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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ X ] SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1997
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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.
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(Name of Small Business Issuer in its charter)
Delaware 14-1673067
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Building 50, Rotterdam Industrial Park
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Schenectady, N.Y. 12306
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(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
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(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, 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 bid 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
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[Cover Page 2 of 2 Pages]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Bitwise Designs, Inc. ("Bitwise"), and its wholly-owned subsidiaries,
System Solutions Technology, Inc. ("SST") and DJS Marketing Group, Inc. ("DJS")
(Bitwise, SST and DJS are sometimes collectively referred to herein as the
"Company") are engaged in the manufacture and distribution of document imaging
systems, computer systems and related peripheral equipment, components and
accessories and advanced technology industrial computers as well as network and
internet services.
In April 1997, the Company sold a subsidiary, Electrograph Systems,
Inc. ("ESI"). ESI was acquired in August 1994 and is a value-added distributor
of monitors and other microcomputer peripherals, components and accessories.
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.
Simultaneously with its acquisition of Electrograph in 1994, 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 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 Technology Center, Rotterdam Industrial Park, Schenectady, New York
12306, and its telephone number is (518) 356-9741.
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GENERAL BUSINESS DEVELOPMENTS DURING THE LAST FISCAL YEAR
In April 1997, the Company sold ESI for $2,522,361, as subsequently
adjusted, plus the Company received $646,912 to satisfy an intercompany
receivable from ESI. The sale was structured as an asset sale with all
liabilities assumed by the purchaser.
INDUSTRY OVERVIEW
The Company competes in the manufacturing and distribution market for
document imaging systems, 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.
........Personal Computers
Personal computers ("PCS") are another principal product offered by
the Company through its DJS subsidiary. 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
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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, 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
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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
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. Documents can be retrieved almost
instantaneously for viewing, printing or faxing thereby offering a significant
time-saving tool to the modern office.
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.
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The Company offers the DocStar System in three models: System 10X, System 20,
System 20FS and System 25. The DocStar System 10X is the base model. The
Systems 20, 20FS and 25 offer faster processors or scanners, and increased
storage capacity. Options and accessories include a jukebox, an optical disk
tower, 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.
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 expense was $176,539 and $129,075 for fiscal years
1997 and 1996, 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.
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Third, each complete unit is "burned-in" from eight to twelve 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.
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, such as monitors and
scanner/printer units, 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.
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SALES AND MARKETING
Currently, Bitwise's products are 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 sales presence. The Company also offers a
co-op advertising program to all its dealers whereby a dealer can earn co-op
advertising credits on everything they purchase and they can use those credits
to advertise in their market area.
Management hopes to continue to 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 or through a
floor planning finance company (to qualified accounts), and are warranted
against defects in materials and workmanship for a period of 13 months from
purchase. Bitwise currently employs three regional sales managers. The
regional sales managers employ several district managers to cover all the
significant markets in their region.
The Company is also pursuing international dealers through agents of
large multi-national firms.
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, Sharp and Mita. 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 62 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.
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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, luggable 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 approximately eighty (80%) percent of its sales in fiscal 1997: 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 $5,000.00 to $10,000.00
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 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, 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 22 full-time employees, including 11 marketing and sales
personnel (including one executive officer), 3 customer service personnel, 1
warehouse employee, and 7 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 PCs 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 provides network integration, Internet/Intranet development,
accounting solutions, service and consultation, document management and video
conferences.
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 custom
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 designs 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.
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 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
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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.
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 $2,143,159 and $2,961,039,
respectively, for its fiscal years ended June 30, 1997 and 1996. The Company
commenced marketing of its DocStar line of document imaging systems on a
national basis in January 1996 which has led to increased costs associated with
the product line. These costs will continue for the foreseeable future as the
Company attempts to increase market awareness and sales. 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 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 document imaging systems, computer
hardware and software as well as technical support services for such
businesses. The document
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imaging business is competitive and the Company competes with major
manufacturers such as Sharp, Canon, Panasonic and Mita. All of these companies
have substantially 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 imaging software 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.
In addition to the competitors and competitive factors described above
with respect to Bitwise, 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 other subsidiary, DJS, 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.
ITEM 2. DESCRIPTION OF PROPERTIES
Bitwise's executive offices and production facilities are located at
Technology Center, Rotterdam Industrial Park, Schenectady, New York 12306 where
Bitwise leases approximately 15,080 square feet of office space pursuant to a
ten year lease at an annual rent of approximately $90,000 plus utilities,
maintenance and escalation charges. The lease expires March 31, 1998.
SST currently leases 11,200 square feet of office and warehouse space
in Laurel, Maryland at a cost of $147,200 per year. This lease expires in
August 1999. Additionally, it leases a 500 square foot sales/service regional
office in Reading, Massachusetts at a cost of $3,000 per year. This lease is a
year to year lease and can be cancelled upon 30 days notice.
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.
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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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BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(AND REPORTS OF INDEPENDENT ACCOUNTANTS)
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
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TABLE OF CONTENTS
Page
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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
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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> 20
KPMG OPINION
2
<PAGE> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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> 40
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
---- ---
Common Stock
------------
Fiscal Year 1997
----------------
<S> <C> <C>
1st Quarter . . . . . . . . 5-13/16 3-1/4
2nd Quarter . . . . . . . . 6-1/4 4-1/4
3rd Quarter . . . . . . . . 6-1/2 3-1/8
4th Quarter . . . . . . . . 3-9/16 2-3/4
<CAPTION>
Fiscal Year 1996
----------------
<S> <C> <C>
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
</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.
As of September 22, 1997, there were approximately 618 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. There are no
outstanding shares of Preferred Stock with dividend rights.
17
<PAGE> 41
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 1997 Compared to Fiscal Year 1996
The Company realized a consolidated net loss of $2,143,159, ($.30 per
share) compared to $2,961,039 ($.55 per share) for the years ended June 30,
1997 and 1996, respectively. Consolidated net sales totaled $53,109,469 and
$30,611,258 for the years ended June 30, 1997 and 1996, respectively.
The sales increase is due in part to the acquisition of DJS on
March 8, 1996. DJS had sales of $16,560,884 for the year ended June 30,
1997 compared to $3,023,648 for the period March 8, 1996 to June 30, 1996.
The sales increase is also due to the growth in the Company's DocStar product
line. DocStar sales totaled $7,792,125 for the year ended June 30, 1997
compared to $1,650,921 for the prior year. All other businesses also
experienced sales growth in fiscal 1997 compared to fiscal 1996. The sales
results also include sales from ESI for all but two months of the 1997 fiscal
year until its sale by the Company in April 1997.
The Company's loss for the year is due to losses incurred by the
Company's Imaging Division, which markets the DocStar product line. DocStar
was introduced to the national marketplace in January 1996. Previously it was
only test marketed in the Albany, NY region. The DocStar product line has
not yet achieved sufficient sales volume to generate a profit.
Gross profit for the fiscal year ended June 30, 1997 was $10,006,736
compared to $4,826,693 for the prior year. The gross profit margin was 18.8%
and 15.8% for years ended June 30, 1997 and 1996, respectively. The gross
profit margin (which is defined as gross profit as a percentage of sales)
increased in fiscal 1997 compared to the prior year due to the growth of
the Company's DocStar product line which has significantly higher margins than
other product lines of the Company.
Selling, general and administrative expenses (SG&A) consist of all
other Company expenses except product development costs and interest. SG&A
expenses amounted to $11,834,173 and $7,564,946 for the years ended
June 30, 1997 and 1996, respectively. SG&A expenses increased due to the
addition of DJS in March 1996, which incurred SG&A expenses of $1,631,791 for
the
18
<PAGE> 42
year ended June 30, 1997 compared to $472,432 for the period March 8, 1996 to
June 30, 1996. In addition, the Company incurred significant expenses related
to the DocStar product line. SG&A expenses related to the DocStar product line
amounted to $5,636,151 and $2,649,203 for the years ended June 30, 1997 and
1996, respectively.
As a percentage of sales, SG&A costs decreased from 24.7% to 22.3%
from fiscal 1996 to fiscal 1997. The decrease is due to the sales growth in
all Company businesses and the fact that sales have grown at a faster rate than
SG&A costs, so that as a percentage of sales SG&A costs have decreased.
Product development expenses relate primarily to software development
of the Company's DocStar product line and increased from $129,075 to $176,539
for the years ended June 30, 1996 and 1997, respectively. The Company has a
policy of capitalizing software development costs and generally amortizing
those costs over three years as product development expense.
Interest expenses totaled $444,918 and $232,678 for the years ended
June 30,1997 and 1996, respectively. The increase in interest cost is due to
the acquisition of DJS which incurred interest on its line of credit
borrowings. It is also due to increased borrowings by all other operations of
the Company under an existing line of credit caused by an increase in sales and
related increases in inventory and accounts receivable. Interest rates
decreased slightly during fiscal 1997 compared to fiscal 1996.
In the last fiscal year the Company incurred significant costs to
introduce, market and sell the DocStar product line, as well as continued
research and development expenditures. The Docstar product line is sold
nationally through office equipment dealer channels. The Company continues to
recruit new dealers across the country which results in significant
personnel, advertising, marketing and travel expenditures.
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 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
19
<PAGE> 43
document imaging product line known as DocStar. Additionally, Electrograph
Systems, Inc., and System Solutions Technology, Inc. ("SST") also
experienced sales growth.
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.
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 the 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.
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
20
<PAGE> 44
and amortizing those costs generally over three years, the estimated economic
life of the product. During fiscal year 1996, the Company capitalized $29,957 in
such costs as compared to $48,911 in fiscal 1995.
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. As sales increased the Company increased its
borrowings to fund inventory and receivables. Additionally, this increase
reflects interest costs associated with the $2.3 million credit facility
obtained by the Company's recently acquired subsidiary, DJS. To a lesser
extent the increase is also due to an increase in interest rates compared to
the prior year.
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 selling and administration
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.
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, 1997 totaled $1,601. The Company also has two
working capital lines of credit totaling $5,300,000 which are collateralized by
all accounts receivable, inventory and all other assets of the Company and its
subsidiaries. At June 30, 1997 the total outstanding balance was $4,219,877.
One of the credit lines, in the principal amount of $2,300,000, may only be
utilized by DJS. The other line of credit of $3,000,000 may be utilized by
Bitwise and SST. Subsequent to June 30, 1997, the DJS line of credit was
increased to $3,500,000, thereby increasing the total lines of credit to
$6,500,000.
The debt accrues interest at rates ranging from the prime rate plus
1.75% to 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, maximum debt to tangible net worth and for DJS a minimum tangible
current ratio and for BitWise a minimum annual net profit. They also require
delivery of periodic financial information and quarterly audits conducted by
the lender. At June 30, 1997 the Company was not in compliance with one of its
debt covenants which required the Company to report a profit for the year ended
June 30, 1997. Subsequent to year end the Company received a covenant waiver
from its lending institution.
21
<PAGE> 45
The Company completed a private equity offering including common stock
and warrants with gross proceeds of $5,000,000 in December 1995 under Section
4(2) of the Securities Act of 1933 or Regulation D; net proceeds approximated
$4,200,000, after expenses. The Company has used the proceeds to fund sales,
marketing and distribution of its DocStar product line on a national basis.
These expenditures include staffing, advertising and promotion, travel,
consulting, office expansion, equipment, furniture and other related costs.
In April 1997, the Company sold substantially all of the assets of a
subsidiary Electrograph Systems, Inc. for $2,500,000 plus $646,912 to satisfy
intercompany payables owed to Bitwise by Electrograph. All liabilities were
assumed by the purchaser as well. The Company later received an additional
$22,361 for adjustments in the selling price which became due upon completion
of Electrograph's final balance sheet.
Property, plant and equipment expenditures totaled $425,739 for the
year ended June 30, 1997. There were no purchase commitments outstanding or
contemplated.
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 $3.6M 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.
The Company anticipates that cash expected to be provided by
operations together with the proceeds from the sale of Electrograph,
the proceeds of the August 1997 offering described above and borrowings under
its lines of credit will be sufficient to satisfy normal operating obligations.
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 (before the $4 million financing in August
1997) at June 30, 1997 totaled approximately $3 million and it had available
approximately $l.l million under existing lines of credit. 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.
22
<PAGE> 46
SAFE HARBOR STATEMENT
Certain statements in this Form l0-KSB, including information set
forth under Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
Act). The Company desires to avail itself of certain "safe harbor"
provisions of the Act and is therefore including this special note to enable
the Company to do so. Forward-looking statements in this Form l0-KSB or
hereafter included in other publicly available documents filed with the
Securities and Exchange Commission, reports to the Company's stockholders
and other publicly available statements issued or released by the Company
involve known and unknown risks, uncertainties and other factors which could
cause the Company's actual results, performance (financial or operating) or
achievements to differ from the future results, performance (financial or
Operating) or achievements expressed or implied by such forward-looking
statements. Such future results are based upon management's best estimates
based upon current conditions and the most recent results of operations. These
risks include, but are not limited to risks associated with the market
acceptance of the DocStar product line, competition and technological changes
and other risks as discussed in the Company's filings with the Securities and
Exchange Commission, including its Registration Statement on Form S-3 declared
effective on July 30, 1996 all of which risk factors could adversely affect the
Company's business and the accuracy of the forward-looking statements contained
herein.
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 1998. 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.
23
<PAGE> 47
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. The adoption of this standard did 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" which became effective for
the Company in fiscal year 1997. The Company has complied with the disclosure
requirements of SFAS No. 123 in fiscal year 1997.
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 2000. The adoption of this standard is not expected to have
a significant impact on the Company's consolidated financial statements.
24
<PAGE> 48
ITEM 7. FINANCIAL STATEMENTS
See attached Financial Statements and Notes annexed hereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
In June 1997, 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 KPMG Peat Marwick LLP, which acted as its independent
accountant with respect to the fiscal years ended June 30, 1994 through June
30, 1996. The Board of Directors also decided to retain the firm of Coopers &
Lybrand to be its independent accountants for the fiscal year ending June 30,
1997. The dismissal of KPMG Peat Marwick LLP was recommended and approved by
the Board of Directors of the Company and is not the result of any disagreement
with KPMG Peat Marwick LLP on any matter of accounting principles or practice,
financial statement disclosure or auditing scope or procedure during fiscal
periods ended June 30, 1996 and June 30, 1995 and through the date of
dismissal. Management of the Company recommended the change in order to
reduce the Company's audit and income tax preparation costs.
The audit reports issued by KPMG Peat Marwick LLP for the years ended
June 30, 1996 and 1995 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.
25
<PAGE> 49
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS.
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
<S> <C> <C>
John T. Botti 33 President, Chief Executive Officer and Chairman of the Board
Ira C. Whitman 34 Senior Vice-President--Research and Development, Secretary and Director
Donald J. Payne 64 Chief Operating Officer and Director
John W. Loofbourrow 59 Director
J. Edward Sheridan 61 Director
Richard F. Clowes 61 Director
William E. Bierlin, Jr. 56 Director
</TABLE>
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 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
26
<PAGE> 50
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 sales and marketing management capacities within the
computer and office products industries, 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 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.
27
<PAGE> 51
For approximately twenty years prior to 1989, Mr. Clowes served in various
capacities in the computer industry, 13 of which were 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. Since September 1997, Mr.
Bierlin has been Chairman of Hamburg Industries Inc., a privately held entity.
Mr. Bierlin was a Managing Director of W. H. Newbold's Son & Co. Inc., a
division of Fahnestock & Co., Inc., since 1980 and its Chairman from 1991 to
September 1997. 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.
Mr. Barry Steinberg resigned as a director of the Company on September
19, 1996. Mr. Steinberg had served as a director since December 1994.
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,
1997, the Audit Committee met on one occasion.
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. The Executive Committee meets when
actions must be approved in an expedient manner and a meeting of the Board of
Directors cannot be
28
<PAGE> 52
convened. During Fiscal 1997, the Executive Committee did not deem it
necessary to meet.
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, 1997, the
Compensation Committee held one meeting.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended June 30, 1997, the Board of Directors of
the Company met on four occasions and voted by unanimous written consent on two
occasions. 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 1997 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.
29
<PAGE> 53
Robert C. Fallows has been Vice President of Sales of the Imaging
Division since September 1995. From 1988 to 1995 Mr. Fallows served in
various sales management positions with Riso Inc., the last being Vice
President of Sales. Riso Inc. is a copier manufacturer. Prior to that, Mr.
Fallows had 21 years of experience in sales management position in the office
products and computer industries. Mr. Fallows has a B.A. degree from Hamilton
College.
John Matyka has been Vice President of Marketing of the Imaging
Division since November 1995. Mr. Matkya brings over 25 years of management
experience in marketing, sales and communication for the office equipment
industry with Ricoh Corp., IBM and Savin Corp. Mr. Matyka has an M.B.A. from
Fairleigh Dickinson University and a B.B.A degree from Pace University.
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,
1997, 1996 and 1995 to each of the named executive officers of the Company.
30
<PAGE> 54
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
LONG TERM
COMPENSATION AWARDS
NO. OF
SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL RESTRICTED UNDERLYING
POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARD(S) OPTIONS/SARS
<S> <C> <C> <C> <C> <C> <C>
John Botti 1997 $110,000(1) 0(1) $1,415(2) 0(3) 0
Chairman, 1996 $ 90,000(1) 0 $1,472 0 0
President and 1995 $ 85,962 0 $1,179 0 600,000
Chief Executive
Officer
Donald Payne 1997 $100,000 0 $ 5,844(6) 0 0
Chief Operating 1996 $43,554 0 $42,729(6) 0 100,000(7)
Officer,
President-
Imaging Div.-
Director
Joseph Vartabedian(4) 1997 $77,500 $118,609 $2,516(4) 0 0
President of 1996 $77,500 $77,480 $2,516 0 0
System 1995 $67,782 $51,669 $2,316 80,000(5)
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 1997 or 1996, therefore, no bonuses were
issued. Additionally, Mr. Botti is entitled to receive $110,000 in
salary per year. See "Employment Agreements."
(2) Includes: (i) for 1997, an automobile and expenses of $1,213 and the
payment of premiums on term life insurance policy of $202; (ii) for
1996, an automobile and expenses of $1,213 and the payment of premiums
on a term life insurance policy of $259; and (iii) for 1995, an
automobile and expenses of $963 and the payment of premiums on a term
life insurance policy of $216.
(3) No restricted stock awards were granted to Mr. Botti in fiscal 1997.
Mr. Botti, however, owned 244,038 restricted shares of the Company's
Common Stock on June 30, 1997, the market value of which was
approximately $724,488 on such date,
31
<PAGE> 55
without giving effect to the diminution in value attributed to the
restriction on such shares.
(4) Includes for fiscal years 1996 and 1997: (i) personal automobile
expenses of $2,400 and $2,400; (ii) the payment of premiums on a term
life insurance policy of $116 and $116, respectively.
(5) 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.
(6) Includes (i) for fiscal year 1997 includes personal transportation of
$5,642 and $202 for premiums on a term life insurance policy; (ii) for
fiscal year 1996 includes personal automobile expenses of $1,177, the
payment of premiums on a term life insurance policy of $84 and
consulting fees of $41,468 which were paid prior to Mr. Payne being
hired by the Company.
(7) 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, 1997,
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 executive officers during the last fiscal
year.
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, 1997.
32
<PAGE> 56
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of
--------
Unexercised
-----------
In-the-Money
------------
Options at
----------
June 30,
--------
Number of Unexercised 1997(1)
--------------------- -------
Shares Acquired Options as of June 30, 1997 Exercisable/
--------------- --------------------------- ------------
Name on Exercise Value Realized Exercisable/Unexercisable Unexercisable
---- ----------- -------------- ------------------------- -------------
<S> <C> <C>
John T. Botti 0 -- 585,185/250,000 $ 1,182,747/350,000
Joseph Vartabedian 0 -- 60,000/20,600 0/0
Donald Payne(2) 0 -- 170,000/0 $ 238,000/0
</TABLE>
- -------------------------
(1) Based upon the closing bid price ($2.96 per share) of the Company's
Common Stock on June 30, 1997 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, 1997, 1998 and 1999; (iv) certain
insurance and severance benefits and (v) automobile and expenses.
COMPENSATION OF DIRECTORS
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
33
<PAGE> 57
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 and expired in
August 1996.
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 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"). As of June 30, 1997, there were outstanding 1,939,370 options
under the 1992 Plan with exercise prices ranging from $.34 to $7.25.
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
34
<PAGE> 58
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 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.
As of June 30, 1997, there are outstanding 220,000 options under the
Director Plan with exercise prices from $3.375 to $5.125.
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
35
<PAGE> 59
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 22,
1997 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.
36
<PAGE> 60
<TABLE>
<CAPTION>
Amount and Nature
Type of Name and Address of of Beneficial Percentage
Class Beneficial Holder Ownership (1) of Class
- ----- ----------------- ------------- --------
<S> <C> <C>
Common John T. Botti 854,223 (2) 8.9%
c/o Bitwise Designs
Rotterdam Industrial Park
Schenectady, NY 12306
Common Ira C. Whitman 761,538 (3) 7.6%
c/o Bitwise Designs
Rotterdam Industrial Park
Schenectady, NY 12306
Common John W. Loofbourrow 68,350 (4) 1.1%
c/o John W. Loofbourrow
Associates, Inc.
One World Trade Center
Suite 2413
New York, NY 10048
Common Dennis Bunt 105,000 (5) 1%
c/o Bitwise Designs, Inc.
Rotterdam Industrial Park
Schenectady, New York 12306
Common Donald J. Payne 177,000 (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. 42,653 (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 __%
</TABLE>
(Footnotes appear on next page....)
37
<PAGE> 61
(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 585,185 shares of Common
Stock. Does not include non-vested options to purchase 250,000 shares
of Common Stock.
(3) Includes vested stock options to purchase 368,518 shares of Common
Stock. Does not include non-vested options to purchase 66,667 shares
of Common Stock.
(4) Includes shares held by John W. Loofbourrow Associates, Inc. Profit
Sharing Plan and options to purchase 50,000 shares of Common Stock.
(5) Includes vested options to purchase 93,000 shares of Common Stock and
excludes nonvested options to purchase 11,000 shares of Common Stock.
Includes 1,000 shares of Common Stock owned by Mr. Bunt's wife.
(6) Includes options to purchase 70,000 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) Includes vested options to purchase 40,000 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
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.
Mr. Botti has personally guaranteed the lease of the Company's
facilities from Rotterdam Ventures, Inc. The Company may attempt to negotiate
with this entity to cancel or limit the personal guarantee.
38
<PAGE> 62
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.
During fiscal 1996 the Company loaned $50,000 to Mr. Richard Clowes.
The loan bears interest at 6% per annum and is secured by all of the securities
owned by Mr. Clowes. The loan is payable in full in November 1997.
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, 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.
Exhibit No. Description
- ----------- -----------
39
<PAGE> 63
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)
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 Notice and Warrant Purchase, Paying and Conversion/Exercise
Agency Agreement dated as of August 8, 1997 between the Company and
Barca 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)
40
<PAGE> 64
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)
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)
41
<PAGE> 65
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 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
42
<PAGE> 66
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 26, 1997
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:
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ John T. Botti President, September 26, 1997
- ------------------------ Chairman of the
John T. Botti Board and Chief
Executive Officer
/s/ Donald J. Payne Chief Operating September 26, 1997
- ------------------------ Officer and Director
Donald J. Payne
/s/ Ira C. Whitman Senior Vice September 26, 1997
- ------------------------ President and Director
Ira C. Whitman
/s/ John W. Loofbourrow Director September 26, 1997
- ------------------------
John W. Loofbourrow
/s/ J. Edward Sheridan Director September 26, 1997
- ------------------------
J. Edward Sheridan
/s/ Richard F. Clowes Director September 26, 1997
- ------------------------
Richard F. Clowes
/s/ William Bierlin, Jr. Director September 26, 1997
- ------------------------
William Bierlin, Jr.
/s/ Dennis H. Bunt Chief Financial September 26, 1997
- ------------------------ Officer and Principal
Dennis H. Bunt Accounting Officer
</TABLE>
43
<PAGE> 67
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
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)
4.7 Form of Notice and Warrant Purchase, Paying and Conversion/Exercise
Agency Agreement dated as of August 8, 1997 between the Company and
Barca 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)
<PAGE> 68
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)
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)
<PAGE> 69
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 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 4.7
NOTE AND WARRANT PURCHASE,
PAYING AND CONVERSION/EXERCISE AGENCY AGREEMENT
entered into effective as of August 8, 1997
between
BITWISE DESIGNS, INC.
being a corporation existing under the laws of the State of Delaware whose head
office is situated at Building 50, Rotterdam Industrial Park Duanesburg Rd..
Route 7, Schenectady, N.Y. 12306, U.S.A.
(hereinafter called the "Company") on the one part and
BANCA DEL GOTTARDO
being a corporation duly organized with limited liability and existing under the
laws of Switzerland, whose registered office is situated at Viale Stefano
Franscini 8, 6901 Lugano, Switzerland,
on the other part
Some Definitions
The Company's 8% Convertible Notes of 1997 due August 1 1. 2002. are referred to
herein as the "Notes" and the Warrants of 1997 expiring August I 1. 2002 as the
"Warrants". Until the Notes have been printed in definitive form pursuant to
Article IX hereto{ the expression "Notes" herein shall include entitlements
under the Global Note, and the expressions "Noteholder(s)" and
"Couponholder(s)". mutatis mutandis. shall mean and include persons and entities
entitled to the benefits under the Global Note. Each Noteholder possesses a
co-ownership in the Global Note in relation to the principal amount of Notes of
which he is an owner. "Global Note" means a global note for the total principal
amount of USD 4'000'000.-- issued in bearer form and representing 800 single
Notes each in the amount of USD 5'()()().-- and representing the aforementioned
total principal amount.
<PAGE> 2
The Global Note will be destroyed by Banca del Gottardo when the Notes are
printed. Until the Warrants have been printed in definitive form pursuant to
Article IX hereto{ the expression "Warrants" herein shall include entitlements
under the Global Warrant. and the expressions "Warrantholder(s)" mutatis
mutandis shall mean and include persons and entities entitled to the benefits
under the Global Warrant. Each Warrantholder possesses a co-ownership in the
Global Warrant in relation to the principal number of Warrants he is an owner
of.
"Global Warrant" means a global warrant for the total number of 400'000 Warrants
issued in bearer form. The Global Warrant will be destroyed by Banca del
Gottardo when the Warrants are printed.
Global Note and Global Warrant are hereinafter sometimes collectively referred
to as the "Global Certificates".
I. SUBJECT
Subject to the terms and conditions hereof
- - the Company, pursuant to authorization by its Board of Directors,
agrees to issue and sell to Banca del Gottardo USD 4'000'000.-- Notes
at a price of 100% of their principal amount, and 400000 Warrants in a
ratio of one Note and 500 Warrants and
- - Banca del Gottardo agrees not later than August 11, 1997
(1) to purchase (i.e. underwriter) on a firm basis for USD
4'000'000.-- Notes at a price of 100% of their principal
amount and 400'000 Warrants, and
(2) to offer the Notes and Warrants in a placement exclusively to
its clients and other financial institutions at a price of
100% of their principal amount.
(i) Notes
with a total principal amount of USD 4'000'000.
(United States Dollars
four million)
maturing on August 11, 2002
bearing interest at the rate of 8% per annum, payable
semi-annually in arrear
each February 11 and
August 11, commencing
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<PAGE> 3
February 11, 1998 until
maturity and
(ii) Warrants
in a total number of 400'000 (four hundred
thousand) expiring
on August 11, 2002
The aggregate amount for which Notes and Warrants are sold are
hereinafter referred to as the "Proceeds".
The net Proceeds of the Notes will be utilized by the Company\ as
follows:
A. 70% to be utilized for marketing and distribution
purposes of the Doc Star-project (to expand areas of
distribution and for general marketing efforts including
advertisement and the possible employment of additional
staff); and
B. the remaining proceeds are at the Company's free disposal
for the financing of acquisitions, working capital and
general corporate purposes.
Banca del Gottardo shall not have any responsibility for or be obliged
to concern itself with the application of the net Proceeds of the
Notes.
II. ANNEXES
The contents of each of the Annexes attached hereto. i.e.
Annex A: Terms of the Notes
Annex B: Form of Definitive Note (face)
Annex C: Form of Interest Coupons
Annex D: Form of Global Note
Annex E: Terms of the Warrants
Annex F: Form of Definite Warrant (face)
Annex G: Form of Global Warrant
Annex H: Conversion Agency Agreement
Annex I: Warrant Agency Agreement
Annex J: Certification of Non U.S. Beneficial
Ownership
Annex K: Form of Certificate of No Material
Adverse Change
Annex L: Specimen signature form
Annex M: Certificate by Banca del Gottardo
shall constitute an integral part of this Agreement.
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<PAGE> 4
III. SALES RESTRICTIONS
a) The Notes and Warrants to be issued pursuant to this Agreement have not
been registered under the United States Securities Act of 1933, as
amended (the "Securities Act"), and may not be offered, sold or
delivered, directly or indirectly. in the United States or to, or for
the account of any U.S. person except in transactions exempt from the
registration requirements of the Securities Act.
b) As to the Company, the Notes and Warrants are intended to be
obligations that are not required to be in registered form for purposes
of United States federal tax laws and the principal (to the extent
characterized as original issue discount) and interest payable on the
Notes are intended to be "portfolio interest" under Sections 871(h) and
881(c) of the United States Internal Revenue Code of 1986 as amended
(the "Code"). Accordingly, the Notes and the Warrants may not, as part
of any part of the initial distribution, be offered for sale or resale,
sold or delivered. directly or indirectly, to a person in the United
States or to a United States person. Banca del Gottardo (i) agrees and
represents that no Notes or Warrants will be offered, sold or delivered
to or on behalf of a person within the United States or a United States
person, (ii) represents and agrees that (a) it will not offer or sell,
and, during the period beginning on August 11. 1997 and ending on the
date forty (40) days after August II. 1997 (the "Restricted Period"),
it will not offer or sell, Notes or Warrants to a person who is within
the United States or to a United States person, (b) it has not
delivered and will not deliver within the United States definitive
Notes or coupons or definitive Warrants that are sold during the
Restricted Period, (c) it has and throughout the Restricted Period will
have in effect procedures reasonably designed to ensure that its
employees or agents who are directly engaged in selling Notes or
Warrants are aware that such Notes or Warrants may not be offered or
sold during the Restricted Period to a person who is within the United
States or to a United States person and (d) it has not entered and will
not enter into any contractual arrangement with respect to the
distribution and delivery of the Notes and the Warrants, except with
its affiliates or with the prior written consent of the Company. (iii)
represents and agrees with respect to each affiliate that acquires from
it Notes or Warrants for the purpose of offering or selling such Notes
or Warrants during the Restricted Period, repeating and confirming the
representations and agreements contained in clauses (ii) (a), (b), (c)
and (d) on each such affiliate's behalf and (iv) represents and agrees
that it will not sell or deliver Notes and Warrants to a holder which
is (a) immediately after the sale or delivery a "10-percent
shareholder" of the Company within the meaning of Section 871(h) (3) of
the Code, (b) a
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<PAGE> 5
bank on an extension of credit made pursuant to a loan agreement
entered into in the ordinary course of its trade or business, (c) a
controlled foreign corporation which is related to the Company under
section 864 (d) (4) of the Code. or (d) within a foreign country which
the United States Secretary of the Treasury has determined under
section 7 I (h) (6) of the Code that the exchange of information with
the foreign country is inadequate to prevent evasion of United States
tax by United States persons. Banca del Gottardo will deliver to the
Company the certificate in the form attached hereto as Annex M within
ten business days of the commencement of the Restricted Period. For
purposes of this Agreement, whether an offer, sale or delivery is made
to a person within the United States or to a United States person will
be determined under the rules set out in the Code, and United States
Treasury Regulation Section 1.163- 5(c)(2)(i)(D). Banca del Gottardo
agrees that it will comply fully with the selling restrictions set out
in this Sub-Section (b) and in particular, Banca del Gottardo hereby
covenants and agrees to the effect set out in clauses (ii) and (iii) of
the second preceding sentence by
c) The Notes will be represented initially - a temporary Global
Convertible Note (the "Global Note"). without interest coupons, and the
Warrants will be represented initially by a temporary Global
Certificate (the "Global Warrant"). the Global Note and Global Warrant
to be deposited by' the Company with Banca del Gottardo, on August 11,
1997. The Global Note may be exchanged. as a whole or in part, for
appropriate definitive Notes, in bearer form in the denominations of
USD 5'000.-- with interest coupons (the "coupons") attached. and the
Global Warrant may be exchanged, as a whole or in part. for appropriate
definitive Warrants. in bearer form not earlier than 40 day's after
August 11, 1997, before which time no Notes represented by the Global
Note or Warrants represented by the Global Warrant or interest therein
may be offered, sold or transferred into the United States or to a U.S.
person. Such exchange shall be made upon certification, in the form
attached hereto as Annex J- 1. that the beneficial owners of the Notes
or Warrants either (i) are not United States persons or U.S. persons or
(ii) are financial institutions (within the meaning of United States
Treasury' Regulation Section 1.165-1 2(c)( I )(v)) located outside the
United States that are not United States persons and have purchased
such Notes or Warrants for resale during the Restricted Period and
certify they have not acquired the Notes or the Warrants for purposes
of resale directly or indirectly to a United States person or to a
person within the United States. Any certificates provided by' a
clearing organization must be based on statements provided to it by its
members. A beneficial owner of Notes must exchange its share of the
Global Note for definitive Notes before such Notes or
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<PAGE> 6
interests therein may be transferred or as regards the Notes before
interest payments or other payments will be made and a beneficial owner
of Warrants must exchange its position of the Global Warrant for
definitive Warrants before such Warrants will be exercised, Banca del
Gottardo agrees (i) to furnish to the Company a properly completed
certificate with respect to each Note and Warrant, in the form attached
hereto as Annex J-1 and J-2 (and, in the case of clearing
organizations, required statements of members of the clearing
organization), on the earlier of the date of the first actual payment
of interest on the Note or the date of deliver, by the Company of the
Note or Warrant in definitive form, and (ii) to issue definitive Notes
and Warrants within a reasonable time after the end of the Restricted
Period (for this purpose a temporary global security is not a security
in definitive form).
d) In this Agreement, references to "dollars" and "USD" are to United
States dollars, the term "United States" means the United States of
America (including the States and the District of Columbia), its
territories, its possessions and other areas subject to its
jurisdiction, and the term "United States person" means a citizen or
resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States
or any political subdivision thereof, or an estate the income of which
is subject to United States federal income taxation regardless of its
source or a trust if a court within the United States is able to
exercise primary jurisdiction over the administration of the trust and
one or more United States fiduciaries has the authority to control all
substantial decisions of the trust, "U.S. person" shall have the
meaning set forth in Sections 230.901 through 904 of Title 17 of the
United States Code of Federal Regulations ("Regulation S").
e) The following legends will appear on the Global Note and all Notes and
coupons issued pursuant to the Offer: (i) "Any United States person who
holds this obligation will be subject to limitations under the United
States income tax laws, including the limitations provided in sections
165(I) and 1287(a) of the Internal Revenue Code", and (ii) "This Note
has not been and will not be registered under the United Stated
Securities Act of 1933, as amended (the "Securities Act"), and may not
be offered, sold or delivered, directly or indirectly, in the United
States or to, or for the benefit of, any U.S. person (as such terms are
defined in Regulation S under the Securities Act) unless this Note is
registered under the Securities Act or an exemption from the
registration requirements of the Securities Act is available." The
sections referred to in the legend provide that, with certain
exceptions, a United States person will not be permitted to deduct any
loss, and will not be eligible for capital gain
6
<PAGE> 7
treatment with respect to any gain, realized on a sale, exchange or
redemption of such Notes or coupons.
f) The following legends will appear on the Global Warrant and all
Warrants issued pursuant to the Offer: "This Warrant has not been and
will not be registered under the United Stated Securities Act of 1933,
as amended (the "Securities Act"). and may not be offered, sold or
delivered, directly or indirectly, in the United States or to, or for
the benefit of, any U.S. person (as such terms are defined in
Regulation S under the Securities Act) unless this Warrant is
registered under the Securities Act or an exemption from the
registration requirements of the Securities Act is available."
g) The Company represents, warrants and covenants that the Notes and the
Warrants have not been and shall not be offered or sold except in
accordance with Rule 903 promulgated under the Securities Act or in a
transaction exempt from the registration requirements of the Securities
Act. Each of the Company and Banca del Gottardo represents, warrants
and covenants that (i) none of it, its affiliates or any person acting
on its behalf has engaged or will engage in any directed selling
efforts (as defined in Rule 902 promulgated under the Securities Act)
in the United States and it has complied and will comply with the
offering restrictions of Regulation S under the Securities Act in
connection with the offer of the Notes and the Warrants, (ii) none of
it, its affiliates or any person acting on its behalf has made or will
make an offer of the Notes in circumstances that would require the
registration of the Notes or Warrants under the Securities Act and
(iii) requests to purchase Notes and/or Warrants shall be accepted only
from persons who are not within the United States.
h) Banca del Gottardo has been advised by the Company and acknowledges and
confirms that it is aware (a) that a violation or breach of any of the
terms and conditions of Article III of this Agreement could directly
cause the Company to become subject to damages and liabilities
(including, but not limited to, excise taxes, a loss of the interest
deduction and assumption of withholding taxes) under various United
States securities and tax laws, and (b) that, as a consequence, Banca
del Gottardo could be held liable for such damages and liabilities, in
the event Banca del Gottardo violated or breached such terms and
conditions.
IV. COMMISSION AND EXPENSES
a) The Company will pay on August 11, 1997 Lugano time (the
"Closing Date") to Banca del Gottardo
(1) a managing and underwriting commission of 7% calculated
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<PAGE> 8
on the principal amount of the Notes
(2) USD 50'000.-- for out-of-pocket expenses incurred by
Banca del Gottardo, which shall include all its legal
fees and expenses.
The payment by the Company of (1) and (2) above will be made by
deduction from the payment by Banca del Gottardo to the Company of the
Proceeds, resulting in the Net Proceeds as per Article VI.
b) The Company shall further bear when ascertainable and due
- all present or future taxes, duties or other charges levied by
or within the United States of America in connection with the
execution and deliver, of this Agreement, the Global Note and
the Global Warrant (excluding tax on interest or principal on
the Notes which is addressed in Annex A); and
- the commissions and expenses for the servicing and the
conversion of the Notes as per Article X and the exercise of
the Warrants as set forth in the Warrant Agency Agreement.
c) The Company will reimburse Banca del Gottardo on first demand for all
reasonable bank charges, legal fees and other reasonable costs and
expenses incurred or to be incurred by Banca del Gottardo in case of or
in connection with reorganization, merger, restructuring or default,
actual or threatened of the Company as well as in connection with the
convening of a Noteholders' meeting and the preservation and
enforcement of any of the rights under this Agreement, the Global
Warrant or the Warrants, the Global Note or the Notes.
d) Banca del Gottardo shall bear
- all costs and expenses in connection with the initial offering
and placement of the Notes and the Warrants incurred by it.
Banca del Gottardo shall further bear the cost for the
printing and deliver to the holders of the definitive Notes or
of the definitive Warrants incurred by Banca del Gottardo on
behalf of the Company.
- all costs incurred by it in connection with the offering,
including the printing in Switzerland of the Information
Memorandum relating to the Notes and the Warrants.
V. WARRANTIES
A) The Company warrants to and for the benefit of Banca del
Gottardo that:
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<PAGE> 9
1. Status: it is a corporation duly incorporated and
existing in good standing under the laws of the
State of Delaware capable of suing and being sued
and has the power and authority to own its assets
and to conduct the business which it presently
conducts.
2. Powers: it has the power to enter into, exercise
its rights and perform and comply with its
obligations under this Agreement;
3. Authorization and Consents: except as to the
registration requirements provided for herein all
actions conditions and things required by the laws
of the State of Delaware and the United States of
America have been taken, fulfilled and done
(including the obtaining of any necessary Consents)
in order
a) to enable it lawfully to enter into exercise its
rights and perform and comply with its obligations
under this Agreement; and
b) to ensure that those obligations are legally
binding and enforceable in accordance with their
terms subject to general equity principles, to
applicable bankruptcy, insolvency, conservatorship,
reorganization and other similar debtor relief
laws and to other laws establishing liens and
priorities or otherwise relating to or affecting
creditors-rights
4. Non-Violation of Laws, etc: its entry into, and exercise
of its rights and/or performance of or compliance with
its obligations under this Agreement, the terms of the
Global Note and the Notes and the terms of the Global
Warrant and the Warrants do not and will not violate in
any material way
a) any law to which it is subject or
b) its Certificate of Incorporation or
c) except for matters for which the Company has
received a waiver, any agreement to which it is a
party or which is binding on it or its assets, and
does not and will not result in the existence of,
or obligate it to increase, any securities interest
in those assets, except to the extent that such
violations in the aggregate would not have a
material adverse effect on the financial
conditions of the Company.
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<PAGE> 10
5. Obligations Binding: its obligations under this Agreement, the
Global Note and the Notes, the Global Warrant and the Warrants
when duly executed are valid, binding and enforceable in
accordance with their terms subject to general equity
principles, to applicable bankruptcy, insolvency,
conservatorship, reorganization and other similar debtor
relief laws, and to other laws establishing liens and
priorities or otherwise relating to or affecting creditors'
rights.
6. Information Memorandum: the information pertaining to the
Company and its subsidiaries which is contained in the
Information Memorandum (defined in Article VIII) is accurate
in all material respects and there are no other facts the
omission of which makes any statement therein materially
misleading.
7. Accounts: the audited and unaudited consolidated financial
statements included as contained in the Information Memorandum
present fairly the results and financial condition of the
Company as a whole for the periods and as of the dates
thereof, and are in accordance with generally accepted
accounting principles in the United States of America;
8. No Material Adverse Change: (i) save as disclosed in the
Information Memorandum and the Company's filings with the
Securities and Exchange Commission in the U.S. and (ii)
provided that the Company has agreed to change its auditors
from KPMG Peat Marwick to Coopers & Lybrand, there has been no
material adverse change in the consolidated financial
condition of the Company' since March 31, 1997;
9. Litigation: except as disclosed in the Information Memorandum,
no litigation, arbitration or administrative proceedings or
judgment or award is current or, so far as the Company is
aware, threatened or pending
a) to restrain the entry into, exercise of its rights
under and/or performance or enforcement of or
compliance with its obligations under this Agreement;
or
b) which either individually or collectively are
material in the context of the issue and sale of the
Notes or the Warrants or the making and performance
of this Agreement;
10. No Breach or Default: neither failure by the Company to comply
with Article III nor any event described in Sections 8.9 or 10
of the Terms of the Notes has
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<PAGE> 11
occurred and is continuing. The Company is not in breach or in
default under any agreement to an extent or in a manner which
has had or could have a material adverse effect on the
financial condition of the Company and its consolidated
affiliates taken as a whole.
(B) Since the commitment of Banca del Gottardo to purchase the
Notes and the Warrants is made on the basis of the aforesaid
representations and warranties, the Company hereby undertakes
with Banca del Gottardo that it will hold Banca del Gottardo
harmless against all losses, liabilities, costs, charges and
expenses which it may incur as a noteholder as a result of or
in relation to any material misrepresentation or any material
breach of said representations and warranties by the Company,
and as long as any of the Notes and the Warrants are
outstanding Banca del Gottardo shall be given prompt notice by
the Company of any claim, action or proceeding which might
give rise to an obligation under this clause (B) of Article V.
This indemnification by the Company shall be in addition to
any other remedy available to Banca del Gottardo under
applicable law.
VI. PAYMENT TO THE COMPANY
On the Closing Date, Banca del Gottardo will pay to the Company the net
proceeds (the "Net Proceeds") of the offering - after compensation with
the commissions and expenses mentioned in Article IV against the Global
Note and the Global Warrant being delivered to Banca del Gottardo
pursuant to Article VII.
Such net proceeds will be placed by Banca del Gottardo in US Dollars to
the credit of the Company in a US Dollar denominated account designated
by the Company. Such net proceeds will be at the free disposal of the
Company subject to any Swiss National Bank regulations or other
regulations that may be in force on the Closing Date.
VII. CONDITIONS TO THE OBLIGATIONS OF BANCA DEL GOTTARDO
Banca del Gottardo shall have received from the Company at the latest
on August 8, 1997 the following documents:
(1) a copy of the Certificate of Incorporation. together with all
amendments thereto, of the by the Company certified secretary
or the Assistant Secretary of the Company and a copy of a
Certificate of the Secretary of State of the State of Delaware
as to the good standing of the Company, each dated as of a
recent date;
(2) a certified copy of a resolution or resolutions duly adopted
by the Board of Directors of the Company signed
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<PAGE> 12
by a duly authorized officer of the Company, conferring the
necessary authority upon the person(s) signing this Agreement,
the Information Memorandum, the Global Note. the Notes, the
Global Warrant, the Warrants and any related documents; and a
certificate of the Secretary, or Assistant Secretary of the
Company as to the incumbency and signatures of the officer(s)
of the Company signing the documents provided for in this
clause (2) on behalf of the Company and the approval of this
Agreement and the Information Memorandum:
(3) Global Note (in the form of Annex D, without interest coupons
and without reproduction of the Terms of the Notes) and the
Global Warrant (in the form of Annex G) both duly issued and
signed by an authorized officer of the Company to be held in
escrow by Banca del Gottardo pending payment of the Net
Proceeds pursuant to Article VI;
(4) an executed copy of the Conversion Agency Agreement as set
forth in Annex H hereto;
(5) an executed copy of the Warrant Agency Agreement as set forth
in Annex I hereto;
(6) specimen signatures for the printing of the Notes;
(7) Certificate of No Material Adverse Change dated as of the
Closing Date and signed by an authorized officer of the
Company, substantially in the form of Annex K hereto;
(8) a legal opinion of Goldstein & DiGioia, LLP, external U.S.
counsel to the Company on the laws of the United States of
America, dated as of the Closing Date;
(9) an opinion of Guy P Novo, Tax Counsel to the Company, with
respect to the status of the Notes in respect of United States
taxes, dated as of the Closing Date;
(10) a certificate of two officers of the Company approving
the terms of the Notes and of the Warrants and the issue
and sale thereof by the Company;
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(11) 2 copies of the Information Memorandum duly signed by an
authorized officer of the Company; and
Each of documents 5,6,7,8,9 and II shall be substantially as agreed by
the Company and Banca del Gottardo prior to the Closing Date.
VIII. INFORMATION MEMORANDUM
The Company will supply Banca del Gottardo on behalf of the holders of
the Notes in due time with information and documentation for the
preparation by Banca del Gottardo of the Information Memorandum (the
"Information Memorandum") relating to the Issue, in compliance with
Swiss law.
The Information Memorandum shall be reviewed by the Company and Banca
del Gottardo.
IX. PRINTING OF THE NOTES AND WARRANTS
Banca del Gottardo shall provide for the printing of all, but not some
only, of the Notes or of the Warrants, at its cost on behalf of the
Company. A proof of the Notes and of the Warrants shall be approved by
the Company, unless the Company is then in default, prior to the
printing thereof.
(1) The Notes shall
- be in the form of Annex B.
- have the Terms of the Notes (as per Annex A)
reproduced in English on the reverse side.
- be dated the Closing Date, and
- bear in facsimile the signature(s) of one or more
duly authorized officer(s) of the Company
- have Coupons attached, whereas
(2) the Coupons shall
- be in the form of Annex C, and
(3) The Warrants shall
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<PAGE> 14
- be in the form of Annex F
- have the Terms of the Warrants (as per Annex E)
reproduced in English on the reverse side
- to be dated the Closing Date, and
- bear in facsimile the signature(s) of one or more
duly authorized officer(s) of the Company.
(4) The Notes with Coupons attached shall be exchanged against the
Global Note delivered to Banca del Gottardo pursuant to
Article VII of this Agreement.
The Global Certificates so exchanged shall thereafter be cancelled and
returned to the Company.
The Company hereby irrevocably authorizes Banca del Gottardo to
reproduce on the Notes, the coupons and the Warrants the signature of
the President of the Company set forth in the specimen signature form
of Annex L attached hereto with the same binding effect upon the
Company as if the Notes and the coupons or the Warrants had been issued
and signed by the Company on the Closing Date. Notes and/or Coupons or
Warrants which are mutilated, lost or destroyed may be replaced by
Banca del Gottardo in accordance with the respective provisions of the
Terms of the Notes and the Terms of the Warrants respectively. The
Company may at any time send a representative to count the securities
before they are delivered to investors.
X. SERVICING OF THE NOTES
(1) Transfer of funds
The Company will effect transfer of the funds in freely
disposable United States Dollars required to make any payment
of principal or interest on the Notes including the
commissions referred to in paragraph (2) hereafter, to Banca
del Gottardo, Lugano, as Paying Agent for value the respective
due date provided that, if such due date does not fall on a
Business Day the Company shall be obliged to effect transfer
of such payments for value the Business day immediately
preceding such due date. Any transfer risk shall be borne by
the Company.
"Business Day" means a day on which commercial banks are open
for domestic business and foreign exchange (including dealings
in US Dollars) in Lugano and New York. Banca del Gottardo will
supply the Company, by facsimile or otherwise in writing
received by the Company not less than five Business Days prior
to each due date
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<PAGE> 15
for any payment under the Notes with any necessary,
information including reference numbers and the name of a
contact person for the receipt of funds. Further information
regarding the transfer may be obtained by Banca del Gottardo
from the Company at the address set out in Article XIV below.
Banca del Gottardo shall credit the funds received to separate
non-interest bearing accounts with Banca del Gottardo for each
Coupon due date and/or redemption date. The receipt by Banca
del Gottardo of the due and punctual payment of the funds in
Lugano shall release the Company of its obligations under the
Global Note or under the Notes for the interest and principal
to the extent of such payment.
Any funds held by Banca del Gottardo which will not be used as
a consequence of Coupons and Notes not having been collected
within the relevant period described by the Statute of
Limitations. shall be held by Banca del Gottardo at the
disposal of the Company. Banca del Gottardo shall promptly
after the expiry of the relevant period inform the Company
about the respective amount.
(2) Commissions and Expenses
The Company will pay to Banca del Gottardo for the
servicing of the Notes a commission of
- 0.25% on the face amount of Coupons to be paid and
- 0.125% on the principal amount of Notes redeemed.
(3) Modalities
Except as provided in paragraph (I) of Article XI or in
Section 5 of the Terms of the Notes, any transfer by the
Company as per (1) and (2) above, shall be made in US Dollars
freely disposable, without any restrictions, and whatever the
circumstances may be, irrespective of the nationality or
domicile of the holder of Notes and/or Coupons, and without
requiring any affidavit. or the fulfilment of any other
formality.
(4) Paying Agency
The Company hereby appoints Banca del Gottardo as sole Paying
Agent (the "Paying Agent") and Banca del Gottardo agrees to
pay to the Noteholders all amounts to become due under the
Notes. The Company undertakes in connection with the Issue,
not to appoint any institutions as paying agent without the
consent of Banca del Gottardo. which
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<PAGE> 16
consent shall not be unreasonably withheld and not to pay to
other banks any commission or remuneration for the payment of
interest or principal on the Notes.
XI. CANCELLATION OF NOTES AND COUPONS OR WARRANTS
The Company requests and authorizes Banca del Gottardo and Banca del
Gottardo undertakes to cancel and destroy all Coupons paid and Notes
redeemed, converted or replaced and Warrants exercised or replaced,
after the period prescribed by law, and to certify to the Company in
writing the serial numbers of Notes or Warrants, as the case may be,
destroyed, the dates when such destruction took place and the names of
the persons witnessing such destruction. Banca del Gottardo reserves
the right to record cashed Coupons as well as redeemed, repaid,
converted or replaced Notes and exercised or replaced Warrants on video
tape or other data cameras and to store them in this way instead of
keeping them physically during the period prescribed by law and to
destroy them subsequently. This reproduction of Coupons and/or Notes or
Warrants will remain in safekeeping at Banca del Gottardo during the
statutory limitation.
XII. COVENANTS
As long as any of the Notes or Warrants remain outstanding the
Company undertakes
(1) To send to Banca del Gottardo
a) Annual Reports on Form 10-K as filed with the United
States Securities and Exchange Commission (the
"SEC"), which report shall include or be accompanied
by a copy of the report of the Company's independent
auditor, and
b) such regular and periodic reports on Form l0-Q and
Form 8-K (deemed material) as the Company files with
the SEC.
Banca del Gottardo is authorized to hold these documents at the
disposal of the Noteholders and/or holders of Coupons and/or
Warrantholders for inspection.
(2) To provide Banca del Gottardo forthwith upon becoming aware
thereof with
- any change of its Certificate of Incorporation
By-laws (if any) and without waiting for Banca del
Gottardo to take any of the actions mentioned in
Section 8, 9 or 10 of the Terms of the Notes with
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- a notice in writing of any event provided for in
Section 8, 9 or 10 of the Terms of the Notes.
(3) To hold meetings of the Board of Directors on a at least
quarterly basis, i.e. at least one meeting each quarter.
(4) To provide Banca del Gottardo with quarterly financial
statements of the Company by no later than the 45th day of the
month following the quarter covered by such statements. Such
statements shall provide Banca del Gottardo with a summary of
all of the Company's operation, in addition to a brief summary
of how the Net Proceeds of this issue have been used by
Company.
(5) To appoint two members, as reasonably acceptable to the
Company, of its Board of Directors upon request of Banca del
Gottardo as long as more than 25% of the Notes initially
issued are outstanding, unless Banca del Gottardo has
exercised any similar right under any other agreement, and
thereafter to nominate such appointee for election by the
Company's stockholders and use its best efforts to assure
their election until any Note or Notes shall be redeemed by
the Company.
(6) (a) So long as any Notes are outstanding, to keep
available authorized shares of Common Stock
sufficient to permit all Notes or Warrants
outstanding and unconverted or unexercised to be
converted or exercised in accordance with the
Provisions (Exhibit I to Annex H of the Agreement)
and the terms of the Warrants respectively.
(b) to assure that all shares of Common Stock delivered
upon conversion of Notes or exercise of Warrants will
be validly issued, fully-paid and non-assessable.
XIII. RIGHT OF TERMINATION
Notwithstanding anything contained in this Agreement. Banca del
Gottardo may by notice to the Company terminate this Agreement at any
time before the time on the Closing Date when payment would otherwise
be due under this Agreement to the Company in respect of the Notes and
Warrants if:
(1) in the reasonable opinion of Banca del Gottardo,
circumstances shall be such as:
a) to prevent or to a material extent restrict payment
for the Notes and the Warrants in the manner
contemplated in this Agreement; or
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b) to a material extent prevent or restrict settlement
of transactions in the Notes or Warrants in the
market or otherwise; or
(2) in the reasonable opinion of Banca del Gottardo, there
shall have been:
a) any change in national or international political,
legal, tax or regulatory conditions; or
b) any calamity or emergency which has in the view of
Banca del Gottardo caused a substantial deterioration
in the price and/or value of the Notes or the
Warrants. Any such termination of this Agreement
shall be without liability on the part of Banca del
Gottardo or on the part of the Company.
Upon any such termination of this Agreement pursuant to Article XIII
(i), the parties hereto shall (except for the liability of the Company
in relation to expenses as provided in Article IV (a) (2) hereof and
except for any liability arising before or in relation to such
termination) be released and discharged from their respective
obligations under this Agreement.
XIV. COMMUNICATIONS
All communications among Banca del Gottardo and the Company regarding
this Agreement shall be made in the English language by telex or
facsimile followed by registered letter, and shall be transmitted by
the Company to: by Banca del Gottardo to:
Banca del Gottardo Bitwise Designs, Inc.
Viale Stefano Franscini 8 Building 50
6901 Lugano, Switzerland Rotterdam Industrial Park
Duanesburg Rd. Route 7
Schenectady, N.Y. 12306, U.S.A.
Attn: Capital Market Department Attn: Chief Financial Officer
Telex No.: 841 052
Facsimile: 0114191 808 1843 Facsimile: 518-356-9749
with copy to:
Goldstein & Di Gioia, LLP
Attn. Victor J. Di Gioia, Esq.
369 Lexington Avenue
New York, NY 10017, U.S.A.
Facsimile: 212-557-0295
XV. APPLICABLE LAW AND JURISDICTION
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The Terms of this Agreement shall be governed by Swiss law, save and
except that paragraph of the terms of the Notes shall be governed by
the laws of the State of New York.
Any dispute which might arise between Banca del Gottardo on the one
hand and the Company on the other hand regarding this Agreement shall
fall within the jurisdiction of the ordinary Courts of Justice of the
Canton of Ticino, the place of jurisdiction being Lugano, with the
right of appeal to the Swiss Federal Court of Justice in Lausanne where
the law permits.
Solely for purposes of the preceding paragraph and for the purpose of
execution of a judgment in Switzerland, the Company elects legal and
special domicile at Banca del Gottardo's office in Lugano, and Banca
del Gottardo shall send to the Company with copy to Goldstein & Di
Gioia, LLP, attn. Victor J. Di Gioia, Esq., 369 Lexington Avenue, New
York, NY 10017, U.S.A. within two business days in Lugano any documents
received by it in this connection.
Banca del Gottardo shall also be at liberty to enforce its rights and
to take legal action before the competent courts of the United States
of America, in which case Swiss law shall be applicable with respect to
the construction and interpretation of this Agreement.
XVI. EFFECTIVENESS
The effectiveness of this Agreement is subject to:
(a) the receipt by Banca del Gottardo of all documents as
requested in Article VII of this Agreement in a form
acceptable to Banca del Gottardo,
(b) no exercise of the Right of Termination as per Article
XIII.
XVII. CURRENCY INDEMNITY
If any sum due from the Company in favour of the Paying Agent has to be
converted from United States Dollars (the "first currency") into
another currency (the "second currency") for the purpose of (i) making
or filing a claim or proof against the Company, (ii) obtaining an order
or judgment in any court or other tribunal or (iii) enforcing any order
or judgment given or made in relation hereto, the Company shall
indemnity, and hold harmless Banca del Gottardo from and against any
loss suffered as a result of any discrepancy between (a) the rate of
exchange used for such purpose to convert the sum in question from the
first currency into the second currency and (b) the rate or rates of
exchange at which Banca del Gottardo
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may in the ordinary course of business purchase the first currency with
the second currency upon receipt of a sum paid to them in the second
currency in satisfaction in whole or in part of any such order
judgment, claim or proof.
This indemnity shall constitute a separate and independent obligation
from the other obligations contained herein, shall give rise to a
separate and independent cause of action and shall apply, irrespective
of any waiver granted by Banca del Gottardo from time to time and shall
continue in full force and effect notwithstanding any judgment or order
for a liquidated sum or sums in respect of amounts due hereunder or
under any such judgment or order. Any such loss or damage aforesaid
shall be deemed to constitute a loss suffered by Banca del Gottardo and
no further proof or evidence of any actual loss shall be required by
the Company.
XVIII. ENTIRE AGREEMENT
This Agreement together with the Annexes hereto and other agreements
and documents delivered pursuant hereto set forth the entire agreement
and understanding of the parties in respect of the subject matter
hereof and thereof and supersede all prior agreements, arrangements and
understandings relating to the subject matter hereof and thereof.
XIX. AMENDMENT, CANCELLATION AND WAIVER
This Agreement and the Annexes hereto may be amended modified,
superseded or cancelled, and any of the terms hereof or thereof may be
waived, only by a written instrument executed by the Company and Banca
del Gottardo hereto or thereto, as the case may be, or, in the case of
a waiver, by the party or parties waiving compliance. The failure of
any party at any time or times to require performance of any provision
hereof or of any Annex hereto shall in no manner affect the rights at a
later time to enforce the same. No waiver by any party of any condition
or of the breach of any term contained in this Agreement or in any
Annex hereto, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be construed as a further or continuing
waiver of any such breach or the breach of any other term of this
Agreement or of the Annexes hereto.
THUS DONE AND SIGNED in 2 originals of which one is for the Company,
in Schenectady effective as of August 8, 1997
BITWISE DESIGNS, INC. BANCA DEL GOTTARDO
By ___________________________ By: _________________________
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EXHIBIT 4.8
ANNEX A
TERMS OF THE "CONVERTIBLE NOTES" OF THE COMPANY
(1) Form and Denomination
The Notes are issuable in bearer form in the denominations of USD
5,000 nominal amount each, with interest coupons (the "Coupons")
attached. The Notes will be represented initially by a temporary Global
Note (the "Global Note"), without interest coupons, to be deposited by
the Company with Banca del Gottardo on August 11, 1997 (the "Payment
Date"). The Global Note may be exchanged, as a whole or in part, for
appropriate definitive Notes, in bearer form in denominations of USD
5,000 with the Coupons attached, not earlier than 40 days after the
Payment Date. Such exchange shall be made upon certification that the
beneficial owners of the Notes either (i) are not United States persons
or U.S. persons or (ii) are financial institutions (as defined in
United States Treasury Regulation Section 1.165-12(c)(I)(v)) located
outside the United States that are not United States persons and that
have purchased such Notes for purposes of resale directlv or indirectly
to a United States person or U.S. person within the United States
during the Restricted Period and that certify that they have not
acquired the Notes for purposes of resale directly or indirectly to a
United States person or to a person within the United States. A
beneficial owner of Notes must exchange its share of the Global Note
for definitive Notes before such Notes or interests therein may be
transferred or interest payments or other payments in respect of the
Notes will be made.
For purposes hereof, (i) the term "Restricted Period" means the period
beguming on the Payment Date and ending on the date forty (40) days
after the Payment Date, (ii) the term "United States" means the United
States of America (including the States and the District of Columbia),
its possessions, its territories and other areas subject to its
jurisdiction, (iii) the term "United States person" means a citizen or
resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States
or any political subdivision thereof, or an estate the income of which
is subject to United States federal income taxation regardless of its
source or a trust if a court within the United States is able to
exercise primary jurisdiction over the administration of the trust and
one or more United States fiduciaries has the authority to control all
substantial
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<PAGE> 2
decisions of the trust and (iv) the term "U.S. person" has
the meaning set forth in Sections 230.901 through .904 of
Title 17 of the United States Code of Federal Regulations
("Regulation S").
(2) Interest
The Notes bear interest from the Payment Date at the rate of 8% per
annum, payable semi-annuallv in arrear on February 11 and August 11 of
each year until maturity (the "Coupon Due Dates") whereby the first
payment shall be made on February 11, 1998 in respect of the period
from August 11, 1997 to Februay 11, 1998. Such interest is payable in
United States Dollars.
Each Note will cease to bear interest on the date on which they become
due for redemption or repayment unless payment of principal and/or
premium (if any) is improperly withheld or refused or default is
otherwise made in respect of such payment. In such event, interest will
continue to accrue (as well after as before any judgment) up to but
exluding the date on which payment in full of the principal of such
Note is made or (if earlier) the date on which payment in full of the
principal thereof having been received bv Banca del Gottardo, notice to
that effect shall have been given to the holders of the Notes. Interest
is computed on the basis of a 360-day year of twelve 30-day months.
(3) Repayment
The Company undertakes to repay the principal amount of the Notes,
unless previously redeemed, without any previous notice on August 11,
2002.
(4) Optional Redemption and Conversion
(a) The Company reserves the right to call all, but not part of,
the outstanding Notes for redemption on November 1, 1997, or
thereafter up to the close of business on August 5, 2002, at a
price of 110% of the principal amount thereof, together with
interest accrued to the date of such redemption provided that
the average of the daily closing sales prices of a Share for a
period of 30 consecutive trading days, the last day of which
trading days is not more than 10 days prior to the day upon
which the Company sends a notice to Banca del Gottardo of its
intention to redeem the Notes under this sub-section (a) is at
least 2000/0 of the Conversion Price in effect on such last
day (taking into account any retroactive adjustment not then
reflected in the Conversion Price). The closing sales
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<PAGE> 3
price for any day shall be the average of the closing prices
on the New York Stock Exchange and if not listed any longer
thereon, the average of the closing bid and asked prices on
the National Association of Securities Dealers Automated
Quotation (NASDAQ). All outstanding Notes will become due 60
days after receipt of the aforesaid notice of early redemption
by Banca del Gottardo.
As long as the Shares are listed on a stock exchange or
exchanges in the United States of America, reference in this
sub-section (a) to the sales price for any day shall be deemed
to refer to the closing price (regular way) of a Share as
reported by the principal stock exchange on which the Shares
are listed for such day. If no such sales price is reported
for one or more trading days, such day or days shall not be
deemed as trading day or days and shall be disregarded in the
calculation of the said 30 trading day period.
(b) Each Noteholder will have the right to require the
Company to redeem any Note or Notes on August 11, 2001
at a price of 106% of the principal amount thereo
together with interest accrued to the due date of
redemption. This right will have to be exercised by
giving notice and surrendering the Note(s), so to be
redeemed to Banca del Gottardo, Lugano, at any time on
or after June 15, 2001 and prior to July 15, 2001
accompanied by an irrvocable request for redemption.
Notes called for redemption will become due on August
11, 2001. Notes called for redemption shall cease to
bear interest from the date fixed for such redemption,
unless the Company shall default in providing for the
payment of the redemption price. The Notes must be
presented for repavment with all unmatured Coupons
attached. An amount equal to any missing unmatured
Coupon shall be deducted from the amount due on
redemption. Such Coupons shall, however, be paid upon
subsequent presentation provided they shall not have
become barred pursuant to Section 11 hereof.
(5) Payments
Payments with respect to the Notes and Coupons shall be made in dollars
of the United States of America against presentation and surrender of
such Notes or Coupons in the manner specified below. Such payments
shall be made without cost to the Noteholders, without any limitations
and under all circumstances notwithstanding any transfer restrictions,
regardless of any bilateral or multilateral payment or
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<PAGE> 4
clearing agreement in existence between the United States of America
and the Swiss Confederation, irrespective of the national its residence
or domicile of any of the Note-holders and without requiring any
affidavit or the fulfillment of any formalities. The funds required for
the payment of principal and interest shall be made available to Banca
del Gottardo in Switzerland as Paying Agent by the Company prior to
each Coupon Due Date. The receipt of the funds by Banca del Gottardo in
Switzerland shall release the Company from its obligations in respect
of the payments due on the respective dates for principal and interest.
Banca del Gottardo will arrange for payment of such funds as and when
due to the holders of Notes and Coupons. Notes and coupons may be
presented for payment at the principal amount printed on the Notes and
the amount of interest printed on the Coupons only at the offices in
Switzerland of Banca del Gottardo. No payment on the Notes or Coupons
will be made by transfer to an account in, or by mailing to an address
in, the United States.
(6) Tax Status
All payments of principal and interest on the Notes and Coupons by the
Company shall be made without deduction for or on account of any
present or future tax, assessment or other governmental charge
("Taxes") imposed upon such payment by the United States of America or
any political subdivision or taxing authority thereof or therein (the
"United States"). If the Company shall at any time be required by law
to withhold any such Taxes, the Company will pay as additional amounts
to Banca del Gottardo for the account of the holders of Notes and
Coupons, such amounts as may be necessary so that every net payment on
each Note or Coupon, after withholding for or on account of any such
Taxes (including any backup withholding tax or similar charge that may
be required in order for such payment to be made without any
certification or disclosure of the national it", residence or identity
of the beneficial owner of such Note or Coupon) will not be less than
the amount provided in such Note or Coupon to be then due or payable,
provided, however, that the Company will not be required to pay such
additional amounts for or on account of any such Taxes that are imposed
(i) otherwise than by withholding from a payment on a Note or Coupon,
(ii) upon a holder of a Note or Coupon who is subject to taxation b.
the United States for any reason other than such holder's ownership or
receipt of payments in respect of such Note or Coupon, or (iii) on
interest or principal received by a holder of a Note or Coupon which is
(a) a "10-per cent shareholder" of the Company within the meaning of
section 871(h) (3) (B)(a) of the Code, (b) a bank or an extension of
credit made pursuant
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<PAGE> 5
to a loan agreement entered into in the ordinary course of its trade or
business, (c) a controlled foreign corporation which is related to the
Company under section 864(d)(4) of the Code, (d) other than a
nonresident individual or a foreign corporation (as determined under
United States tax principles) with respect to the United States, or (e)
a holder whose Note or Coupon is presented for retirement or
redemption, or payment is otherwise made, other than outside the United
States as provided in United States Treasury Regulations. Any reference
in this Note to the payment of principal or interest shall be deemed to
include payment of the additional amounts payable pursuant to the
provisions of this paragraph.
If, as the result of any change in, enactment of, or amendment to any
laws or regulations of the United States or any political subdivision
or taxing authorities thereof affecting taxation, or any change in the
official application of such laws or regulations, or any change in,
execution of or amendment to any treaty or treaties affecting taxation
to which the United States is a party, it is determined by the Company,
that it would be required at any time to pay additional amounts
pursuant to the preceding paragraph, the Company is entitled to redeem
the Notes, as a whole but not in part, on giving not more than 60 days
but not less than 30 day's prior notice to Banca del Gottardo, on or
after February 11, 1998 at par. Notice of redemption shall be given by
the Company in writing to Banca del Gottardo and such notice so given
shall constitute good and sufficient notice and shall be binding upon
all holders of the Notes, regardless of who they may be or where they
may be located.
Banca del Gottardo shall as soon as practicable notify the Noteholders
of such redemption in accordance with Section 12 hereof. The Company
has been advised by Banca del Gottardo that pursuant to the Swiss
federal laws at present in force, interest payments on the Notes are
not subject to Swiss withholding tax.
(7) Authorizations
The Company has confirmed to Banca del Gottardo that no authorizations
or approvals are required under the laws of the United States for
performance of its obligations hereunder, except for the registration
requirements provided for herein.
(8) Status of the Notes and Negative Pledge
The Notes constitute unsecured direct obligations of the Company,
ranking equally with other unsecured and
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unsubordinated indebtedness for borrowed money of the Company.
So long as any Note remains outstanding the Company will not at any
time pledge or otherwise subject to any lien any of its property or
assets (other than (i) liens incurred in the ordinarv course of
business, as for example, installment payment purchases of equipment or
other assets used in the Company's business, (ii) liens not incurred in
the ordinary course of business not exceeding USD 250'000.-- in the
aggregate and (iii) liens incurred to secure working capital from banks
and/or financial institutions), without thereby expressly securing the
Notes equally and ratably with any and all other obligations and
indebtedness secured by such pledge or other lien.
(9) Conversion
Exhibit 1 to Annex H attached to the Agreement dated August 8, 1997 and
entered into between the Company and Banca del Gottardo. which is
available for inspection at the Head Office in Lugano of Banca del
Gottardo, as Conversion Agent for the Notes, contains frill provisions
relevant to conversion of the Notes into freely transferable Shares of
Common Stock. The following is a summary of such provisions:
The conversion price shall be USD 3.25 (such price hereinafter called
the "Conversion/Price").
The holder of 10 Notes or more will be entitled at any time on and
after November 1, 1997 up to the close of business on August 11, 2002,
subject to prior redemption, to convert the Notes, at the principal
amount thereof, into freely transferable and non-restricted (such
non-restriction being subject to the effectiveness of a registration
statement under the U.S. securities laws covering such common stock, if
required,) shares of Common Stock of the Company, at the Conversion
Price, subject to adjustment as described below. No payment or
adjustment will be made on conversion of any Note for interest accrued
thereon or dividends on any Common Stock issued, except that accrued
interest will be paid on the conversion of any Note which has been
called for redemption prior to the conversion date. The Company is not
required to issue fractional shares of Common Stock upon conversion of
Notes and in lieu thereof; will pay a cash adjustment based upon the
market price of the Common Stock on the last trading day prior to the
date of conversion. In the case of Notes called for redemption
conversion rights will expire at the close of business on the fifth
business day prior to the redemption date. Notes may be presented for
conversion only to an office of Banca del Gottardo
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outside the United States and Banca del Gottardo will deliver Common
Stock or other consideration received upon conversion only to an
account or address outside the United States.
The Conversion Price is subject to adjustment in the following events
occurring after August 11, 1997:
- the issuance of stock of the Company as a dividend or
distribution on the Common Stock;
- subdivisions of outstanding shares of the Common Stock
into a greater number of shares;
- combinations of outstanding shares of Common Stock into
a smaller number of shares
- reclassification of the Common Stock into other shares
of the Company's capital stock;
- issuance to all holders of Common Stock of certain rights or
warrants entitling them to subscribe for Common Stock at a
price per share less than the current market price but not for
shares issuable under the Company's stock option and stock
purchase plans; and
- the distribution to all holders of Common Stock of debt
securities or assets of the Company or rights or warrants to
purchase assets or debt securities of the Company (excluding
cash dividends or distributions from retained earnings).
No adjustment in the Conversion Price will be made unless such adjustment would
require an increase or decrease of at least USD 0.05 in the Conversion Price
then in effect; but any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment. No
adjustment need be made for rights to purchase Common Stock pursuant to a
Company dividend or interest reinvestment plan. The Company may at any time
reduce the Conversion Price by any amount, provided that the Conversion Price is
not less than the par value of a share of Common Stock. If the Company
consolidates or merges into or transfers or leases all or substantially all of
its assets to any person, or is a party to a merger that reclassifies or changes
its outstanding Common Stock the Notes will become convertible into the kind and
amount of securities, cash or other assets which the Holders would have owned
immediately after the transaction if the holders had converted the Notes
immediately before the effective date of the transaction.
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(10) Events of Default
Subject to the provisions of Section 15, Banca del Gottardo as regards
all Notes or Holders having 10% or more of the aggregate principal
amount of all Notes outstanding shall have the right to declare by
notice to the Company the Notes held by such Holder, plus accrued
interest, to be due and payable if any of the following events of
default shall occur:
(a) default in the payment of principal, or, for a period of 15
days, in the payment of interest on any Note; or
(b) default in the performance or observance in any material
respect of any covenant or agreement of the Company in the
Notes if such default continues for a period of 30 days after
notice thereof has been given to the Companys; or
(c) a default shall occur under any evidence of indebtedness for
money borrowed by the Company or under any instrument under
which there may be issued or by which there may be secured or
guaranteed any indebtedness for money borrowed by the Company
which default involves the failure to pay when due (after any
applicable grace period and subject to any extension or
postponement of such maturity), or results in the acceleration
of, indebtedness in an amount in excess of USD 250'000.--
without such indebtedness having been discharged or such
default or acceleration having been waived, rescinded or
annulled, within a period of 30 day's after notice thereof
shall have been given to the Company; or
(d) the entry of a decree or order in respect of the Company in an
involuntary case under any bankruptcy, insolvency or other
similar law, or appointing a receiver, liquidator, trustee or
other similar official of the Company or for any substantial
part of its property, or ordering the winding up or
liquidation of its affairs, and the continuance of any such
decree or order unstayed and in effect for a period of 45
consecutive days; or
(e) the Company shall commence a voluntary case under any
bankruptcy, insolvency or other similar law, or consent to the
appointment of or taking possession by a receiver, liquidator,
trustee or other similar official, of the Company or for any
substantial part of its property, or the making by it of a
general assignment for the benefit of creditors, or if it
shall fail generally to pay its debts as they become due, or
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shall take any corporate action in furtherance of any of the
foregoing; or
(f) if the Company shall merge or consolidate or sell except for
the sale of its two subsidiaries Systems Solutions Technology,
Inc. and DJS Marketing Group, Inc. disclosed by the Company -
or convey all or substantially all of its assets to, any other
corporation, unless (i) the Company is the surviving
corporation, or (ii) the surviving or transferee corporation
expressly assumes all obligations of the Company, under the
Notes by supplemental agreement, confirmed by an opinion of
U.S. counsel reasonably satisfactory to Banca del Gottardo
and the Company, or (iii) the Company or the surviving or
transferee corporation irrevocably deposits in trust with
Banca del Gottardo, money or U.S. government obligations
sufficient to pay principal and interest on the Notes to
maturity.
Upon the occurrence of an event of default, the Company shall promptly
give notice thereof to Banca del Gottardo which shall publish such
notice of default in accordance with Section 12 hereof Banca del
Gottardo shall in relation to any event of default have no other
obligation than the publication of such event of default.
The principal amount of all Notes declared to be due and payable plus
accrued interest thereon shall become due and payable 15 days after
notice to the Company by Banca del Gottardo or by each Holder of such
event of default; provided, however, that such declaration shall be
rescinded if, within 15 days of such notice, such event of default
shall have been remedied by payment, in the case of a payment default,
or in a manner reasonably satisfactory to Banca del Gottardo.
In the event that a Resolution or Extraordinary Resolution is passed at
a meeting of Holders held pursuant to Section 15, any actions taken
pursuant to this Section 10 by a Holder shall be subject to any
previously taken action pursuant to such Section 15.
(11) Prescription
In accordance with the Swiss Statute of Limitations the coupons will
become barred five years and the Notes ten years after their respective
due dates.
(12) Notices and Publications
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All notices to the Holders shall be deemed to have been duly given if
provided by the Company, to Banca del Gottardo and if published by
Banca del Gottardo on behalf of the Company in the Feuille Officielle
Suisse du Commerce and in a daily newspaper in Zurich and Lugano. All
notices to the Company by any Holder shall be deemed to have been duly
given if sent by cable or telex to the principal office of the Company.
(13) Listing of the Notes
No application will be made for the admission and quotation of the
Notes on any stock exchange.
(14) Replacement of Notes or Coupons
If any Note or coupon is defaced, mutilated, destroyed, stolen or lost,
it may be renewed or replaced at the head office of Banca del Gottardo
in Lugano, Switzerland on payment of such costs as may be incurred in
connection therewith and on presentation of such evidence and indemnity
as Banca del Gottardo may require. Defaced or mutilated Notes or
coupons must be surrendered before replacements may be issued.
(15) Noteholders' Meeting
a) A meeting of the Holders (hereinafter called a
"Meeting") may be convened by the Company or shall be
convened by the Company if so requested by Notes
representing not less than 25% of the aggregate
principal amount of all Notes outstanding under the
Terms of the Notes (i) after the event of default shall
have occurred and be continuing to consider a waiver of
an event of default or any modification or amendment of
the provisions of the terms of the Notes, or (ii) to
request a substitution of Banca del Gottardo.
The cost and expenses of a Meeting shall be borne by the Company.
b) Notice of the Meeting specifying the place, day and hour of
the Meeting shall be given at least 20 days prior to the
proposed date thereof (exclusive of the day on which the
notice is given and the day on which the Meeting is to be
held) in accordance with Section 12 hereof Such notice shall
state generally the nature of the business to be transacted
at the Meeting thereby convened but (except for an
Extraordinary Resolution (as defined below)) it shall not be
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necessary to 5 pecity in such notice the terms of any resolution to be
proposed.
c) The Meeting shall be held in Lugano and shall be chaired by a
representative of the Company or if such representative of the Company
shall not be present within 30 minutes after the time appointed for the
holding of the Meeting, the Noteholders present shall choose one of
their members to be chairman. The Meeting shall be conducted in the
English language exclusively.
d) Resolutions shall only be passed if a quorum of two or more persons
holding 25% or more of the aggregate principal amount of all Notes
outstanding are present. The quorum at any Meeting for passing an
Extraordinary Resolution shall be two or more persons holding
two-thirds or more of the aggregate principal amount of all Notes
outstanding. Resolutions shall be passed if approved by the absolute
majority of votes cast save that an Extraordinary Resolution shall be
passed only if approved by three-fourths or more of votes cast. Any
resolution passed at a Meeting duly convened and held in accordance
with the terms of the Notes shall be binding upon all the Holders,
whether present or not present at such Meeting and whether or not
voting, and upon all the holders of coupons.
e) If within 30 minutes after the time appointed for any such Meeting a
quorum is not present, the Meeting shall, if convened upon the request
of Holders, be dissolved. In any other case, it shall stand adjourned
for such period being not less than 14 days nor more than 28 days, and
at such place as may be appointed by the Company. At such adjourned
Meeting, two or more persons present holding 10% or more of the
aggregate principal amount of all Notes outstanding shall form a
quorum, provided that if the business of such adjourned Meeting
includes consideration of a proposed Extraordinany Resolution, the
quorum shall be two or more persons present holding one-third or more
of the aggregate principal amount of all Notes for the time being
outstanding.
f) If within 30 minutes after the time appointed for any such adjourned
Meeting the respective quorum is not present the Meeting shall stand
further adjourned for such period being not less than 14 days nor more
than 28 days, and at such place as may be appointed by the Company and
at such further adjourned Meeting two or more persons present holding
any Notes outstanding (whatever the principal amount of the Notes so
held by them) shall form a quorum provided that if the business of such
further adjourned Meeting includes consideration of a proposed
Extraordinary Resolution, the quorum shall be two or more persons
present holding
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<PAGE> 12
one-third or more of the aggregate principal amount of all Notes for
the time being outstanding.
g) Notice of any adjourned Meeting or further adjourned Meeting shall be
given in the same manner as notice of an original Meeting and such
notice shall state, in the case of an adjourned Meeting, that two or
more persons present holding 10% (or in the case of a Meeting the
business of which includes consideration of a proposed Extraordinary
Resolution, one-third) or more of the aggregate principal amount of all
Notes for the time being outstanding will form a quorum, or, in the
case of a further adjourned Meeting, that two or more persons present
holding any Notes outstanding (or in the case of a Meeting the business
of which includes the consideration of a proposed Extraordinary
Resolution, two or more persons present holding one-third or more of
the aggregate principal amount of all Notes for the time being
outstanding) shall form a quorum.
h) The voting rights of the Holders shall be determined according to the
principal amount of Notes held, each Note with a principal amount of
USD 5,000, giving the right to one vote. Holders of the coupons shall
not have any voting rights. Notes held by or on behalf of the Company
shall have no voting rights and shall be disregarded for the purpose of
this Section 15, save that the Company shall be entitled to vote in
respect of Notes held by it for the benefit of and at the direction of
an independent third party. In the case of an equality of votes the
chairman shall have a casting vote in addition to the vote or votes (if
any) to which he may be entitled as a Holder.
i) Any director or officer of the Company and its lawyers and any other
person authorized on its behalf by it may attend and speak at any
Meeting.
j) The Meeting shall have the following powers exercisable by
Extraordinary Resolution with the consent of the Company.
(i) extension of the date fixed for final maturity of the Notes.
(ii) reduction or cancellation of the principal payable on the
Notes.
(iii) reduction or cancellation of the rate or amount payable or
extension of the date of payment, in respect of any coupons.
(iv) alteration of the majority required to pass an Extraordinary
Resolution, and
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<PAGE> 13
(v) waiver of any Event of Default.
k) Any reference in these Terms of the Notes to an "Extraordinary
Resolution" shall be construed as references to resolutions of the
Holders passed in accordance with the foregoing provisions of this
Section 15 with respect to any of the matters stated in sub-section j)
above.
(16) Applicable Law and Jurisdiction
The terms, conditions and form of the Notes and coupons (the English
language version of which shall govern) shall be governed by and
construed in accordance with Swiss law.
Any action or proceedings against the Company relating to the Notes may
be brought and enforced in the ordinary courts of the Canton of Ticino,
venue being in the City of Lugano, or, if such courts fail to grant
jurisdiction in the ordinary courts of the Canton of Basle-City, venue
being in Basle, and the Company hereby irrevocably submits to the
jurisdiction of such courts in respect of any such action or
proceeding, with the right to appeal, as provided by law, to the Swiss
Federal Court in Lausanne, the judgment of which shall be final. Solely
for that purpose, the Company hereby elects legal and special domicile
at the office of Banca del Gottardo, Viale Stefano Franscini 8.6901
Lugano, Switzerland. The Company covenants that so long as any Notes
are outstanding it will maintain an agent for service of process in
Switzerland. The aforementioned jurisdiction shall also be valid for
the cancellation and replacement of lost, stolen, defaced, mutilated or
destroyed Notes and coupons. Payment effected to a holder of Notes who
has been identified as the legitimate holder of a Note or coupon by a
final judgment of a Swiss court shall release the Company from its
payment obligations under such Note or coupon.
Any Noteholder shall also have the right to bring any legal action or
proceeding against the Company in respect of a Note or coupon and all
covenants contained therein in any state or federal court in the United
States of America which may have jurisdiction.
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<PAGE> 14
ANNEX B
(Form of Convertible Note)
No. ___________
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO
LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS
PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE
OFFERED, SOLD, DELIVERED OR CONVERTED, DIRECTLY OR INDIRECTLY, IN THE UNITED
STATES OR TO, OR FOR THE BENEFIT OF, ANY U.S. PERSON (AS SUCH TERMS ARE DEFINED
IN REGULATION S UNDER THE SECURITIES ACT) UNLESS THIS NOTE IS REGISTERED UNDER
THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT IS AVAILABLE.
BITWISE DESIGNS, INC.
(Incorporated in the State of Delaware)
USD 5,000
8% Notes due August 11, 2002
Convertible into freely transferable and non-restricted shares of
Common Stock of the Company
BITWISE DESIGNS, INC. (the "Company") for value received, hereby certifies that
it owes to the bearer, payable upon presentation and surrender hereof; the
principal amount of 5,000 US Dollars (USD five thousand) on August 11, 2002
or on such earlier date as such principal amount may become due in accordance
with the Terms of the Notes appearing on the reverse hereof and interest from
August 11, 1997 on said principal amount at the rate of 8% (eight percent) per
annum, payable in cash, semi-annually, in arrear on February 11 and August 11 of
each year and at maturity, beginning on, February 11, 1998 for the period from
August 11, 1997 to February 11, 1998, until payment of said principal amount has
been made or duly provided for, but only, in the case of interest due on or
before maturity, upon presentation and surrender of the interest coupons
attached hereto as they shall severally become due, all in accordance with the
Terms of the Notes.
This Note is one of a duly authorized issue of 8% Notes due August 11, 2002 of
the Company in the aggregate principal amount of 4,000,000 US Dollars (the
"Notes") issued pursuant to a Note and Warrant Purchase, Paying and
Conversion/Exercise Agency
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<PAGE> 15
Agreement, dated as of August 8, 1997 (the "Agreement"), between the Company of
the first part and Banca del Gottardo of the second part.
The Notes are issued subject to and with the benefit of the Agreement.
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed under
its corporate seal as of August 11, 1997.
Swiss Security no.: 667.087
BITWISE DESIGNS, INC.
By: _________________________
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<PAGE> 16
ANNEX C
(Form of Coupon)
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO
LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS
PROVIDED IN SECTIONS l65-) AND 1287(a) OF THE INTERNAL REVENUE CODE. THIS NOTE
HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT
OF 1933 AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD OR
DELIVERED, DIRECTLY OR INDIRECTLY, IN THE UNITED STATES OR TO, OR FOR THE
BENEFIT OF, ANY U.S. PERSON (AS SUCH TERMS ARE DEFINED IN REGULATION S UNDER THE
SECURITIES ACT) UNLESS THIS NOTE IS REGISTERED UNDER THE SECURITIES ACT OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS AVAILABLE.
Coupon No. 1-10
BITWISE DESIGNS, INC.
Schenectady, N.Y., U.S.A.
US Dollars 5'000.--
8% Notes due August 11, 2002
Note of US Dollars 5'000.-- (five thousand)
Semi-annual interest due on February 11 and August 11, 1998/2002 payable in cash
on the terms set forth in the Terms of the Notes:
US Dollars 200.--
BITWISE DESIGNS INC.
By: _________________________
(Reverse Coupon)
This coupon is payable at the head office in Lugano of Banca del Gottardo.
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<PAGE> 17
ANNEX D
(to be typed on security paper)
GLOBAL NOTE
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO
LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS
PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE. THIS NOTE
HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD.
DELIVERED OR CONVERTED, DIRECTLY OR INDIRECTLY, IN THE UNITED STATES OR TO, OR
FOR THE BENEFIT OF, ANY U.S. PERSON (AS SUCH TERMS ARE DEFINED IN REGULATION S
UNDER THE SECURITIES ACT) UNLESS THIS NOTE IS REGISTERED UNDER THE SECURITIES
ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS
AVAILABLE.
BITWISE DESIGNS. INC.
USD 4'000'000.--
8% Notes due August 11, 2002
Convertible into freely transferable and non-restricted shares of
Common Stock of the Company
This Global Note without interest coupons is a Global Note in respect of a duly
authorized issue of 8% Notes due August 11, 2002 (the "Notes") of Bitwise
Designs. Inc. (the "Company"), a corporation duly organized and existing under
the laws of the State of Delaware, in the principal amount of four million US
Dollars and issued pursuant to a Note and Warrant Purchase. Paying and
Conversionl Exercise Agency Agreement (the "Agreement") dated as of August
8. 1997 between the Company of the first part and Banca del Gottardo of the
second part.
Subject to the provisions of the Agreement. Bitwise Designs. Inc. for value
received, hereby promises to pay to the holder of this Global Note. payable upon
presentation and surrender hereof; the amount of US Dollar 4'000'000 (USD
four million) and interest thereon at 8% per annum, in accordance with the Terms
of the Notes set forth in Annex A of the Agreement.
In accordance with Section 1 of the Terms this Global Note may be exchanged, as
a whole or in part, for definitive Notes, in bearer form in the denominations of
USD 5'000.-- with interest coupons attached, not earlier than 40 days after the
later of the date on which the Notes are first offered or the Payment Date,
before which time no Notes represented bv this Global Note or interest herein
may be transferred into the United States or to a U.S.
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<PAGE> 18
person. Such exchange shall be made upon certification, in the form set forth in
Annex J of the Agreement and appended to this Global Note, that the beneficial
owners of the Notes are not United States persons or U.S. persons or are
financial institutions (as defined in the United States Treasury Regulation
Section 1.165-1 2(c)(I)(v)) located outside the United States that have
purchased such Notes for resale during the Restricted Period and that certify
that they have not acquired the Notes for purposes of resale directly or
indirectly to a United States Person or a U.S. person or to a person within the
United States. A beneficial owner of Notes must exchange its share of the Global
Note for definitive Notes before interest payments or other payments in respect
of the Notes will be made. The Terms of the Notes set forth in Annex A of the
Agreement are hereby incorporated by reference herein mutatis mutandis and
except as othe-vise provided herein, shall be binding on the Company and the
holder hereof as if fully set forth herein. Except as othe-vise provided herein,
the Company shall make all payments hereunder as and when provided in the Terms
of the Notes and shall be bound by all its covenants set forth therein. This
Global Note shall be governed by and construed in accordance with the laws of
Switzerland.
IN WITNESS WHEREOF the Company has caused this Global Note to be duly executed
under its corporate seal as of August 11, 1997.
Dated: August 11, 1997
Swiss Security no.: 667.087
BITWISE DESIGNS INC.
By: _________________________
This Global Note shall not become valid for any purpose until this Global Note
has been authenticated by any two officers of Banca del Gottardo.
By: _________________________ By: _________________________
Authorized Officer Authorized Officer
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<PAGE> 19
Exhibit I to ANNEX H
CONVERSION PROVISIONS
The following are the provisions for the conversion (the "Conversion
Provisions") of the USD 4'000'000.-- 8% Convertible Notes due August II 2002 of
Bitwise Designs. Inc., Schenectady, New York (the "Company") into freely
transferable and non-restricted shares of the common stock of the Company.
Unless otherwise defined herein, the terms used herein have the meanings
ascribed to them in the Note and Warrant Purchase, Paying and
Conversion/Exercise Agency Agreement and the Conversion Agency Agreement (the
"Agency Agreement") dated as of August 8, 1997 between the Company and Banca del
Gottardo.
Article 1
Conversion Right
1.1 Subject to and upon compliance with these Conversion Provisions, the holder
of any Note (a "Noteholder") will have the right at any time on and after
November 1. 1997 up to the close of business of banks in Lugano on August 11.
2002. or. in case the Notes are called for redemption in accordance with Section
4 of the Terms of the Notes, then prior to the close of business of banks in
Lugano on the earlier of August 11.2002 and the fifth business day preceding the
date fixed for redemption, but in no event thereafter, to convert ten Notes or
more Notes into freely transferable and non-restricted shares of common stock
which are duly registered under the 1933 Securities Act, if required. with par
value USD 0.001 per share (such presently authorized capital stock and any other
stock into which such presently authorized common stock may hereafter be
changed, the "Common Stock"), of the Company, calculated as to each conversion
to the greatest number of full Shares, disregarding fractions. at the price of
initially as determined pursuant to Section 9 of the terms of the Notes for each
Share, such price being subject to adjustment in certain instances as provided
in Article 2 hereafter (as so adjusted from time to time, the "Conversion
Price"). Fractions of a share will not be issued on conversion, provided,
however, that if a Noteholder at any one time delivers more than one Note for
conversion, the number of Shares issued shall be calculated on the basis of the
aggregate principal amount of the Notes so delivered. A cash adjustment shall be
paid in respect of any fractional Share which would otherwise be issuable upon
conversion of any Note in an amount in U.S. Dollars based upon the market price
of the Common Stock on the last trading day prior to the date of conversion.
Cash adjustments for fractional shares will not be made for amounts less than
one U.S. Dollar.
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<PAGE> 20
1.2. In order to exercise the right of conversion, a Noteholder shall (a)
deliver the Note or Notes to be converted during normal business hours
accompanied by the conversion notice in the form obtainable from the Conversion
Agent (the "Conversion Notice") to any Conversion Agent and (b) pay to the
Conversion Agent any stamp or other taxes that may be payable in Switzerland on
such conversion. Each Note delivered for conversion must be delivered with all
unmatured coupons attached and/or with an amount equal to the face value of any
missing, unmatured coupons. Such missing, unmatured coupons shall be paid by
Banca del Gottardo upon subsequent presentation thereto, provided they shall not
have become barred pursuant to Section 11 of the Terms of the Notes.
1.3. The Conversion Agent undertakes to:
(a) make available to Noteholders the Conversion Notice in such form as may from
time to time be agreed by the Company and the Conversion Agent:
(b) upon receipt of a Conversion Notice from a Noteholder:
(i) verify that (A) the Conversion Notice has been duly completed and
signed by or on behalf of the Noteholder named therein. (B) the Conversion
Notice is accompanied by all Notes to which it relates and all unmatured coupons
appertaining to such Notes and/or an amount equal to the face value of any
missing unmatured coupons and (C) the amount of any stamp or other taxes payable
by the Noteholder has been paid: and
(ii) endorse the Conversion Notice:
(c) imprint or stamp all Notes submitted to it for conversion, and all unmatured
coupons attached thereto, in accordance with Article 4 of the Agency Agreement
promptly upon satisfaction by the Noteholder of all conditions precedent to the
conversion: and
(d) dispatch within two business days after satisfaction by the Noteholder of
all conditions precedent to the conversion to the relevant tax authorities,
payment in respect of any stamp or other taxes payable on the conversion, in
accordance with the laws of Switzerland.
1.4. The Conversion Agent shall promptly, upon the later of the date of receipt
of the Conversion Notice and the satisfaction of all other conditions precedent
to the conversion stated above, endorse the Conversion Notice and notify the
Company and the Stock Transfer Agent of the Company (at present Continental
Stock Transfer and Trust Company, 2 Broadway, New York, NY 10004, U.S.A.). by
facsimile. telex or cable of (a) the principal amount and serial numbers of the
Notes deposited for conversion. (b) the number of Shares issuable upon
conversion of such Notes and (c)
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<PAGE> 21
the name and address of each person (the "Shareholder") to whom such Shares are
to be issued. Such conversion shall become effective at the close of business on
the date (the "Conversion Date") on which the Company shall have received at its
principal executive offices, during normal business hours from the Conversion
Agent a telex or cable notification. If such facsimile, telex or cable
notification is received after the close of business on such date, the
Conversion Date will be the immediately following business day. At such
Conversion Date the rights of the holder (other than the Company) of a Note
shall cease and the Shareholder shall be deemed to have become the holder of
such Shares.
1.5. As soon as practicable on or after the Conversion Date, but in no event
later than seven business days thereafter, the Company shall (a) cause the
Shareholder to be registered as the owner of the Shares issued upon conversion
of such Shareholder's Notes in the register of Shareholders of the Company, (b)
make available or cause the Stock Transfer Agent to issue, a certificate or
certificates for such Shares registered in the name of the Shareholder (together
with any other securities, properties or cash deliverable at the Conversion
Date) and (c) at the request of the Shareholder, cause the Stock Transfer Agent
to forward at the risk and expense and for account of such Shareholder such
certificate or certificates (together with any other securities, properties or
cash deliverable upon conversion) to such person or persons at the address
specified in the Conversion Notice together with such assignments and other
documents, if any, as may be required by law to effect the transfer thereof with
full benefits under the laws of the applicable jurisdiction of the United States
of America.
1.6. The Company covenants that:
(a) so long as any Notes are outstanding, it shall keep available authorized
shares of Common Stock sufficient to permit all Notes outstanding and
unconverted to be converted in accordance with these Conversion Provisions:
(b) all shares of Common Stock delivered upon conversion of Notes as provided
herein will be validly issued, fully-paid and non-assessable:
(c) it shall file, on or before November 2, 1997, if required, any registration
under the United States securities laws that may be required before the Shares
can be delivered upon conversion of the Notes and freely marketed in the United
States.
1.7. Shares issued upon conversion and registered in the name of the Shareholder
shall be freely transferable and non-restricted and shall be entitled to receive
all dividends paid on such Common Stock on or after the Conversion Date, except
for
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<PAGE> 22
dividends payable to Shareholders registered as such as of a record date
occurring prior to the Conversion Date. No payments shall be made upon
conversion for interest accrued since the Coupon Due Date next preceding the
Conversion Date.
1.8. Notes may be presented for conversion only to an office of the Conversion
Agent outside the United States. The Company and the Conversion Agent will
deliver Common Stock or other consideration received upon conversion only to an
account or address outside the United States.
Article 2
The Conversion Price shall be subject to adjustments in the following
circumstances occurring after August 11, 1997:
2.1. In case the Company shall hereafter (i) pay a dividend on its Common Stock
in shares of its Conversion Stock or make a distribution in shares of its Common
Stock with respect to its outstanding Common Stock (ii) subdivide its
outstanding shares of Common Stock into a greater number of shares of Common
Stock or (iii) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock the Conversion Price in effect at the time of
the record date for such dividend or of the effective date of such subdivision
or combination shall be determined by multiplying the Conversion Price in effect
immediately prior to such record date or effective date by a fraction the
numerator of which shall be the total number of outstanding shares of Common
Stock immediately prior to such record date or effective date, and the
denominator of which shall be the total number of outstanding Common Stock
immediately following such record date or effective date. Such adjustments made
pursuant to this Section 2.1 shall be made successively whenever any event
listed above shall occur.
2.2. In case the Company shall fix a record date for the issuance of rights,
options or warrants to all (but not less than all) holders of its outstanding
Common Stock entitling them to subscribe for or purchase shares of Common Stock
(or securities convertible into shares of Common Stock) at a price per share (or
having a Conversion Price per share if a security convertible into Common Stock)
less than the Current Market Price per share of Common Stock (as defined in
Section 2.4) on such record date the Conversion Price to be in effect after such
record date shall be determined by multiplying the Conversion Price in effect
immediately prior to such record date by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding on such record date
plus the number of shares of Common Stock which the aggregate offering price of
the total number of shares of Common Stock so to be offered (or the aggregate
initial Conversion Price of the convertible securities so to be offered) would
purchase at such Current Market Price and
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<PAGE> 23
of which the denominator shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of Common
Stock to be offered for subscription or purchase (or into which the convertible
security so to be offered are initially convertible). In case such subscription
or exercise price may be paid in a consideration part or all of which shall be
in a form other than cash, the value of such consideration shall be as
determined by the Board of Directors of the Company. Shares of Common Stock
owned by or held for the account of the Company or any majority-owned subsidiary
shall not be deemed outstanding for the purpose of any such computation. Such
adjustment shall be made successively whenever such a record date is fixed: and
in the event that such rights or warrants are not so issued, the Conversion
Price shall again be adjusted to be the Conversion Price which would then be in
effect if such record date had not been fixed.
2.3. In case the Company shall fix a record date for the making of a
distribution to all (but not less than all) holders of shares of Common Stock of
evidences of its indebtedness or assets (other than cash dividends or cash
distributions payable out of surplus legally available for dividends under the
laws of the jurisdiction of incorporation of the Company, dividends or
distributions payable in shares of Common Stock as described in Section 2.1. or
rights, options or warrants or convertible securities containing the right to
subscribe for or purchase shares of Common Stock (excluding those referred to in
Section 2.2)) the Conversion Price to be in effect after such record date shall
be determined by multiplying the Conversion Price in effect immediately prior to
such record date by a fraction of which the numerator shall be the Current
Market Price per share of Common Stock (as defined in Section 2.4) on such
record date less the fair market value per share (as determined by the Board of
Directors of the Company whose determination shall be conclusive, and described
in a statement filed with Banca del Gottardo) of the portion of the assets or
evidences of indebtedness so to be distributed, or of such rights, options, or
warrants or convertible securities applicable to one share of Common Stock, and
of which the denominator shall be such Current Market Price per share of Common
Stock. Such adjustment shall be made successively whenever such a record date is
fixed: and in the event that such distribution is not so made, the Conversion
Price shall again be adjusted to be the Conversion Price which would then be in
effect if such record date had not been fixed. If any such rights, options, or
warrants or convertible securities shall by their terms provide for an increase
or increases, with the passage of time, in the amount of additional
consideration per share of Common Stock payable to the Company upon the exercise
or conversion thereof, the Conversion Price then in effect shall, forthwith upon
any such increase becoming effective, be readjusted to reflect such increase.
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<PAGE> 24
2.4. For the purpose of any computation under Sections 2.2 and 2.3, the "Current
Market Price" means with respect to any Trading Day the last sale price (regular
way) of the Common on such day as reported on the New York Stock Exchange
Consolidated Tape (as published in the Wall Street Journal), or, if such Common
Stock is not listed on the New York Stock Exchange, Inc. or reported on such
Consolidated Tape, then the last sale price on such day on the principal
domestic stock exchange on which such stock is then listed or admitted to
trading, or, if no sale takes place on such day on such exchange, the average of
the closing bid and asked prices on such day as officially quoted on such
exchange or, if such Common Stock is not then listed or admitted to trading on
any domestic stock exchange but is quoted in the National Market System
("NMS/NASDAQ") of the National Association of Securities Dealers Inc. Automated
Quotation System ("NASDAQ") then the Current Market Price for each such
Trading Day shall be the last sale price on such day as quoted by NMS/NASDAQ or
if no sale takes place on such day or if such Common Stock is neither listed or
admitted to trading on any domestic stock exchange nor quoted on such National
Market System, then the Current Market Price for each such Trading Day shall be
the average of the reported closing bid and asked price quotations on such day
in the over-the-counter market as reported by NASDAQ or, if not so reported, as
furnished by the National Quotation Bureau, Inc or if such firm at the time is
not engaged in the business of reporting such prices, as furnished by any
similar firm then engaged in such business as selected by the Company, or if
there is no such firm, as furnished by any member of the National Association of
Securities Dealers. Inc. selected by the Company with the written approval of
the Holders of Warrants exercisable for a majority of the shares of Warrant
Stock issuable under then outstanding Warrants. If at any time such Common Stock
is not listed on any domestic exchange or quoted in the domestic
over-the-counter market the Current Market Price shall be deemed to be an
amount mutually agreed upon in writing between the Company and the Holder of
this Warrant within fifteen days immediately following the date on which the
Current Market Price is to be determined. If no agreement as to Current Market
Price is determined as stated herein, (i) the Holder of this Warrant shall
select an independent appraiser who shall determine the fair market value per
share of the Common Stock which shall be the Current Market Price, provided the
Company shall agree to such Current Market Price. If the Company shall not agree
to the Current Market Price as determined in the preceding sentence then (ii)
the Company and Banca del Gottardo shall each select an independent appraiser
who shall, independently of the other appraiser determine the fair market value
of the Common Stock of the Company. If the value determined by the appraiser
whose determination is the higher of the two appraisals does not exceed by more
than ten percent (10%) the average of the values determined by each
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appraiser, then the Current Market Price shall be the average of the values
determined by the two appraisers. If the value determined by the appraiser whose
determination is the higher of the two appraisals does exceed by more than ten
percent (10%) the average of the value determined by each appraiser, then the
two appraisers shall select a third independent appraiser who shall,
independently of the other appraisals, determine the fair market value of the
Common Stock. The value determined by the appraiser whose determination is the
most discrepant from the average of the three appraisals shall be discarded, and
the Current Market Price shall equal the average of the remaining two
appraisals: except that in the event that the highest and lowest appraisals are
equally discrepant from the average of the three appraisals the Current Market
Price shall be such average. The Company shall bear the expenses of all
appraisals.
For the purpose of this Section 2.4. "trading day" shall mean a day on which the
securities exchange or on NASDAQ specified for purposes of this Section 2.4
shall be open for business or, if the shares of Common Stock shall not be listed
on such exchange for such period, a day with respect to which quotations of the
character referred to in the next preceding sentence shall be reported.
2.5. In computing an adjustment in the Conversion Price pursuant to Sections 2.1
to 2.3 above, shares of Common Stock not outstanding at the time of such
computation shall be deemed outstanding to the extent that the Conversion Price
has been previously adjusted to reflect the issuance of such shares of Common
Stock or rights, options or warrants to subscribe for or purchase such shares of
Common Stock.
2.6. Except as stated in Sections 2.1, 2.2 and 2.3 above the Conversion Price
(except at the Company's option) shall not be adjusted for the issuance of
shares of Common Stock of the Company whether or not at less than the Current
Market Price or the current Conversion Price, whether for cash or property.
2.7. No adjustment shall be made to the Conversion Price unless such adjustment
would result in any increase or decrease of at least USD 0.05 in the Conversion
Price then in effect; provided, however, that any adjustments which by reason of
this Section 2.7 are not required to be made will be carried forward and taken
into account in any subsequent adjustment.
2.8. All calculations under these Conversion Provisions shall be made to the
nearest one U.S. cent, with 0.5 U.S. cent or more to be considered a frill U.S.
cent or to the nearest one-hundredth of a share, as the case may be.
2.9. Whenever the Conversion Price is adjusted as herein provided, the Company
shall promptly send to Banca del Gottardo a
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certificate of the Company setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment and the date on which it becomes effective. The contents of any
certificate required by this Section 2.9 may be transmitted by telex or cable
but shall be confirmed in writing as hereinbefore provided. Banca del Gottardo
may rely upon such certificate (or such transmission by cable or telex, whether
or not so confirmed) as conclusive evidence of the correctness of the adjustment
referred to therein.
2.10. Notwithstanding the foregoing, no adjustment shall be made to the extent
that it would reduce the Conversion Price to less than the par value of the
shares of Common Stock (USD .01 at the date hereof).
2.11. Anything in this Article 2 to the contrary notwithstanding, the Company
shall be entitled, but shall not be required to make such reductions in the
Conversion Price in addition to those required by this Article as it, in its
discretion, shall determine to be advisable.
2.12. In any case in which this Article shall require that an adjustment be made
retroactively immediately following a record date, the Company shall as promptly
as practicable issue to the holder of any Note converted after such record date
the shares of Common Stock and other common stock of the Company issuable on
such conversion in excess of the shares of Common Stock and other common stock
of the Company issuable on such conversion on the basis of the Conversion Price
prior to such adjustment.
Article 3
3.1. In the event that:
(a) the Company shall authorize the issuance to all holders of shares of Common
Stock of rights, options or warrants to subscribe for or purchase any shares of
Common Stock or any securities convertible into shares of Common Stock, or of
any other subscription rights or warrants:
(b) the Company shall authorize the distribution to all holders of shares of
Common Stock of evidences of its indebtedness or assets (other than cash
dividends or cash distributions payable out of consolidated earnings or earned
surplus or dividends payable in Common Stock):
(c) there shall be any consolidation or merger to which the Company is a party
and for which approval of any shareholders of the Company is required, or there
shall be the conveyance or transfer of all or substantially all of the
properties and assets of the Company, or there shall be any reorganization or
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reclassification or change of outstanding Common Stock issuable upon the
exercise of conversion rights hereunder (other than a change in par value, or
from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination):
(d) there shall be voluntary or involuntary dissolution, liquidation or
winding-up of the Company: or
(e) the Company proposes to take any action (other than the actions of the type
described in Section 2.1) which would require an adjustment of the Conversion
Price pursuant to Article 2:
then the Company shall, at least 10 days prior to the applicable record date,
provide written notice of such event to Banca del Gottardo stating (x) the
record date in the United States of America as of which the holders of record of
shares of Common Stock to be entitled to receive any such rights, warrants, or
distributions are to be determined, or (y) the date in the United States of
America on which such reorganization, consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding-up is expected to become
effective, and the date as of which it is expected that holders of record of the
shares of Common Stock shall be entitled to vote upon, and, if approved, to
exchange their shares of Common Stock for securities or other property, if any,
deliverable upon such reorganization, reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding-up.
3.2. If the event described in the notice given pursuant to Section 3.1. will
result in an adjustment of the Conversion Price pursuant to Article 2, such
notice shall also state the new Conversion Price unless the Conversion Price
cannot be calculated at the time such notice is given.
3.3. The failure to give or publish the notice required by this Article 3 or any
defect therein shall not affect the legality or validity of the proceedings
referred to in Section 3.1.
Article 4
So long as any of the Convertible Notes remain convertible, the Company shall
not take any action which would result in an adjustment of the Conversion Price
pursuant to Article 2 if, after giving effect thereto, the Conversion Price
would be decreased to such an extent that the Shares could not be legally
issued, under applicable law of the jurisdiction of incorporation of the Company
then in effect, at such decreased Conversion Price as fully-paid and
non-assessable Shares.
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Article 5
The Conversion Agent shall not at any time be responsible to any Noteholder for
determining whether any facts exist (a) which may require any adjustment of the
Conversion Price, (b) with respect to the nature or extent of any such
adjustment when made, (c) with respect to the method employed, or herein or in
any supplemental agreement (if any) provided to be employed in making any such
adjustment. The Conversion Agent makes no representation as to the validity or
value (or the kind or amount) of any shares of Common Stock, or of any
securities, property or cash, which may at any time be issued or delivered upon
the conversion of any Convertible Note. The Conversion Agent shall not be
responsible for any failure of the Company to make any cash payment or to issue,
transfer or deliver any shares of stock or stock certificates or other
securities or property upon the surrender of any Note for the purpose of
conversion or to comply with any of the covenants of the Company contained in
these Conversion Provisions.
Article 6
6.1. In case of any consolidation of the Company with or merger of the Company
into, any other corporation (other than a consolidation or merger in which the
Company is the continuing corporation), or in the case of any sale or transfer
of all of the assets of the Company as an entirety or substantially as an
entirety the corporation formed by such consolidation or the corporation into
which the Company shall have been merged or the corporation which shall have
acquired such assets as the case may be, shall execute with Banca del Gottardo a
supplemental agreement which shall (a) provide that the holder of each
Convertible Note then outstanding shall have the right to receive thereafter
during the period such Convertible Note shall be convertible as specified in
Article 2, upon conversion of such Convertible Note, in lieu of each share of
Common Stock deliverable on such conversion immediately prior to such event,
only the kind and amount of shares and/or other securities and/or property
and/or cash which are receivable, or which, but for the failure to distribute to
holders of Common Stock all or substantially all of the consideration receivable
on such sale or transfer of assets, would be receivable upon such consolidation,
merger, sale or transfer by a holder of one share of Common Stock of the Company
and (b) set forth the Conversion Price for the shares and/or other securities
and/or property and/or cash so issuable which shall be an amount equal to the
Conversion Price per share of Common Stock of the Company immediately prior to
such event.
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6.2. In case of any reclassification or change of the shares of Common Stock
issuable upon conversion of the Notes (other than a change in par value or from
par value to no par value, or as a result of a subdivision or combination) or in
case of any consolidation or merger of another corporation into the Company in
which the Company is the continuing corporation and in which the holders of the
shares of Common Stock thereafter receive shares other securities, property,
cash or any combination thereof for such shares of Common Stock (including for
this purpose shares reflecting a change in par value or from par value to no par
value or as a result of a subdivision or combination of the shares of Common
Stock), the Company shall execute with Banca del Gottardo a supplemental
agreement which shall (a) provide that the holder of each Convertible Note then
outstanding shall receive upon conversion thereof: in lieu of each share of
Common Stock of the Company deliverable upon such conversion immediately prior
to such event, the kind and amount of shares and/or other securities and/or
property and/or cash receivable upon such reclassification change consolidation
or merger by a holder of one share of Common Stock and (b) set forth the
Conversion Price for the shares and/or other securities and/or property and/or
cash so issuable which shall be an amount equal to the Conversion Price per
share of Common Stock immediately prior to such event.
6.3. If, as a result of Section 6.1 or Section 6.2 the holder of any Convertible
Note thereafter surrendered for conversion shall become entitled to receive
shares of two or more classes of common stock of the Company the Board of
Directors (whose determination shall be conclusive) shall determine the
allocation of the Conversion Price between or among shares of such classes of
capital stock. Any supplemental agreement executed pursuant to Sections 6.1 and
6.2 shall provide for adjustments which shall be as nearly equivalent as
practicable to the adjustments provided for herein and where appropriate, state
the Conversion Price in terms of one full share of Common Stock or one full
share of common stock of any successor or purchasing corporation. The terms of
this Article 6 also shall apply to successive consolidations, merger, sales or
transfers. In the event that at any time as a result of an adjustment made
pursuant to this Article 6 the holder of any Note thereafter surrendered for
conversion shall become entitled to receive any shares or securities other than
shares of Common Stock thereafter the prices or price of such other shares or
other securities so receivable on conversion of any Convertible Note shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to Common Stock
contained in Article 2, and the provisions of Article 2 with respect to the
Common Stock shall apply on like terms to any such other shares.
6.4. The Conversion Agent shall have no responsibility for any
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consolidation, merger, sale or transfer, the form or substance or any plan
relating thereto or the consequences thereof to any Noteholder.
The Conversion Agent shall have no responsibility to determine the correctness
of any provision contained in any supplemental agreement relating either to the
kind or amount of shares of stock or securities or property receivable by
Noteholders upon the conversion of their Convertible Notes after any such
consolidation, merger, sale or transfer, or to any adjustment made with respect
thereto. The Conversion Agent may, at its option, receive an opinion of counsel
for the Company as conclusive evidence that any such supplemental agreement
complies with the provisions of this Article.
Article 7
Conversion Agent:
BANCA DEL GOTTARDO
Viale Stefano Franscini 8. 6901 Lugano
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EXHIBIT 4.9
ANNEX E
TERMS OF THE "WARRANTS" OF THE COMPANY
1. General
The Warrants are issuable in bearer form and have the benefit of and are subject
to the provisions for the exercise thereof contained in the Warrant Agency
Agreement to be dated as of August 8, 1997 between the Company and Banca del
Gottardo (the "Warrant Agent" or the "Standing Agent" as the case may be) which
will be available for inspection at the office in Lugano of the Warrant Agent or
its successor as Warrant Agent. The holders of the Warrants (the "Holders") are
deemed to have knowledge of the provisions of such Agreement, all of which will
be binding on them, provided however that the rights of such Holders hereunder
shall be governed by the terms hereof.
The Standing Agent or the Warrant Agent may resign in its duties and be
discharged from all further duties as Agent or Warrant Agent in accordance with
the terms of the Warrant Agency Agreement. In such event a successor Standing
Agent or Warrant Agent, which will have the same duties as its predecessor and
will agree to be bound by the terms of the Warrant Agency by the Agreement, will
be appointed Company or if the Company shall fail to appoint such successor
Standing Agent or Warrant Agent by a court of competent jurisdiction.
The Global Warrant may be exchanged as a whole or in part for appropriate
definitive Warrants, in bearer form not earlier than 40 days after August 11,
1997 (the "Payment Date"). Such exchange shall be made upon certification that
the beneficial owners of the Warrants are not United States persons or U.S.
persons or are financial institutions (as defined in United States Treasury
Regulation Section 1, 165-12(c)(l)(v)) located outside the United States that
are not United States persons and that the beneficial owners have not purchased
such Warrants for resale during the Restricted Period and that the beneficial
owners certify that they have not acquired the Warrants for purposes of resale
directly or indirectly to a United States person or to a person within the
United States. A beneficial owner of Warrants must exchange its share of the
Global Warrant for definitive Warrants before such Warrants may be transferred
or shares may be delivered upon exercise of the Warrants.
For purposes hereof (i) the term "Restricted Period" means the period beginning
on the Payment Date and ending on the date forty (40) days after the Payment
Date (ii) the term "United States" means the United States of America (including
the States and the District of Columbia), its possessions its territories and
other
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areas subject to its jurisdiction. (iii) the term "United States person" means a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, or an estate the income of which is subject to
United States federal income taxation regardless of its source or a trust if a
court within the United States is able to exercise primary jurisdiction over the
administration of the trust and one or more United States fiduciaries has the
authority to control all substantial decisions of the trust and (iv) the term
"U.S. person" has the meaning set forth in Sections 230.901 through .904 of
Title 17 of the United States Code of Federal Regulations ("Regulation S").
2. Duration
The right to subscribe for and purchase shares of Warrant Stock represented by
the Warrants shall commence subject to Section 8 hereof on November 1, 1997 and
shall expire August 11, 2002 at 5:00 P.M. US Eastern Time, provided, however,
that it, on such expiration date, the Company is then required, pursuant to an
effective request therefor, to effect, or is in the process of effecting, a
registration under the Securities Act for an underwritten public offering in
which shares of Warrant Stock are, pursuant to this Warrant, entitled to be
included, or if the Company is in default of any obligations created by this
Warrant, said right to subscribe for and purchase shares of Warrant Stock shall
expire at 5:00 P.M. US Eastern Time, on the 30th day following the date on which
such registration shall have become effective (but in no event longer than 180
days beyond the date this Warrant otherwise would have expired) or on the 30th
day following the date all of such defaults have been cured, as the case may be.
3. Warrant Price: Method of Exercise; Payment: Issuance of New
Warrant: Transfer and Exchange
The exercise price shall initially be USD 3.25 (such price hereinafter called
the "Warrant Price").
The purchase right represented by this Warrant may be exercised at any time and
from to time prior to expiration subject to Section 8 hereof.
In order to exercise the Warrants and receive certificates for Shares legally
issuable on such exercise, the Holder shall deposit at least 5,000 Warrants or
more with the Warrant Agent at its office in Lugano and accompanied by a written
notice the form of which being obtainable at the office of the Warrant Agent
(which notice must contain a certification of non-U.S. beneficial ownership)
signed by or on behalf of the Holder to the effect that such Holder elects to
exercise the Warrants and payment of
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the Warrant Price (the "Warrant Consideration Amount"). As a further condition
precedent to the exercise of the Warrants, the Holder must pay all stamp, issue,
registration or other taxes and duties arising upon exercise in Switzerland or
payable in any jurisdiction upon the issue or delivery of Shares, if any, to the
exercising Holder or to the order of a person other than the exercising Holder.
The date on which these conditions precedent to exercise as stated above have
been verified and recognized by the Warrant Agent as being fulfilled in
hereafter called the "Deposit Date". The Common Stock Warrant shall be treated
as exercised at the close of business in New York on the Exercise Date. The
"Exercise Date" for the Warrant means the business days in New York immediately
following the Deposit Date. The "Exercise Date" for the Common Stock Warrant
shall not be later than the Termination Date.
The Company shall not be obligated to issue any fraction of a Share upon the
exercise of any Warrant or make any payment for a fraction of a Share. If more
than one Warrant shall be exercised at one time by the same Holder, the number
of full Shares which shall be issuable upon exercise thereof shall be computed
on the basis of the aggregate number of shares issuable upon the exercise of all
the Warrants exercised by such Holder. Any Shares issued upon the exercise of
the Common Stock Warrants shall be delivered in accordance with the instructions
of the Holder.
In the event of any exercise of the rights represented by this Warrant
certificates for the shares of Warrant Stock so purchased shall be dated the
date of such exercise and delivered to the Holder hereof within a reasonable
time, not exceeding five Business Days after such exercise, and the Holder
hereof shall be deemed for all purposes to be the Holder of the shares of
Warrant Stock so purchased as of the date of such exercise.
Neither this Warrant nor any Warrant Stock has been registered under the
Securities Act. Accordingly, neither this Warrant nor any Warrant Stock is
transferable except as permitted under various exemptions contained in the
Securities Act, or upon satisfaction of the registration and prospectus delivery
requirements of the Securities Act.
4. Stock Fully Paid; Reservation of Shares
The Company covenants and agrees that all shares of Warrant Stock which may be
issued upon the exercise of this Warrant and payment of the Warrant Price will,
upon issuance, be fully paid and non-assessable and free from all taxes, liens
and charges with respect to issuance. The Company further covenants and agrees
that during the period within which this Warrant may be
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<PAGE> 4
exercised, the Company will at all times have authorized and reserved for the
purpose of the issue upon exercise of the subscription rights evidenced by this
Warrant a sufficient number of shares of Common Stock to provide for the
exercise of this Warrant. If the Warrant Price is at any time less than the par
value of the Warrant Stock or if the Warrant at any time is exercisable by its
delivery alone and without payment of any additional consideration, the Company
also covenants and agrees to cause to be taken such action (whether by
decreasing the par value of the Warrant Stock, the conversion of the Warrant
Stock from par value to no par value, or otherwise) as will permit the exercise
of this Warrant without any additional payment by the Holder hereof (other than
payment of the Warrant Price, if any, and applicable transfer taxes, if any),
and the issuance of the Warrant Stock, which Warrant Stock, upon such issuance,
will be fully paid and non-assessable.
The Company shall not by any action including, without limitation, amending its
certificate of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking if all such actions as may be
necessary or appropriate to protect the rights of the Holders hereof against
impairment. Without limiting the generality of the foregoing, the Company will
(a) not increase the par value of any shares of Common Stock receivable upon the
exercise of this Warrant above the amount payable therefor upon such exercise
immediately prior to such increase in par value, (b) take all such action as may
be necessary or appropriate in order that the Company may validly and legally
issue fully paid and non-assessable shares of Common Stock, free and clear of
any liens, claims, encumbrances and restrictions (other than as provided herein)
upon the exercise of this Warrant, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
5. Adjustment of Purchase Price and Number of Shares
The number and kind of securities purchasable upon the exercise of this Warrant
and the payment of the Warrant Price shall be subject to adjustment from time to
time upon the happening of certain events as follows:
a) Recapitalization, Reorganization, Reclassification,
Consolidation, Merger or Sale
In case of any recapitalization or reorganization of the Company
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<PAGE> 5
or any reclassification or change of outstanding Securities issuable upon
exercise of this Warrant (other than a change in par value, or from par value to
no par value, or from no par value to par value or as a result of a subdivision
or combination), or in case of any consolidation or merger of the Company with
or into another corporation (other than a merger with another corporation in
which the Company is the surviving corporation and which does not result in any
reclassification or change - other than a change in par value, or from par value
to no par value, or from no par value to par value, or as a result of a
subdivision or combination - of outstanding Securities issuable upon exercise of
this Warrant), or in case of any sale or transfer to another corporation of the
Property of the Company as an entirety or substantially as an entirety in
connection with a liquidation or dissolution of the Company, the Company or such
successor or purchasing corporation therefor, issue a new Warrant, providing
that the Holder(s) of this Warrant shall have the right to exercise such new
Warrant and procure upon such exercise in lieu of each share of Warrant Stock
theretofore issuable upon exercise of this Warrant the kind and the highest
amount of shares of Stock, other securities, money and property receivable upon
such recapitalization, reorganization, reclassification, change, consolidation,
merger, sale or transfer by a Holder of one share of Common Stock issuable upon
exercise of this Warrant had it been exercised immediately prior to such
recapitalization, reorganization, reclassification, change, consolidation,
merger sale or transfer. Such new Warrant shall provide for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Section 5. The provisions of this subsection (a) shall similarly
apply to successive recapitalizations, reorganizations, reclassifications,
changes, consolidations, mergers, sales and transfers.
b) Subdivision or Combination of Shares
If the Company, at any time while this Warrant is outstanding, shall
subdivide or combine any class or classes of its Common. (i) in case of
subdivision of shares, the Warrant Price shall be proportionately reduced (as at
the effective date of such subdivision of, if the Company shall take a record of
Holders of its Common for the purpose of so subdividing, as at the applicable
record date, whichever is earlier) to reflect the increase in the total number
of shares of Common outstanding as a result of such subdivision, or (ii) in the
case of a combination of shares, the Warrant Price shall be proportionately
increased (as at the effective date of such combination, or, if the Company
shall take a record of Holders of its Common for the purpose of so combining, as
at the applicable record date, whichever is earlier) to reflect the reduction in
the total number of shares of Common outstanding as a result of such
combination.
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c) Certain Dividends and Distributions
If the Company, at any time while this Warrant is outstanding shall:
(i) Stock Dividends
Pay a dividend in, or make any other distribution of, shares
of any class or classes of Common, the Warrant Price shall be adjusted, as at
the date the Company shall take a record of the holders of such class or classes
of Common, for the purpose of receiving such dividend or other distribution (or
if no such record is taken, as at the date of such payment or other
distribution), to that price determined by multiplying the Warrant Price in
effect immediately prior to such record date (or if no such record is taken,
then immediately prior to such payment or other distribution), by a fraction (I)
the numerator of which shall be the total number of shares of Common outstanding
immediately prior to such dividend or distribution, and (2) the denominator of
which shall be the total number of shares of Common outstanding immediately
after such dividend or distribution (plus in the event that the Company paid
cash for fractional shares, the number of additional shares which would have
been outstanding had the Corporation issued fractional shares in connection with
said dividends), or
(ii) Liquidating Dividends, etc.
Make a distribution of its Property to the holders of its
Common as a dividend in liquidation or partial liquidation or by way of return
of capital other than as a dividend payable out of funds legally available for
dividends under the laws of the State of Delaware, the Holder of this Warrant
shall, upon exercise and payment of the Warrant Price, be entitled to receive.
in addition to the number of shares of Warrant Stock receivable thereupon. and
without payment of any additional consideration therefor, a sum equal to the
amount of such Property as would have been payable to such Holder as owner of
that number of shares of Warrant Stock of the receivable by exercise of this
Warrant, had such Holder been the holder of record of such Warrant Stock on the
record date for such distribution. and an appropriate provision therefor shall
be made a part of any such distribution.
d) Issuance of Additional Shares of Common
If the Company, at any time while this Warrant is outstanding,
shall issue any Additional Shares of Common (otherwise than as provided in the
foregoing subsections (a) through (c) of this Section 4), at a price per share
less than the Warrant Price then in effect or without consideration. then
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the Warrant Price upon each such issuance shall be adjusted to that price
determined by multiplying the Warrant Price BV a fraction:
the numerator of which shall be the number of shares of Common
outstanding immediately prior to the issuance of such Additional Shares of
Common plus the number of shares of Common which the aggregate consideration for
the total number of such Additional Shares of Common so issued would purchase at
the Warrant Price, and
the denominator of which shall be the number of shares of
Common outstanding immediately after the issuance of such Additional Shares of
Common.
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The provisions of this subsection (d) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (a), (b) or (c)
of this Section 5. No adjustment of the Warrant Price shall be made under this
subsection (d) upon the issuance of any Additional Shares of Common which are
issued pursuant to any Common Stock Equivalent if upon the issuance of such
Common Stock Equivalent (1) any adjustment shall have been made pursuant to
subsection (e) of this Section 5 or (2) no adjustment was required pursuant to
subsection (e) of this Section 5.
e) Issuance of Common Stock Equivalents
In case the Company shall at any time while this Warrant is
outstanding, issue any Common Stock Equivalent and the price per share of Common
for which Additional Shares of Common may be issuable thereafter pursuant to
such Common Stock Equivalent shall be less than the Warrant Price then in effect
on the date of issuance of such Common Stock Equivalent or if, after any such
issuance of Common Stock Equivalents, the price per share for which Additional
Shares of Common may be issuable thereafter is amended (other than as a result
of the operation of anti-dilution provisions of or relating to Common Stock
Equivalents outstanding as of the date hereof pursuant to events or
circumstances which would also result in an adjustment in the Warrant Price),
and such price as so amended shall be less than the Warrant Price in effect at
the time of such amendment, then the Warrant Price upon each such issuance or
amendment shall be adjusted as provided in the first sentence of subsection (d)
of this Section 4 on the basis that (1) the maximum number of Additional Shares
of Common issuable pursuant to all such Common Stock Equivalents shall be deemed
to have been issued (whether or not such Common Stock Equivalents are actually
then exercisable, convertible or exchangeable in whole or in part) as of the
earlier of (A) the date on which the Company shall enter into a firm contract
for the issuance of such Common Stock Equivalent, or (B) the date of actual
issuance of such Common Stock Equivalent, and (2) the aggregate consideration
for such maximum number of Additional Shares of Common shall be deemed to be the
minimum consideration received and receivable by the Company for the issuance of
such Additional Shares of Common pursuant to such Common Stock Equivalent. No
adjustment of the Warrant Price shall be made under this subsection (e) upon the
issuance of any Convertible Securities which is issued pursuant to the exercise
of any warrants or other subscription or purchase rights therefor. if any
adjustment shall previously have been made in the Warrant Price then in effect
LI upon the issuance of such warrants or other rights pursuant to this
subsection (e).
f) Other Provisions Applicable to Adjustments Under this
Section A
The following provisions shall be applicable to the
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<PAGE> 9
making of adjustments in the Warrant Price hereinbefore provided in this Section
5:
(i) Computation of Consideration
The consideration received by the Company shall be deemed to
be the following: (a) to the extent that any Additional Shares of Common or any
Common Stock Equivalents shall be issued for a cash consideration. the
consideration received by the Company the re for, or (b) if such Additional
Shares of Common or Common Stock Equivalents are offered by the Company for
subscription, the subscription price, or, (c) if such Additional Shares of
Common or Common Stock Equivalents are sold to underwriters or dealers for
public offering without a subscription offering, the initial public offering
price. in any such case excluding any amounts paid or receivable for accrued
interest or accrued dividends and without deduction of any compensation,
discounts, commissions, or expenses paid or incurred by the Company for or in
connection with the underwriting thereof or otherwise in connection with the
issue thereof; (d) to the extent that such issuance shall be for a consideration
other than cash, then, except as herein othervise expressly provided, the fair
market value of such consideration at the time of such issuance as determined in
good faith by the Board. The consideration for any Additional Shares of Common
issuable pursuant to any Common Stock Equivalents shall be the consideration
received by the Corporation for issuing such Common Stock Equivalents, plus the
additional consideration payable to the Corporation upon the exercise,
conversion or exchange of such Common Stock Equivalents. In case of the issuance
at any time of any Additional Shares of Common or Common Stock Equivalents in
payment or satisfaction of any dividend upon any class of Stock other than
Common, the Corporation shall be deemed to have received for such Additional
Shares of Common or Common Stock Equivalents a consideration equal to the mount
of such dividend so paid or satisfied. In any case in which the consideration to
be received or paid shall be other than cash, the Board shall notify the Holder
of this Warrant through Banca del Gottardo of its determination of the fair
market value of such consideration prior to payment or accepting receipt
thereof. If, within thirty days after receipt of said notice, the Holders of
Warrants exercisable for at least a majority of Warrant Stock then unissued
shall notify the Board in writing of their objection to such determination, a
determination of fair market value of such consideration shall be made by
arbitration in accordance with the Rules of the American Arbitration Association
by an arbitrator in the Borough of Manhattan, City of New York, State of New
York.
(ii) Readjustment of Warrant Price
Upon the expiration of the right to convert. exchange or
exercise any Common Stock Equivalent the issuance of which
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<PAGE> 10
effected an adjustment in the Warrant Price, if such Common Stock Equivalent
shall not have been converted, exercised or exchanged, the number of shares of
Common Stock deemed to be issued and outstanding by reason of the fact that they
were issuable upon conversion, exchange or exercise of any such Common Stock
Equivalent shall no longer be computed as set forth above, and the Warrant Price
shall forthwith be readjusted and thereafter be the price which it would have
been (but reflecting any other adjustments in the Warrant Price made pursuant to
the provisions of this Section 5 after the issuance of such Common Stock
Equivalent) had the adjustment of the Warrant Price been made in accordance with
the issuance or sale of the number of Additional Shares of Common actually
issued upon conversion, exchange or issuance of such Common Stock Equivalent and
thereupon only the number of Additional Shares of Common actually so issued
shall be deemed to have been issued and only the consideration actually received
by the Company (computed as in clause (i) of this subsection (g)) shall be
deemed to have been received by the Company.
(iii) Treasury Shares
The number of shares of Common at any time outstanding shall
not include any shares thereof then directly or indirectly owned or held by or
for the account of the Company or any of its Subsidiaries.
g) Other Action Affecting Common
In case after the date hereof the Company shall take any
action affecting its common, other than an action described in any of the
foregoing subsections (a) through (f) of this Section 5, inclusive, and the
failure to make any adjustment would not protect the purchase rights represented
BV this Warrant in accordance with the essential intent and principle of this
Section 5, then the Warrant Price shall be adjusted in such manner and at such
time as the Board may in good faith determine to be equitable in the
circumstances.
h) Adjustment of Number of Shares
Upon each adjustment in the Warrant Price pursuant to any
provision of this Section 5, the number of shares of Warrant Stock purchasable
hereunder shall be adjusted, to the nearest whole share, to the product obtained
by multiplying such number of shares purchasable immediately prior to such
adjustment in the Warrant Price by a fraction, the numerator of which shall be
the Warrant Price immediately prior to such adjustment and the denominator of
which shall be the Warrant Price immediately thereafter. If the Company shall be
in default under any provision contained in the last sentence of Section 5 of
this Warrant so that shares issued at the Warrant price adjusted in
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<PAGE> 11
accordance with this Section 5 would not be validly issued, the adjustment of
number of shares provided for in the foregoing sentence shall nonetheless be
made and the Holder of this Warrant shall be entitled to purchase such greater
number of shares at the lowest price at which such shares may then be validly
issued under applicable law. Such exercise shall not constitute a waiver of any
claim arising against the Company by reason of its default under Section 5 of
this Warrant.
i) Notwithstanding anything in this Section 5 to the contrary
neither the number of shares of Warrant Stock purchasable hereunder nor the
Warrant Price shall be adjusted with respect to any Common Stock Equivalents (i)
issued and outstanding as of the date of the issuance of this Warrant, or the
issuance of any Securities upon exercise or conversion of any such Common Stock
Equivalent, including, without limitation, any Securities issued from time to
time pursuant to the exercise of options outstanding as of the date of issuance
of the Warrant and held by present or former directors, officers or employees of
the Company or
(ii) issued under any stock option plan currently approved by
the shareholders of the Company.
6. Notice of Adjustments
Whenever the Warrant Price or number of Warrant Shares purchasable upon exercise
of this Warrant shall be adjusted pursuant to Section 5 hereof, the Company
shall deliver to Banca del Gottardo for certification to the Holder(s) of the
Warrant a certificate (the "Adjustment Certificate") setting forth, in
reasonable detail, the event requiring the adjustment, the amount of by which
the adjustment, the method such adjustment was calculated (including a
description of the basis on which the Board made any determination hereunder),
and the Warrant Price and number of Warrant Shares purchasable hereunder after
giving effect to such adjustment, and shall cause copies of such certificate to
be mailed (by first class mail postage prepaid) to the Holder(s) of this Warrant
promptly after each adjustment, provided, however, that in the event that any
Holder disagrees with the calculations, amounts or other information with
respect to the adjustments set forth in the Adjustment Certificate, such Holder
shall within 10 Business Days after receipt of such Adjustment Certificate
request that the Company cause the independent accounting firm then regularly
engaged by it to audit its financial statements to propose and execute and
promptly deliver to the Holder(s) a certificate with respect to each of the
items set forth in the Adjustment Certificate. Such determination as to
adjustments of the accounting firm shall be final and binding in the absence of
manifest error.
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<PAGE> 12
7. Fractional Shares
No fractional shares of Warrant Stock will be issued in connection with any
exercise hereof, but in lieu of such fractional shares, the Company shall cause
the payment therefor equal in amount to the product of the applicable fraction
multiplied by the Warrant Price then in effect.
8. Definitions
For the purposes of this Warrant, the following terms have the following
meanings:
"Additional Shares of Common" shall mean all shares of Common issued by the
Corporation after the date hereof except Warrant Stock.
"Board" shall mean the Board of Directors of the Corporation.
"Business Day" shall mean any day except a Saturday, a Sunday or a legal holiday
in New York City.
"Closing Date" shall mean the date of the closing of the sale and delivery of
the Notes.
"Commission" shall mean the Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act.
"Common" shall mean the Common Stock and any capital stock of the Company of any
class which shall be authorized at any time after the date of this Warrant and
which shall have the right to participate in the distribution of earnings and
assets of the Company without limitation as to amount.
"Common Stock Equivalent" shall mean any Convertible Security or warrant, option
or other right to subscribe for or purchase any Additional Shares of Common or
any Convertible Securities.
"Company" shall mean Bitwise Designs, Inc., a Delaware corporation, and its
successors and assigns.
"Convertible Securities" shall mean evidences of Indebtedness, shares of Stock
or other Securities which are or may be at any time convertible into or
exchangeable for Additional Shares of Common. The term "Convertible Security"
shall mean one of the Convertible Securities.
"Current Market Price" means with respect to any Trading Day the last sale price
(regular way) of the Common on such day as reported on the New York Stock
Exchange Consolidated Tape (as published in the Wall Street Journal), or, if
such Common is not
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<PAGE> 13
listed on the New York Stock Exchange, Inc. or reported on such Consolidated
Tape, then the last sale price on such day on the principal domestic stock
exchange on which such stock is then listed or admitted to trading, or, if no
sale takes place on such day on such exchange, the average of the closing bid
and asked prices on such day as officially quoted on such exchange, or, if such
Common is not then listed or admitted to trading on any domestic stock exchange
but is quoted in the National Market System ("NMS/NASDAQ") of the National
Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ"),
then the Current Market Price for each such Trading Day shall be the last sale
price on such day as quoted by NMS/NASDAQ, or, if no sale takes place on such
day or if such Common is neither listed or admitted to trading on any domestic
stock exchange nor quoted on such National Market System, then the Current
Market Price for each such Trading Day shall be the average of the reported
closing bid and asked price quotations on such day in the over-the-counter
market, as reported by NASDAQ, or, if not so reported, as furnished BV the
National Quotation Bureau, Inc., or, if such firm at the time is not engaged in
the business of reporting such prices, as furnished BV any similar firm then
engaged in such business as selected by the Company, or if there is no such
firm, as furnished BV any member of the National Association of Securities
Dealers, Inc. selected by the Company with the written approval of the Holders
of Warrants execrable for a majority of the shares of Warrant Stock usable under
then outstanding Warrants. If at any time such Common is not listed on any
domestic exchange or quoted in the domestic over-the-counter market, the Current
Market Price shall be deemed to be an amount mutually agreed upon in writing
between the Corporation and the Holder of this Warrant within fifteen days
immediately following the date on which the Current Market Price is to be
determined. If no agreement as to Current Market Price is determined as stated
herein, (i) the Holder of this Warrant shall select an independent appraiser who
shall determine the fair market value per share of the Common which shall be the
Current Market Price, provided the Company shall agree to such Current Market
Price. If the Company shall not agree to the Current Market Price as determined
in the preceding sentence then (ii) the Company and Banca del Gottardo shall
each select an independent appraiser who shall, independently of the other
appraiser, determine the fair market value of the Common of the Company. If the
value determined by the appraiser whose determination is the higher of the two
appraisals does not exceed by more than ten percent (10%) the average of the
values determined by each appraiser, then the Current Market Price shall be the
average of the values determined by the two appraisers. If the value determined
by the appraiser whose determination is the higher of the two appraisals does
exceed by more than ten percent (10%) the average of the value determined by
each appraiser, then the two appraisers shall select a third independent
appraiser who shall, independently of the other appraisals, determine the fair
market
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<PAGE> 14
value of the Common. The value determined by the appraiser whose determination
is the most discrepant from the average of the three appraisals shall be
discarded, and the Current Market Price shall equal the average of the remaining
two appraisals except that in the event that the highest and lowest appraisals
are equally discrepant from the average of the three appraisals the Current
Market Price shall be such average. The Company shall bear the expenses of all
appraisals.
"Governmental Body" shall mean any federal, state, county, city, town, village,
municipal or other governmental department commission, board, bureau, agency
authority or instrumentality, domestic or foreign.
"Holders" shall mean the Persons who shall from time to time own of record any
Warrant. The term "Holder" shall mean one of the Holders.
"Material Adverse Effect" means any change or changes or effect or effects that
individually or in the aggregate are or are likely to be materially adverse to
(i) the assets, business, operations, income, prospects or condition (financial
or otherwise) of the Company and its Subsidiaries taken as a whole, (ii) the
legality validity or enforceability of the Warrants and (iii) the ability of the
Corporation to fulfill its obligations under the Warrants.
"Note Purchase Agreement" shall mean the Note and Warrant Purchase, Paying and
Conversion Exercise Agency Agreement dated as of August 8, 1997, by and between
the Company and Banca del Gottardo as such Agreement may hereafter from time to
time be amended, modified or supplemented in accordance with the terms thereof.
"Notes" shall mean collectively the Convertible Notes (each as defined in the
Note Purchase Agreement).
"Person" shall mean and include an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization or a government or any
department or agency thereof.
"Property" with respect to any Person shall mean any interest in any kind of
property or asset, whether real, personal or mixed, tangible or intangible, of
such Person.
"Registrable Securities" shall mean (a) any Warrant Stock or other Securities
issued or issuable upon exercise of any Warrants, and (b) any Securities issued
or issuable with respect to any such Warrant Stock or other Securities by way of
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise. As
to any particular Registrable
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<PAGE> 15
Securities, once issued such shares or securities shall cease to be registrable
securities hen (i) a registration statement with respect to the sale of such
Securities shall have become effective under the Securities Act and such
Securities shall have been disposed of in accordance with such registration
statement, (ii) they shall have been distributed to the public pursuant to Rule
144 (or any successor provision) under the Securities Act, (iii) they shall have
been otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been delivered by the Company and
subsequent disposition of them shall not require registration or qualification
of them under the Securities act or any similar state law then in force (iv)
they shall have ceased to be outstanding or (v) the Company agrees to remove the
legend restricting transferability in accordance with applicable law on the
certificates evidencing such Securities.
"Registration Expenses" shall mean all expenses incident to the Company's
performance of or compliance with Section 4, including, without limitation, all
registration, filing and National Association of Securities Dealers fees all
fees and expenses of complying with securities or blue sky laws, all word
processing duplicating and printing expenses, messenger and delivery expenses,
the fees and disbursements of counsel for the Company and of its independent
public accountants, including the expenses of any special audits or "cold
comfort" letters required by or incident to such performance and compliance the
reasonable fees and disbursements of not more than one firm of attorneys
retained BV the holders of the Registrable Securities being registered, premiums
and other costs of policies of insurance against liabilities arising out of the
public offering of the Registrable Securities being registered and any fees and
disbursements of underwriters customarily paid BV issuers or sellers of
securities but excluding underwriting discounts and commissions and transfer
taxes if any provided that, in any case whereby the Registration Expenses are
not to be borne by the Company, such expenses shall not include salaries of
Company personnel or general overhead expenses of the Company, auditing fees,
premiums or other expenses relating to liability insurance required by
underwriters of the Company or other expenses for the preparation of financial
statements or other data normally prepared by the Corporation in the ordinary
course of its business or which the Company would have incurred in any event.
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<PAGE> 16
"Securities" shall mean any debt or equity securities of the Company whether now
or hereafter authorized, and any instrument convertible into or exchangeable for
Securities or a Security.
"Security" shall mean one of the Securities.
"Securities Act" shall mean as of any date the Securities Act of 1933, as
amended or any similar Federal statute then in effect.
"Stock" shall include any and all shares, interests or other equivalents
(however designated) of, or participation in the capital stock of a corporation
of any class.
"Subsidiary" shall mean with respect to any Person, any corporation or other
entity of which at least a majority of the outstanding Voting Stock is at the
time directly or indirectly owned or controlled by such Person or by one or more
of any entities directly, or indirectly owned or controlled by such Person.
"Trading Day" shall mean any day on which equity securities are traded on any
national securities exchange or on NASDAQ.
"Voting Stock", as applied to the Stock of any corporation, shall mean Stock of
any class or classes (however designated) having ordinary voting power for the
election of a majority of the members of the Board of Directors (or other
governing body) of such corporation, other than Stock having such power only by
reason of the happening of a contingency.
"Warrant Price" shall mean the price specified in the first paragraph of this
Warrant and such other prices as shall result from the adjustments specified in
Section 4 hereof.
"Warrant Stock" shall mean the Common Stock issuable upon exercise of any
Warrant or Warrants.
"Warrants" shall mean the Warrants issued and sold pursuant to the Note Purchase
Agreement, including, without limitation this Warrant.
9. Amendment and Waiver: Assignees
Any term, covenant, agreement or condition in this Warrant may be amended, or
compliance therewith may be waived (either generally or in a particular instance
and either retroactively or prospectively), by a written instrument or written
instruments executed by the Company and Banca del Gottardo provided however,
that no such amendment or waiver shall reduce the number of shares of Warrant
Stock issuable under the Warrants, increase the Warrant Price, shorten the
period during which the Warrants may be exercised or modified any provision of
this Section 9 without the consent of the Holders of all Warrants then
outstanding.
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10. Loss or Mutilation
Upon receipt by the Warrant Agent of evidence satisfactory to it of the
ownership of and the loss, theft, destruction or mutilation of any Warrant and
(in the case of loss, theft or destruction) of indemnity satisfactory to it, and
(in the case of mutilation) upon surrender and cancellation thereof, the Warrant
Agent shall execute and deliver in lieu thereof a new Warrant entitling the
Holder to acquire without further consideration the same number of Shares upon
the same terms as the Warrant so lost, stolen or destroyed or so surrendered and
canceled. Any such substitute Warrant shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen or
destroyed Warrant shall be at any time enforceable by any one. Applicants for a
substitute Warrant shall also comply with such other reasonable regulations and
pay such other reasonable charges as the Warrant Agent may prescribe.
11. Notices and Publications
All notices to the Holders shall be deemed to have been duly given if provided
by the Company to Banca del Gottardo and if published by Banca del Gottardo on
behalf of the Company in the
Feuille Officielle Suisse du Commerce and in a daily newspaper in Lugano and
Zurich.
12. Governing Law
The terms, conditions and form of the Warrants and the Warrant Agency Agreement
shall be governed by and construed in accordance with Swiss law. The issuance of
the Common Stock upon exercise of the Warrants shall be governed by and
construed in accordance with the laws of the State of Delaware.
Any action or proceedings against the Company relating to the Warrants may be
brought and enforced in the ordinary courts of the Canton of Ticino, venue being
in the City of Lugano, or if such courts fail to grant jurisdiction in the
ordinary courts of the Canton of Basle-City, venue being in the city of Basle
and the Company hereby irrevocably submits to the jurisdiction of such courts in
respect of any such action or proceeding in either case with the right to
appeal, as provided by law, to the Swiss Federal Court in Lausanne, the judgment
of which shall be final. Solely for that purpose, the Company hereby elects
legal and special domicile at the principal office of Banca del Gottardo, Viale
Stefano Franscini 8, 6901 Lugano, Switzerland. The Company covenants that so
long as any Warrants are outstanding it will maintain an agent for service of
process in Switzerland. The aforementioned jurisdiction shall also be valid for
the cancellation and replacement of lost, stolen, defaced, mutilated or
destroyed Warrants. Issuance of Common Stock to a Holder who
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<PAGE> 18
has been identified as the legitimate Holder by a final judgment of a Swiss
Court shall release the Company from its obligations under such Warrants.
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<PAGE> 19
ANNEX F
FORM OF WARRANT
(FACE)
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, DELIVERED OR
EXERCISED, DIRECTLY OR INDIRECTLY, IN THE UNITED STATES OR TO, OR FOR THE
BENEFIT OF, ANY U.S. PERSON (AS SUCH TERMS ARE DEFINED IN REGULATION S UNDER THE
SECURITIES ACT) EXCEPT TO AN EFFECTIVE REGISTRATION STATEMENT, OR AN EXEMPTION
FROM REGISTRATION UNDER SAID ACT.
WARRANT
No. Warrant to Purchase one Share of Common Stock
(subject to adjustment)
BITWISE DESIGNS, INC.
Incorporated Under the Laws of the State of Delaware
This Warrant entitles the holder hereof (the "Holder") to subscribe for and
purchase, during the period specified in this Warrant, one share (subject to
adjustment as hereinafter provided) of duly authorized, validly issued, fully
paid and non-assessable Common Stock, par value USD 0.001 per share ("Common
Stock") of BITWISE DESIGNS, INC., a Delaware corporation (the "Company"), at an
initial exercise price per share as determined pursuant to Section 3 of the
terms of the Warrants, subject, however, to the provisions and upon the terms
and conditions hereinafter set forth (such exercise price, as from time to time
adjusted in accordance with the terms hereof, being hereinafter called the
"Warrant Price"). 5,000 Warrants or more are required for any exercise.
Reference is hereby made to the further provisions of this Warrant set forth on
the reverse hereof and such further provisions shall for all purposes have the
same effect as though fully set forth at this place.
IN WITNESS WHEREOF, BITWISE DESIGNS, INC. has caused this Warrant to be signed
in its name by the facsimile signature of its Chief Executive Officer and
President or one of its Vice Presidents.
Dated: August 11, 1997
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<PAGE> 20
Swiss Security no.: 667.088
BITWISE DESIGNS. INC
By: __________________________
John T. Botti
Chief Executive Officer
and President
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<PAGE> 21
ANNEX G
(to be typed on security paper)
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIE5 ACT") AND MAY NOT BE OFFERED, SOLD, DELIVERED OR
EXERCISED, DIRECTLY OR INDIRECTLY IN THE UNITED STATES OR TO, OR FOR THE BENEFIT
OF, ANY U.S. PERSON (AS SUCH TERMS ARE DEFINED IN REGULATION S UNDER THE
SECURITIES ACT) EXCEPT TO AN EFFECTIVE REGISTRATION STATEMENT, OR AN EXEMPTION
FROM REGISTRATION UNDER SAID ACT.
GLOBAL WARRANT
BITWISE DESIGNS INC.
Incorporated Under the Laws of the State of Delaware
This Global Warrant is a Global Warrant in respect of a duly authorized issue of
400'000 Warrants, each entitling the holder to subscribe for and purchase,
during the period specified in this Warrant, 400'000 shares (subject to
adjustment as hereinafter provided) of duly authorized, validly issued, fully
paid and non-assessable Common Stock par value USD 0.001 per share ("Common
Stock") of BITWISE DESIGNS INC. a Delaware corporation (the "Company"), at an
initial exercise per share as determined pursuant to Section 3 of the terms of
the Warrants subject however, to the provisions and upon the terms and
conditions hereinafter set forth (such exercise price, as from time to time
adjusted in accordance with the terms hereof being hereinafter called the
"Warrant Price"). 5'000 Warrants or more are required for any exercise.
The Warrants are issued pursuant to the Note and Warrant Purchase, Paying and
Conversion/Exercise Agency Agreement dated as of Angust 8, 1997 between the
Company as issuer of the Warrants and Banca del Gottardo (the "Agreement").
The Global Warrant may be exchanged as a whole or in part for appropriate
definitive Warrants, in bearer form, not earlier than 40 days after the later of
the date on which the Warrants are first offered or the Payment Date. Such
exchange shall be made upon certification that the beneficial owners of the
Warrants are not United States persons or U.S. persons or are financial
institutions (as defined in United States Treasury Regulation Section 1.165-1
2(c)(I)(v)) located outside the United States that are not United States persons
and that the beneficial owners have not purchased such Warrants for resale
during the Restricted Period and that the beneficial owners certify that they
have not acquired the Warrants for purposes of resale directly or indirectly to
a United States person or to a person within the United States. A beneficial
owner of Warrants must exchange its
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share of the Global Warrant for definitive Warrants before such Warrants may be
transferred or shares may be delivered upon exercise of the Warrants in respect
of the Warrants will be made.
For purposes hereof, (i) the term "Restricted Period" means the period beginning
on August 11, 1997 (the "Payment Date") and ending on the date forty (40) days
after the Payment Date, (ii) the term "United States" means the United States of
America (including the States and the District of Columbia), its possessions,
its territories and other areas subject to its jurisdiction. (iii) the term
"United States person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate the
income of which is subject to United States federal income taxation regardless
of its source or a trust if a court within the United States is able to exercise
primary jurisdiction over the administration of the trust and one or more United
States fiduciaries has the authority to control all substantial decisions of the
trust and (iv) the term "U.S. person" has the meaning set forth in Sections
230.901 through .904 of Title 17 of the United States Code of Federal
Regulations ("Regulation S"). Until so exchanged, this Global Warrant shall have
the same rights and benefits as the definitive Warrants.
The Terms of the Warrants set forth in Annex E of the Agreement are hereby
incorporated by reference herein mutatis mutandis and, except as otherwise
provided herein, shall be binding on the Company and the holder hereof as if
fully set forth herein. Except as otherwise provided herein, the Company shall
meet all its obligations hereunder as and when provided in the Terms of the
Warrants and shall be bound by all its covenants set forth herein.
This Global Warrant shall be governed by and construed in accordance with the
laws of Switzerland.
IN WITNESS WHEREOF, the Company has caused this Global Warrant to be duly
executed under its corporate seal as of August 11, 1997.
Dated: August 11, 1997
Swiss Security no.: 667.088
BITWISE DESIGNS, INC.
By: ________________________
John T. Botti
Chief Executive Officer
and President
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<PAGE> 23
This Global Warrant shall not become valid for any purpose until this Global
Warrant has been authenticated by any two officers of Banca del Gottardo.
By: _________________________ By: _________________________
Authorized Officer Authorized Officer
23
<PAGE> 1
ANNEX H
EXHIBIT 10.24
CONVERSION AGENCY AGREEMENT
This agreement is entered into effective as of August 8, 1997, between BITWISE
DESIGNS, INC., a Delaware corporation with principal offices at Building 50,
Rotterdam Industrial Park, Duanesburg Rd., Route 7, Schenectady N.Y. 12306,
United States of America (the "Company") of the first part and BANCA DEL
GOTTARDO, a Swiss corporation with principal offices at Viale Stefano Franscini
8, 6901 Lugano, Switzerland ("Banca del Gottardo") of the second part.
As authorized by its Board of Directors on July 23, 1997 and pursuant to a Note
and Warrant Purchase, Paying and Conversion/Exercise Agency Agreement dated
August 8, 1997 (the "Agreement"), the Company proposes to make an offer on the
Swiss capital market for the sale of its convertible notes (the "Convertible
Notes") and Warrants The Convertible Notes will be convertible into freely
transferable and non-restricted shares (the "Shares") of the Common Stock of the
Company (the "Common Stock"), on the terms and conditions provided hereafter The
Board of Directors of the Company has approved this agreement as regards the
conversion of the Notes and has authorized the conversion of the Convertible
Notes into the Common Stock of the Company on the terms and conditions hereof.
Article I Conversion Agent
1.1. The Company hereby appoints Banca del Gottardo, acting through its
specified office in Switzerland, as sole Conversion Agent (the "Conversion
Agent") for the conversion of Notes or coupons into Shares in accordance with
the provisions for conversion set forth in Exhibit I hereto (the "Conversion
Provisions") which constitutes an integral part of this agreement.
1.2. So long as any Notes are outstanding, the Company shall maintain a stock
transfer agent (the "Stock Transfer Agent") or shall itself perform the
functions required of such agent under this agreement.
1.3. The appointment of the Conversion Agent hereunder shall
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<PAGE> 2
continue in effect until the conversion right in respect of the Convertible
Notes shall have terminated. So long as Banca del Gottardo satisfactorily
performs its obligations hereunder the Company shall not without the consent of
Banca del Gottardo appoint any other Conversion Agent or pay any other bank any
commission or remuneration for the conversion of the Convertible Notes or
coupons. The Company may at any time send a representative to count the
securities before they are delivered to investors.
Article 2 Commissions
2.1. In consideration for the services rendered by the Conversion Agent in
connection with the conversion of the Convertible Notes and coupons, the Company
undertakes to pay upon demand to the Conversion Agent in US Dollars a commission
of 0.25 per cent of the principal amount of each Note converted however at least
USD 50.-- per conversion of a Convertible Note in a principal amount of USD
5'000.-- together with reasonable out-of-pocket expenses (e.g. telex, cable,
postage, telephone, legal and insurance expenses if any) incurred by the
Conversion Agent in connection with its services hereunder.
2.2. Neither Banca del Gottardo nor the Noteholders shall have any obligation to
pay to the Stock Transfer Agent any commission, tees, costs or charges in
connection with the conversion of Convertible Notes or coupons and the making
available of the respective Shares as provided hereafter.
Article 3 Indemnification
The Company will indemnify and hold harmless the Conversion Agent against any
losses, liabilities, costs claims actions or demands which it may incur or which
may be made against it as a result of or in connection with its appointment or
the exercise of its powers and duties under this Agreement other than those
based upon or arising out of the negligence of willful misconduct on the part of
the Conversion Agent or any of its employees.
Article 4 Conversion of Convertible Notes and Coupons
Each Convertible Note and all unmatured coupons attached thereto, submitted for
conversion to the Conversion Agent (a "Converted Note") shall be imprinted or
stamped for cancellation by the Conversion Agent with a legend to the effect
that such Convertible Note or coupon has been converted. All cancelled Converted
Notes and coupons shall be held by Banca del Gottardo for the account of the
Company. Banca del Gottardo shall maintain a record of Convertible Notes and
coupons converted.
Article 5 Notices
2
<PAGE> 3
All notices required under this Agreement shall be deemed to have been duly
given if sent by cable telex or facsimile transmission (confirmed in writing,
sent by registered airmail) to the following addresses:
If to the Company:
BITWISE DESIGNS, INC.
Building 50, Rotterdam Industrial Park
Duanesburg Rd. Route 7
Schenectady, N.Y. 12306
U.S.A.
Attention: Chief Financial Officer
Facsimile: (518)356-9749
If to the Conversion Agent:
BANCA DEL GOTTARDO
Viale Stefano Franscini 8
6901 Lugano, Switzerland
Attention: New Issue Department
Telex: 841 052
Facsimile: 0114191 808 18 43
or to such other address as at the party receiving the notice shall have
notified to the other party in writing. Such cable. telex or facsimile
transmission notice shall be deemed to have been duly given at the time of
dispatch. Any party receiving a notice by cable, telex or facsimile transmission
will be protected by relying upon the cabled, telexed or transmitted notice even
though such notice is not subsequently confirmed in writing.
Article 6 Governing Law
6.1. This agreement shall be governed by and construed in accordance with Swiss
law, except as to matters regarding conversion of the Notes into Common Stock of
the Company, which shall be governed by and construed in accordance with the
laws of Delaware. Any action or proceedings against the Company relating to this
agreement or the Convertible Notes or coupons may be brought and enforced in the
ordinary courts of the Canton of Ticino, venue being in the City of Lugano, and
the Company hereby irrevocably submits to such courts in respect of any such
action or proceeding with the right to appeal, as provided by law, to the Swiss
Federal Court in Lausanne, the judgment of which shall be final. Solely for that
purpose and for the purpose of execution in Switzerland, the Company hereby
elects legal and special domicile at the office of Banca del Gottardo. Viale
Stefano Franscini 8, 6901 Lugano, Switzerland.
3
<PAGE> 4
Banca del Gottardo shall notify the Company promptly upon receipt of any notice
by it in its capacity as the Company's agent for service of process.
6.2. The Conversion Agent shall also have the right to bring any legal action or
proceeding hereunder against the Company in any state or federal court in the
United States of America which may have jurisdiction.
Article 7 Counterparts
This agreement may be executed in any number of counterparts, each of which
shall be an original; but such counterparts shall together constitute but one
and the same instrument.
IN WITNESS WHEREOF, the Company and Banca del Gottardo have caused this
agreement to be signed and acknowledged by their officers authorized to do so,
as of August 8, 1997.
BITWISE DESIGNS, INC.
By: _________________________
BANCA DEL GOTTARDO
By: __________________________
4
<PAGE> 1
EXHIBIT 10.25
ANNEX I
WARRANT AGENCY AGREEMENT
Dated as of August 8, 1997
BITWISE DESIGNS, INC.
AND
BANCA DEL GOTTARDO
as Standing Agent
WARRANT AGENCY AGREEMENT dated as of August 8, 1997 between BITWISE DESIGNS,
INC., a Delaware corporation (the "Company\-"), and Banca del Gottardo of
Lugano, Switzerland, as Warrant Agent (the "Warrant Agent") and as Standing
Agent (the "Standing Agent").
WITNESSETH:
WHEREAS, the Company proposed to issue Warrants as hereinafter described (the
"Warrants") (the certificate representing the Warrants being referred to herein
as the "Warrant Certificate"), in connection with the sale by the Company to
issue USD 4'000'000.-- principal amount of 8% Convertible Notes due August 11,
2002 (the "Notes"), one warrant entitling to acquire against consideration
initially one share of Common Stock par value of USD 0.001 per Share of the
Company (the "Common Stock").
WHEREAS, the Board of Directors of the Company has duly authorized the issuance
of the Warrants and the shares issuable upon exercise thereof;
WHEREAS, the Company desires to provide for the issuance of the Warrants and to
provide herein for certain terms and provisions of the Warrants more fully then
is set forth in the Warrants Certificate, and
WHEREAS, the Company desires the Standing Agent and the Warrants Agent to act on
behalf of the Company, and the Standing Agent and the Warrant Agent are willing
so to act, in connection with the issuance of Warrants and other matters as
provided herein;
1
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the Warrant Certificate and the respective rights and
obligations thereunder of the Company, the holders of the Warrants and the
Standing Agent and Warrant Agent, the parties hereto agree as follows:
SECTION 1
Definitions
In addition to the definitions set forth elsewhere herein. as used herein:
"Deposit Date" shall have the meaning assigned to it in the Terms of Warrants,
as appropriate.
"Holder" shall mean the person depositing the Warrant Certificate with the
Warrant Certificate with the Warrant Agent or Sub-Warrant Agent pursuant to
Section 4.
"Termination Date" shall mean 12.00 Noon. Lugano Time, August 11, 2002.
"Terms of Warrants" shall refer to Annex E of the Note and Warrant Purchase,
Paying and Conversion/Exercise Agency Agreement dated August 8, 1997 made by and
between the Company and Banca del Gottardo.
SECTION 2
Appointment of Standing Agent and Warrant Agent
The Company hereby appoints the Standing Agent and the Warrant Agent to act as
agents for the Company in accordance with the instructions set forth hereinafter
in this Agreement, and the Standing Agent and Warrants Agent hereby accept such
appointments, upon the terms and conditions hereinafter set forth. The Company
may at any time send a representative to count the securities before they are
delivered to investors.
SECTION 3
Number, Form and Execution of Warrant Certificates
The number of Warrant Certificates is limited in each case to 400'000. The
Warrant Certificate shall be in bearer form substantially in the form of Annex F
of the Note and Warrant Purchase. Paying and Conversion/Exercise Agency
Agreement dated August 8, 1997 made by and between the Company and Banca del
Gottardo (the provisions of which are hereby incorporated herein) and may have
such letters, numbers or other marks of
2
<PAGE> 3
identification or designation, and such legends, summaries or endorsements,
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto.
The Warrant Certificate shall be signed on behalf of the Company by its
President or a Vice President and by its Secretary or an Assistant Secretary.
Each such signature upon the Warrant Certificate may be in the form of a
facsimile signature of the President, Vice President, Secretary or Assistant
Secretary and may be imprinted or otherwise reproduced on the Warrant
Certificate. The Company, the Standing Agent and the Warrant Agent may deem and
treat the Holder(s) of the Warrants as the absolute owner(s) thereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone), for the purpose of any exercise thereto any distribution to the
Holder(s) thereof, and for all other purpose, and neither the Company, the
Standing Agent nor the Warrant Agent shall be affected by any notice to the
contrary.
SECTION 4
Exercise; No Fractional Shares
(a) The provisions of Sections 3 and 7 of the Terms of the Warrants are
incorporated herein.
(b) On the Deposit Date, the Warrant Agent shall give notice of the
individual exercise of the Warrants in the form as annexed hereto as
Exhibit 2 to the Standing Agent.
(c) Upon surrender of a Warrant Certificate, and payment of the Exercise
Price, the Standing Agent shall thereupon (i) transfer the Exercise
Price to the Company according to the Company 5 standing instructions,
(ii) promptly requisition. from the transfer agent of the Common Stock
of the Company, one or more certificates for the number of shares to be
purchased, and (iii) promptly after receipt of such certificate or
certificates for shares, cause the same to be delivered in accordance
with the instructions of the Holder of such Warrant Certificate
together with a check in payment for any fraction of a share. The
Company irrevocably authorizes the Standing Agent to make all such
requests for shares and the transfer agent or transfer agents for the
Common Stock of the Company to comply with all such requests.
3
<PAGE> 4
SECTION 5
Authorization; Reservation of Shares; Listing; Reports to Warrantholders, etc.
The provisions of Section 4 of the Terms of Warrants are incorporated herein.
SECTION 6
Loss or Mutilation
The provisions of Section II of the Terms of Warrants are incorporated herein.
SECTION 7
Adjustment of Exercise Price and Number of Share Deliverable
The provisions of Section 5 of the Terms of Warrants are incorporated herein.
SECTION 8
Concerning the Standing Agent and the Warrant Agent
1. The Standing Agent and the Warrant Agent act hereunder solely as agents
for the Company and each of its shall be determined solely by the provisions
hereof. The Standing Agent and the by delivering Warrant Agent shall not. g the
Warrant Certificate or by any other act hereunder, be deemed to make any
representations as to the validity. of this Warrant Agency Agreement (except its
valid execution) or the validity. or value or authorization of the Warrant
Certificate or Warrants represented thereby or of any shares or other property
delivered upon exercise of any Warrants or whether any such shares or other
shares are fully paid and non-assessable. The Standing Agent and the Warrant
Agent shall not at any time be under any duty or responsibility to any Holder of
the Warrants to make or cause to be made any adjustment of the Exercise Price or
any adjustment to the number of shares of Common Stock issuable upon exercise of
the Warrants provided in this Agreement. or to determine whether any fact exists
which may require any such adjustment. or with respect to the nature or extent
of any such adjustment, when made, or with respect to the method employed in
making the same Each shall not (i) be liable for the correctness of any recital
or statement of fact contained herein or in the Warrant Certificate or for any
action taken, suffered, or omitted by them in reliance on any Warrant
Certificate or other document or instrument believed by them in good faith to be
genuine and to have been signed, sent or presented by the proper party or
4
<PAGE> 5
parties. (ii) be responsible for any failure on the part of the Company to
comply with any of its covenants and obligations contained in this Agreement or
in the Warrant Certificate. or (iii) be liable for any act or omission in
connection with this Agreement except for their own negligence or wilful
misconduct
2. The Standing Agent or the Warrant Agent may at any time consult with
counsel satisfactory to them (who may be counsel to the Company) and shall incur
no liability or responsibility to the Company or to any Holder of any Warrant or
any other person or corporation for any action taken. suffered or omitted by
them in good faith in accordance with the opinion or advice of such counsel.
3. Any notice, statement. instruction. request. direction, order, election
or demand of the Company shall be sufficiently. evidenced by an instrument
signed by its President, any of its Vice Presidents, its Secretary, any of its
Assistant Secretaries or its Treasurer (unless other evidence in respect thereof
is herein specifically prescribed). The Standing Agent or the Warrant Agent
shall not be liable for any action taken. suffered or omitted by them in
accordance with such notice, statement, instruction. request, direction. order
or demand believed b the Standing Agent or Warrant Agent to be genuine and to
have been signed. sent or presented by the proper party or parties.
4. The Company agrees to pay the Standing Agent and the Warrant Agent
reasonable compensation for each of its services hereunder and to reimburse it
for all expenses (e.g. telex, cable, postage, telephone, etc.), including
counsel fees, taxes and governmental charges and other charges of any kind and
nature. incurred by the Standing Agent and the Warrant Agent. In consideration
for the services rendered by the Warrant Agent. the Company undertakes to pay
upon demand to the Warrant Agent in USD a commission which is USD -.10 for each
Common Stock Warrant exercised.
5. The Company further agrees to indemnity the Standing Agent or the
Warrant Agent and save each of them harmless against any and all losses.
expenses and liabilities, including judgments. costs and counsel fees, for any
thing done or omitted by the Standing Agent or Warrant Agent in the execution of
their duties and powers hereunder, except losses, expenses and liabilities
arising as a result of the Standing Agent's or the Warrant Agent's negligence or
willful misconduct. The Company will not be liable for any Swiss taxes that may
be payable for or in respect of the deposit or surrender of the Warrants. or the
issue and delivery of shares or the surrender of the Warrants.
6. Neither Banca del Gottardo nor the Warrantholders shall have any
obligation to pay to the Standing Agent and Stock Transfer Agent any commission,
fees. costs or charges in connection vith
5
<PAGE> 6
the exercise of Warrants and the making available of the respective Shares as
provided hereafter.
7. The Standing Agent or the Warrant Agent may resign its duties and be
discharged from all further duties and liabilities hereunder (except liabilities
arising as a result of the Standing Agent's ovn negligence or willful
misconduct). after giving thirty days' prior written notice to the Company. At
least fifteen days prior to the date such resignation is to become effective,
the Standing Agent or the Warrant Agent shall cause a copy of such notice of
resignation to be published in the manner set forth in Section 10. Upon such
resignation, the Company shall appoint in writing a new Standing Agent or
Warrant Agent and if the Company shall fail to make - 80 - such appointment
within a period of thirty days after it has notified in writing of such
resignation by the resigning Standing Agent or Warrant Agent. then the Holders
of any Warrant may apply to any court of competent jurisdiction for the
appointment of such successor Standing Agent or Warrant Agent and if such
successor Standing Agent or the Warrant Agent shall be carried out by the
Company pending such appointment.
After acceptance in writing of such appointment by the successor Standing Agent
or Warrant Agent is received by the Company. such successor Standing Agent or
Warrant Agent shall be vested with the same powers, rights. duties and
responsibilities
6
<PAGE> 7
as if it had been originally named herein as the Standing Agent or the Warrant
Agent, without any further assurance, conveyance, act or deed. Not later than
the effective date of any such appointment the Company shall file notice thereof
with the resigning Standing Agent or Warrant Agent and shall cause a copy of
such notice to be published in the manner set forth in Section 10. Any
corporation into which the Standing Agent or the Warrant Agent or any successor
Standing Agent or Warrant Agent may be converted or merged or any corporation
resulting from any consolidation succeeding to the corporate trust business of
the Standing Agent or the Warrant Agent, shall be a successor Standing Agent or
Warrant Agent under this Agreement without any further act. Any such successor
Standing Agent or Warrant Agent shall promptly cause notice of its succession as
Standing Agent or Warrant Agent to be mailed to the Company and notice published
in the manner set forth in Section 10.
The Warrant Agent, its subsidiaries and affiliates. and any of its officers,
directors, stockholders, or employees may buy and hold or sell Warrants or other
securities of the Company and otherwise deal \ith the Company in the same
manner and to the same extent and with like effect as though it were not Warrant
Agent. Nothing herein shall preclude the Standing Agent or the Warrant Agent
from acting in any other capacity for the Company or for any other legal entity.
SECTION 9
Modification of Agreement
The Standing Agent, the Warrant Agent and the Company may, by supplemental
agreement, make any changes or corrections in this Agreement that they shall
deem appropriate to cure any ambiguity or to correct any defective or
inconsistent provisions or manifest mistake or error herein contained.
SECTION 10
Notices
The provisions of Section 12 of the Terms of Warrants are incorporated herein.
SECTION 11
Governing Law
The provisions of Section 13 of the Terms of Warrants are
7
<PAGE> 8
incorporated herein.
SECTION 12
Persons Benefiting
This Agreement shall be binding upon and inure to the benefit of the Company,
the Standing Agent, the Warrant Agent and their respective successor and
assigns, and. to the extent that the provisions hereof are incorporated in the
Warrants by the terms thereof, shall be binding upon and shall inure to the
benefit of the Holders form time to time of the Warrants, and their respective
successor and assigns. Nothing in this Agreement is intended or shall be
construed to confer upon any other person or corporation any legal or equitable
remedy, or claim or to impose upon any other persons any duty, liability or
obligation.
SECTION 13
Notices
All notices required under this Agreement shall be deemed to have been duly
given if sent by cable, telex or facsimile transmission (confirmed in writing,
sent by registered airmail) to the following addresses:
If to the Company:
BITWISE DESIGNS, INC
Building 50, Rotterdam Industrial Park
Duanesburg Rd., Route 7
Schenectady, N.Y. 12306. U.S.A.
Attention: Chief Financial Officer
Facsimile: (518) 356 9749
If to the Warrant Agent and to the Standing Agent:
BANCA DEL GOTTARDO
Viale Stefano Franscini 8
6901 Lugano, Switzerland
Attention: New Issue Department
Telex: 841 052
Facsimile: 01141918081843
or to such other address as at the party receiving the notice shall nave
notified to the other party in writing. Such cable,
8
<PAGE> 9
telex or facsimile transmission notice shall be deemed to have been duly given
at the time of dispatch. Any party receiving a notice by cable, telex or
facsimile transmission will be protected by relying upon the cabled, telexed or
transmitted notice even though such notice is not subsequently confirmed in
writing.
SECTION 14
Descriptive Headings
The descriptive headings of the several Sections of this Agreement are inserted
for convenience only and shall not control or affect the meaning or construction
of any of the provisions hereof.
SECTION 15
Termination
This Agreement shall terminate on the Termination Date of Warrants. subject to
completion of actions taken on or prior thereto pursuant to this Agreement, or
on any earlier date if all the Warrants have been exercised.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
BITWISE DESIGNS, INC.
By: ________________________
Its: _________________________
BANCA DEL GOTTARDO
As Warrant Agent and Standing Agent
By: _________________________
Its: ___________________________
9
<PAGE> 1
Exhibit 11
Schedule of Computation of Primary Earnings/(Loss) Per Share
<TABLE>
<CAPTION>
For Years Ended
June 30, 1997 June 30, 1996
<S> <C> <C>
Net loss ($2,143,159) (2,961,039)
Less preferred stock dividends (7,610) (30,441)
-------------- -------------
Subtotal (2,150,769 (2,991,480)
Number of common shares outstanding
at beginning of the year 6,754,606 4,473,661
Weighted average number of common shares issued
as follows:
Conversion of preferred stock to common stock 102,797
Issuance of common stock pursuant to a private placement 804,056
Dissolution of subsidiary Employee Stock
Ownership Plan 63,700
Common stock warrants exercised 266,838 155,618
Acquisition of DJS subsidiary 45,902
Common stock options exercised 6,152
--------------- ------------
Weighted average number of common shares
outstanding at the end of the year 7,194,094 5,479,237
Net loss per common share ($0.30) ($0.55)
</TABLE>
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF REGISTRANT
1. DJS Marketing Group, Inc.,
2. System Solutions Technology Inc.
3. DJS Marketing Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Bitwise Designs, Inc. and Subsidiaries:
We consent to the incorporation by reference in the registration statements on
Forms S-3 (No. 33-80917 and 333-05445) and Form S-8 (No. 333-23933) of Bitwise
Designs, Inc. of our report dated September 4, 1997, on our audit of the
consolidated financial statements of Bitwise Designs, Inc. and Subsidiaries as
of June 30, 1997, and for the year ended June 30, 1997, which report is
included in this annual report on Form 10-KSB.
/s/ Coopers & Lybrand L.L.P.
Albany, New York
September 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,863,847
<SECURITIES> 0
<RECEIVABLES> 7,625,130
<ALLOWANCES> 189,126
<INVENTORY> 3,137,332
<CURRENT-ASSETS> 13,622,171
<PP&E> 1,869,414
<DEPRECIATION> 870,633
<TOTAL-ASSETS> 18,924,765
<CURRENT-LIABILITIES> 7,730,498
<BONDS> 0
0
20
<COMMON> 7,368
<OTHER-SE> 11,185,582
<TOTAL-LIABILITY-AND-EQUITY> 18,924,765
<SALES> 53,109,469
<TOTAL-REVENUES> 53,109,469
<CGS> 43,102,733
<TOTAL-COSTS> 55,113,445
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 118,710
<INTEREST-EXPENSE> 444,918
<INCOME-PRETAX> (2,117,340)
<INCOME-TAX> 25,819
<INCOME-CONTINUING> (2,143,159)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,143,159)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
