or warrant, the estimated volatility of the stock, expected dividend
payments and the risk-free interest rate over the expected life of the
option or warrant. The dividend yield was calculated by dividing the
current annualized dividend by the option or warrant price for each
grant. The expected volatility was based on the stock prices for the
period beginning in May 1992 when the Company completed its first
public offering until June 30, 1997 and 1996, respectively. The
risk-free interest rate was the rate available on zero coupon U.S.
government issues with a term equal to the remaining term for each
grant. The expected life of the option or warrant was estimated based
on the exercise history from previous grants.
The Company applies APB No. 25 in accounting for its stock option and
stock warrant plans and, accordingly, no compensation cost has been
recognized in the Company's financial statements for stock options or
warrants granted under any of the stock or warrant plans. If under
SFAS No. 123, the Company determined compensation cost based on the
fair value at the grant date for its stock options and warrants, net
loss and loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
<S> <C> <C>
Net loss
As reported $ 2,143,159 $ 2,961,039
Pro forma 2,237,301 4,151,890
Loss per share
As reported $ .30 $ .55
Pro forma .31 .76
</TABLE>
17
<PAGE> 27
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
D) SFAS No. 123, Continued:
Under SFAS No. 123, stock options and warrants granted prior to fiscal
1996 are not required to be included as compensation in determining
pro forma net earnings. To determine pro forma net earnings, reported
net earnings have been adjusted for compensation costs calculated for
vested stock options granted during fiscal 1997 and 1996.
The effects of applying SFAS 123 on providing pro-forma disclosures
are not necessarily likely to be representative of the effects on
reported net income for future years.
10. COMMITMENTS
Employment agreements:
Effective July 1, 1995, the Company entered into a new employment
agreement with its chief executive officer 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 income, with such additional bonuses as
may be awarded at 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 increments of 100,000 shares vested on June 30, 1995, and the
remainder vests in increments of 125,000 shares on each of June 30,
1996, 1997, 1998 and 1999; (iv) certain insurance and severance
benefits and (v) an automobile and expenses.
In March 1996, the Company entered into employment agreement with the
three principals of DJS Marketing Group, Inc. in connection with the
acquisition of DJS as described in Note 14. The president and two vice
presidents entered into two-year employment agreements each providing
for a specified annual compensation, performance bonus payments and an
aggregate of 375,000 employee stock options to purchase shares of the
Company's common stock at exercise prices ranging from $6.125 to
$7.125 per share.
11. CASH FLOWS - SUPPLEMENTAL INFORMATION
Cash flows:
The Company paid interest in the amounts of $424,843 and $207,684 for
the years ended June 30, 1997 and 1996, respectively. Income taxes
paid aggregated $40,446 and $19,011 during the years ended June 30,
1997 and 1996, respectively.
Noncash investing and financing activities (see also Note 14):
During the year ended June 30, 1997, the Company received a note of
$296,912 in exchange for assets disposed of as part of the sale of
Electrograph.
During the year ended June 30, 1996, the Company entered into capital
lease obligations for the purchase of equipment aggregating $12,555.
18
<PAGE> 28
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. RELATED PARTIES
Employee receivables:
At June 30, 1997 and 1996, "Due from related parties" included
non-interest bearing advances of $25,056 and $74,136, respectively,
from employees and officers of the Company.
Notes receivable:
During 1996, Bitwise entered into two promissory notes receivable with
a director (hereinafter referred to as the Director Note) and the
former shareholders of DJS Marketing Group, Inc. (hereinafter referred
to as the DJS Note), included within "Due from related parties," in
the amounts of $50,000 and $125,000. The director Note bears interest
at the rate of 6% per annum. The note principal and accrued interest
thereon was due and payable on May 10, 1997 and is secured by all of
the borrowers issued and outstanding director stock options (options
to purchase 40,000 shares at June 30, 1997). The due date has been
extended to November 10, 1997. The DJS Note bears interest at the rate
of 8% per annum. The note principal and accrued interest thereon is
due on March 8, 1998 and is collateralized by 30,000 shares of Bitwise
Designs, Inc. common stock.
Other transactions:
The Company's subsidiary, SST, conducts its primary operations from a
building leased from its President and two other individuals. During
1997 and 1996, SST paid rent on this building of approximately
$144,200 and $108,000, respectively.
During 1997, the Company dissolved SST's Employee Stock Ownership Plan
by converting the SST common stock shares to shares of Bitwise common
stock.
13. EMPLOYEE BENEFIT PLAN
Effective July 1, 1993, the Company implemented a qualified defined
contribution 401(k) profit sharing plan for all eligible employees. The
Company will make contributions in percentages of compensation, or
amounts as determined by the Company. The Company contributed $1,341 and
$1,750 during the years ended June 30, 1997 and 1996, respectively.
14. ACQUISITIONS AND SALES OF BUSINESSES
On March 8, 1996, Bitwise completed its acquisition of DJS Marketing
Group, Inc. The shareholders of DJS Marketing Group, Inc. received
$80,000 in cash and 200,000 shares of restricted common stock of Bitwise
in exchange for the 4,000 outstanding shares of DJS Marketing Group, Inc.
common stock. The cost of the acquisition was approximately $1,140,000.
Under the indemnification provisions of the merger, 25,000 common shares
of Bitwise received by the former shareholders of DJS are held in escrow
for a period of 18 months from the date of the acquisition. In addition,
the common shares of Bitwise transferred in connection with the
acquisition are restricted for a period of two years. Also, as a
condition of the acquisition, the former shareholders of DJS Marketing
Group, Inc. have entered into employment and non-competition agreements
expiring on March 31, 1998 (see also Note 10).
19
<PAGE> 29
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. ACQUISITIONS AND SALES OF BUSINESSES, CONTINUED
In April 1997, the Company sold Electrograph with the transaction
structured as an asset sale. The Company realized a gain of $214,989. The
Company received $2,522,361 in cash including an adjustment to the
purchase price of $22,361 based on the final balance sheet. In addition
the Company was owed $646,912 by Electrograph at the date of sale. The
buyer paid $350,000 in cash and $296,912 with a nine-month note at 3%
interest.
15. SECURITIES OFFERINGS
In December 1995, the Company completed a private equity offering
including common stock and redeemable common stock warrants of $5,000,000
exempt from registration under Regulation D of the Securities Act of
1933. Each redeemable common stock warrant entitles the holder thereof to
purchase on or prior to the last business day of the sixtieth month
following the date of the first closing of this offering one share of
common stock of the Company at an exercise price of $4.50 per share,
subject to adjustment in certain circumstances. The common stock purchase
warrants are redeemable, in whole or in part, at the option of the
Company, for $.10 per warrant on not less than thirty days prior written
notice, at any time, commencing six months from the first closing of this
offering, provided that (i) the closing bid quotation of the Company's
common stock is at least 150% of the then exercise price of the warrants
on each of the 20 trading days ending on the third trading day prior to
the day on which notice of redemption is given; and (ii) the warrants
have been registered under the Securities Act of 1933, as amended
(registration completed in fiscal 1997). Proceeds from the offering of
the 1,428,565 shares aggregated $5,000,000. The Company also incurred
expenses associated with the offering in the amount of $756,353.
In addition, the Company granted Whale Securities Co. L.P. (Whale), which
acted as the placement agent in the December 1995 offering, warrants to
purchase 428,568 shares of common stock, exercisable for a period of five
years, at a price equal to the offering price. These warrants contain
anti-dilution provisions and registration rights, including demand and
"piggy back" registration rights, and shall not be redeemable by the
Company. Also, the Company granted Whale a three-year right of first
refusal with respect to certain future financings of the Company, the
right to designate, at its option, a nominee for election as a member of
the Board of Directors of the Company or as a non-voting advisor to the
Board of Directors, and the Company will use its best efforts to cause
such nominee to be elected and continued in office as a director of the
Company or as such advisor for a period of three years from the first
closing of the offering. The Company has also agreed to indemnify Whale
against certain liabilities, including liabilities under the Securities
Act of 1933, in connection with the offering.
20
<PAGE> 30
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. FINANCIAL INSTRUMENTS
Concentrations of credit risk:
Financial instruments which subject the Company to concentrations of
credit risk consist of cash and cash equivalents and trade accounts
receivable. To reduce credit risk, the Company places its temporary
cash investments with high credit quality financial institutions. The
Company's credit customers are not concentrated in any specific
industry or business. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information.
Fair value:
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value.
Cash and cash equivalents, accounts receivable, notes receivable,
accounts payable and accrued expenses and other current liabilities.
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses and other current liabilities
approximates fair value because of the short maturity of these
instruments. The carrying amount of notes receivable, included within
"Due from related parties," approximates fair value because the notes
bear interest that approximates the market rate.
Lines of credit and long-term debt. The interest rates on the
Company's lines of credit are reset according to changes in the
current market (see Note 4). The remaining balance of long-term debt
approximates fair value because of its short maturity (see Note 5).
Consequently, the carrying value of the borrowings under lines of
credit and long-term debt approximates fair value.
21
<PAGE> 31
EXHIBIT INDEX
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. Those exhibits designated by a double
asterisk (**) were filed with the original Form 10KSB filing filed on September
29, 1997.
Exhibit No. Description
2.1* Agreement and Plan of Merger between Bitwise Designs, Inc. and
Electrograph Systems, Inc. dated February 7, 1994
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)
<PAGE> 32
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)
4.7** Form of Note and Warrant Purchase, Paying and
Conversion/Exercise agency agreement dated as of August 8,
1997 between the Company and Banca del Gottardo.
4.8** Terms of 8% Convertible Notes due August 11, 2002.
4.9** Terms of Warrants and Global Warrant expiring August 11, 2002.
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)
10.4* Leases with Adirondack Leasing Associates, Ltd. (Exhibit 10.4
to Registration Statement on Form S-18, File No. 33-46246-NY)
<PAGE> 33
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)
10.18* Financing Agreement by and among Maryland Industrial
Development Financing Authority, JED Associates, State
<PAGE> 34
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)
10.24** Form of Conversion Agency Agreement between the Company and
Banca del Gottardo dated as of August 8, 1997.
10.25** Form of Warrant Agency Agreement between the Company and Banca
del Gottardo dated as of August 8, 1997.
11** Statement re: Computation of Per Share Earnings
21** Subsidiaries of Registrant
23 Consent of KPMG PEAT MARWICK LLP
23.1** Consent of Coopers & Lybrand LLP
27** Financial Data Schedule
<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) and the registration statements on Form
S-8 (No. 333-23933) 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 the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended, which
report appears in the June 30, 1997 annual report on Form 10-KSB of Bitwise
Designs, Inc.
/s/ KPMG Peat Marwick LLP
Albany, New York
September 26, 1997
