<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 1999
FILE NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BITWISE DESIGNS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3571 14-1673067
(STATE OF INCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER
INDUSTRIAL CLASSIFICATION NO.) IDENTIFICATION NUMBER)
</TABLE>
------------------------
<TABLE>
<S> <C>
2165 TECHNOLOGY DRIVE JOHN T. BOTTI
SCHENECTADY, NEW YORK 12308 CHIEF EXECUTIVE OFFICER
(518) 346-7799 BITWISE DESIGNS, INC.
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, 2165 TECHNOLOGY DRIVE
INCLUDING AREA CODE, OF COMPANY'S PRINCIPAL EXECUTIVE SCHENECTADY, NEW YORK 12308
OFFICES) (518) 346-7799
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
------------------------
WITH COPIES TO:
VICTOR J. DIGIOIA, ESQ.
MICHAEL A. GOLDSTEIN, ESQ.
GOLDSTEIN & DIGIOIA, LLP
369 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
TELEPHONE (212) 599-3322
FACSIMILE (212) 557-0295
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SECTION 8(a) MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
PROPOSED
AMOUNT MAXIMUM PROPOSED AMOUNT OF
TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION
TITLE OF SHARES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Common Stock, par value $.001.......... 1,552,750 $5.75 $8,928,312.50 $ 2,482.07
Common Stock underlying Privately
Issued Warrants, par value
$.001(2)............................. 777,000 $5.75 $4,467,750 $ 1,242.03
Common Stock underlying Series B
Preferred Stock, par value
$.001(3)............................. 666,667 $5.75 $3,833,335.25 $ 1,065.62
Common Stock underlying Series C
Warrants, par value $.001(4)......... 999,999 $5.75 $5,749,994.50 $ 1,598.50
Series B Common Stock Purchase
Warrants............................. 1,520,000 $4.375(6) $6,650,000 $ 1,848.70
Common Stock underlying Series B
Warrants, par value $.001(5)......... 1,520,000 $5.75 $ 8,74,000 $ 2,429.72
- -------------------------------------------------------------------------------------------------------
Total.................................. 7,036,416 $38,369,392.50 $10,666.69
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total estimated solely for the purpose of determining the registration fee.
Based upon the average of the high and low prices of Bitwise's Common Stock
as reported on the Nasdaq SmallCap Market on November 16, 1999 ($5.25).
(2) Represents Shares of Common Stock issuable upon exercise of outstanding
privately issued Common Stock purchase warrants held by certain security
holders. Pursuant to Rule 416 of the Securities Act of 1933, as amended (the
"Act"), there are being registered such additional number of shares of
Common Stock as may become issuable pursuant to the anti-dilution provisions
of the Warrants.
(3) Represents Shares of Common Stock issuable upon exercise of the conversion
of outstanding shares of Series B Preferred Stock held by certain security
holders. Pursuant to Rule 416 of the Securities Act of 1933, as amended (the
"Act"), there are being registered such additional number of shares of
Common Stock as may become issuable pursuant to the anti-dilution provisions
of the Warrants.
(4) Represents Shares of Common Stock issuable upon exercise of outstanding
Series C Common Stock purchase warrants held by certain security holders.
Pursuant to Rule 416 of the Securities Act of 1933, as amended (the "Act"),
there are being registered such additional number of shares of Common Stock
as may become issuable pursuant to the anti-dilution provisions of the
Warrants.
(5) Represents Shares of Common Stock issuable upon exercise of outstanding
Series B Common Stock purchase warrants held by certain security holders.
Pursuant to Rule 416 of the Securities Act of 1933, as amended (the "Act"),
there are being registered such additional number of shares of Common Stock
as may become issuable pursuant to the anti-dilution provisions of the
Warrants.
(6) The proposed offering price of the Series B Warrants was determined by
subtracting the initial exercise price of the warrant of $1.375 by the
average high and low prices of Bitwise's Common Stock as reported on the
Nasdaq SmallCap Market on November 16, 1999 of $5.75.
<PAGE> 3
PROSPECTUS
5,516,416 SHARES, 1,520,000 SERIES B WARRANTS
BITWISE DESIGNS, INC.
COMMON STOCK AND SERIES B COMMON STOCK PURCHASE WARRANTS
We are registering (1) 3,297,776 shares of Bitwise's common stock, par
value $.001, which will be issued upon the exercise of (a) 1,520,000 Series B
Warrants; (b) 999,999 Series C Warrants; and (c) 777,000 privately issued common
stock purchase warrants; (2) 666,667 shares of our common stock which will be
issued upon the conversion of 50,000 shares of our Series B Preferred Stock; and
(3) the resale of 1,552,750 shares and 1,520,000 Series B Warrants held by
certain selling shareholders.
We will not receive any of the proceeds from the sale of the Shares or
Series B Warrants by the Selling Security Holders.
Bitwise's common stock is traded in the over-the counter market and is
quoted on the Nasdaq SmallCap Market under the symbol "BTWS" and on the Pacific
Stock Exchange under the symbol "BTWS". On November 18, 1999, the closing price
for the common stock as reported on Nasdaq was $6.00.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT CERTAIN FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES
OF COMMON STOCK OR THE SERIES B WARRANTS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Shares of common stock, including the Shares underlying the Series B,
Series C and Private Warrants, the Shares issuable upon the conversion of the
Series B Preferred Stock, and the Series B Warrants will be issued by Bitwise
upon exercise or conversion by the holders of the warrants or preferred stock,
or the transferees of the holders. The shares of common stock will be offered
and sold from time to time by the Selling Security Holders and their transferees
in the over-the-counter market, or otherwise, at prices and terms then
prevailing or at prices related to the then-current market price, or in
negotiated transactions.
Prospectus dated , 1999
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.......................................... 1
THE OFFERING................................................ 3
SELECTED FINANCIAL DATA..................................... 4
RISK FACTORS................................................ 5
USE OF PROCEEDS............................................. 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 11
DESCRIPTION OF BUSINESS..................................... 17
LEGAL PROCEEDINGS........................................... 21
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS................................................... 22
EXECUTIVE COMPENSATION...................................... 24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 30
SELLING SECURITY HOLDERS.................................... 31
SELLING SECURITY HOLDERS AND TRANSACTIONS WITH SELLING
SECURITY HOLDERS.......................................... 31
DESCRIPTION OF SECURITIES................................... 35
EXPERTS..................................................... 39
DISCLOSURE OF COMMISSION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES...........................................
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.... 40
PLAN OF DISTRIBUTION........................................ 41
ADDITIONAL INFORMATION...................................... 41
FORWARD LOOKING STATEMENTS.................................. 41
</TABLE>
i
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and Bitwise's consolidated financial statements and the notes to
those statements appearing elsewhere in this prospectus.
BITWISE DESIGNS, INC.
OUR BUSINESS
Bitwise Designs, Inc., with our wholly-owned subsidiary, DJS Marketing
Group, Inc., designs, assembles and distributes document imaging systems,
computer systems and related peripheral equipment, components and accessories,
and network and Internet services. We also recently established a majority-owned
subsidiary named Authentidate.com, Inc. Authentidate will engage in a new
business line of providing end users with a service which will:
- accept and store electronic images from networks and personal computers
throughout the world and from different operating systems via the
Internet;
- indelibly date and time stamp all electronic images received via the
Internet;
- allow for confirmation of acceptance of all e-mails sent through the
system (notarized e-mail);
- produce confirmations of receipt of e-mail by third parties;
- certify transmission and receipt of electronic documents to facsimile
machines around the world;
- verify the authenticity of all captured digital images; and
- allow for a secure payment system, including use of credit cards.
Our Products and Services
In developing and marketing our products and services, along with DJS, we
primarily market the following different products and services:
- THE DOCSTAR DOCUMENT IMAGING SYSTEM -- enables a user to scan paper
documents onto an optical disk, hard disk drive or other storage medium.
The DocStar product line consists of a personal computer, proprietary
software and a scanner and can be utilized as a "stand-alone" system or
as part of a network installation;
- COMPUTER PRODUCTS AND INTEGRATION SERVICES -- we market personal
computers and peripheral computer products which we purchase from many
different suppliers. In addition, DJS, as a systems integrator,
configures various computer hardware and peripheral products such as
software together, to satisfy a customer's individual needs.
- NETWORK SERVICES -- DJS also designs and installs network systems which
involves network software being installed on a fileserver computer with
less powerful computers sharing information from the fileserver.
Applications that the network system provides include E-mail, accounting
systems, word processing, communication and any other applications that
require the sharing of information.
- INTERNET/INTRANET DEVELOPMENT SERVICES -- Through DJS, we provide our
customers with the ability to advertise products, provide news and stock
market products, provide educational data bases, as well as one on one
and Group Communications through the Internet or intranet. Our services
include web page installation.
- AUTHENTIDATE.COM -- Through Authentidate, we will provide a service
allowing customers to time and date stamp all electronic images to verify
authenticity. The service will be sold over the Internet.
1
<PAGE> 6
Our Approach to the Market
In January 1996, we introduced, on a national level, the DocStar system. We
believe that a broad spectrum of businesses and governmental agencies experience
the problem of storage, management and security of paper documents. The DocStar
product line is intended to provide a cost effective method of reducing the
space necessary to store documents while granting a user the ability to
instantly retrieve documents.
DJS markets its products and services to a variety of customers, including
corporations, schools, government agencies, manufacturers and distributors. In
addition to the products and services noted above, DJS also provides accounting
solutions, consultation, document management and video conferencing services.
DJS also services the products it sells by employing factory trained computer
technicians and network engineers.
We anticipate that Authentidate will commence offering services through its
Authentidate.Com Internet site within the next 30 to 60 days. We intend to
market the Authentidate services through traditional print and media advertising
and banner advertising and links on other Internet provider home pages. To date,
Authentidate's operations have been limited to developing the technology for its
services and home page.
Our Offices
We were initially organized in August 1985 and reincorporated under the
laws of the state of Delaware in May 1992. Our executive offices are located at
2165 Technology Drive, Schenectady, New York 12308, our telephone number is
(518) 346-7799, and our Internet address is www.docstar.com.
2
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Selling Security
Holders............................................ 5,516,416
Series B Warrants Offered by the Selling Security
Holders.............................................. 1,520,000
Common Stock Outstanding Prior to Offering(1)........ 9,448,436
Common Stock Outstanding After the Offering(2)....... 13,434,852
Use of Proceeds(3)................................... Bitwise will not receive any proceeds from the
sales of the Selling Shareholders. We
anticipate that proceeds received from the
exercise of any of the Series B or privately
issued Warrants will be used for working
general corporate purposes. Please see "Use of
Proceeds."
Nasdaq Smallcap Market Symbol (Common Stock): ....... "BTWS"
Pacific Stock Exchange Symbol (Common Stock): ....... "BTWS"
</TABLE>
- ---------------
(1) Based on the number of shares actually outstanding as of November 9, 1999.
Unless otherwise specifically stated, information throughout this prospectus
excludes as of October 12, 1999:
- 3,000,000 shares of Common Stock reserved for issuance under our 1992
Employee Stock Option Plan, of which 1,984,870 shares have been
reserved for currently outstanding options and 1,015,130 shares are
available for future issuances, and
- 180,000 shares of Common Stock reserved for currently outstanding
options under our Directors Plan.
(2) This assumes the exercise of all of the Series B Warrants, Series C Warrants
and Private Warrants for which underlying shares are being registered and
the conversion of all shares of Series B Preferred Stock for which the
Conversion Shares are hereby being registered.
(3) We will receive up to approximately $8,245,147 in proceeds upon the exercise
of all of the Series B Warrants, Series C Warrants (within 30 days of the
effective date of this registration statement) and Private Warrants are
exercised. We plan to use all such proceeds for working capital and general
corporate purposes. Please see "Use of Proceeds."
3
<PAGE> 8
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements, including the related notes, and
"Managements's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales........................................... $17,094,765 $33,755,625 $53,109,469
Gross Profit........................................ 5,615,468 8,092,566 10,006,736
Net (Loss)/Net Income............................... (3,166,488) (5,464,059) (2,143,159)
Basic and Diluted Net (Loss)/Net Income Per Common
Share............................................. (0.43) (0.74) (0.30)
BALANCE SHEET DATA:
Current Assets...................................... 9,857,681 12,138,995 13,622,171
Current Liabilities................................. 6,225,966 4,789,896 7,730,498
Working Capital..................................... 3,631,715 7,349,099 5,891,673
Total Assets........................................ 14,484,984 14,708,454 18,924,765
Total Long Term Liabilities......................... 5,327,901(1) 3,975,000(2) 1,297
Stockholders' Equity................................ 3,335,705 6,478,226 11,192,970
</TABLE>
- ---------------
(1) Long-term liabilities excluding discount of $404,588.
(2) Long-term liabilities excluding discount of $534,668.
4
<PAGE> 9
RISK FACTORS
The securities offered hereby are speculative in nature and involve a high
degree of risk, including, but not limited to, the risk factors described below.
Each prospective investor should carefully consider the following risk factors
before making an investment decision.
WE FACE UNCERTAINTIES IN MARKETING THE DOCSTAR SYSTEM AND ARE LOSING MONEY.
We incurred losses of $3,166,488; $5,464,059 and $2,143,159 for the fiscal
years ended June 30, 1999, 1998 and 1997. Furthermore, for the last three years
we have been expanding our marketing and sales efforts of the DocStar line of
document imaging systems which has led to increased costs associated with the
product line. We have also been investing in new technologies, namely
Authentidate.com. We will continue to incur these costs in the future as we
attempt to increase market awareness and sales of DocStar and Authentidate.com.
Our 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 we operate. There can be no assurance that we
will be able to achieve profitable operations in future operating periods.
WE HAVE LIMITED WORKING CAPITAL.
Our capital requirements have been and will continue to be significant. We
have been substantially dependent upon public offerings and private placements
of our securities and on short-term and long-term loans from lending
institutions to fund such requirements. We are expending significant amounts of
capital to promote and market DocStar and due to these expenditures, have
incurred significant losses to date. In the future, we will need additional
funds from loans and/or the sale of equity securities. No assurance can be given
that such funds will be available or, if available, will be on commercially
reasonable terms satisfactory to us. In the event such funds are not available,
we may be forced to curtail operations, or, in an extreme situation, cease
operations.
WE HAVE PREVIOUSLY GRANTED SECURITY INTERESTS ON MOST OF OUR ASSETS.
We have granted security interests with respect to substantially all of our
assets to secure certain of our indebtedness, which will continue following this
offering. In the event of a default by us on our secured obligations, a secured
creditor could declare our indebtedness to be immediately due and payable and
foreclose on the assets securing the defaulted indebtedness. Moreover, to the
extent that all of our assets continue to be pledged to secure outstanding
indebtedness, such assets will not be available to secure additional
indebtedness. Our line of credit for $1,500,000 was recently terminated by our
lender as a result of our not being in compliance with all of its loan
covenants. On June 30, 1999 the balance of the line of credit was approximately
$1,300,000. On October 1, 1999, we entered into an agreement with the lender to
extend repayment of the outstanding balance until September 30, 2000. We were
required to make a partial payment to the lender of $600,000 on October 4, 1999
for the repayment of the remaining balance from the proceeds of our recently
completed private offering. The remaining balance is being paid in weekly
installments over one year with interest at prime plus 4%. Our President, John
Botti, also agreed to guarantee repayment of the loan balance. The line of
credit is secured by our account receivables and inventory, and does not include
our new office building which is secured by a mortgage. We are attempting to
locate a new lender for our inventory financing. There can be no assurance that
we will be successful in its efforts to obtain alternative inventory financing,
and the failure to obtain inventory financing may have an adverse material
effect upon our operations.
OUR PRODUCTS MAY NOT BE ACCEPTED BY OUR CONSUMERS.
Although we introduced our DocStar imaging system products on a national
level in January 1996, demand and market acceptance for the DocStar imaging
system remains subject to a high level of uncertainty. Achieving widespread
acceptance of this product line will continue to 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. The Authenti-
5
<PAGE> 10
date.com product line is a brand new product line with no sales to date. We
expect to commence sales in this product line in the next 30-60 days over the
Internet. 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.
OUR PRODUCTS MAY BECOME OBSOLETE.
The computer industry and Internet services industry are characterized by
extensive research and development efforts which result in the frequent
introduction of new products which render existing products obsolete. Our
ability to compete successfully in the future will depend in large part on our
ability to maintain a technically competent research and development staff and
our ability to adapt to technological changes in the industry and enhance and
improve existing products and successfully develop and market new products that
meet the changing needs of our customers. Although we are dedicated to continued
research and development of our products with a view towards offering products
with the most advanced capabilities, there can be no assurance that we will be
able to continue to develop new products on a regular basis which will be
competitive with products offered by other manufacturers. At the present time,
we do not have a targeted level of expenditures for research and development. We
will evaluate all opportunities but believe the majority of our research and
development will be devoted to enhancements of our existing products.
Technological improvements in new products that we and our competitors
offer, which, among other things, results in the rapid decline of the value of
inventories, as well as the general decline in the economy and other factors,
have resulted in recent declines in retail prices for computer products. As
competitive pressures have increased, many companies have ceased operation and
liquidated inventories, further increasing downward pricing pressure. Such
declines have, in the past, and may in the future, reduce our profit margins.
WE DO NOT HAVE PATENTS ON ALL THE TECHNOLOGY WE USE.
We do not currently hold any patents and the technology embodied in our
current products cannot be patented. We (1) have a patent pending for the
innovative technology underlying the Authentidate business plan that can verify
the authenticity of digital images by employing a secure clock to stamp the date
and time on each image captured and (2) have registered as trademarks the logo
"BitWise Designs," "DocStar" and "Authentidate". We rely on confidentiality
agreements with our key employees to the extent we deem it to be necessary. We
further intend to file a patent application for any new products we may develop,
to the extent any technology included in such products is patentable, if any.
There can be no assurance that any patents in fact, will be issued or that such
patents will be effective to protect our products from duplication by other
manufacturers. In addition, there can be no assurance that any patents that may
be issued will be effective to protect our products from duplication by other
developers.
Other companies operating within our business segment may independently
develop substantially equivalent proprietary information or otherwise obtain
access to the our know-how. In addition, there can be no assurance that we will
be able to afford the expense of any litigation which may be necessary to
enforce its rights under any patent. Although we believe that the products we
sell do not and will not infringe upon the patents or violate the proprietary
rights of others, it is possible that such infringement or violation has or may
occur.
In the event that products we sell are deemed to infringe upon the patents
or proprietary rights of others, we could be required to modify our products or
obtain a license for the manufacture and/or sale of such products. There can be
no assurance that, in such an event, we would be able to do so in a timely
manner, upon acceptable terms and conditions, or at all, and the failure to do
any of the foregoing could have a material adverse effect upon our business.
Moreover, there can be no assurance that we will have the financial or other
resources necessary to enforce or defend a patent infringement or proprietary
rights violation action. In addition, if our products or proposed products are
deemed to infringe upon the patents or proprietary rights of others, we could,
under certain circumstances, become liable for damages, which could also have a
material adverse effect on our business.
6
<PAGE> 11
WE DEPEND ON OTHERS FOR COMPONENTS OF OUR PRODUCTS.
We do not own or lease any manufacturing facilities and do not manufacture
any of the component parts for our products. Rather, we purchase all of these
components from unaffiliated suppliers. All of our products are assembled at our
facilities. We believe that at the present time we have sufficient sources of
supply of component parts, and that in the event any existing supplier ceases to
furnish component parts to us, alternative sources are available. However, there
can be no assurance that the future production capacity of our current suppliers
and manufacturers will be sufficient to satisfy our requirements or that
alternate suppliers and manufacturers will be available on commercially
reasonable terms, or at all. Further, there can be no assurance that the
availability of such supplies will continue in the future.
OUR PRODUCTS MAY NOT BE COMPETITIVE.
Along with our subsidiaries, we 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 products.
The document imaging business is competitive and we compete with major
manufacturers such as Sharp, Panasonic and Mita. All of these companies have
substantially more experience, greater sales, as well as greater financial and
distribution resources than do we. We also compete with many independent imaging
software companies, smaller than those mentioned, many of which also have
substantially greater sales, financial resources and experience than us. The
most significant aspects of competition are the quality of products, including
advanced capabilities, and price. There can be no assurance that we can
effectively continue to compete in the future.
Our subsidiary, DJS, is engaged in the highly competitive business of
systems integration, computer services 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.
WE DEPEND ON OUR PRESIDENT.
Our success is largely dependent upon the services of our Chairman of the
Board and President, John T. Botti. The loss of his services would have a
material adverse affect on our business and prospects. We have entered into a
five-year employment agreement with Mr. Botti expiring in June 2000. We haves
obtained, for our benefit, "key man" life insurance in the amount of $1,000,000
on Mr. Botti's life.
WE MAY NOT BE ABLE TO INTEGRATE THE OPERATIONS FROM OUR PREVIOUS AND FUTURE
ACQUISITIONS.
As part of our business strategy, we have completed and expect to enter
into additional business combinations and acquisitions. Acquisition transactions
are accompanied by a number of risks, including, among others:
- The difficulty of assimilating the operations and personnel of the
acquired companies;
- The potential disruption of our ongoing business;
- The inability of management to maximize our financial and strategic
position through the successful incorporation of acquired technology with
our products;
- Expenses associated with the transactions;
- Additional expenses associated with amortization of intangible assets;
- The difficulty of maintaining uniform standards, controls, procedures and
policies;
- The impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
- The potential unknown liabilities associated with acquired businesses.
7
<PAGE> 12
Our failure to adequately address these issues could have a material
adverse effect on our business, results of operations and financial condition.
We may at times become involved in discussions with potential acquisition
candidates. Accordingly, we may use a portion of the proceeds of this offering
which may be realized upon the exercise of the Warrants in connection with the
acquisitions of compatible product lines and businesses. However, there can be
no assurance that we will identify and/or consummate an acquisition, or that
such acquisitions, if completed, will be profitable. Further, there can be no
assurance that our cash flow, will be sufficient to finance any acquisitions.
In addition, should we consummate an acquisition, such acquisition could
have an adverse affect on our liquidity and earnings. We are currently not
considering any acquisition and we cannot give any assurances that any business
acquisition opportunities may be obtained in the future or if obtained, may be
negotiated on terms favorable to us.
WE HAVE NOT PAID DIVIDENDS.
We have not paid any dividends on our Common Stock since our inception and
do not contemplate or anticipate paying any dividends on our Common Stock in the
foreseeable future. Earnings, if any, will be used to finance the development
and expansion of our business.
OUR COMMON STOCK MAY BE DELISTED FROM NASDAQ.
Our Common Stock is listed for trading on the Nasdaq SmallCap Market. In
order to continue to be listed on Nasdaq, however, we must meet certain criteria
including one of the following:
- maintaining $2,000,000 in net tangible assets or
- having a market capitalization of at least $35,000,000 or
- having net income of $500,000.
In addition, the minimum bid price of our Common Stock must be at least $1.00
per share and the market value of the public float must be at least $1,000,000.
As of June 30, 1999, we had net tangible assets of $1,994,000 and did not
satisfy the requirements for market capitalization or net income. As of October
4, 1999, we had net tangible assets of approximately $3,000,000. The failure to
meet Nasdaq maintenance criteria may result in the delisting of the our Common
Stock from Nasdaq, and trading, if any, in our securities would thereafter be
conducted in the non-Nasdaq over-the-counter market. As a result of such
delisting, an investor could find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, our securities.
Although we anticipate that our Common Stock will continue to be listed for
trading on Nasdaq, if the Common Stock were to become delisted from trading on
Nasdaq and the trading price of the Common Stock were to fall below $5.00 per
share on the date the Common Stock was delisted, trading in such securities
would also be subject to the requirements of certain rules promulgated under the
Exchange Act, which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any non-Nasdaq equity security that has a market price of less than
$5.00 per share, subject to certain exceptions). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in our securities, which could
severely limit the market price and liquidity of such securities and the ability
of purchasers to sell their securities in the secondary market.
8
<PAGE> 13
WE HAVE SOLD RESTRICTED SHARES WHICH MAY DEPRESS OUR STOCK PRICE.
Approximately 5,923,472 shares of Common Stock currently outstanding,
including the 4,891,666 Shares being registered for resale pursuant to this
Prospectus, may be deemed "restricted securities" as that term is defined under
the Securities Act of 1933 (the "Act"), and in the future, may be sold pursuant
to a registration under the Act, in compliance with Rule 144 under the Act, or
pursuant to another exemption therefrom. Rule 144 provides, that, in general, a
person holding restricted securities for a period of one year may, every three
months thereafter, sell in brokerage transactions an amount of shares which does
not exceed the greater of one percent of our then outstanding Common Stock or
the average weekly trading volume of the Common Stock during the four calendar
weeks prior to such sale. Rule 144 also permits, under certain circumstances,
the sale of shares without any quantity limitations by a person who is not an
affiliate of ours and was not an affiliate at any time during the 90 day period
prior to sale and who has satisfied a two year holding period. Sales of our
Common Stock by certain present stockholders under Rule 144 may, in the future,
have a depressive effect on the market price of our securities. In addition, the
sale of shares by officers and directors and other affiliated shareholders, may
also have a depressive effect on the market for our securities.
OUR OUTSTANDING OPTIONS AND WARRANTS MAY DEPRESS OUR STOCK PRICE.
As of November 18, 1999, there were outstanding immediately exercisable
stock options to purchase an aggregate of 2,164,870 shares of Common Stock at
exercise prices ranging from $0.34 to $8.00 per share, and outstanding
immediately exercisable warrants to purchase an aggregate of 5,539,708 shares of
Common Stock at exercise prices ranging from $.69 to $8.00 per share, including
the Shares underlying the Series B Warrants and the Private Warrants being
registered for resale pursuant to this Prospectus. In addition, there are
outstanding 50,000 shares of our Series B Preferred Stock, which is convertible
into an aggregate of 666,667 Shares of Common Stock. These Conversion Shares are
also being registered for resale pursuant to this Prospectus. To the extent that
outstanding stock options and warrants are exercised or the Series B Preferred
Stock is converted, dilution to our shareholders will occur. Moreover, the terms
upon which we will be able to obtain additional equity capital may be adversely
affected, since the holders of the outstanding options and warrants can be
expected to exercise or convert them at a time when we would, in all likelihood,
be able to obtain any needed capital on terms more favorable to us than the
exercise and conversion terms provided by the outstanding options, warrants and
preferred stock.
OUR ABILITY TO OFFSET FUTURE TAXABLE INCOME MAY BE LIMITED.
At June 30, 1999, we had net operating loss carryforwards ("NOLS") for
federal income tax purposes of approximately $13,000,000 available to offset
future taxable income. Under Section 382 of the Internal Revenue Code of 1986,
as amended, utilization of prior NOLS is limited after an ownership change, as
defined in Section 382, to an annual amount equal to the value of the
corporation's outstanding stock immediately before the date of the ownership
change multiplied by the federal long-term exempt tax rate. Use of our NOLS
could also be limited as a result of grants of stock options under stock option
plans and other events. In the event we achieve profitable operations, any
significant limitation on the utilization of NOLS would have the effect of
increasing our current tax liability.
THE HOLDERS OF OUR OUTSTANDING SERIES A PREFERRED STOCK CONTROL OUR BOARD OF
DIRECTORS.
Our Certificate of Incorporation authorizes our Board of Directors to issue
up to 5,000,000 shares of Preferred Stock, from time to time, in one or more
series. The Board of Directors is authorized, without further approval of the
stockholders, to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, and any other
rights, preferences, privileges and restrictions applicable to each new series
of Preferred Stock. We previously established 200 shares of Series A Preferred
Stock which are owned by John Botti and Ira Whitman, our founders and officers.
The Series A Preferred Stock entitles the holders to elect a majority of the
Board of Directors. The existence of such stock could adversely affect the
voting power of the holders of Common Stock and, under certain circumstances,
make it more difficult for a third party to gain control of us, discourage bids
for the Common Stock at a premium, or otherwise adversely affect the market
price of the Common Stock.
9
<PAGE> 14
USE OF PROCEEDS
Some of the Shares being registered will be acquired from us upon the
exercise of currently outstanding Series B and Private Warrants. We would
receive $8,245,147 in proceeds if all the Series B and Private Warrants are
exercised after the effective date of this registration statement. We plan to
use all proceeds generated from the exercise of warrants for working capital and
general corporate purposes. We will receive none of the proceeds from the sale
of the Shares or Series B Warrants.
10
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following analysis of our results of operations and financial condition
should be read in conjunction with our Financial Statements, including the notes
thereto, contained elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Fiscal Year 1999 Compared to Fiscal Year 1998
We realized a consolidated net loss of $3,166,488 ($.43 per share) compared
to a consolidated net loss of $5,464,059 ($.74 per share) for the fiscal years
ended June 30, 1999 and 1998, respectively. Consolidated net sales totaled
$17,094,765 and $33,755,625 for the fiscal years ended June 30, 1999 and 1998,
respectively. During the fourth quarter of 1999, we recorded an adjustment
increasing the net loss for sales made with the right of return by approximately
$1,350,000 for which income will not be recognized until sale of the product by
the customer. Additionally, a reserve of approximately $186,000 was recorded for
claims arising from the sale of SST.
The consolidated sales decrease is due to the sale of one of our
subsidiaries, System Solutions Technology, Inc. in June 1998 and reductions in
DocStar sales. SST had sales of $13,915,029 for the fiscal year ended June 30,
1998. Bitwise sales of the DocStar product line were $7,674,451 and $9,002,203
for fiscal years ended June 30, 1999 and 1998, respectively. In addition, we had
returnable sales of $3,829,052 which were not recognized as sales. These
returnable sales will be recognized when the customers accept the sales as
final. Sales by our subsidiary DJS Marketing Group, Inc., were $9,536,994 and
$11,219,497 for the fiscal years ended June 30, 1999 and 1998, respectively.
Our net loss improvement is due to a combination of a reduction in Bitwise
operating costs and increase in profits from DJS. DJS realized a reduction in
sales, however profits increased due to an increase in gross profit margins as
DJS shifted its business from hardware sales to a business model that produced
more service revenue such as network and Internet services in addition to
hardware sales. DJS was also able to reduce operating costs.
Consolidated gross profit for the fiscal years ended June 30, 1999 and 1998
was $5,615,468 and $8,092,566, respectively. This reduction is mainly due to the
sale of SST in June 1998. The consolidated profit margin was 32.8% and 24.0% for
the fiscal years ended June 30, 1999 and 1998, respectively. Gross profit margin
is defined as gross profit as a percentage of sales. The increase in gross
profit margin is due to the sale of SST. Bitwise and its DocStar product has
significantly higher gross profit margins than products and services provided by
both SST and DJS.
Selling, general and administrative expenses (S,G&A) consist of all our
other expenses except product development costs and interest. S,G&A expenses
amounted to $7,765,234 and $12,251,515 for the fiscal years ended June 30, 1999
and 1998, respectively. S,G&A expenses decreased as a result of the sale of SST,
which incurred S,G&A expenses of $2,891,409 for the fiscal year ended June 30,
1998. The remainder of the decrease is due to cost cutting by Bitwise and DJS.
As a percentage of sales, S,G&A costs increased from 36.3% in 1998 to 45.4%
in 1999. This increase is due to the sale of SST. Bitwise historically has had
higher S,G&A expenses than any of the subsidiary companies because of its
organization structure which includes sales, training and service personnel
stationed around the country to serve the national dealer network. This has
resulted in high payroll and travel and living expenses. In addition, Bitwise
incurs significant advertising and marketing costs to market DocStar nationally.
The subsidiaries typically sell in a localized area and only employ personnel in
their local region and incur minimal advertising and marketing costs.
Interest expense totaled $630,396 and $939,595 for fiscal years ended June
30, 1999 and 1998, respectively. The decrease is due to the sale of SST which
incurred $202,198 of interest expense during the
11
<PAGE> 16
fiscal year ended June 30, 1998. The decrease was also due to lower borrowing
levels for DJS offset by higher borrowing levels for Bitwise. Interest rates
decreased during the fiscal year ended June 30, 1999 compared to the prior year.
Product development expenses, excluding capitalized costs and including
amortization of capitalized costs relate to software development for the DocStar
product line incurred by Bitwise. These costs increased from $230,652 to
$248,801 for the fiscal years ended June 30, 1998 and 1999, respectively.
Bitwise has a policy of capitalizing qualified software development costs and
amortizing those costs over three years as product development expense.
Fiscal Year 1998 Compared to Fiscal Year 1997
We realized a consolidated net loss of $5,464,059, $.74 per share compared
to $2,143,159, $.30 per share for the years ended June 30,1998 and 1997,
respectively. Consolidated net sales totaled $33,755,625 and $53,109,469 for the
years ended June 30,1998 and 1997, respectively. During the fourth quarter, we
recognized some unusual expenses, including the loss on the sale of SST
($256,000), an increase in the reserves for obsolete inventory ($588,000), and
an increase in the allowance for bad debts ($170,000). In addition, net sales
for the fourth quarter 1998 aggregated $5,708,000, approximately $6,600,000
below net sales for the fourth quarter 1997.
The sales decrease is due to the sale of ESI in April 1997. During the
fiscal year ended June 30,1997 ESI had sales of $17,156,187. The sales decrease
is offset somewhat by the growth in our DocStar product line. DocStar sales
totaled $9,002,203 for the year ended June 30, 1998 compared to $7,792,125 for
the prior year.
Gross profit for the fiscal year ended June 30,1998 was $8,092,566 compared
to $10,006,736 for the prior year. The gross profit margin was 24.0% and 18.8%
for years ended June 30,1998 and 1997, respectively. The gross profit margin
increased in fiscal 1998 compared to the prior year due to the growth of our
DocStar product line which has significantly higher margins than our other
product lines. Additionally, the sale of ESI resulted in a lower gross profit.
Selling, general and administrative expenses ("S,G&A") consist of all our
other expenses except product development costs and interest. S,G&A expenses
amounted to $12,251,515 and $11,834,173 for the years ended June 30, 1998 and
1997, respectively. S,G&A expenses increased mainly due to increased selling and
marketing expenses for the DocStar product line. The increase was offset
somewhat by the sale of ESI. There were also increases in S,G&A expenses in our
other divisions as well.
As a percentage of sales, S,G&A costs increased from 22.3% to 36.3% from
fiscal 1997 to fiscal 1998. Our DocStar product line has not yet achieved
sufficient sales volume to cover all S,G&A expenses and thereby generate a
profit.
Interest expenses totaled $939,595 and $444,918 for the years ended June
30,1998 and 1997, respectively. The increase in interest costs is due to the
issuance of $4 million of convertible notes in August 1997. The increase is also
due to increased borrowing on our lines of credit during the year. Interest
rates increased slightly compared to the prior year.
Product development expenses relate primarily to software development of
our DocStar product line and increased from $176,539 to $230,652 for the year
ended June 30, 1998 compared to the prior year. We have a policy of capitalizing
software development costs and amortizing those costs over three years as
product development expense.
LIQUIDITY AND CAPITAL RESOURCES
Our 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, 1999 totaled approximately $4,947,000, net of discounts; $3,975,000 of
this amount, undiscounted, relates to convertible notes payable which mature on
August 11, 2002 and $1,210,712 relates to a mortgage loan.
12
<PAGE> 17
Our subsidiary, DJS may utilize a line of credit facility totaling
$625,000, of which approximately $256,000 was available at June 30, 1999. This
facility is a wholesale inventory credit facility which is supported by a
guaranty furnished by one of DJS's vendors and expressly limited for purchase
from this vendor. This line is non-interest bearing and payment terms are net
40. The line is collateralized by all assets of DJS.
Our other line of credit for $1,500,000 was terminated by our lender as a
result of our not being in compliance with all of our loan covenants. At June
30, 1999 the balance was approximately $1,300,000. Subsequent to year end, we
entered into an agreement with the lender to extend repayment of the outstanding
balance until September 30, 2000. We were required to make a partial payment to
the lender of $600,000 on October 4, 1999 for the repayment of the remaining
balance from the proceeds of its recently completed private offering. See
"Recently Completed Private Offering." The remaining balance is being paid in
weekly installments over one year with interest at prime plus 4%. Our President,
John Botti, also agreed to guarantee repayment of the loan balance. The line of
credit is secured by our account receivables and inventory, and does not include
its new office building which is secured by a mortgage. We are attempting to
locate a new lender for our inventory financing. There can be no assurance that
we will be successful in its efforts to obtain alternative inventory financing,
and the failure to obtain inventory financing may have an adverse material
effect upon our operations.
In August 1997, we concluded an offering with an offshore bank for
$4,000,000 in gross proceeds ($3,600,000 net proceeds after expenses) in the
form of unsecured, convertible, bearer notes, payable in its entirety on August
11, 2002, with 400,000 detachable Common Stock Purchase Warrants. The $650,411
value of the warrants has been recorded as discount on the debt and is being
amortized over the term of the debt. The Notes accrue interest at 8%, payable
semiannually in arrears. The holder of $25,000 principal amount or more may
convert the notes into common stock commencing November 1, 1997 until August 11,
2002 at the rate of $3.25 per share. As of June 30, 1999, 7,692 common shares
were issued pursuant to the conversion of $25,000 of convertible debt into
common stock. The principal balance of this debt at June 30, 1999 totaled
approximately $3,570,000 net of discounts. We did not make its interest payment
in the amount of approximately $159,000 to the debtholders which was due on
September 1, 1999 until October 1, 1999 but no default has been declared.
In June 1998, we sold SST for $4,000,000 in a stock sale. We received
approximately $3,600,000 in cash and approximately $400,000 worth of inventory
and receivables. In 1999, we received a claim for indemnity from the purchaser
of SST under the terms of the agreement. We have agreed to pay $341,000 over the
next fifteen months to settle this claim.
Property, plant and equipment expenditures totaled $2,402,661 for the year
ended June 30, 1999. There were no purchase commitments outstanding. We
completed the construction of a new office/production facility for approximately
$2,300,000 in Schenectady, N.Y. We were awarded a grant totaling $1,000,000 from
an agency of New York State to be used towards the construction of the facility.
The funding is being received in stages as costs are incurred and submitted for
reimbursement. The grant stipulates that we are obligated to achieve certain
annual employment levels at the new site between January 1, 2001 and January 1,
2005 or some or all other grant will have to be repaid. As of June 30, 1999,
$142,189 had been received and is recorded as deferred revenue. The remainder of
the financing, $1,400,000, was provided by a local financial institution in the
form of a mortgage loan.
During the fiscal year ended June 30, 1999, we incurred a net loss of
$3,166,488, and cash used by operating activities totaled $1,864,509. Our
available cash balance at June 30, 1999 totaled approximately $549,000. At
September 30, 1999 our available cash balance was approximately $415,000. One of
our lines of credit has been terminated by its lender and we are currently
paying off the outstanding balance. To date, we have been largely dependent on
our ability to sell additional shares of our common stock or other financing to
fund our operating deficits. Under our current operating plan to obtain a
national acceptance of the DocStar product line and to launch the Authentidate
product line, our ability to improve operating cash flow is highly dependent on
the market acceptance of its products and our ability to reduce overhead costs.
If we are unable to attain projected sales levels for DocStar and other
products, or is unable to implement cost reduction
13
<PAGE> 18
strategies, 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.
RECENTLY COMPLETED PRIVATE OFFERING
On October 4, 1999, we closed two concurrent private offerings. In the
first offering, we sold 740,000 units at an aggregate offering price of
$740,000. Each unit consisted of two shares of common stock and two Series B
Common Stock Purchase Warrants. The Series B Warrants entitle the holder to
purchase one share of common stock at an exercise price of $1.375 per share
during the offering period commencing on the date of issuance and terminating
five years thereafter.
The Series B Warrants are redeemable at any time commencing one year after
issuance at our option with not less than 30 nor more than 60 days written
notice to the registered holders at a redemption price of $.05 per warrant
provided; (1) The public sale of the shares of common stock issuable upon
exercise of the Series B warrants are covered by a tentative registration
statement; and (2) During each of the immediately preceding 20 consecutive
trading days ending within 10 days of the date of the notice of redemption, the
closing bid price of our common stock is at least $3.25 per share.
In the second offering, we sold 50,000 shares of a newly created class of
Series B convertible cumulative Preferred Stock. The Series B Preferred Stock
was sold at $25.00 per share for an aggregate offering price of $1,250,000. The
following terms apply to the Series B Preferred Stock:
- - DIVIDENDS Dividends on the Series B Preferred Stock are
payable at the rate of 10% per annum,
semi-annually in cash.
- - CONVERSION Each share of Series B Preferred Stock is
convertible into the number of shares of our
common stock as shall equal $25.00 divided by
the conversion price of $1.875 per share,
subject to adjustment under certain
circumstances.
- - ADJUSTMENT TO CONVERSION
PRICE Commencing three years after the closing, the
conversion price shall be the lower of $1.875
per share or the average of the closing bid and
asked price of our common stock for the 10
consecutive trading days immediately ending one
trading day prior to the notice of the date of
conversion; provided, however, that the holders
are not entitled to convert more than 20% of
the Series B preferred shares held by such
holder on the third anniversary of the date of
issuance per month.
- - REDEMPTION The Series B Preferred Stock is redeemable at
any time commencing one year after issuance or
not less than 30 nor more than 60 days written
notice at a redemption price of $25 plus
accrued and unpaid dividends provided;
- the public sale of the shares of common
stock issuable upon conversion of the
Series B Preferred Stock are covered by
an effective registration statement or
are otherwise exempt from registration;
and
- during the immediately preceding 20
consecutive trading days ending within
10 days of the date of the notice of
redemption, the closing bid price of our
Common Stock is not less than $3.75 per
share.
Commencing 34 months after the Closing, the
Series B Preferred Stock is redeemable at our
option without regard to the closing price of
our Common Stock.
14
<PAGE> 19
We also created a new subsidiary, Authentidate.com, Inc. through which we
will market our new Internet service which allows for the verification of the
authenticity of digital images. In connection with the above offerings, the
purchasers were granted the right to purchase 20% of Authentidate.com, Inc. for
$100,000. In addition, combined with the offering of common stock in
Authentidate, we are offering an aggregate of 999,999 Series C Common Stock
Purchase Warrants.
The Series C Warrants are redeemable at any time commencing six months
after issuance, on not less than 30 nor more than 60 days written notice to
registered holders at a redemption price equal to $.05 per Warrant, provided (1)
the public sale of the shares of common stock issuable upon exercise of the
Series C Warrants are covered by an effective registration statement or are
otherwise exempt from registration; and (2) during each of the immediately
preceding 20 consecutive trading days ending within 10 days of the date of the
notice of redemption, the closing bid price of our common stock is not less than
120% of the current exercise price of the Series C Warrants.
The Series C Warrants were also divided into three equal classes of
333,3333 each to provide for varying exercise prices. The exercise price of the
Series C Warrants is as follows:
<TABLE>
<S> <C>
Class I $1.50 per share of Common Stock, increasing (i) $.75 per
share 30 days after the effective date of the registration
statement covering the underlying shares; (ii) an additional
$.75 per share 7 months after the effective date; and (iii)
an additional $.75 per share 13 months after the effective
date, subject to adjustment for stock splits and corporate
reorganizations.
Class II $1.50 per share of Common Stock, increasing (i) $.75 per
share 60 days after the effective date of the registration
statement; (ii) an additional $.75 per share 7 months after
the effective date; and (iii) an additional $.75 per share
13 months after the effective date, subject to adjustment
for stock splits and corporate reorganizations.
Class III $1.50 per share of Common Stock, increasing (i) $.75 per
share 90 days after the effective date of the registration
statement; (ii) an additional $.75 per share 7 months after
the effective date; and (iii) an additional $.75 per share
13 months after the effective date, subject to adjustment
for stock splits and corporate reorganizations.
</TABLE>
We currently received gross proceeds of approximately $1,990,000 and will
receive an additional $100,000 upon the closing of the offering of Authentidate
common stock and our Series C Warrants.
We have utilized the proceeds of the three offerings as follows:
- approximately $600,000 has been utilized to repay a portion of our line
of credit;
- approximately $400,000 will be utilized to develop the Authentidate.com
business;
- approximately $160,000 was utilized to make a past due interest payment
on our outstanding 8% convertible notes; and
- the remainder has been reserved for working capital.
We incurred offering expenses of approximately $60,000.
EFFECTS OF INFLATION AND CHANGING PRICES
The impact of general inflation on our operations has not been significant
to date and we believe inflation will continue to have an insignificant impact
on our operations. However, price deflation in the major categories of
components we purchase has been substantial and is anticipated to continue
through fiscal 2000. Typically, new components such as new generations of
microprocessors and new optical disk drive technologies etc. are introduced at
premium prices, by its vendors. During this period, we earn lower margins on our
products. As the life cycle progresses competitive pressures could force vendor
prices down and thus improve our profit margins. We do not believe that
competitive pressures will require us to lower our DocStar
15
<PAGE> 20
selling price. Because much of DJS's business is service-related, price
deflation has less of an impact on DJS's profits.
NEW ACCOUNTING STANDARDS
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 became
effective for annual and interim financial statements beginning the fiscal year
ending June 30, 1999, and will require reclassifications of prior periods. We
had no other comprehensive income to report for the years ended June 30, 1999
and 1998.
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 became effective for annual financial statements beginning the
fiscal year ending June 30, 1999, and for interim periods beginning the fiscal
year ending 2000.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes a new model for accounting for derivatives and hedging activities.
This Statement is effective for fiscal years beginning June 30, 2000. The
adoption of this standard is not expected to have a significant impact on our
consolidated financial statements.
YEAR 2000 COMPLIANCE
The Year 2000 creates risks for us if the computers, software and other
equipment utilizing microprocessors do not correctly recognize and process date
information beyond the year 1999. We are addressing this issue by performing a
survey on all of our desktops and servers to ensure Year 2000 compliance. The
survey concluded that all of our in-house work systems use hardware that is that
100% Year 2000 compliant. Most of our software and operating systems are
Microsoft(TM) based and are believed to be Year 2000 compliant. Our product
hardware is fully Year 2000 compliant and the software is Year 2000 compliant in
the latest version 2.30. Because the DocStar System is a relatively new system,
it was designed to handle a four (4) digit year. In addition, we are in the
process of surveying our critical vendors for Year 2000 compliance. However, we
do not believe there would be significant difficulties finding alternate supply
services should the need arise.
Achieving Year 2000 compliance is dependant on many factors, some of which
are not completely within our control. If our internal systems or the internal
systems of the significant vendors or suppliers fail to achieve Year 2000
compliance, our business and our results of operations could be adversely
affected.
16
<PAGE> 21
DESCRIPTION OF BUSINESS
INTRODUCTION
Bitwise, and its wholly-owned subsidiary DJS Marketing Group, Inc. are
engaged in the manufacture and distribution of document imaging systems,
computer systems and related peripheral equipment, components, and accessories
and network and internet services.
We have also recently established a majority owned subsidiary named
Authentidate.Com LLC to engage in a new business line of providing end users
with a service which will:
- accept and store e-mail from networks and personal computers throughout
the world and from different operating systems via the Internet;
- allow for confirmation of acceptance of all e-mails sent to the system;
- allow for a secure payment system, including use of credit cards; and
- produce confirmations of receipt of e-mail.
In June 1998, we sold a subsidiary, System Solutions Technology, Inc.,
which had been acquired by the Company in August 1994. SST is a value added
distributor of advanced technology industrial computers and computer peripheral.
In April 1997, we sold a subsidiary, Electrograph Systems, Inc. ESI had been
acquired in August 1994 and is a value-added distributor of monitors and other
microcomputer peripherals, components and accessories. Our financial statements
and discussion under the heading "Management Discussion and Analysis" includes
the results of operations for both ESI and SST to the date of their divestiture.
In March 1996, we acquired DJS, 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. The financial statements include operations
from the date of the acquisition of DJS.
We were organized in August 1985 and reincorporated under the laws of the
state of Delaware in May 1992. Our executive offices are located at 2165
Technology Drive, Schenectady, New York 12308, and our telephone number is (518)
346-7799.
GENERAL BUSINESS DEVELOPMENTS DURING THE LAST FISCAL YEAR
In June 1998, we sold SST to United Strategies, Inc. for $4,000,000. We
received approximately $3,600,000 in cash and approximately $400,000 worth of
SST inventory and receivables. The transaction was in the form of a stock
purchase. During the year ended June 30, 1999, we received certain claims from
USI for indemnification under the agreements governing the sale. We agreed to
pay USI $341,000 to settle these claims to be paid over 15 months accruing
interest of 6%. We realized a loss of approximately $597,000 on the sale.
BITWISE'S PRODUCTS
Document Imaging and Management
In January 1996, Bitwise, on a national level, introduced its document
imaging management system under the tradename DocStar. Our DocStar system
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. We believe that
a broad spectrum of businesses and governmental agencies experience the problem
of storage, management and security of paper documents. The DocStar product line
is intended to provide a cost effective method of reducing the space necessary
to store documents while granting a user the ability to instantly retrieve
documents.
The operation of a document management system is similar to the operation
of a facsimile machine. Documents are fed into an optical scanner that reads the
documents and stores the information on one of
17
<PAGE> 22
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.
We purchase scanners, laser printers and other essential hardware from
unaffiliated third parties and manufacture the PC's for the system.
The software utilized in DocStar consists of various versions of existing
software from other developers, as well as software which we developed. We offer
the DocStar System in four models: System 15, System 25X2, System 50, and the
DocStar DCL. The DocStar System 15 is the base model. The Systems 25X2 and 50
offer faster advanced 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 DCL
connects DocStar electronic imaging capabilities with the network scanning and
printing functions of Xerox Corporation's Document Centre digital copiers.
We market the document management system under the tradename DocStar
through a national dealer network. We own one dealership in the Albany, New York
region, which also serves as a test market for new applications and software.
BACKLOG
We normally ship products within 5 days after receipt of an order and
typically have no more than two weeks of sales in backlog at any time. The
amount of backlog fluctuates but usually is not material.
RESEARCH AND DEVELOPMENT
The market for our 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. Our ability to be competitive depends upon our ability to
anticipate and effectively react to technological change, as well as the
application requirements of our customers.
Since inception, we have devoted efforts to research and development
activities in an effort to improve our current products and introduce new
products. Current development efforts are directed toward improving ease of use,
adding system enhancements and increasing performance. Product development
expense was $248,801 and $230,652 for fiscal years 1999 and 1998, respectively.
We will continue to improve our document imaging products in an effort to
satisfy the needs of an ever changing marketplace.
QUALITY CONTROL AND SERVICE
We administer quality control at each of the three levels of the production
process. First, components considered for use in standard systems are tested for
compatibility by the research staff. Second, incoming components receive a
physical damage inspection on receipt and again at the start of the production
process. Each memory module is electronically tested prior to assembly. Each
complete unit is then functionally tested at the end of the assembly process to
demonstrate that all components are engaged and fully operational.
Third, each complete unit is "burned-in" 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
18
<PAGE> 23
operation, management believes that the burn-in process reveals nearly all
faulty components before they reach the end user.
Our dealers provide service to the end users. All dealers receive service
training from the national service staff. We provide the dealer with replacement
parts free of charge for 13 months after date of shipment. Our vendors provide a
similar warranty for failed components. We offer liberal telephone support
service to our dealers.
MANUFACTURING AND SUPPLIERS
Our products have been designed to enable a variety of system
configurations to be assembled from a few basic modules. Our manufacturing
operations consist primarily of the assembly, test and quality control of all
parts, components, subassemblies and systems.
We use standard parts and components in its existing product lines which we
purchase from unaffiliated third party suppliers. We, however, do not have any
contractual arrangements with our current suppliers. Although we have never
experienced material delays in deliveries from our suppliers, shortages of
component parts could occur and delay or interrupt our manufacture and delivery
of products and adversely affect our operating results. We believe adequate
alternative suppliers are available to mitigate the potentially adverse effect
of supply interruptions, but there can be no assurance that such components will
be available as and when needed.
All peripheral computer products available through us, such as monitors and
scanner/printer units, are manufactured by third parties. We only assemble the
computer which is part of the DocStar system and the optical disk tower option.
PATENTS AND TRADEMARKS
We have one patent pending and have registered the logo "BitWise Designs"
and Bitwise's associated trademarks, "DocStar" and "Authentidate." The patent
pending is for innovative technology that can verify the authenticity of digital
images by employing a secure clock to stamp the date and time on each image
captured. The product name is Authentidate(TM) Image Marking. No assurance can
be given that registration will be effective to protect our trademarks. We
believe the tradenames are material to our business.
SALES AND MARKETING
Our products are primarily being distributed through a national dealer
network and through a dealership which we own in our local market area. We
believe that we has achieved a national sales presence through national
advertising, favorable reviews in industry publications, newspapers, magazines,
press releases and other periodicals utilized by the document imaging industry.
Moreover, we offer direct mail and tele-marketing services to selected qualified
dealers in their market area. Management intends to increase the number of
dealer locations for the current fiscal year, although there can be no assurance
that we will be successful in such efforts.
Our products are usually 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. We currently
employ five regional sales directors, one district sales manager and three
direct sales managers, to cover the significant markets of the country.
COMPETITION
The market for our products is rapidly changing and highly competitive. The
competition is direct (i.e., companies that make similar products) and indirect
(i.e., companies that participate in the market, but do not directly compete
with us). We compete with major document imaging manufacturers such as
Panasonic, Sharp and Mita. Many of our current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
resources, as well as a larger installed base, than do we.
19
<PAGE> 24
EMPLOYEES
We employ 40 full-time employees including our executive officers. No
employees are covered by a collective bargaining agreement, and we believe our
employee relations are satisfactory.
FORMATION OF NEW AUTHENTIDATE BUSINESS LINE
We have recently established a majority owned subsidiary named
Authentidate.Com LLC to engage in a new business line of providing end users
with a service which will:
- accept and store e-mail from networks and personal computers throughout
the world and from different operating systems via the Internet;
- allow for confirmation of acceptance of all e-mails sent to the system;
- allow for a secure payment system, including use of credit cards; and
- produce confirmations of receipt of e-mail.
We anticipate that Authentidate will commence offering services through its
Authentidate.Com Internet site within the next 45 to 90 days. We intend to
market the Authentidate services through traditional print and media advertising
and banner advertising and links on other Internet provider home pages. To date,
Authentidate's operations have been limited to developing the technology for its
services and home page.
DJS PRODUCTS AND SERVICES
DJS (d/b/a "Computer Professionals") is a network and systems integrator of
computer and peripheral products to a variety of customers, including
corporations, schools, government agencies, manufacturers and distributors. DJS
is the largest systems integrator in the Albany, New York region.
DJS provides network integration, Internet/Intranet development, accounting
solutions, service, consultation, document management and video conferences. DJS
also services the products it sells by employing factory trained computer
technicians and network engineers.
PRODUCTS
Network Integration
DJS' network integration group designs, implements, installs, manages and
supports enterprise networks with products from Novell, Microsoft, UNIX,
Tricord, Synoptics, Compaq, Cisco and others.
DJS designs customized solutions for its clients with precise objectives
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 to various
end-users such as distributors, manufacturers and wholesalers. DJS analyzes each
particular client's needs and custom designs an accounting system to satisfy
these needs.
20
<PAGE> 25
Service and Consultation
DJS's service department is authorized to repair and maintain all major
brand products sold by DJS, including warranty and post-warranty equipment. DJS
generally guarantees a four (4) hour response time for all service calls, with
an average resolution time of next day.
DJS's engineers also provide complete system configuration services, which
includes 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 and all malfunctioning units are
eliminated.
Document Management
DJS also offers document imaging services which it believes is 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 Biwise's
DocStar line.
SALES AND MARKETING
DJS markets its products and services throughout New York State, parts of
Vermont and Massachusetts. DJS intends to expand its national and international
sales and marketing departments. Clients include corporations, small office/home
office owners, schools, government agencies, 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 in the Albany, New York
region offers the extensive services that DJS offers, competitors in computer
sales, service and support in general, include Computerland, Computers Etc.,
CompUSA, Entex and Ameridata.
EMPLOYEES
DJS has 34 full-time staff members, including two (2) executive officers.
None of the employees of DJS are represented by a collective bargaining
agreement. DJS believes that its employee relations are good.
DESCRIPTION OF PROPERTIES
Our executive offices and production facilities are located at 2165
Technology Drive, Schenectady, New York 12308. We own the 26,000 square foot
building.
A New York State agency awarded us a $1,000,000 grant to build a this
facility, which was recently completed. The grant is subject to a requirement
regarding our employment practices which will be reviewed in February 2001. We
expect to be in compliance with this requirement.
GOVERNMENT REGULATION
Compliance with laws and regulations governing our business can be
complicated, expensive, and time-consuming and may require significant
managerial and legal supervision. Failure to comply with such laws and
regulations could have a materially adverse effect on our business. Further, any
changes in any of these laws and regulations could materially and adversely
affect our business. There is no assurance that we will be able to secure on a
timely basis, or at all, necessary regulatory approvals in the future.
Our suppliers must comply with federal, state and local environmental laws
and regulations relating to air quality, waste management, water quality and
related land use matters. They may need to maintain various permits concerning
waste handling and discharges of waste water. We believe that our suppliers are
in compliance with all required permits relating to environmental regulations.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings which could have a material
adverse effect on our operations.
21
<PAGE> 26
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS
MANAGEMENT
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ---- --- ------
<S> <C> <C>
John T. Botti................................ 35 President, Chief Executive Officer and Chairman
of the Board
Ira C. Whitman............................... 36 Senior Vice-President -- Research and
Development, Secretary and Director
Steven A. Kriegsman.......................... 56 Director
J. Edward Sheridan........................... 62 Director
Charles C. Johnston.......................... 63 Director
Nicholas Themelis............................ 36 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 of our officers or directors.
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 for a period
of three years from the date of the closing of the private placement. In
December, 1997, Whale selected Steven Kriegsman as its representative on the
Board and Mr. Kriegsman continues to serve on the Board.
In connection with the Company's recent private placement which closed on
October 4, 1999, the Board of Directors appointed Nicholas Themelis to serve as
a director to fill a vacancy on the Board.
JOHN T. BOTTI, a co-founder, has served as President, Chief Executive
Officer and Director since our incorporation 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 our Senior Vice-President of Research and
Development and one of our Directors since our incorporation in August 1985. Mr.
Whitman graduated from RPI in 1984 with a B.S. in Computer and Systems
Engineering and in 1990 he earned a Masters 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 of 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.
STEVEN A. KRIEGSMAN joined the Board of Directors in December, 1997. In
1989, Mr. Kriegsman founded The Kriegsman Group, a private financial consulting
services firm and has served as its President since such time. In 1981 Mr.
Kriegsman co-founded ANA Financial Services, Inc., a holding company engaged,
through its subsidiaries, in securities brokerage, financial planning and
investment advisory services and franchising of certified public accountants.
Mr. Kriegsman served as Chairman and Chief Executive Officer of ANA Financial
until 1989. Mr. Kriegsman is a former Certified Public Accountant. Mr. Kriegsman
holds a B.S. from New York University.
CHARLES C. JOHNSTON joined the Board of Directors in December, 1997. Mr.
Johnston has been the Chairman of Ventex Technology, Inc., a privately-held neon
light transformer company since July 1993. Mr. Johnston has also served as
Chairman of AFD Technologies, a private corporation since 1994 and J&C
22
<PAGE> 27
Resources a private corporation, a position that he has held since 1987. Mr.
Johnston serves as a Trustee of Worcester Polytechnic Institute ("WPI") and
earned his B.S. degree from WPI in 1957.
NICHOLAS THEMELIS joined the Board of Directors in October, 1999. Mr
Themelis has been a Senior Vice President of Lehman Brothers since 1991 and has
worked out of its New York, Hong Kong and Tokyo offices. He is currently
developing the firm's E-commerce technology group and is responsible for
developing technical strategy and system architecture. While working in Asia at
Lehman Brothers, he founded the firm's Internet committee in Asia. Mr. Themelis
also co-founded Nutrisserie, Inc in 1991, a retail health food store. Prior to
that, in 1986, Mr. Themelis was a co-founder of Bentley, Themelis and
Associates, a software consulting company.
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
and Charles Johnston. The Audit Committee acts to: (i) acquire a complete
understanding of our audit functions; (ii) review with management our finances,
financial condition and interim financial statements; (iii) review with our
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,
1999, the Audit Committee met on one occasion.
Executive Committee. The members of the Executive Committee are John Botti
and Ira C. Whitman. 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 our securities; (v)
authorize the acquisition of any major assets or business or change our
business; 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 convened. During Fiscal 1999,
the Executive Committee did not deem it necessary to meet.
Compensation Committee. The members of the Compensation Committee are
Steven Kriegsman and J. Edward Sheridan. The Compensation Committee functions
include administration of our 1992 Employee Stock Option Plan and Non-Executive
Director Stock Option Plan and negotiation and review of all employment
agreements with our executive officers. During the fiscal year ended June 30,
1999, the Compensation Committee held one meeting.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended June 30, 1999, our Board of Directors met on
three occasions and voted by unanimous written consent on two occasions. No
member of the Board of Directors attended less than 50% 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
our Directors and officers, and persons who own, directly or indirectly, more
than 10% of a registered class of our equity securities, to file with the
Securities and Exchange Commission reports of ownership and reports of changes
in ownership of our common stock and other equity securities. Officers,
directors and greater than 10% shareholders are required by SEC regulations to
furnish us with copies of all Section 16(a) forms that they file. Based solely
on review of the copies of such reports that we have received, we believe that
all Section 16(a) filing requirements applicable to officers, directors and 10%
shareholders were complied with during the 1999 fiscal year.
23
<PAGE> 28
SIGNIFICANT EMPLOYEES
DENNIS H. BUNT has been our Chief Financial Officer 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 KPMG Peat Marwick 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.
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.
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, and which we paid during the years ended June 30, 1999, 1998 and
1997 to the named executive officers.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
--------------------------
NO. OF
OTHER RESTRICTED SECURITIES
FISCAL ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS
- --------------------------- ------ -------- ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
John Botti................. 1999 $132,794(1) 0(1) $1,702(2) 0(3) 0
Chairman, President and 1998 $121,000 0 $1,702 0 0
Chief Executive Officer 1997 $110,000 0 $1,415 0 0
</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 our pre-tax profits, which criteria was not met in 1999, 1998
or 1997, therefore, no bonuses were issued. Additionally, Mr. Botti is
entitled to receive approximately $132,000 in salary per year. See
"Employment Agreements."
(2) Includes: (i) for 1999, an automobile and expenses of $1,500 and the payment
of premiums on term life insurance policy of $202; (ii) for 1998, an
automobile and expenses of $1,500 and the payment of premiums on a term life
insurance policy of $202; and (iii) for 1997, an automobile and expenses of
$1,213 and the payment of premiums on a term life insurance policy of $202.
(3) No restricted stock awards were granted to Mr. Botti in fiscal 1999. Mr.
Botti, however, owned 233,853 restricted shares of our Common Stock on June
30, 1999, the market value of which was approximately $226,604 on such date,
without giving effect to the diminution in value attributed to the
restriction on such shares.
24
<PAGE> 29
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE ALTERNATIVE TO
VALUE AT (F) AND (G)
ASSUMED ANNUAL GRANT DATE
PERCENT OF INDIVIDUAL GRANTS RATES OF VALUE
TOTAL ------------------------ STOCK PRICE --------------
NUMBER OF OPTION/SARS APPRECIATION
SECURITIES GRANTED TO FOR
UNDERLYING EMPLOYEES EXERCISE OF OPTION TERM GRANT DATE
OPTION/SARS IN FISCAL BASE PRICE EXPIRATION -------------- PRESENT
NAME GRANTED(#) YEAR (S/SH) DATE 5%($) 10%($) VALUE ($)
(a) (b) (c) (d) (e) (f) (g) (h)
- ---- ----------- ----------- ----------- ---------- ----- ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
John Botti............... 0 N/A N/A N/A 0 0
</TABLE>
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, 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AS OF IN-THE-MONEY OPTIONS
ACQUIRED VALUE JUNE 30, 1999 AT JUNE 30, 1999(1)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
John T. Botti.............. 0 -- 835,185/0 6,406/0
</TABLE>
- ---------------
(1) Based upon the closing bid price ($.969 per share) of our Common Stock on
June 30, 1999 less the exercise price for the aggregate number of shares
subject to the options.
EMPLOYMENT AGREEMENTS
Effective July 1, 1995, we entered into a new employment agreement with Mr.
Botti for a five year term ending June 30, 2000. The employment agreement
provides for:
- annual compensation of $100,000 for the first year of the agreement,
increasing by 10% in each year thereafter;
- a bonus of 3% of our pre-tax net income, with such additional bonuses as
may be awarded in the discretion of the Board of Directors;
- the award of non-qualified stock options to purchase 600,000 shares of
our 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 vested on each of June 30, 1997, 1998 and 1999;
- certain insurance and severance benefits; and
- automobile and expenses.
COMPENSATION OF DIRECTORS
Directors are compensated for their services during the last fiscal year in
the amount of $5,000 annually. The Directors receive options to purchase 10,000
shares for each year of service under the Non-Executive Director Stock Option
Plan ("Stock Options") and are reimbursed for expenses incurred in order to
attend
25
<PAGE> 30
meetings of the Board of Directors. Directors also receive 20,000 Stock Options
upon being elected to the Board.
STOCK OPTION PLANS
1992 Employees Stock Option Plan
In April 1992, we 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 our Common Stock. On January 26, 1995, our stockholders 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, 1999, there were
outstanding 1,984,870 options under the 1992 Plan with exercise prices ranging
from $.34 to $7.125.
The 1992 Plan is administered by a Compensation Committee designated by the
Board of Directors. The Compensation Committee has the discretion to determine
the eligible employees to whom, and the times and the price at which, options
will be granted. Whether such options shall be ISOs or Non-ISOs; the periods
during which each option will be exercisable; and the number of shares subject
to each option, shall be determined by the Committee. The Board or Committee
shall have full authority to interpret the 1992 Plan and to establish and amend
rules and regulations relating thereto.
Under the 1992 Plan, the exercise price of an option designated as an ISO
shall not be less than the fair market value of the Common Stock on the date the
option is granted. However, in the event an option designated as an ISO is
granted to a ten percent stockholder (as defined in the 1992 Plan) such exercise
price shall be at least 110% of such fair market value. Exercise prices of
Non-ISOs options may be less than such fair market value. The aggregate fair
market value of shares subject to options granted to a participant which are
designated as ISOs which become exercisable in any calendar year shall not
exceed $100,000. The "fair market value" will be the closing Nasdaq bid price,
or if our Common Stock is not quoted by Nasdaq, as reported by the National
Quotation Bureau, Inc., or a market maker of our 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.
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 our stockholders
in May, 1992. With the approval of the shareholders, the Director Plan was
amended in December, 1997. Options are granted under the Director Plan until
April, 2002 to (1) non-executive directors as defined and (2) members of any
advisory board established by us who are not full-time employees of us or any of
our subsidiaries.
The Director Plan provides that each non-executive director will
automatically be granted an option to purchase 20,000 shares, upon joining the
Board of Directors, and 10,000 shares on each September 1st thereafter, provided
such person has served as a director for the 12 months immediately prior to such
September 1st. 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 our Common Stock, providing such person has served as a
director of the advisory board for the previous 12 month period.
As of October 15, 1999, there are outstanding 180,000 options under the
Director Plan with exercise prices from $1.00 to $5.13.
The exercise price for options granted under the Director Plan is 100% of
the fair market value of the Common Stock on the date of grant. The "fair market
value" is the closing bid price, or if our Common Stock
26
<PAGE> 31
is not quoted by Nasdaq, as reported by the National Quotation Bureau, Inc., or
a market maker of our Common Stock, or if the Common Stock is not quoted by any
of the above by the Board of Directors acting in good faith. Until otherwise
provided in the Stock Option Plan the exercise price of options granted under
the Director Plan must be paid at the time of exercise, either in cash, by
delivery of shares of our Common Stock 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 our officers (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.
27
<PAGE> 32
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of October 15, 1999
with respect to (1) each director and each executive officer, (2) all directors
and officers as a group, and (3) 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 our
Common Stock and Series A Preferred Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENTAGE
TYPE OF CLASS BENEFICIAL HOLDER OWNERSHIP(1) OF CLASS
- ------------- ------------------- ----------------- ----------
<S> <C> <C> <C>
Common................................. John T. Botti 944,683(2) 9.10%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common................................. Ira C. Whitman 667,239(3) 6.43%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common................................. Steven Kriegsman 50,000(4) 0.48%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common................................. Dennis Bunt 77,550(5) 0.71%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common................................. J. Edward Sheridan 50,000(4) 0.77%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common................................. Charles Johnston 50,000(4) 0.48%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common................................. Nicholas Themelis 20,000(8) 0.20%
14 Serenite Lane
Muttontown, NY 11791
Series A Preferred Stock............... John T. Botti 100(6) 50%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Series A Preferred Stock............... Ira C. Whitman 100(7) 50%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Directors/Officers as a group (2)(3)(4)(5)(6)(7)(8)(9)............... 1,859,672 18.17%
</TABLE>
- ---------------
(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 710,185 shares of Common Stock.
(3) Includes vested stock options to purchase 435,185 shares of Common Stock.
(4) Includes vested options to purchase 50,000 shares of Common Stock.
(5) Includes vested options to purchase 74,667 shares of Common Stock and
excludes nonvested options to purchase 6,667 shares of Common Stock.
Includes 1,000 shares of Common Stock owned by Mr. Bunt's wife.
28
<PAGE> 33
(6) See footnote (2). Each share of Series A Preferred Stock is entitled to ten
(10) votes per share.
(7) See footnote (3). Each share of Series A Preferred Stock is entitled to ten
(10) votes per share.
(8) Includes vested options to purchase 20,000 shares of Common Stock and
excludes a Series B Common Stock Purchase Warrant to purchase 20,000 shares
of Common Stock.
* Percentage not significant.
29
<PAGE> 34
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as disclosed herein, we have 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 our Common Stock.
Pursuant to an agreement dated October 1, 1999 with Bank of America, Mr.
Botti personally guaranteed the Company's repayment of its line of credit with
Bank of America.
In connection with our October 1999 private offering, we entered into an
agreement with Corporate Funding Group, LLC, pursuant to which Corporate Funding
Group has been retained to provide us with financial consulting services related
to our corporate finance and other financial service matters. As part of this
agreement, we granted Corporate Funding Group an irrevocable preferential right
for a period of three years to purchase up to $5,000,000 of our securities that
we may seek to sell in a private offering. In consideration for these services,
we agreed to sell to Corporate Funding 20,000 Series B Warrants at a price of
$.001 per warrant.
In connection with the founding of Authentidate, we retained Nicholas
Themelis to perform general advisory services concerning the development of
Authentidate and the implementation of the Authentidate business plan. In
consideration for rendering these services, we have issued to Mr. Themelis
20,000 Series B Warrants and have agreed to reimburse Mr. Themelis for his
expenses incurred in the performance of his duties.
Pursuant to an agreement dated September 15, 1999, we retained Shore
Venture Group, L.L.C., to design and develop a site on the World Wide Web for
our Authentidate business. The design and development services include the
design and development of any and all computer software in order to ensure that
the Authentidate site performs in the manner contemplated by the parties. In
consideration for these services:
- we agreed to issue 100,000 common stock warrants at an exercise price of
$.69 per share, with an exercise term of five (5) years from the date of
grant and which are exchangeable into the underlying, unrestricted common
stock of Bitwise on a one for one basis at any time beginning with the
date of issue and extending for a five (5) year period thereafter;
- we agreed that Shore Venture shall receive a guaranteed minimum of
$200,000 of service fees related to enhancements to, and service of, the
Authentidate site during a one (1) year period commencing on September
30, 1999;
- we paid to Shore Venture the sum of $15,000 representing payment in full
of cash sums owed by us to Shore Venture for past design and development
services;
- we also agreed to pay Shore Venture $40,000.00 for design and development
of the fax portion of the Authentidate site; and
- Authentidate agreed to issue to Shore Venture equity interests
representing 7.5% of the outstanding equity as of the date of agreement.
For information concerning employment agreements with, and compensation of,
our executive officers and directors, see "MANAGEMENT -- Executive
Compensation."
30
<PAGE> 35
SELLING SECURITY HOLDERS
We have agreed to register the resale of outstanding Shares of Common
Stock, Series B Warrants and the Shares underlying the Series B and Private
Warrants and the Shares into which the Series B Preferred Stock is convertible
under the Securities Act and to pay all expenses in connection therewith. An
aggregate of 5,516,416 Shares and 1,520,000 Series B Warrants may be offered and
sold pursuant to this prospectus by the Selling Shareholders. Except as set
forth below, none of the Selling Shareholders has ever held any position or
office with us or had any other material relationship with us.
SELLING SECURITY HOLDERS AND
TRANSACTIONS WITH SELLING SECURITY HOLDERS
<TABLE>
<CAPTION>
SHARES/ SHARES/
WARRANT SHARES/ SHARES/ WARRANT SHARES/
SERIES B WARRANTS/ WARRANT SHARES/ SERIES B WARRANTS/ PERCENTAGE OF
CONVERSION SHARES SERIES B WARRANTS/ CONVERSION SHARES SHARES
NAME AND ADDRESS OF BENEFICIALLY OWNED CONVERSION SHARES OWNED AFTER OWNED AFTER
SELLING SECURITY HOLDER PRIOR TO OFFERING OFFERED OFFERING OFFERING(1)
- ----------------------- ------------------ ------------------ ------------------ -------------
<S> <C> <C> <C> <C>
Nicholas Themelis(2)....... 0/20,000/20,000/0 0/20,000/20,000/0 0 ++
Corporate Funding Group,
LLC(3)................... 0/20,000/20,000/ 0/20,000/20,000/ 0 ++
2,000 2,000
Shore Venture Group,
LLC(4)................... 0/100,000/0/0 0/100,000/0/0 0 ++
Tami Skelly(5)............. 150,000/150,000/ 150,000/150,000/ 0 ++
150,000/5,000 150,000/5,000
Interpacific Capital
Corp.(6)................. 400,000/600,001/ 400,000/600,001/ 0 ++
400,000/28,000 400,000/28,000
Bantry Bay Associates,
LLC(7)................... 150,000/150,000/ 150,000/150,000/ 0 ++
150,000/5,000 150,000/5,000
Gateway Network, LLC(8).... 300,000/499,998/ 300,000/499,998/ 0 ++
300,000/10,000 300,000/10,000
Azure Capital, LLC(9)...... 240,000/440,001/ 240,000/440,001/ 0 ++
240,000/0 240,000/0
RW Capital, LLC(10)........ 240,000/439,998/ 240,000/439,998/ 0 ++
240,000/0 240,000/0
Beara Group, LLC(11)....... 0/200,001/0/0 0/201,000/0/0 0 ++
Cambridge Capital & Equity
Corp.(12)................ 72,750/200,000/0/0 72,750/200,000/0/0 0 ++
Stonewall Capital,
Inc.(13)................. 0/120,000/0/0 0/120,000/0/0 0 ++
Canterbury Companies,
Inc.(14)................. 0/40,000/0/0 0/40,000/0/0 0 ++
Robert Raffa(15)........... 0/10,000/0/0 0/10,000/0/0 0 ++
Candle Business Systems,
Inc.(16)................. 0/10,000/0/0 0/10,000/0/0 0 ++
2B Systems, Inc.(17)....... 0/5,000/0/0 0/5,000/0/0 0 ++
B.E. Associates,
Inc.(18)................. 0/7,000/0/0 0/7,000/0/0 0 ++
Jack Erlanger(19).......... 0/160,000/0/0 0/160,000/0/0 0 ++
Stanley Goldstein(20)...... 0/40,000/0/0 0/40,000/0/0 0 ++
Victor DiGioia(21)......... 10,000/50,000/0/0 0/50,000/0/0 10,000 ++
Brian Daughney(22)......... 0/20,000/0/0 0/20,000/0/0 0 ++
Barry Lax(23).............. 0/2,000/0/0 0/2,000/0/0 0 ++
Michael Goldstein(24)...... 0/11,500/0/0 0/11,500/0/0 0 ++
</TABLE>
31
<PAGE> 36
<TABLE>
<CAPTION>
SHARES/ SHARES/
WARRANT SHARES/ SHARES/ WARRANT SHARES/
SERIES B WARRANTS/ WARRANT SHARES/ SERIES B WARRANTS/ PERCENTAGE OF
CONVERSION SHARES SERIES B WARRANTS/ CONVERSION SHARES SHARES
NAME AND ADDRESS OF BENEFICIALLY OWNED CONVERSION SHARES OWNED AFTER OWNED AFTER
SELLING SECURITY HOLDER PRIOR TO OFFERING OFFERED OFFERING OFFERING(1)
- ----------------------- ------------------ ------------------ ------------------ -------------
<S> <C> <C> <C> <C>
Barbara Cereghino(25)...... 0/750/0/0 0/750/0/0 0 ++
Dorothy Philipps(26)....... 0/750/0/0 0/750/0/0 0 ++
</TABLE>
- ---------------
++ Percentage is less than 1%.
(1) Computed for purposes herein to give effect to the exercise of all Warrants
held by such Selling Security Holder and not any other Selling Security
Holder. Figures are computed based upon 13,274,852 shares of Common Stock
outstanding on the effective date of this Registration Statement.
(2) Includes 20,000 Shares issuable upon exercise of Series B Warrants and the
Series B Warrants, both of which are being registered pursuant to this
Registration Statement. Does not include options to purchase 20,000 shares.
(3) Includes 20,000 Shares issuable upon exercise of Series B Warrants and
20,000 Series B Warrants, both of which are being registered pursuant to
this Registration Statement. Also includes 2,000 Shares issuable upon
Conversion of Series B Preferred Stock.
(4) Shore Venture Group, LLC has entered into a contract with Bitwise to
perform services related to the formation of the web-site for
Authentidate.com, Inc.
(5) Includes 150,000 Shares issuable upon exercise of Series B Warrants and
150,000 Series B Warrants, both of which are being registered pursuant to
this Registration Statement. Also includes 5,000 Shares issuable upon
Conversion of Series B Preferred Stock.
(6) Includes 400,000 Shares issuable upon exercise of Series B Warrants,
200,001 Shares issuable upon exercise of Series C Warrants and 400,000
Series B Warrants, both of which are being registered pursuant to this
Registration Statement. Also includes 28,000 Shares issuable upon
Conversion of Series B Preferred Stock.
(7) Includes 150,000 Shares issuable upon exercise of Series B Warrants and
150,000 Series B Warrants, both of which are being registered pursuant to
this Registration Statement. Also includes 5,000 Shares issuable upon
Conversion of Series B Preferred Stock.
(8) Includes 300,000 Shares issuable upon exercise of Series B Warrants,
199,998 Shares issuable upon exercise of Series C Warrants, and 300,000
Series B Warrants, both of which are being registered pursuant to this
Registration Statement. Also includes 10,000 Shares issuable upon
Conversion of Series B Preferred Stock.
(9) Includes 240,000 Shares issuable upon exercise of Series B Warrants,
200,001 Shares issuable upon exercise of Series C Warrants and 240,000
Series B Warrants, each of which are being registered pursuant to this
Registration Statement.
(10) Includes 240,000 Shares issuable upon exercise of Series B Warrants,
199,998 Shares issuable upon exercise of Series C Warrants and 240,000
Series B Warrants, each of which are being registered pursuant to this
Registration Statement.
(11) Includes 200,001 Shares issuable upon exercise of Series C Warrants which
are being registered pursuant to this registration statement.
(12) Cambridge Capital will provide certain financial consulting services to
Bitwise. Includes 25,000 warrants to purchase common stock at an exercise
price of $3.00 per share; 25,000 warrants to purchase common stock at an
exercise price of $5.50 per share; 50,000 warrants to purchase common stock
at an exercise price of $6.88 per share; 50,000 warrants to purchase common
stock at an exercise price of $8.25 per share; and 50,000 warrants to
purchase common stock at an exercise price of $11.25 per share.
(13) Includes three warrants each to purchase 40,000 shares of common stock at
exercise prices of $1.56, $2.07, and $3.58. All three warrants are
exercisable until September 1, 2000.
32
<PAGE> 37
(14) Includes warrants to purchase 40,000 shares of common stock at an exercise
price of $3.4375 and is exercisable until August 15, 2002.
(15) Includes warrants to purchase 10,000 shares of common stock at an exercise
price of $4.4375 and is exercisable until September 12, 2001.
(16) Includes warrants to purchase 10,000 shares of common stock at an exercise
price of $6.4375 and is exercisable until February 26, 2001.
(17) Includes warrants to purchase 5,000 shares of common stock at an exercise
price of $7.00 and is exercisable until December 22, 2000.
(18) Includes warrants to purchase 7,000 shares of common stock at an exercise
price of $5.3125 and is exercisable until November 21, 2000.
(19) Includes warrants to purchase 160,000 shares of common stock at an exercise
price of $3.25 and which expire of August 8, 2002.
(20) Mr. Goldstein is a principal of Goldstein & DiGioia, LLP, counsel to
Bitwise. The 40,000 Shares are underlying warrants exercisable at $0.875
and expire on September 9, 2004.
(21) Mr. DiGioia is a principal of Goldstein & DiGioia, LLP, counsel to Bitwise.
The 50,000 Shares are underlying warrants exercisable at $0.875 and expire
on September 9, 2004.
(22) Mr. Daughney is a principal of Goldstein & DiGioia, LLP, counsel to
Bitwise. The 20,000 Shares are underlying warrants exercisable at $0.875
and expire on September 9, 2004.
(23) Mr. Lax is an associate with of Goldstein & DiGioia, LLP, counsel to
Bitwise. The 2,000 Shares are underlying warrants exercisable at $0.875 and
expire on September 9, 2004.
(24) Mr. Goldstein is an associate with Goldstein & DiGioia, LLP, counsel to
Bitwise. The 11,500 Shares are underlying warrants exercisable at $0.875
and expire on September 9, 2004.
(25) Ms. Cereghino is an employee of Goldstein & DiGioia, LLP, counsel to
Bitwise. The 750 Shares are underlying warrants exercisable at $0.875 and
expire on September 9, 2004.
(26) Ms. Philipps is an employee of Goldstein & DiGioia, LLP, counsel to
Bitwise. The 750 Shares are underlying warrants exercisable at $0.875 and
expire on September 9, 2004.
ABOUT THIS PROSPECTUS
The Securities registered hereby will be issued by Bitwise upon exercise or
conversion by the holders of the warrants or preferred stock, or the transferees
of the holders. The shares of common stock will be offered and sold from time to
time by the Selling Security Holders and their transferees in the
over-the-counter market, or otherwise, at prices and terms then prevailing or at
prices related to the then-current market price, or in negotiated transactions.
No underwriting arrangements have been entered into by the Selling Security
Holders.
The distribution of the Securities by the Selling Security Holders and/or
their transferees may be effected in one or more transactions that may take
place on the over-the-counter market, including
- ordinary brokers transactions;
- privately negotiated transactions; or
- through sales to one or more dealers for resale of the Securities as
principals, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices.
The Securities may be sold by the Selling Security Holders either
- to a broker or dealer as principal for resale as such broker or dealer
for its account pursuant to this prospectus (e.g. in a transaction with a
"market maker");
- in brokerage transactions, including transactions in which the broker
solicits purchasers or
33
<PAGE> 38
- in privately negotiated transactions pursuant to any applicable exemption
under the Securities Act of 1933, as amended.
Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Security Holders in connection with such
sales. The Selling Security Holders and intermediaries through whom such
Securities are sold may be deemed "underwriters" within the meaning of the
Securities Act, with respect to the Securities offered.
34
<PAGE> 39
DESCRIPTION OF SECURITIES
COMMON SHARES
Subject to the rights of the holders of any classes of Preferred Stock,
holders of shares of our Common Stock are entitled to cast one vote for each
share held at all stockholders' meetings for all purposes, including the
election of directors. The holders of our outstanding Series A Preferred Stock
have the right to elect a majority of the Board of Directors. Directors are
elected each year at our annual meeting of stockholders to serve for a period of
one year and until their respective successors have been duly elected and
qualified.
Common stockholders have the right to share ratably in such dividends on
shares of Common Stock as may be declared by the Board of Directors out of funds
legally available therefor. Upon liquidation or dissolution, each outstanding
share of Common Stock will be entitled to share equally in our assets legally
available for distribution to stockholders after the payment of all debts and
other liabilities, subject to any superior rights of the holders of Preferred
Stock.
Common stockholders have no pre-emptive rights. There are no conversion or
redemption privileges or sinking fund provisions with respect to the Common
Stock. All of the outstanding shares of Common Stock, par value $.001, are, and
all of the shares of Common Stock offered hereby will be, validly issued, fully
paid and nonassessable. The Common Stock does not have cumulative voting rights
so holders of more than 50% of the outstanding Common Stock can elect all of our
Directors as to which Common Stock holders are entitled to elect.
SERIES A PREFERRED STOCK
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 John
T. Botti and Ira C. Whitman, the President and Senior Vice President,
respectively, of the Company. The holders of the Series A Preferred Shares have
the right to elect a majority of the Board of Directors as long as such holder
remains, subject to certain conditions, an officer, director and 5% stockholder
of the Company. During such time as the Series A Preferred Stock is outstanding,
the Board of Directors will consist of an odd number of directors, a majority of
whom will be designated as "Preferred Directors" and be elected solely by the
holders of Series A Preferred Stock voting separately 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.
SERIES B PREFERRED STOCK
Pursuant to the terms of the recently completed private offering, we filed
a Certificate of Designation designating 50,000 shares of Preferred Stock as
"Series B Convertible Redeemable Preferred Stock." The following is a summary of
the rights, preferences and privileges of the Series B Preferred Stock and is
qualified in its entirety by the provisions of our Certificate of Incorporation
and the Certificate of Designation.
DIVIDENDS. Subject to the limitations described below, holders of shares
of the Series B Preferred Stock will be entitled to receive, when, as and if
declared by the Board, out of our funds legally available for payment, dividends
in cash at an annual rate of 10% per share.
- Dividends are payable semi-annually, commencing on December 31, 1999 and
thereafter on June 30th and December 31st of each year. Dividends will be
cumulative from the date of original issuance of the Series B Preferred
Stock and will be payable to holders of record as they appear on our
stock books on the tenth business day prior to the dividend payment date.
- The Series B Preferred Stock will be junior to dividends to any series or
class of our stock hereafter issued which ranks senior as to dividends to
the Series B Preferred Stock. If at any time any dividend on Senior
Dividend Stock is in default, we may not pay any dividend on the Series B
Preferred Stock until all accrued and unpaid dividends on the Senior
Dividend Stock for all prior periods and the current period are paid or
declared and set aside for payment. No such Senior Dividend Stock shall
be issued without the approval of holders of a majority of the Series B
Preferred Stock.
35
<PAGE> 40
- The Series B Preferred Stock will have priority as to dividends over the
Common Stock and any other series or class of our stock hereafter issued
which ranks junior as to dividends to the Series B Preferred Stock. We
may not pay any dividend on (other than dividends payable solely in
Junior Dividend Stock), and we may not purchase, redeem or consummate any
other acquisition of, any Junior Dividend Stock unless all accrued and
unpaid dividends on the Series B Preferred Stock for all prior periods
and the current period have been paid or declared and set apart for
payment.
- We may not pay dividends on any class or series of our stock having
parity with the Series B Preferred Stock as to dividends, unless we have
paid or declared and set apart for payment or contemporaneously pay or
declare and set apart for payment all accrued and unpaid dividends for
all prior periods on the Series B Preferred Stock. We may not pay
dividends on the Series B Preferred Stock unless we have paid or declared
and set apart for payment or contemporaneously pay or declare and sets
apart for payment all accrued and unpaid dividends for all prior periods
on the parity dividend stock. Whenever all accrued dividends are not paid
in full on the Series B Preferred Stock or any parity dividend stock, all
dividends declared on the Series B Preferred Stock and such parity
dividend stock will be declared or made pro rata so that the amount of
dividends declared per share on the Series B Preferred Stock and such
parity dividends stock will bear the same ratio that accrued and unpaid
dividends per share on the Series B Preferred Stock and such parity
dividend stock bear to each other.
- The amount of dividends payable for the initial dividend period and for
any period shorter than a full year dividend period will be computed on
the basis of a 360-day year of twelve 30-day months. No interest will be
payable in respect of any dividend payment on the Series B Preferred
Stock which may be in arrears.
See "Redemption" below for information regarding restrictions on our
ability to redeem the Series B Preferred Stock when dividends on the Series B
Preferred Stock are in arrears.
VOTING RIGHTS. The holders of the Series B Preferred Stock will be
entitled to no voting rights except with respect to:
- the establishment of another class of preferred stock with rights equal
to or senior to the Series B Preferred Stock;
- any proposed changes in the rights of the Series B Preferred holders; or
- as required by Delaware law.
REDEMPTION AT OUR OPTION. The Series B Preferred Stock is redeemable at
any time commencing one year after the Closing at our option, on not less than
30 nor more than 60 days written notice to registered holders at a redemption
price equal to $25.00 per share plus accrued and unpaid dividends, provided:
- the public sale of the shares of Common Stock issuable upon conversion of
the Preferred Shares (the "Conversion Shares") are covered by an
effective registration statement or are otherwise exempt from
registration; and
- during the immediately preceding 20 consecutive trading days ending
within 10 days of the date of the notice of redemption, the closing bid
price of our Common Stock is not less than $3.75 per share, subject to
proportional adjustments for stock splits, stock dividends, combinations
of shares, corporate reorganizations or like events.
However, commencing 36 months after the Closing, the Series B Preferred
Stock is redeemable at our option, on not less than 30 nor more than 60 days
written notice to registered holders at a redemption price equal to $25.00 plus
accrued and unpaid dividends, provided the public sale of the Conversion Shares
are covered by an effective registration statement or are otherwise exempt from
registration.
- If less than all of the outstanding shares of Series B Preferred Stock
are to be redeemed, we will select those to be redeemed pro rata or by
lot or in such other manner as the Board of Directors may determine.
36
<PAGE> 41
- There is no mandatory redemption or sinking fund obligation with respect
to the Series B Preferred Stock.
- In the event that we have failed to pay accrued and unpaid dividends on
the Series B Preferred Stock, we may not redeem any of the then
outstanding shares of the Series B Preferred Stock, unless all the then
outstanding shares are redeemed, until all such accrued and unpaid
dividends and (except with respect to shares to be redeemed) the then
current semi-annual dividend have been paid in full.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of shares of Series B
Preferred Stock to be redeemed at the address shown on our stock books. After
the redemption date, dividends will cease to accrue on the shares of Series B
Preferred Stock called for redemption, and all rights of the holders of such
shares will terminate except the right to receive the redemption price without
interest (unless we default in the payment of the redemption price). Shares of
Series B Preferred Stock which we have redeemed will be restored to the status
of authorized but unissued shares of preferred stock, without designation as to
series, and may thereafter be issued, but not as shares of Series B Preferred
Stock unless used to pay dividends on the then outstanding Series B Preferred
Stock.
CONVERSION RIGHTS. The holders of Series B Preferred Stock will be
entitled at any time to convert their shares of Series B Preferred Stock into
one share of Common Stock (the "Conversion Shares"), at any time commencing one
year after the closing of the Offering, at the option of the holder, into such
number of shares of our Common Stock as shall equal $25.00 divided by the
conversion price of $1.875 per share, subject to adjustment to for stock splits,
stock dividends, combinations of shares, corporate reorganizations or like
events.
However, commencing three years after the Closing, the Conversion Price
shall be the lower of:
- $1.875 per share, subject to adjustment for stock splits and corporate
reorganizations; and
- the average of the closing bid and asked prices of our Common Stock for
the immediately preceding 10 consecutive trading days ending one trading
day prior to the date of the notice of conversion;
- provided, however, that the holder shall not be entitled to convert more
than 20% of the Series B Preferred Shares held by such holder on the
third anniversary of the Closing during any period of thirty days. For
purposes of conversion, each share of Series B Preferred Stock shall be
valued at $25.00 per share. Conversion rights will expire after 5:00 p.m.
on the redemption date for any shares of Series B Preferred Stock which
we have called for redemption.
- No payment or adjustment will be made in respect of dividends for Series
B Preferred Stock that may be accrued or unpaid or in arrears upon
conversion of shares of Series B Preferred Stock.
- No fractional shares will be issued and, in lieu of any fractional share,
cash in an amount based on the then current market price, determined as
provided in the Certificate of Designation, of the Common Stock will be
paid.
In case of any consolidation or merger of us with any other corporation
(other than a wholly owned subsidiary), or in case of sale or transfer of all or
substantially all of our assets, or in the case of any share exchange whereby
the Common Stock is converted into other securities or property, we will be
required to make appropriate provision so that the holder of each share of
Series B Preferred Stock then outstanding will have the right thereafter to
convert such share of Series B Preferred Stock into the kind and amount of
shares of stock and other securities and property receivable upon such
consolidation, merger, sale, transfer or share exchange by a holder of the
number of shares of Common Stock into which such share of Series B Preferred
Stock might have been converted immediately prior to such consolidation, merger,
sale, transfer or share exchange.
LIQUIDATION RIGHTS. In case of our voluntary or involuntary liquidation,
dissolution or winding up, holders of shares of Series B Preferred Stock are
entitled to receive the liquidation price of $25.00 per share, plus an amount
equal to any accrued and unpaid dividends to the payment date, before any
payment or
37
<PAGE> 42
distribution is made to the holders of the Common Stock or any other series or
class of our stock hereafter issued which ranks junior as to liquidation rights
to the Series B Preferred Stock.
- The holders of the shares of the Series B Preferred will not be entitled
to receive the liquidation price of such shares until the liquidation
price of any other series or class of our stock hereafter issued which
ranks senior as to the liquidation rights to the Series B Preferred Stock
has been paid in full. No such senior liquidation stock shall be issued
without the approval of holders of a majority of the Series B Preferred
Stock. See "Voting Rights."
- The holders of Series B Preferred Stock and all series or classes of our
stock hereafter issued which rank on a parity as to liquidation rights
with the Series B Preferred Stock are entitled to share ratably, in
accordance with the respective preferential amounts payable on such
stock, in any distribution (after payment of the liquidation price of the
senior liquidation stock) which is not sufficient to pay in full the
aggregate of the amounts payable thereon. After payment in full of the
liquidation price of the shares of the Series B Preferred Stock, the
holders of such shares will not be entitled to any further participation
in any distribution of assets by us. Neither a consolidation or merger of
us with another corporation, nor a sale or transfer of all or part of our
assets for cash, securities or other property will be considered to be
our liquidation, dissolution or winding up.
NO SINKING FUND. We are not required to provide for the retirement or
redemption of the Series B Preferred Stock through the operation of a sinking
fund.
OTHER PROVISIONS. The shares of Series B Preferred Stock, when issued,
will be duly and validly issued, fully paid and nonassessable. The holders of
the shares of the Series B Preferred Stock have no preemptive rights with
respect to any shares of our capital stock or any of our other securities
convertible into or carrying rights or options to purchase any such shares.
SERIES B COMMON STOCK PURCHASE WARRANTS
THE FOLLOWING DISCUSSION IS SUBJECT TO THE TERMS AND CONDITIONS OF THE
SERIES B WARRANTS, AND SUBSCRIBERS ARE REFERRED TO THE FORM OF SERIES B WARRANT
FOR MORE DETAILED INFORMATION.
EXERCISE PRICE. Each Series B Warrant will entitle the holder to purchase
one share of Common Stock during the period commencing on the date of issuance
and terminating five years thereafter, unless redeemed, at an exercise price of
$1.375 per share of Common Stock, subject to adjustment to for stock splits and
corporate reorganizations.
REDEMPTION. The Series B Warrants are redeemable at any time commencing
one year after the Closing at our option, on not less than 30 nor more than 60
days written notice to registered holders at a redemption price equal to $.05
plus, provided:
- the public sale of the Warrant Shares are covered by an effective
registration statement or are otherwise exempt from registration; and
- during each of the immediately preceding 20 consecutive trading days
ending within 10 days of the date of the notice of redemption, the
closing bid price of our Common Stock is not less than $3.25 per share,
as proportionately adjusted to reflect any stock splits, stock dividends,
combination of shares, corporate reorganizations or like events.
SERIES C COMMON STOCK PURCHASE WARRANTS
THE FOLLOWING DISCUSSION IS SUBJECT TO THE TERMS AND CONDITIONS OF THE
SERIES C WARRANT, AND SUBSCRIBERS ARE REFERRED TO THE SERIES C WARRANT FOR MORE
DETAILED INFORMATION.
TERMS. Each Warrant will entitle the holder to purchase one share of
Common Stock of Bitwise during the three year exercise period which commences on
the date of issue and expires three years from such date.
38
<PAGE> 43
CLASSES/EXERCISE PRICE. The Warrants will be divided into three equal
classes, Class I, Class II and Class III. Each Class shall have an initial
exercise price of $1.50 (subject to adjustment to for stock splits and corporate
reorganizations) which shall increase in $0.75 increments according to the
following schedule:
<TABLE>
<S> <C>
First increase -- 30 days after the effective date of a
registration statement covering the underlying Warrant
Shares (the "Effective Date");
Class I -- Second increase -- 7 months after the Effective Date;
Third increase -- 13 months after the Effective Date;
First increase -- 60 days after the Effective Date;
Class II -- Second increase -- 7 months after the Effective Date;
Third increase -- 13 months after the Effective Date;
First increase -- 90 days after the Effective Date;
Class III -- Second increase -- 7 months after the Effective Date; and
Third increase -- 13 months after the Effective Date.
</TABLE>
LEGAL MATTERS
Certain legal matters relating to our common stock will be passed upon for
us by the law firm of Goldstein & DiGioia, LLP, New York, New York. Members of
the firm of Goldstein & DiGioia, LLP own warrants to purchase 125,000 Shares of
our common stock registered in this prospectus.
EXPERTS
The consolidated financial statements and schedules included in this
prospectus have been audited by PricewaterhouseCoopers, LLP, independent
certified public accountants, to the extent and for the periods indicated in
their reports, appearing elsewhere herein and are included in reliance upon such
reports given upon the authority of said firm as experts in auditing and
accounting.
INDEMNIFICATION UNDER DELAWARE LAW AND OUR BY-LAWS
Our By-Laws provide for indemnification of our officers and directors to
the greatest extent permitted by Delaware law for any and all fees, costs and
expenses incurred in connection with any action or proceeding, civil or
criminal, commenced or threatened, arising out of services by or on behalf of
us, providing such officer's or director's acts were not committed in bad faith.
The By-Laws also provide for advancing funds to pay for anticipated costs and
authorizes the Board to enter into an indemnification agreement with each
officer or director.
In accordance with Delaware law, our Certificate of Incorporation contains
provisions eliminating the personal liability of directors, except for breach of
a director's fiduciary duty of loyalty to the us or to our stockholders, acts or
omission not in good faith or which involve intentional misconduct or a knowing
violation of the law, and in respect of any transaction in which a director
receives an improper personal benefit. These provisions only pertain to breaches
of duty by directors as such, and not in any other corporate capacity, e.g., as
an officer. As a result of the inclusion of such provisions, neither Bitwise nor
our stockholders may be able to recover monetary damages against directors for
actions taken by them which are ultimately found to have constituted negligence
or gross negligence, or which are ultimately found to have been in violation of
their fiduciary duties, although it may be possible to obtain injunctive or
equitable relief with respect to such actions. If equitable remedies are found
not to be available to stockholders in any particular case, stockholders may not
have an effective remedy against the challenged conduct.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and therefore is unenforceable.
39
<PAGE> 44
Except for the payment by us of expenses incurred or paid by any of our
directors, officers or controlling persons in the successful defense of any
action, suit or proceeding, in the event that a claim for indemnification
against liabilities is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter is settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
final adjudication of the issue.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Upon the effectiveness of our public offering on May 13, 1992, our Common
Stock commenced trading in the over-the-counter market and was listed on the
SmallCap Market of the Nasdaq Stock Market 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, we withdrew our listing on the Boston Stock
Exchange. On April 24, 1996, our Common Stock commenced trading on the Pacific
Stock Exchange.
The following is the range of high and low closing prices for our Common
Stock on the Nasdaq SmallCap Market for the periods indicated below:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Common Stock
FISCAL YEAR 1999
1st Quarter................................................. 1 1/2 7/8
2nd Quarter................................................. 1 7/8 23/32
3rd Quarter................................................. 1 5/8 7/8
4th Quarter................................................. 1 1/2 15/16
FISCAL YEAR 1998
1st Quarter................................................. 4 2 3/4
2nd Quarter................................................. 4 5/16 2 3/32
3rd Quarter................................................. 3 3/4 2 7/16
4th Quarter................................................. 2 7/8 1 9/16
FISCAL YEAR 1997
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
</TABLE>
The above quotations represent prices between dealers and do not include
retail mark-ups, mark-downs, or commissions, and do not necessarily represent
actual transactions.
As of September 23, 1999, there were approximately 372 holders of record of
our Common Stock. We believe there are more than 500 beneficial holders of our
Common Stock.
DIVIDEND POLICY
We have not paid any dividends upon our Common Stock since our inception.
We do 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, our Certificate of Incorporation authorizes
our Board of Directors to issue Preferred Stock with a preferential right to
dividends. Holders of our Series B Preferred Stock are entitled to a preference
on dividends, which are cumulative and payable semi-annually. See "Description
of Securities -- Series B Preferred Stock."
40
<PAGE> 45
PLAN OF DISTRIBUTION
The Shares of common stock, including the Shares underlying the Series B,
Series C and Private Warrants, the Shares issuable upon the conversion of the
Series B Preferred Stock, and the Series B Warrants will be issued by Bitwise
upon exercise or conversion by the holders of the warrants or preferred stock or
the transferees of the holders. The shares of common stock will be offered and
sold from time to time by the Selling Security Holders or their transferees in
the over-the-counter market, or otherwise, at prices and terms then prevailing
or at prices related to the then-current market price, or in negotiated
transactions.
The Securities registered hereby may be sold by one or more of the
following methods, without limitation:
- a block trade in which a broker or dealer so engaged will attempt to sell
the securities as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus;
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
- face-to-face transactions between sellers and purchasers without a
broker-dealer.
In effecting sales, brokers or dealers engaged by the Selling Security
Holders may arrange for other brokers or dealers to participate. Brokers or
dealers may receive commissions or discounts from the Selling Security Holders
in amounts to be negotiated immediately prior to the sale. These brokers and
dealers and any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, in connection
with such sales.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form SB-2 under the Securities Act of 1933,
with respect to the common stock offered hereby. This prospectus does not
contain all of the information in the registration statement and the exhibits
and schedules. For further information about us and our common stock, please
refer to the registration statement and the exhibits and schedules filed.
Statements contained in this prospectus as to the contents of any contract or
document filed as an exhibit to the registration statement are qualified to such
exhibit as filed.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and file reports, proxy statements and other
information with the Securities and Exchange Commission. In addition to the
registration statement, and the exhibits and schedules thereto, our reports,
proxy statements and other information filed with the Securities and Exchange
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the following Regional Offices of the Commission: New York Regional
Office, 7 World Trade Center, New York, New York 10048; and Chicago Regional
Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois,
60661. Copies of such material may be obtained from the public reference section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a Website that contains reports,
proxy statements and other information regarding issuers that file
electronically with the Commission. The address of that Website is:
http://www.sec.gov.
FORWARD LOOKING STATEMENTS
Certain statements in this Prospectus constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. We desire to avail ourselves of certain "safe harbor" provisions of the
1995 Reform Act and are therefore including this special note to enable us to do
so. Forward-looking statements included in this Prospectus or hereafter included
in other publicly available documents filed with the Securities and Exchange
Commission, reports to our stockholders and other publicly available statements
issued or released by us involve known and unknown risks, uncertainties, and
other factors which could cause our actual results, performance (financial or
operating) or achievements to differ from the future
41
<PAGE> 46
results, performance (financial or operating) achievements expressed or implied
by those forward looking statements. These future results are based upon
management's best estimates of current conditions and the most recent results of
our operations. The statements appear in a number of places in this Prospectus
and include statements regarding our intent, belief or current expectations, and
those of our directors or officers with respect to: (i) future revenues,(ii)
product development, (iii) the future of the wide format document system
industry, and (iv) other matters. Our actual results could differ materially
from those anticipated in the forward looking statements as a result of certain
factors, including those discussed throughout this Prospectus. These risks
include, but are not limited to, risks associated with recent and accumulated
losses, competition, conflicts of interest, limited operating history,
dependence upon one product line, and other risks detailed in this Prospectus
and our Securities and Exchange Commission filings, including our Annual Report
on Form 10-KSB, Form 10-QSB as well as recently filed Reports on Form 8-K, if
any, each of which could adversely affect our business and the accuracy of the
forward looking statements contained herein.
42
<PAGE> 47
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(AND REPORTS OF INDEPENDENT ACCOUNTANTS)
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<PAGE> 48
CONTENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS........................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets............................................ F-3
Statements of operations.................................. F-4
Statements of shareholders' equity........................ F-5
Statements of cash flows.................................. F-6
Notes to consolidated financial statements................ F-7 - F-21
</TABLE>
F-1
<PAGE> 49
[LETTERHEAD TO COME]
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Bitwise Designs, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Bitwise Designs, Inc. and its subsidiaries at June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the two years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
[PRICEWATERHOUSECOOPERS, L.L.P.
SIGNATURE]
August 23, 1999, except for Note 5 and Note 18,
for which the date is October 4, 1999
F-2
<PAGE> 50
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998 AND SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
JUNE 30,
--------------------------- SEPTEMBER, 30
1999 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 549,097 $ 4,000,370 $ 377,004
Accounts receivable, net of allowance for doubtful
accounts of $421,018 on June 30, 1999, $480,229
on June 30, 1998 and $428,937 on September 30,
1999............................................ 5,141,178 4,609,807 4,081,680
Due from related parties........................... 48,094 48,422 55,256
Inventories........................................ 3,824,387 3,210,868 3,589,469
Income taxes receivable............................ 12,130 3,291 13,246
Prepaid expenses and other current assets.......... 282,795 266,237 290,434
------------ ------------ ------------
Total current assets....................... 9,857,681 12,138,995 8,407,089
Property and equipment, net.......................... 2,949,458 776,925 2,964,900
Other assets:
Software development costs, net of accumulated
amortization of $300,510 on June 30, 1999,
$185,818 on June 30, 1998 and $330,510 on
September 30, 1999.............................. 129,993 88,391 180,755
Excess of cost over net assets of companies
acquired, net................................... 1,341,239 1,422,526 1,320,916
Deferred financing costs........................... 165,989 244,109 146,459
Other assets....................................... 40,624 37,508 39,779
------------ ------------ ------------
Total assets............................... $ 14,484,984 $ 14,708,454 $ 13,059,898
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under lines of credit................... $ 1,274,779 1,673,275 $ 1,212,452
Current portion of long-term debt.................. 23,781 343,929
Accounts payable................................... 3,852,032 2,294,192 2,950,776
Accrued expenses and other current liabilities..... 1,075,374 822,429 373,513
------------ ------------ ------------
Total current liabilities.................. 6,225,966 4,789,896 4,880,670
Long-term debt, net.................................. 4,781,124 3,440,332 4,971,341
Deferred grant....................................... 142,189 900,000
------------ ------------ ------------
Total liabilities.......................... 11,149,279 8,230,228 10,752,011
------------ ------------ ------------
Commitments
Shareholders' equity
Preferred stock, Series A -- $.10 par value,
5,000,000 shares authorized; 200 shares issued
and outstanding ($1.00 liquidation value)....... 20 20 20
Common stock, $.001 par value; 20,000,000 shares
authorized; 7,410,745 shares issued at June 30,
1999 and 7,460,745 at September 30, 1999........ 7,411 7,411 7,461
Additional paid-in capital......................... 19,846,126 19,822,159 19,925,748
Accumulated deficit................................ (16,441,133) (13,274,645) (17,548,623)
------------ ------------ ------------
3,412,424 6,554,945 2,384,606
Less cost 28,082 shares of common stock in
treasury........................................ (76,719) (76,719) (76,719)
------------ ------------ ------------
Total shareholders' equity................. 3,335,705 6,478,226 2,307,887
------------ ------------ ------------
Total liabilities and shareholders'
equity................................... $ 14,484,984 $ 14,708,454 $ 13,059,898
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 51
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998 AND THE THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- SEPTEMBER 30,
1999 1998 1999
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales........................................... $17,094,765 $33,755,625 $ 3,071,766
Cost of goods sold.................................. 11,479,297 25,663,059 2,482,323
----------- ----------- -----------
Gross profit................................... 5,615,468 8,092,566 589,443
----------- ----------- -----------
Selling, general and administrative expenses........ 7,765,234 12,251,515 1,437,510
Product development expenses........................ 248,801 230,652 64,547
----------- ----------- -----------
Total operating expenses....................... 8,014,035 12,482,167 1,502,057
----------- ----------- -----------
Loss from operations........................... (2,398,567) (4,389,601) (912,614)
----------- ----------- -----------
Other income (expense):
Interest and other income......................... 107,208 163,126 (1,897)
Loss on sale of subsidiary........................ (249,568) (255,888)
Interest expense.................................. (630,396) (939,595) (192,979)
----------- ----------- -----------
(772,756) (1,032,357) (194,876)
----------- ----------- -----------
Loss before income taxes....................... (3,171,323) (5,421,958) (1,107,490)
Income tax (benefit) expense........................ (4,835) 42,101 --
----------- ----------- -----------
Net loss....................................... $(3,166,488) $(5,464,059) $(1,107,490)
=========== =========== ===========
Per share amounts:
Net loss per common share.................... $ (.43) $ (.74) (.15)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 52
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998 AND THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- ---------------------- TOTAL
NUMBER OF $.10 PAR NUMBER OF $.001 PAR PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL DEFICIT STOCK EQUITY
--------- -------- ---------- --------- ----------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997..... 200 $20 7,367,720 $7,368 $18,996,591 $ (7,810,586) $ (423) $11,192,970
Stock options exercised... 35,333 35 82,255 82,290
Detachable warrants issued
in connection with
convertible note........ 650,411 650,411
Warrants issued for
non-employee services... 67,910 67,910
Acquisition of shares
through note default
(27,744 shares)......... (76,296) (76,296)
Conversion of debt to
common shares........... 7,692 8 24,992 25,000
Net loss.................. (5,464,059) (5,464,059)
--- --- ---------- ------ ----------- ------------ -------- -----------
Balance, June 30, 1998.... 200 $20 7,410,745 $7,411 $19,822,159 $(13,274,645) $(76,719) $ 6,478,226
Warrants issued for
non-employee services... 23,967 23,967
Net loss.................. (3,166,488) (3,166,488)
--- --- ---------- ------ ----------- ------------ -------- -----------
Balance, June 30, 1999.... 200 $20 7,410,745 $7,411 $19,846,126 $(16,441,133) $(76,719) $ 3,335,705
Stock issued for
non-employee services
(unaudited)............. 50,000 50 35,992 36,042
Warrants issued for
non-employee services
(unaudited)............. 45,130 45,130
Deferred offering costs
(unaudited)............. (1,500) (1,500)
Net loss (unaudited)...... (1,107,490) (1,107,490)
--- --- ---------- ------ ----------- ------------ -------- -----------
Balance, September 30,
1999 (unaudited)........ 200 $20 $7,460,745 $7,461 $19,925,748 $(17,548,623) $(76,719) $ 2,307,887
=== === ========== ====== =========== ============ ======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 53
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998 AND THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- SEPTEMBER 30,
1999 1998 1999
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(3,166,488) $(5,464,059) $(1,107,490)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................. 637,186 813,392 168,051
Provision for doubtful accounts receivable..... (60,694) 416,780 18,000
Loss on sale of subsidiary..................... 249,568 255,888
Non-cash compensation expense.................. 67,910
Non-cash selling, general and administrative
expenses..................................... 36,042
Changes in operating assets and liabilities:
Accounts receivable and due from related
parties................................... (470,349) (741,608) 1,034,336
Inventories.................................. (613,519) (1,482,031) 234,918
Prepaid expenses and other current assets.... 7,409 (113,863) 33,730
Accounts payable and accrued expenses........ 1,561,217 1,301,813 (1,603,117)
Income taxes receivable and other............ (8,839) 5,359 (717)
----------- ----------- -----------
Net cash used in operating activities..... (1,864,509) (4,940,419) (1,186,247)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment............... (2,402,661) (250,162) (78,730)
Trademarks acquired............................... (2,500)
Patent costs...................................... (17,105)
Software development costs........................ (156,293) (77,392) (78,945)
Proceeds from sale of businesses.................. 3,600,000
Other............................................. 13,609 (1,500)
----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. (2,564,950) 3,270,946 (157,675)
----------- ----------- -----------
Cash flows from financing activities:
Increase (decrease) in borrowings under line of... (398,496) (873,836) (62,327)
Proceeds from borrowings on long-term debt........ 4,000,000 525,973
Proceeds from borrowings on mortgage obligation... 1,234,493
Principal payments on long-term debt.............. (1,601) (48,128)
Receipt of deferred revenue from economic
development grant.............................. 142,189 757,811
Principal payments on capital lease obligations... (10,277)
Stock options exercised........................... 82,290
Payment of deferred offering and financing
costs.......................................... (390,580) (1,500)
----------- ----------- -----------
Net cash provided by financing
activities.............................. 978,186 2,805,996 1,171,829
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... (3,451,273) 1,136,523 (172,093)
Cash and cash equivalents, beginning of period...... 4,000,370 2,863,847 549,097
----------- ----------- -----------
Cash and cash equivalents, end of period............ $ 549,097 $ 4,000,370 $ 377,004
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 54
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business and business continuity:
Bitwise Designs, Inc. (Bitwise) and its subsidiary 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
integration and Internet services and products. Bitwise sells a line of document
imaging systems which it markets nationally under the tradename "DocStar."
In August 1994, Bitwise acquired Electrograph Systems, Inc. (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 System Solutions Technology, Inc. (SST),
a value-added distributor of advanced technology industrial computers and
computer peripherals. In June 1998 Bitwise sold SST in a stock sale.
In March 1996, Bitwise acquired DJS Marketing Group, Inc. DJS distributes
personal computer systems, workstations and peripheral equipment. In addition,
DJS offers systems integration, network, internet and hardware repair services.
Subsequent to the acquisition of DJS, Bitwise transferred its personal computer
division to DJS.
In June 1999, Bitwise established a majority owned subsidiary,
Authentidate.com LLC (Authentidate), to engage in a new business line of
providing end users with a service which will (a) accept and store e-mail from
networks and personal computers throughout the world and from different
operating systems via the internet, (b) allow for confirmation of acceptance of
all e-mails sent to the system, (c) produce confirmation of receipt of e-mail,
and (d) provide a technology that can verify the authenticity of digital images
by employing a secure clock that will date stamp the images when received. To
date, Authentidate's operations have been limited to developing the technology
for its services and home page.
During the fiscal year ended June 30, 1999 the Company incurred a net loss
of $3,166,488, and cash used by operating activities totaled $1,864,509. The
Company's available cash balance at June 30, 1999 totaled approximately
$549,000. One of the Company's lines of credit has been terminated by its lender
and the Company is currently paying off the outstanding balance (see Note 5). To
date, the Company has been largely dependent on its ability to sell additional
shares of its common stock or other financing to fund its operating deficits.
Under its current operating plan to obtain a national acceptance of the DocStar
product line and to introduce the new Authentidate technology, the Company's
ability to improve operating cash flow is highly dependent on the market
acceptance of its products and the Company's ability to reduce overhead costs.
If the Company is unable to attain projected sales levels for DocStar and other
products, or is unable to implement cost reduction strategies, 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.
Financial statements as of and for the three months ended September 30, 1999:
The consolidated financial statements as of and for the three months ended
September 30, 1999 (unaudited) are presented for purposes of additional analysis
and have not been subjected to any auditing procedures by our independent
accountants.
Principles of consolidation:
The consolidated financial statements include the accounts of Bitwise
Designs, Inc. and its subsidiaries, which are wholly-owned. The accounts of the
subsidiaries have been consolidated since the acquisition date. All material
intercompany balances and transactions have been eliminated in consolidation.
F-7
<PAGE> 55
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash equivalents:
The Company considers all highly liquid debt instruments with original
maturities not exceeding three months to be cash equivalents. At June 30, 1999
and 1998, cash equivalents were composed primarily of investments in commercial
paper and overnight deposits.
Inventories:
Inventories are stated at the lower of average cost or market.
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
1999 and 1998 amounted to $156,293 and $77,392, respectively. Amortization
expense related to software development costs for the years ended June 30, 1999
and 1998 was $114,692 and $70,060, 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 1999 and
1998 was $81,287 and $234,380, respectively. Accumulated amortization at June
30, 1999 and 1998 was $282,002 and $200,715, respectively.
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.
F-8
<PAGE> 56
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue recognition and warranty provisions:
Revenue from the sale of products is recognized when the products are
shipped to customers unless such shipments are with right of return, in which
case, revenue is recognized upon sale of the product. 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.
New accounting pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," (SFAS 133). SFAS
133 establishes a new model for accounting for derivatives and hedging
activities. This statement is effective for fiscal years beginning June 30,
2000. 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 130). SFAS 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 is effective for annual and interim financial statement beginning the
fiscal year ending June 30, 1999, and requires reclassifications of prior
periods. The Company had no other comprehensive income to report for the years
ended June 30, 1999 and 1998.
Advertising expenses:
The Company recognizes advertising expenses as incurred. Advertising and
promotion expense for 1999 and 1998, was approximately $331,000 and $1,175,000,
respectively.
Fourth quarter adjustments:
The Company realized a consolidated net loss of $3,166,488, or $.43 per
share, compared to a consolidated net loss of $5,464,059, or $.74 per share, for
the years ended June 30, 1999 and 1998, respectively. Consolidated net sales
totaled $17,094,765 and $33,755,625 for the years ended June 30, 1999 and 1998,
respectively. During the fourth quarter of 1999, the Company recorded an
adjustment increasing its net loss for sales made with the right of return by
approximately $1,350,000 for which income will not be recognized until sale of
the product by the customer. Additionally, a reserve of approximately $186,000
was recorded for claims arising from the sale of SST. During the fourth quarter
1998, the Company's operating results included the loss on the sale of SST
($256,000), an increase in the reserves for obsolete inventory ($588,000), and
an increase in the allowance for bad debts ($170,000).
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.
Reclassifications:
It is the Company's policy to reclassify, where appropriate, prior year
financial statements to conform to the current year presentation.
F-9
<PAGE> 57
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. LOSS PER SHARE
The following is basic and diluted loss per share information:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net loss applicable to common stockholders........ $(3,166,488) $(5,464,059)
Weighted average shares........................... 7,410,745 $ 7,380,484
Basic and diluted loss per share.................. (.43) (.74)
</TABLE>
The impact of options, warrants and convertible notes was antidilutive to
the calculation of basic and dilutive loss per share, and were accordingly
excluded from the calculation.
3. INVENTORIES
Inventories at June 30, 1999 and 1998 consist of:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Purchased components and raw materials.............. $1,197,192 $2,860,591
Finished goods -- in stock.......................... 559,508 350,277
-- held by resellers................ 2,067,687
---------- ----------
$3,824,387 $3,210,868
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
1999 1998 IN YEARS
----------- ----------- -----------
<S> <C> <C> <C>
Land.......................................... $ 651,932 $ N/A
Building...................................... 1,580,191 40
Machinery and equipment....................... 1,433,904 1,253,958 3-6
Demonstration and rental computers............ 179,752 200,747 5-6
Furniture and fixtures........................ 247,273 237,515 5-7
Leasehold improvements........................ 83,692 84,021 6
Vehicles...................................... 15,090 15,089 5
----------- -----------
4,191,834 1,791,330
Less accumulated depreciation and
amortization................................ (1,242,376) (1,014,405)
----------- -----------
$ 2,949,458 $ 776,925
=========== ===========
</TABLE>
In June 1999, the Company completed construction of a new office/production
facility in Schenectady, New York for approximately $2,300,000. The Company was
awarded a grant totaling $1,000,000 from the Empire State Development
Corporation (an agency of New York State) to be used towards the construction of
the facility. The funding is being received in stages as costs are incurred and
submitted for reimbursement. The grant stipulates that the Company is obligated
to achieve certain annual employment levels at the new site between January 1,
2001 and January 1, 2005 or some or all of the grant will have to be repaid. As
of June 30, 1999, $142,189 had been received and is recorded as deferred
revenue. The remainder of the financing for the new facility, totaling
approximately $1,400,000, is being provided by a local financial institution in
the form of a mortgage loan (See Note 6).
F-10
<PAGE> 58
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization expense on property and equipment for the
years ended June 30, 1999 and 1998 was $230,127 and $321,041, respectively.
5. LINE OF CREDIT
The Company's subsidiary DJS may utilize a line of credit in the amount of
$625,000, of which approximately $256,000 was available at June 30, 1999. This
facility is a wholesale inventory credit facility which is supported by a
guaranty furnished by one of DJS's vendors and expressly limited for purchases
from this vendor. The line is non-interest bearing and payment terms are net 40.
The line is collateralized by all assets of DJS.
In May 1999, the Company's other line of credit for $1,500,000 was
terminated by its lender as a result of the Company not being in compliance with
all of its financial covenants. At June 30, 1999, the balance outstanding was
approximately $1,300,000. Subsequent to year-end, the Company entered into an
agreement with the lender to extend repayment of the outstanding balance until
September 30, 2000. The Company was required to make a partial payment to the
lender of $600,000 by October 4, 1999 with the remainder to be paid off in
weekly installments of $11,778 plus interest. Interest accrues at the prime rate
plus 4%. The agreement has been guaranteed by the President of the Company and
is collateralized by all of the Company's accounts receivable and inventory.
6. LONG-TERM DEBT
Long-term debt at June 30, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Convertible notes payable with 400,000 detachable common
stock purchase warrants. Interest accrues at 8%, payable
semi-annually, in arrears. Each note is in the
denomination of $5,000 and holders may convert at the rate
of $3.25 per share until August 11, 2002 when the notes
mature. The warrants may also be exercised at $3.25 per
share of common stock until August 11, 2002. The warrants
were valued at $650,411 upon issuance and were recorded as
a discount to the face value of the debt and as a credit
to paid in capital. The discount is being amortized to
interest expense over the term of the note. During 1998,
7,692 shares were issued upon conversion of a portion of
the outstanding debt. As of August 11, 1999, the Company
was in default of its obligations as a result of an
overdue interest payment Subsequently, payment of the
interest was extended, the Company paid the interest, and
a waiver of the default has been obtained from the bank... $3,975,000 $3,975,000
Mortgage payable with Central National Bank in the original
amount of $1,400,000 (when fully advanced) with interest,
adjusted every five years, equal to the five-year Treasury
Bill rate plus 2.5%, not to be less than 8.25% (8.25% at
June 30, 1999), payable in monthly installments through
October 2018. The mortgage is collateralized by a first
mortgage lien on the Company's headquarters................. 1,234,493 --
---------- ----------
5,209,493 3,975,000
Less current portion........................................ (23,781)
Less unamortized discount................................... (404,588) (534,668)
---------- ----------
Long-term debt, net of current portion.................... $4,781,124 $3,440,332
========== ==========
</TABLE>
F-11
<PAGE> 59
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate principle maturities of long-term debt for each of the
subsequent five years and thereafter, assuming the convertible notes are not
converted into common stock by August 11, 2002 are as follows:
<TABLE>
<S> <C>
2000..................................................... $ 23,781
2001..................................................... 30,335
2002..................................................... 32,934
2003..................................................... 4,010,757
2004..................................................... 38,821
Thereafter............................................... 1,072,865
----------
$5,209,493
==========
</TABLE>
7. INCOME TAXES
Income tax expense (benefit) for the years ended June 30, 1999 and 1998
consists of currently payable state and local income taxes.
At June 30, 1999, the Company has federal net operating loss carryforwards
for tax purposes approximating $11,570,000. The years in which the net operating
loss carryforwards expire are as follows: 2000 -- $124,000; 2001 -- $684,000;
2002 -- $48,000; 2003 -- $3,000; 2004 -- $6,000; 2008 -- $1,568,000;
2009 -- $867,000; 2011 -- $2,762,000; 2012 -- $686,000, 2013 -- $3,197,000 and
2019 -- $1,625,000.
The following table reconciles the expected tax benefit at the federal
statutory rate of 34% to the effective tax rate.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Computed expected tax benefit..................... $(1,078,250) $(1,843,466)
Increase in valuation allowance................... 1,198,438 867,815
Additional tax gain on sale of subsidiary......... 393,666
Nondeductible goodwill amortization............... 27,638 79,689
Adjustment to prior years' taxes.................. (167,436)
Loss of NOL carryforward on sale of subsidiary.... 470,221
State income taxes, net of federal benefit........ (3,191) 42,101
Other nondeductible expenses...................... 17,966 32,075
----------- -----------
$ (4,835) $ 42,101
=========== ===========
</TABLE>
F-12
<PAGE> 60
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of June 30, 1999 and 1998 are presented
below:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred income tax asset:
Allowance for doubtful accounts................... $ 143,146 $ 179,187
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 and inventory
reserves..................................... 176,026 264,368
Other liabilities............................... 186,790 180,724
Deferred revenue................................ 639,904
Net operating loss carryforward................. 3,970,517 3,350,234
----------- -----------
Total gross deferred tax assets......... 5,116,383 3,974,513
Less valuation allowance........................ (5,095,274) (3,896,836)
----------- -----------
Net deferred tax asset.................. 21,109 77,677
Deferred income tax liability:
Equipment, principally due to differences in
depreciation methods......................... (21,109) (77,677)
----------- -----------
Net deferred income taxes............... $ -0- $ -0-
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets as of July 1, 1999 and 1998
was $5,095,274 and $3,896,836, respectively. The net change in the total
valuation allowance for the years ended June 30, 1999 and 1998 was an increase
of $1,198,438 and $867,815, respectively.
8. LEASE COMMITMENTS
The Company is obligated under operating leases for certain equipment and
facilities expiring at various dates through the year 2001.
As of June 30, 1999, future minimum payments by year, and in the aggregate,
noncancelable operating leases with initial terms of one year or more consist of
the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30:
- ---------------------------
<S> <C>
2000...................................................... $ 76,539
2001...................................................... 76,503
--------
$153,042
========
</TABLE>
Rental expense was approximately $216,000 and $309,000 for the years ended
June 30, 1999 and 1998, respectively.
9. 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
F-13
<PAGE> 61
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
10. 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.
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 begin to vest one year after the date
of grant. Vesting occurs one-third per year over three years. 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 on the grant date of shares subject to
options which are designated as ISOs which become exercisable in any calendar
year, shall not exceed $100,000 per optionee.
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.
F-14
<PAGE> 62
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE OPTION
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding at July 1, 1997........................ 1,939,370 $3.53
Options granted equal to market price.............. 973,833 2.93
Options exercised.................................. (35,333) 2.33
Options canceled or surrendered.................... (539,000) 4.79
---------
Outstanding at June 30, 1998....................... 2,338,870 2.99
Options granted equal to market.................... 50,500 1.39
Options canceled or surrendered.................... (404,500) 3.48
---------
Outstanding at June 30, 1999....................... 1,984,870 2.85
=========
</TABLE>
The following is a summary of the status of employee stock options at June
30, 1999:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------- -------------------
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.................... 961,870 1.3 $1.54 888,037 $1.54
2.01 - 4.00.................... 675,500 3.1 3.04 561,333 3.09
4.01 - 8.00.................... 347,500 1.6 6.10 343,333 6.11
</TABLE>
As of June 30, 1999 and 1998, 1,792,703 shares and 1,587,703 shares,
respectively, were exercisable under the 1992 Employees Stock Option Plan.
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
stockholders in May 1992. With the approval of the shareholders, the Director
Plan was amended in December 1997. 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
20,000 shares upon joining the Board of Directors and 10,000 on each September 1
thereafter, provided such person has served as a director for the 12 months
immediately prior to such September 1st. Each eligible director of an advisory
board will receive, upon joining the advisory board, and on each September 1st
thereafter, an option to purchase 5,000 shares of the Company's common stock,
providing such person has served as a director of the advisory board for the
previous 12-month period.
The exercise price for options granted under the Director Plan is 100% of
the fair market value of the common stock on the date of grant. The "fair market
value" is the closing NASDAQ bid price, or if the Company's common stock is not
quoted by NASDAQ, as reported by the National Quotation Bureau, Inc., or a
market maker of the Company's common stock, or if the common stock is not quoted
by any of the above by the Board of Directors acting in good faith. Until
otherwise provided in the Stock Option Plan, the exercise price of options
granted under the Director Plan must be paid at the time of exercise, either in
cash, by delivery of shares of common stock of the Company or by a combination
of each. The term of each option commences on the date it is granted and unless
terminated sooner, as provided in the Director Plan, expires five years from the
date of grant. The Director Plan is administered by a committee of the board of
directors composed of not fewer than three persons who are officers of the
Company (the "Committee"). The Committee has no discretion to determine which
non-executive director or advisory board member will
F-15
<PAGE> 63
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
A schedule of director stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE OPTION
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding July 1, 1997........................... 200,000 $3.59
Options granted equal to market price.............. 70,000 2.94
Options cancelled or surrendered................... (130,000) 4.17
--------
Outstanding June 30, 1998.......................... 140,000 3.67
Options granted equal to market price.............. 50,000 1.00
Options cancelled or surrendered................... (60,000) 3.70
--------
Outstanding June 30, 1999.......................... 130,000 2.54
========
</TABLE>
The options range in price from $1.00 to $5.13 per share and have a
weighted average remaining contractual life of 2.6 years.
C) Common Stock Warrants:
A schedule of common stock warrant activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE WARRANT
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding July 1, 1997.......................... 2,326,995 $4.23
Warrants granted equal to market price............ 40,000 3.44
Warrants granted less than market price........... 400,000 3.25
---------
Outstanding June 30, 1998......................... 2,766,995 4.07
Warrants granted equal to market price............ 232,000 3.02
Warrants cancelled or surrendered................. (100,000) 7.50
---------
Outstanding June 30, 1999......................... 2,898,995
=========
</TABLE>
In August 1997, the Company issued 400,000 detachable common stock purchase
warrants in connection with $4.0 million of convertible debt. Other warrants
issued during the years ended June 30, 1999 and 1998 were to various firms
providing services to the Company.
The following is a summary of the status of common stock warrants at June
30, 1999:
<TABLE>
<CAPTION>
OUTSTANDING WARRANTS EXERCISABLE WARRANTS
----------------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE
- -------------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.50 - 4.00............. 1,151,284 2.7 $2.87 1,151,284 $2.87
4.01 - 8.00............. 1,747,711 1.5 4.53 1,747,711 4.53
</TABLE>
F-16
<PAGE> 64
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D) Options and warrants valuation:
The per share weighted average fair value for all common stock options
granted to employees during fiscal 1999 and 1998 was $2.79 and $1.15,
respectively. These amounts were determined using the Black Scholes
option-pricing model which values options based on the stock price at the grant
date, the expected life of the option, 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 zero in 1999 and 1998. The
expected volatility was based on the stock prices for the period beginning in
May 1992 when the Company completed its first public offering. The expected
volatility was 75.0% and 68.7% for 1999 and 1998, 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 risk free rate ranges
from 4.3% to 5.4% in 1999 and 5.5% to 6.3% in 1998, respectively. The expected
life of the option was estimated based on the exercise history from previous
grants and is estimated to be five years.
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 under any of the stock plans.
However, compensation cost has been recognized for warrants granted. 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,
1999 1998
----------- -----------
<S> <C> <C>
Net loss
As reported....................................... $(3,166,488) $(5,464,059)
Pro forma....................................... (2,960,231) (6,160,155)
Basic and diluted loss per share
As reported..................................... $ (.43) $ (.74)
Pro forma....................................... (.40) (.83)
</TABLE>
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 1999 and 1998.
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.
11. 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% each year thereafter; (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.
F-17
<PAGE> 65
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. CASH FLOWS -- SUPPLEMENTAL INFORMATION
Cash flows:
The Company paid interest in the amounts of $451,387 and $639,446 for the
years ended June 30, 1999 and 1998, respectively. Income taxes paid aggregated
$4,304 and $27,254 during the years ended June 30, 1999 and 1998, respectively.
Noncash investing and financing activities:
During the year ended June 30, 1998, the Company received common shares of
the Company's stock with a market value of $76,296 in satisfaction of a note
receivable with the former shareholders of DJS Marketing Group, Inc. of
$145,657.
In March 1998, the Company issued 7,692 common shares of the Company's
stock pursuant to the conversion of $25,000 of convertible debt into common
stock.
13. RELATED PARTIES
At June 30, 1999 and 1998, "Due from related parties" included non-interest
bearing advances of $48,094 and $48,422, respectively, from employees and
officers of the Company.
14. 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
can make contributions in percentages of compensation, or amounts as determined
by the Company. The Company did not contribute to the plan during the years
ended June 30, 1999 and 1998.
15. SALE OF BUSINESS
In June 1998, the Company sold SST in a stock sale. The Company received
approximately $3.6 million in cash and approximately $400,000 in accounts
receivable and inventory. In 1999, the Company received certain claims from the
buyer of SST for indemnification under the agreements governing its sale. A
settlement was negotiated and the Company agreed to pay the buyer $341,000 to be
paid monthly over fifteen months accruing interest at 6%. An additional reserve
of approximately $250,000 was recorded in 1999 related to these claims. The
Company realized a loss of approximately $505,000 on the sale.
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, accounts payable and
accrued expenses and other current liabilities. The carrying amount of cash and
cash equivalents, accounts receivable, accounts payable and
F-18
<PAGE> 66
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accrued expenses and other current liabilities approximates fair value because
of the short maturity of these instruments.
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. The
remaining balance of long-term debt approximates fair value based on its
discounted face amount. Consequently, the carrying value of the borrowings under
lines of credit and long-term debt approximates fair value.
17. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 is effective for
fiscal years beginning after December 15, 1997. SFAS 131 establishes standards
for reporting financial and descriptive information about an enterprise's
operating segments in its annual financial statements and selected segment
information in interim financial reports.
The Company has two reportable segments: Bitwise, a document imaging
company and DJS Marketing Group, Inc. (DJS), a computer systems integrator.
Bitwise produces a product called DocStar which is a document storage and
retrieval business and DJS markets computer services including network services,
internet services and software installation and integration. In addition, DJS
sells a complete line of personal computers and peripheral equipment.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
The Company's reportable segments are separate companies which are managed
separately. In prior years the Company owned two other subsidiary companies,
Electrograph Systems, Inc. which was sold in April 1997 and Systems Solutions
Technology, Inc. which was sold in June 1998. Both companies marketed personal
computers and peripheral equipment. Those companies are included in the "All
Other" column for fiscal years ending June 30, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
BITWISE DJS ALL OTHER TOTALS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SEGMENT INFORMATION:
June 30, 1999
Revenues from external customers...... $ 7,674,451 $ 9,420,314 $17,094,765
Intersegment revenues................. 116,680 116,680
Interest and other revenue............ 107,208 107,208
Interest expense...................... 595,345 35,051 630,396
Depreciation and amortization......... 586,591 50,595 637,186
Segment profit/(loss)................. (3,331,296) 392,854 (2,938,442)
Segment assets........................ 11,831,310 2,667,161 14,498,471
June 30, 1998
Revenues from external customers...... $ 9,002,203 $11,159,759 $13,593,663 $33,755,625
Intersegment revenues................. 59,738 321,366 381,104
Interest and other revenue............ 156,241 400 6,485 163,126
Interest expense...................... 511,414 225,983 202,198 939,595
Depreciation and amortization......... 686,804 59,642 66,946 813,392
Segment profit/(loss)................. (4,196,227) (594,609) (128,593) (4,919,429)
</TABLE>
F-19
<PAGE> 67
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BITWISE DJS ALL OTHER TOTALS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Other significant non cash items:
Receipt of common shares with a
market value of $76,296 in
satisfaction of a note
receivable....................... 145,657 145,657
Segment assets........................ 12,463,515 2,274,346 14,737,861
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
RECONCILIATIONS:
Revenues:
Total revenues for reportable segments...................... $17,211,445 $34,136,729
Elimination of intersegment revenues........................ (116,680) (381,104)
----------- -----------
Total consolidated revenues................................. $17,094,265 $33,755,625
=========== ===========
Profit or (Loss):
Total profit or loss for reportable segments................ $(2,688,874) $(4,919,429)
Product development expenses................................ (248,801) (230,652)
Loss on sale of subsidiary.................................. (249,568) (255,888)
Elimination of intersegment profits......................... 15,920 (15,989)
----------- -----------
Loss before income taxes.................................... $(3,171,323) $(5,421,958)
=========== ===========
Assets:
Total assets for reportable segments........................ $14,498,471 $14,737,861
Elimination of intersegment profit.......................... (13,487) (29,407)
----------- -----------
Consolidated total assets................................... $14,484,984 $14,708,454
=========== ===========
</TABLE>
18. SUBSEQUENT EVENTS
On October 4, 1999, the Company closed three concurrent private offerings.
In the first offering, the Company sold 740,000 units at an aggregate offering
price of $740,000, each unit consisting of two shares of common stock and two
Series B common stock purchase warrants (the "Series B Warrants"). The Series B
Warrants entitle the holder to purchase one share of common stock at an exercise
price of $1.375 per share during the offering period commencing on the date of
issuance and terminating five years thereafter. The Series B warrants are
redeemable at any time commencing one year after issuance at the option of the
Company with not less than 30 nor more than 60 days written notice to the
registered holders at a redemption price of $.05 per warrant provided; (i) The
public sale of the shares of common stock issuable upon exercise of the Series B
warrants are covered by a tentative registration statement; and (ii) During each
of the immediately preceding 20 consecutive trading days ending within 10 days
of the date of the notice of redemption, the closing bid price of the Company's
common stock is at least $3.25 per share.
In the second offering, the Company sold 50,000 shares of a newly created
class of Series B convertible cumulative preferred stock (the "Series B
Preferred Stock"). The Series B preferred stock was sold at $25.00 per share for
an aggregate offering price of $1,250,000. Dividends on the Series B Preferred
Stock are payable at the rate of 10% per annum, semi-annually in cash. Each
share of Series B Preferred Stock is convertible into shares of the Company's
common stock or is converted into such number of shares of the common stock as
shall equal $25.00 divided by the conversion price of $1.875 per share subject
to adjustment under certain circumstances. Commencing three years after the
closing, the conversion price shall be the lower of $1.875 per share or the
average of the closing bid and asked price of the Company's common stock for the
10 consecutive trading days immediately ending one trading day prior to the
notice of the date of conversion;
F-20
<PAGE> 68
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provided, however, that the holders are not entitled to convert more than 20% of
the Series B preferred shares held by such holder on the third anniversary of
the date of issuance per month. The Series B Preferred Stock is redeemable at
any time commencing one year after issuance or not less than 30 nor more than 60
days written notice at a redemption price of $25 per share plus accrued and
unpaid dividends provided; (i) the public sale of the shares of common stock
issuable upon conversion of the Series B preferred Stock (the "Conversion
Shares") are covered by an effective registration statement or are otherwise
exempt from registration; and (ii) during the immediately preceding 20
consecutive trading days ending within 10 days of the date of the notice of
redemption, the closing bid price of the Company's Common Stock is not less than
$3.75 per share.
Commencing 34 months after the Closing, the Series B Preferred Stock is
redeemable at the option of the Company without regard to the closing price of
the Company's Common Stock.
The Company also created a new subsidiary, Authentidate.Com, LLC through
which it will market its new Internet service which allows for the verification
of the authenticity of digital images. In connection with the above offerings,
the purchasers were granted the right to purchase 20% of Authentidate.Com, LLC
for $100,000. In addition, the Purchasers were issued an aggregate of 999,999
Series C common stock purchase warrants (the "Series C Warrants"). The Series C
Warrants are redeemable at any time commencing six months after issuance, on not
less than 30 nor more than 60 days written notice to registered holders at a
redemption price equal to $.05 per Warrant, provided (i) the public sale of the
shares of common stock issuable upon exercise of the Series C Warrants (the
"Warrant Shares") are covered by an effective registration statement or are
otherwise exempt from registration; and (ii) during each of the immediately
preceding 20 consecutive trading days ending within 10 days of the date of the
notice of redemption, the closing bid price of the Company's common stock is not
less than 120% of the current exercise price of the Series C Warrants.
The Series C Warrants were also divided into three classes (333,333
warrants per class) to provide for varying exercise prices. The exercise price
of the Series C Warrants is as follows:
Class I -- $1.50 per share of Common Stock, increasing (i) $.75 per share
thirty days after the effective date of the registration statement covering the
underlying shares (the "Registration Statement"); (ii) an additional $.75 per
share seven months after the effective date of the Registration Statement; and
(iii) an additional $.75 per share 13 months after the effective date of the
Registration Statement, subject to adjustment for stock splits and corporate
reorganizations.
Class II -- $1.50 per share of Common Stock, increasing (i) $.75 per share
sixty days after the effective date of the Registration Statement; (ii) an
additional $.75 per share seven months after the effective date of the
Registration Statement; and (iii) an additional $.75 per share 13 months after
the effective date of the Registration Statement, subject to adjustment for
stock splits and corporate reorganizations.
Class III -- $1.50 per share of Common Stock, increasing (i) $.75 per share
ninety days after the effective date of the Registration Statement; (ii) an
additional $.75 per share seven months after the effective date of the
Registration Statement; and (iii) an additional $.75 per share 13 months after
the effective date of the Registration Statement, subject to adjustment for
stock splits and corporate reorganizations.
The Company received gross proceeds of approximately $2,000,000. The
Company has utilized the proceeds of the three offerings as follows:
approximately $600,000 has been utilized to repay a portion of the Company's
line of credit; approximately $400,000 will be utilized to develop the
Authentidate.com business; approximately $160,000 was utilized to make a past
due interest payment on the Company's outstanding 8% convertible notes, and the
remainder has been reserved for working capital. The Company included offering
expenses of approximately $60,000.
F-21
<PAGE> 69
5,516,416 SHARES
1,520,000 SERIES B WARRANTS
BITWISE DESIGNS, INC.
COMMON STOCK
SERIES B WARRANTS
PROSPECTUS
, 1999
<PAGE> 70
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Delaware provides generally that a
corporation may indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative in nature
to procure a judgment in its favor, by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) and, in a proceeding not by or in
the right of the corporation, judgments, fines and amounts paid in settlement,
actually and reasonably incurred by him in connection with such suit or
proceeding, if he acted in good faith and in a manner believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reason to believe his conduct was
unlawful. Delaware law further provides that a corporation will not indemnify
any person against expenses incurred in connection with an action by or in the
right of the corporation if such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his duty to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine that, despite the adjudication of liability but in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for the expenses which such court shall deem proper.
Our By-Laws provide for indemnification of our officers and directors to
the greatest extent permitted by Delaware law for any and all fees, costs and
expenses incurred in connection with any action or proceeding, civil or
criminal, commenced or threatened, arising out of services by or on behalf of
us, providing such officer's or director's acts were not committed in bad faith.
The By-Laws also provide for advancing funds to pay for anticipated costs and
authorizes the Board to enter into an indemnification agreement with each
officer or director.
In accordance with Delaware law, our Certificate of Incorporation contains
provisions eliminating the personal liability of directors, except for breach of
a director's fiduciary duty of loyalty to us or to our stockholders, acts or
omission not in good faith or which involve intentional misconduct or a knowing
violation of the law, and in respect of any transaction in which a director
receives an improper personal benefit. These provisions only pertain to breaches
of duty by directors as such, and not in any other corporate capacity, e.g., as
an officer. As a result of the inclusion of such provisions, neither Bitwise nor
our stockholders may be able to recover monetary damages against directors for
actions taken by them which are ultimately found to have constituted negligence
or gross negligence, or which are ultimately found to have been in violation of
their fiduciary duties, although it may be possible to obtain injunctive or
equitable relief with respect to such actions. If equitable remedies are found
not to be available to stockholders in any particular case, stockholders may not
have an effective remedy against the challenged conduct.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and therefore is unenforceable.
II-1
<PAGE> 71
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We will bear all expenses in connection with the issuance and distribution
of the securities, including those set forth below. None of these expenses will
be borne by the Selling Security Holders.
<TABLE>
<CAPTION>
ITEMS AMOUNTS
- ----- ----------
<S> <C>
Securities and Exchange Commission Registration Fee......... $10,666.69
Printing and Engraving Expenses............................. $ 2,000.00*
Accounting Fees and Expenses................................ $ 3,500.00
Legal Fees and Expenses..................................... $ 5,000.00
Blue Sky Fees and Expenses.................................. $ 2,500.00*
Transfer Agent and Registrar Fees........................... $ 2,000.00*
Miscellaneous Fees and Expenses............................. $ 0.00*
----------
Total............................................. $25,666.69*
==========
</TABLE>
- ---------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On October 4, 1999, we closed two concurrent private offerings. In the
first offering, we sold 740,000 units at an aggregate offering price of
$740,000. Each unit consisted of two shares of common stock and two Series B
Common Stock Purchase Warrants.
SERIES B WARRANTS
- The Series B Warrants entitle the holder to purchase one share of common
stock at an exercise price of $1.375 per share during the offering period
commencing on the date of issuance and terminating five years thereafter.
- The Series B Warrants are redeemable at any time commencing one year
after issuance at our option with not less than 30 nor more than 60 days
written notice to the registered holders at a redemption price of $.05
per warrant provided; (1) The public sale of the shares of common stock
issuable upon exercise of the Series B warrants are covered by a
tentative registration statement; and (2) During each of the immediately
preceding 20 consecutive trading days ending within 10 days of the date
of the notice of redemption, the closing bid price of our common stock is
at least $3.25 per share.
In the second offering, we sold 50,000 shares of a newly created class of Series
B convertible cumulative Preferred Stock. The Series B Preferred Stock was sold
at $25.00 per share for an aggregate offering price of $1,250,000.
SERIES B PREFERRED STOCK
The following terms apply to the Series B Preferred Stock:
- - DIVIDENDS Dividends on the Series B Preferred Stock are
payable at the rate of 10% per annum,
semi-annually in cash.
- - CONVERSION Each share of Series B Preferred Stock is
convertible into the number of shares of our
common stock as shall equal $25.00 divided by
the conversion price of $1.875 per share,
subject to adjustment under certain
circumstances.
- - ADJUSTMENT TO CONVERSION
PRICE Commencing three years after the closing, the
conversion price shall be the lower of $1.875
per share or the average of the closing bid and
asked price of our common stock for the 10
consecutive trading days immediately ending one
trading day prior to the notice
II-2
<PAGE> 72
of the date of conversion; provided, however,
that the holders are not entitled to convert
more than 20% of the Series B preferred shares
held by such holder on the third anniversary of
the date of issuance per month.
- - REDEMPTION The Series B Preferred Stock is redeemable at
any time commencing one year after issuance or
not less than 30 nor more than 60 days written
notice at a redemption price of $25 plus
accrued and unpaid dividends provided;
- the public sale of the shares of common
stock issuable upon conversion of the
Series B Preferred Stock are covered by
an effective registration statement or
are otherwise exempt from registration;
and
- during the immediately preceding 20
consecutive trading days ending within
10 days of the date of the notice of
redemption, the closing bid price of our
Common Stock is not less than $3.75 per
share.
Commencing 34 months after the Closing, the
Series B Preferred Stock is redeemable at our
option without regard to the closing price of
our Common Stock.
We also created a new subsidiary, Authentidate.com, Inc. through which we
will market our new Internet service which allows for the verification of the
authenticity of digital images. In connection with the above offerings, the
purchasers were granted the right to purchase 20% of Authentidate.com, Inc. for
$100,000. In addition, combined with the offering of common stock in
Authentidate, we offered an aggregate of 999,999 Series C Common Stock Purchase
Warrants.
SERIES C WARRANTS
- The Series C Warrants are redeemable at any time commencing six months
after issuance, on not less than 30 nor more than 60 days written notice
to registered holders at a redemption price equal to $.05 per Warrant,
provided (1) the public sale of the shares of common stock issuable upon
exercise of the Series C Warrants are covered by an effective
registration statement or are otherwise exempt from registration; and (2)
during each of the immediately preceding 20 consecutive trading days
ending within 10 days of the date of the notice of redemption, the
closing bid price of our common stock is not less than 120% of the
current exercise price of the Series C Warrants.
- The Series C Warrants were also divided into three equal classes of
333,333 each to provide for varying exercise prices. The exercise price
of the Series C Warrants is as follows:
Class I $1.50 per share of Common Stock, increasing (1) $.75 per share 30
days after the effective date of the registration statement
covering the underlying shares; (2) an additional $.75 per share
7 months after the effective date; and (3) an additional $.75 per
share 13 months after the effective date, subject to adjustment
for stock splits and corporate reorganizations.
Class II $1.50 per share of Common Stock, increasing (1) $.75 per share 60
days after the effective date of the registration statement; (2)
an additional $.75 per share 7 months after the effective date;
and (3) an additional $.75 per share 13 months after the
effective date, subject to adjustment for stock splits and
corporate reorganizations.
Class III $1.50 per share of Common Stock, increasing (1) $.75 per share 90
days after the effective date of the registration statement; (2)
an additional $.75 per share 7 months after the effective date;
and (3) an additional $.75 per share 13 months after the
effective date, subject to adjustment for stock splits and
corporate reorganizations.
II-3
<PAGE> 73
We currently received gross proceeds of approximately $1,990,000 and will
receive an additional $100,000 upon the closing of the offering of Authentidate
common stock and our Series C Warrants.
We have utilized the proceeds of the three offerings as follows:
- approximately $600,000 has been utilized to repay a portion of our line
of credit;
- approximately $400,000 will be utilized to develop the Authentidate.com
business;
- approximately $160,000 was utilized to make a past due interest payment
on our outstanding 8% convertible notes; and
- the remainder has been reserved for working capital.
We incurred offering expenses of approximately $60,000.
ITEM 27. EXHIBITS
The following exhibits are filed herewith.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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 Note and Warrant Purchase, Paying and
Conversion/Exercise agency agreement dated as of August 8,
1997 between the Company and Banca del Gottardo (Exhibit 4.7
to the Company's Form 10-KSB dated June 30, 1997).
4.4 Terms of 8% Convertible Notes due August 11, 2002 (Exhibit
4.8 to the Company's Form 10-KSB dated June 30, 1997).
4.5 Form of Series B Warrant
4.6 Form of Series C Warrant
4.7 Form of Warrant held by members of Goldstein & DiGioia, LLP
4.8 Form of Series B Convertible Preferred Stock
5. Opinion of Goldstein & DiGioia, LLP re legality of shares
offered (to be filed by amendment).
10.1 Employment agreement with John T. Botti, dated April, 1992
(Exhibit 10.8 to Registration Statement on Form S-18, File
No. 33-46246-NY)
10.2 Employment agreement with Ira C. Whitman, dated April, 1992
(Exhibit 10.9 to Registration Statement on Form S-18, File
No. 33-46246-NY)
10.3 1992 Employee stock option plan (Exhibit 10.10 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.4 1992 Nonexecutive Directors stock option plan (Exhibit 10.11
to Registration Statement on Form S-18, File No.
33-46246-NY)
10.5 Loan agreement with Norstar Bank dated February 6, 1992
(Exhibit 10.13 to Registration Statement on Form S-18, File
No. 33-46246-NY)
10.6 Form of Conversion Agency Agreement between the Company and
Banca del Gottardo dated as of August 8, 1997 (Exhibit 10.24
to Form 10-KSB dated June 30, 1997).
</TABLE>
II-4
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.7 Form of Warrant Agency Agreement between the Company and
Banca del Gottardo dated as of August 8, 1997 (Exhibit to
Form 10-KSB dated June 30, 1997).
10.8 Stock Purchase and Merger Agreement dated April 7, 1998
between the Company USI and SST. (Exhibit A to Proxy
Statement dated May 8, 1998).
10.9 Financial Consulting Agreement, dated September 21, 1999, by
and between Bitwise Designs and Corporate Funding Group,
LLC.
10.10 Consulting Agreement, dated September 23, by and between
Bitwise Designs, Inc. and Nicholas Themelis.
10.11 Line of Credit Agreement with Bank of America, dated October
1, 1999.
10.12 Service Agreement, dated September 15, 1999, by and between
Bitwise Designs, Inc. and Shore Venture Group, L.L.C.
11 Statement re: Computation of Per Share Earnings (Exhibit 11
to Form 10-KSB, filed October 4, 1999).
21 Subsidiaries of Registrant. (Exhibit 21 to Form 10-KSB,
filed October 4, 1999).
23.1 Consent of PricewaterhouseCoopers, LLP.
23.2 Consent of Goldstein & DiGioia, LLP, contained in Exhibit 5.
</TABLE>
ITEM 28. UNDERTAKINGS
(a) We hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10 (a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of a prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a twenty percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement;
(iii) To include any material information with respect to the plan
of distribution.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore, unenforceable.
II-5
<PAGE> 75
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-6
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we certify that
we have reasonable grounds to believe that we meet all of the requirements for
filing on Form SB-2 and have duly caused this Registration Statement to be
signed on our behalf by the undersigned, thereunto duly authorized, in the City
of Albany, New York, on November 18, 1999.
BITWISE DESIGNS, INC.
By: /s/ JOHN T. BOTTI
------------------------------------
John T. Botti
Chief Executive Officer, Chairman of
the Board and President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below substitutes and appoints John Botti his true and lawful attorney-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be don in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1933, this
registration statement has been signed below by the following persons on our
behalf and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ JOHN T. BOTTI President, Chief Executive November 18, 1999
- --------------------------------------------------- Officer, Chairman of the Board
John T. Botti and Director
/s/ IRA C. WHITMAN Senior Vice President, November 18, 1999
- --------------------------------------------------- Secretary and Director
Ira C. Whitman
/s/ STEPHEN A. KRIEGSMAN Director November 18, 1999
- ---------------------------------------------------
Steven A. Kriegsman
/s/ J. EDWARD SHERIDAN Director November 18, 1999
- ---------------------------------------------------
J. Edward Sheridan
/s/ CHARLES C. JOHNSTON Director November 18, 1999
- ---------------------------------------------------
Charles C. Johnston
/s/ NICHOLAS T. THEMELIS Director November 18, 1999
- ---------------------------------------------------
Nicholas T. Themelis
/s/ DENNIS H. BUNT Chief Financial Officer and November 18, 1999
- --------------------------------------------------- Principal Accounting Officer
Dennis H. Bunt
</TABLE>
II-7
<PAGE> 1
EXHIBIT 3.1.1
BITWISE DESIGNS, INC.
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND
RIGHTS AND NUMBER OF SHARES OF SERIES B
CONVERTIBLE PREFERRED STOCK
Pursuant to Section 151 of the
Delaware General Corporation Law
The undersigned President and Secretary, respectively, of BITWISE
DESIGNS, INC., a Delaware corporation (the "Corporation"), certify that pursuant
to authority granted to and vested in the Board of Directors of the corporation
by the provisions of the Certificate of Incorporation and in accordance with the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, its Board of Directors has duly adopted the following resolutions
creating the Series B Convertible Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by the Corporation's Certificate of Incorporation,
a series of preferred stock of the Corporation be, and it hereby is, created out
of the 4,999,800 shares of authorized but unissued shares of the preferred
stock, par value $.10 per share, of the Corporation, such series to be
designated Series B Convertible Preferred Stock (the "Series B Preferred
Stock"), to consist of 50,000 shares, par value $.10 per share, of which the
preferences and relative and other rights, and the qualifications, limitations
or restrictions thereof, shall be (in addition to those set forth in the
Corporation's Certificate of Incorporation) as follows:
(1) Certain Definitions
Unless the context otherwise requires, the terms defined in this
paragraph 1 shall have, for all purposes of this resolution, the meanings herein
specified.
Closing. The term "Closing" shall mean the date on which the
Corporation first accepts a subscription for the Series B Preferred Stock.
Common Stock. The term "Common Stock" shall mean all shares now or
hereafter authorized of any class of Common Stock, par value $.001 per share, of
the Corporation, and any other stock of the Corporation, howsoever designated,
authorized after the Issue Date, which has the right (subject always to prior
rights of any class or series of preferred stock) to participate in the
distribution of the assets and earnings of the Corporation without limit as to
per share amount.
Conversion Date. The term "Conversion Date" shall have the meaning set
forth in subparagraph 4(b) below.
<PAGE> 2
Conversion Price shall equal $1.875, as may be adjusted from time to
time.
Conversion Rate. The term "Conversion Rate" shall mean the number of
shares of Common Stock deliverable upon conversion of a share of the Series B
Preferred Stock, which rate shall equal the Issue Price divided by the
Conversion Price.
Conversion Shares. The shares of Common Stock issued or issuable to the
holders of the Series B Preferred Stock upon conversion thereof in accordance
with the terms hereof.
Dividend Date. The term "Dividend Date" shall mean June 30th and
December 31st of each year that any share of the Series B Preferred Stock is
outstanding.
Issue Date. The term "Issue Date" shall mean the date that shares of
Series B Preferred Stock are first issued by the Corporation.
Issue Price. The term "Issue Price" shall mean the per share price of
the Series B Preferred Stock of $25.00 issued by the Corporation.
Junior Stock. The term "Junior Stock" shall mean any class or series of
capital stock of the Corporation, including the Common Stock, ranking junior to
the Series B Preferred Stock in respect of the right to receive dividends, and
for the purposes of paragraphs 2 and 3 below, any class or series of capital
stock of the Corporation, including the Common Stock, ranking junior to the
Series B Preferred Stock in respect of the right to receive assets upon the
liquidation, dissolution or winding up of the affairs of the Corporation.
Offering. The term "Offering" shall mean the offering by the
Corporation to certain accredited investors, pursuant to Section 4(2) of the
Securities Act of 1933, as amended, and/or Regulation D promulgated thereunder,
of: (1) 740,000 units of its securities, each unit consisting of two shares of
Common Stock and two Series B Common Stock Purchase Warrants; (2) 50,000 shares
of Series B Preferred Stock; and (3) 999,999 Series C Common Stock Purchase
Warrants, as described in the Corporation's Subscription Agreements dated
September 21, 1999.
Redemption Date. The term "Redemption Date" shall mean any date set by
the Corporation for redemption of all or a part of the Series B Preferred Stock
in accordance with Section 6 hereof.
Redemption Price. The term "Redemption Price" shall mean $25.00 per
share of Series B Preferred Stock, plus accrued and unpaid dividends.
Senior Stock. The term "Senior Stock" shall mean any class or series of
stock of the Corporation issued after the Issue Date ranking senior to the
Series B Preferred Stock in respect of the right to receive dividends, and, for
the purposes of paragraph 3 below, any class or series of stock of the
Corporation issued after the Issue Date ranking senior to the Series B Preferred
2
<PAGE> 3
Stock in respect of the right to receive assets upon the liquidation,
dissolution or winding up of the affairs of the Corporation.
Subsidiary. The term "Subsidiary" shall mean any corporation of which
shares of stock possessing at least a majority of the general voting power in
electing the board of directors are, at the time as of which any determination
is being made, owned by the Corporation, whether directly or indirectly through
one or more Subsidiaries.
(2) Dividends
Subject to the limitations described below, holders of shares of the
Series B Preferred Stock will be entitled to receive, when, as and if declared
by the Board out of funds of the Company legally available for payment,
dividends in cash at an annual rate of 10% per share, payable semi-annually and
commencing on December 31, 1999 and thereafter on June 30th and December 31st of
each year. Dividends will be cumulative from the date of original issuance of
the Series B Preferred Stock and will be payable to holders of record as they
appear on the stock books of the Company on the tenth business day prior to the
dividend payment date.
The Series B Preferred Stock will be junior to dividends to any series
or class of the Company's stock hereafter issued which ranks senior as to
dividends to the Series B Preferred Stock ("Senior Dividend Stock"), and if at
any time any dividend on Senior Dividend Stock is in default, the Company may
not pay any dividend on the Series B Preferred Stock until all accrued and
unpaid dividends on the Senior Dividend Stock for all prior periods and the
current period are paid or declared and set aside for payment. No such Senior
Dividend Stock shall be issued without the approval of holders of a majority of
the Series B Preferred Stock. The Series B Preferred Stock will have priority as
to dividends over the Common Stock and any other series or class of the
Company's stock hereafter issued which ranks junior as to dividends to the
Series B Preferred Stock ("Junior Dividend Stock"), and no dividend (other than
dividends payable solely in Junior Dividend Stock) may be paid on, and no
purchase, redemption or other acquisition may be made by the Company of, any
Junior Dividend Stock unless all accrued and unpaid dividends on the Series B
Preferred Stock for all prior periods and the current period have been paid or
declared and set apart for payment. The Company may not pay dividends on any
class or series of the Company's stock having parity with the Series B Preferred
Stock as to dividends ("parity dividend stock"), unless it has paid or declared
and set apart for payment or contemporaneously pays or declares and sets apart
for payment all accrued and unpaid dividends for all prior periods on the Series
B Preferred Stock and may not pay dividends on the Series B Preferred Stock
unless it has paid or declared and set apart for payment or contemporaneously
pays or declares and sets apart for payment all accrued and unpaid dividends for
all prior periods on the parity dividend stock. Whenever all accrued dividends
are not paid in full on the Series B Preferred Stock or any parity dividend
stock, all dividends declared on the Series B Preferred Stock and such parity
dividend stock will be declared or made pro rata so that the amount of dividends
declared per share on the Series B Preferred Stock and such parity dividends
stock will bear the same ratio that accrued and
3
<PAGE> 4
unpaid dividends per share on the Series B Preferred Stock and such parity
dividend stock bear to each other.
The amount of dividends payable for the initial dividend period and for
any period shorter than a full year dividend period will be computed on the
basis of a 360-day year of twelve 30-day months. No interest will be payable in
respect of any dividend payment on the Series B Preferred Stock which may be in
arrears.
(3) Distributions Upon Liquidation, Dissolution or Winding Up.
In case of the voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of shares of Series B Preferred Stock are
entitled to receive the liquidation price of $25.00 per share, plus an amount
equal to any accrued and unpaid dividends to the payment date, before any
payment or distribution is made to the holders of the Common Stock or any other
series or class of the Company's stock hereafter issued which ranks junior as to
liquidation rights to the Series B Preferred Stock. The holders of the shares of
the Series B Preferred will not be entitled to receive the liquidation price of
such shares until the liquidation price of any other series or class of the
Company's stock hereafter issued which ranks senior as to the liquidation rights
to the Series B Preferred Stock ("senior liquidation stock") has been paid in
full. No such senior liquidation stock shall be issued without the approval of
holders of a majority of the Series B Preferred Stock. See "Voting Rights." The
holders of Series B Preferred Stock and all series or classes of the Company's
stock hereafter issued which rank on a parity as to liquidation rights with the
Series B Preferred Stock ("parity liquidation stock") are entitled to share
ratably, in accordance with the respective preferential amounts payable on such
stock, in any distribution (after payment of the liquidation price of the senior
liquidation stock) which is not sufficient to pay in full the aggregate of the
amounts payable thereon. After payment in full of the liquidation price of the
shares of the Series B Preferred Stock, the holders of such shares will not be
entitled to any further participation in any distribution of assets by the
Company. Neither a consolidation or merger of the Company with another
corporation, nor a sale or transfer of all or part of the Company's assets for
cash, securities or other property will be considered a liquidation, dissolution
or winding up of the Company.
(4) Conversion Rights
The Series B Preferred Stock shall be convertible into Common
Stock as follows:
(a) Optional Conversion. The holders of Series B Preferred Stock will
be entitled to convert their shares of Series B Preferred Stock into one share
of Common Stock (the "Conversion Shares") without the Company's consent at any
time commencing one year after the closing of the Offering (the "Closing"), at
the option of the holder, into such number of shares of the Company's Common
Stock as shall equal the Issue Price divided by $1.875, subject to adjustment
for stock splits, corporate reorganizations and other events identified herein.
Commencing three years after the Closing, however, the Conversion Price shall be
the lower of (i) $1.875 per share, subject to
4
<PAGE> 5
adjustment to for stock splits, corporate reorganizations and other events
identified herein, and (ii) the average of the closing bid and asked prices of
the Company's Common Stock for the immediately preceding 10 consecutive trading
days ending one trading day prior to the date of the notice of conversion;
provided, however, that the holder shall not be entitled to convert more than
20% of the Series B Preferred Shares held by such holder on the third
anniversary of the Closing during any period of thirty days. Conversion rights
will expire after 5:00 p.m. on the redemption date for any shares of Series B
Preferred Stock which the Company has called for redemption. No payment or
adjustment will be made in respect of dividends on Series B Preferred Stock that
may be accrued or unpaid or in arrears upon conversion of shares of Series B
Preferred Stock. No fractional shares will be issued and, in lieu of any
fractional share, cash in an amount based on the then current market price,
determined as provided in this Certificate of Designation, of the Common Stock
will be paid.
(b) Mechanics of Conversion. The holder of any shares of Series B
Preferred Stock may exercise the conversion right specified in subparagraph 4(a)
by surrendering to the Corporation or any transfer agent of the Corporation the
certificate or certificates for the shares to be converted, accompanied by
written notice specifying the number of shares to be converted; provided that
the Corporation shall not be obligated to issue to any such holder certificates
evidencing the shares of Common Stock issuable upon such conversion unless
certificates evidencing the shares of Series B Preferred Stock are either
delivered to the Corporation or any transfer agent of the Corporation.
Conversion of the shares may be exercised in whole or in part by the holder by
faxing an executed and completed notice of conversion to the Corporation and
delivering the original notice of conversion and the certificate representing
the shares of Series B Preferred Stock being converted to the Corporation by
express courier within three (3) business days of exercise. Conversion shall be
deemed to have been effected on the date when delivery of notice of an election
to convert and certificates for shares to be converted are delivered to the
Corporation and such date is referred to herein as the "Conversion Date".
Subject to the provisions of subparagraph 4(d)(iv), as promptly as practicable
thereafter, the Corporation shall issue and deliver to or upon the written order
of such holder a certificate or certificates for the number of full shares of
Common Stock to which such holder is entitled and a check or cash with respect
to any fractional interest in a share of Common Stock as provided in
subparagraph 4(c). Subject to the provisions of subparagraph 4(d)(iv), the
person in whose name the certificate or certificates for Common Stock are to be
issued shall be deemed to have become a holder of record of such Common Stock on
the applicable Conversion Date. Upon conversion of only a portion of the number
of shares covered by a certificate representing shares of Series B Preferred
Stock surrendered for conversion (in the case of conversion pursuant to
subparagraph 4(a), the Corporation shall issue and deliver to or upon the
written order of the holder of the certificate so surrendered for conversion, at
the expense of the Corporation, a new certificate covering the number of shares
of Series B Preferred Stock representing the unconverted portion of the
certificate so surrendered. Upon receipt by the Corporation of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of a
Series B Preferred Stock Certificate, and, in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and
reimbursement to the Corporation of all reasonable expenses incidental thereto,
and upon
5
<PAGE> 6
surrender and cancellation of the certificates, if mutilated, the Corporation
will make and deliver a Series B Preferred Stock certificate of like tenor, in
lieu thereof and any such lost, stolen, destroyed or mutilated certificate shall
thereupon become void.
(c) Fractional Shares. No fractional shares of Common Stock or scrip
shall be issued upon conversion of shares of Series B Preferred Stock. If more
than one share of Series B Preferred Stock shall be surrendered for conversion
at any one time by the same holder, the number of full shares of Common stock
issuable upon conversion thereof shall be computed on the basis of the aggregate
number of shares of Series B Preferred Stock so surrendered. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of Series B Preferred Stock, the Corporation shall pay
a cash adjustment in respect of such fractional interest in an amount equal to
that fractional interest multiplied by the Conversion Price.
(d) Conversion Rate Adjustments. The Conversion Rate shall be subject
to adjustment from time to time as follows:
(i) Stock Dividends, Subdivisions, Reclassifications or
Combinations. If the Corporation shall (A) declare a dividend or make a
distribution on its Common Stock in shares of its Common Stock, (B) subdivide or
reclassify the outstanding shares of Common Stock into a greater number of
shares, or (C) combine or reclassify the outstanding Common Stock into a smaller
number of shares, the Conversion Rate in effect at the time of the record date
for such dividend or distribution or the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted so that the
holder of any shares of Series B Preferred Stock surrendered for conversion
after such date shall be entitled to receive the number of shares of Common
Stock which he would have owned or been entitled to receive had such Series B
Preferred Stock been converted immediately prior to such date. Successive
adjustments in the Conversion Rate shall be made whenever any event specified
above shall occur.
(ii) Other Distributions. In case the Corporation shall fix a
record date for the making of a distribution to all holders of shares of its
Common Stock (A) of shares of any class other than its Common Stock or (B) of
evidence of indebtedness of the Corporation or any Subsidiary or (C) of assets
(excluding cash dividends or distributions, and dividends or distributions
referred to in subparagraph 4(d)(i) above), or (D) of rights or warrants
(excluding those referred to in subparagraph 4(d)(i) above), each holder of a
share of Series B Preferred Stock shall, upon the exercise of his right to
convert after such record date, receive, in addition to the shares of Common
Stock to which he is entitled, the amount of such shares, indebtedness, or
assets, rights or warrants (or, at the option of the Corporation, the sum equal
to the value thereof at the time of distribution as determined by the Board of
Directors in its sole discretion) that would have been distributed to such
holder if he had exercised his right to convert immediately prior to the record
date for such determination.
6
<PAGE> 7
(iii) Consolidation, Merger, Sale or Conveyance. In case of
any consolidation or merger of the Company with any other corporation (other
than a wholly owned subsidiary), or in case of sale or transfer of all or
substantially all of the assets of the Company, or in the case of any share
exchange whereby the Common Stock is converted into other securities or
property, the Company will be required to make appropriate provision so that the
holder of each share of Series B Preferred Stock then outstanding will have the
right thereafter to convert such share of Series B Preferred Stock into the kind
and amount of shares of stock and other securities and property receivable upon
such consolidation, merger, sale, transfer or share exchange by a holder of the
number of shares of Common Stock into which such share of Series B Preferred
Stock might have been converted immediately prior to such consolidation, merger,
sale, transfer or share exchange.
(iv) Timing of Issuance of Additional Common Stock Upon
Certain Adjustments. In any case in which the provisions of this subparagraph
(d) shall require that any adjustment shall become effective immediately after a
record date for an event, the Corporation may defer until the occurrence of such
event (A) issuing to the holder of any share of Series B Preferred Stock
converted after such record date and before the occurrence of such event the
additional shares of Common Stock issuable upon such conversion by reason of the
adjustment required by such event over and above the shares of Common Stock
issuable upon such conversion before giving effect to such adjustment and (B)
paying to such holder any amount of cash in lieu of a fractional share of Common
Stock pursuant to subparagraph (e) of this paragraph 4, provided that the
Corporation upon request shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares, and such cash, upon the occurrence of the event requiring such
adjustment.
(e) Statement Regarding Adjustments. Whenever the Conversion Rate shall
be adjusted as provided in subparagraph 4(d), the Corporation shall forthwith
file, at the office of any transfer agent for the Series B Preferred Stock and
at the principal office of the Corporation, a statement showing in detail the
facts requiring such adjustment and the Conversion Rate that shall be in effect
after such adjustment, and the Corporation shall also cause a copy of such
statement to be sent by registered or certified mail, return receipt requested,
postage prepaid, to each holder of shares of Series B Preferred Stock at its
address appearing on the Corporation's records. Each such statement shall be
signed by the Corporation's independent public accountants, if applicable. Where
appropriate, such copy may be given in advance and may be included as part of a
notice required to be mailed under the provisions of subparagraph 4(f).
(f) Notice to Holders. In the event the Corporation shall propose to
take any action of the type described in clause (d) (but only if the action
would result in an adjustment in the Conversion Rate), (ii) or (iii) of
subparagraph 4(d), the Corporation shall give notice to each holder of shares of
Series B Preferred Stock, in the manner set forth in subparagraph 4(f), which
notice shall specify the record date, if any, with respect to any such action
and the approximate date on which such action is to take place. Such notice
shall also set forth such facts with respect thereto as shall be reasonably
necessary to indicate the effect of such action (to the extent such effect may
be known at the date of such notice) on the Conversion Price and the number,
kind or
7
<PAGE> 8
class of shares or other securities or property which shall be deliverable upon
conversion of shares of Series B Preferred Stock. In the case of any action
which would require the fixing of a record date, such notice shall be given at
least 10 days prior to the date so fixed, and in case of all other action, such
notice shall be given at least 10 days prior to the taking of such proposed
action. Failure to give such notice, or any defect therein, shall not, however,
affect the legality or validity of any such action.
(g) Costs. The Corporation shall pay all documentary, stamp, transfer
or other transactional taxes attributable to the issuance or delivery of shares
of Common Stock upon conversion of any shares of Series B Preferred Stock;
provided that the Corporation shall not be required to pay any taxes which may
be payable in respect of any transfer involved In the issuance or delivery of
any certificate for such shares in a name other than that of the holder of the
shares of Series B Preferred Stock in respect of which such shares are being
issued.
(h) Reservation of Shares. The Corporation shall reserve at all times
so long as any shares of Series B Preferred Stock remain outstanding, free from
preemptive rights, out of its treasury stock (if applicable) or its authorized
but unissued shares of Common Stock, or both, solely for the purpose of
effecting the conversion of the shares of Series B Preferred Stock, sufficient
shares of Common Stock to provide for the conversion of all outstanding shares
of Series B Preferred Stock.
(i) Valid Issuance. All shares of Common Stock which may be issued upon
conversion of the shares of Series B Preferred Stock will upon issuance by the
Corporation be duly and validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issuance thereof, and the
Corporation shall take no action which will cause a contrary result (including,
without limitation, any action which would cause the Conversion Price to be less
than the par value, if any, of the Common Stock).
(5) Voting Rights
The holders of record of shares of Series B Preferred Stock shall not
be entitled to any voting rights except as follows:
(i) so long as any shares of Series B Preferred Stock shall be
outstanding and unless the consent or approval of a greater number of shares
shall then be required under the Delaware General Corporation Law, without first
obtaining the approval of at least a majority of the then outstanding shares of
Series B Preferred Stock, given in person or by proxy either by written consent
or at a meeting at which the holders of such shares shall be entitled to vote
separately as a class, the Corporation shall not (A) amend, alter or repeal any
provisions of the Series B Preferred Stock, Certificate of Incorporation or
ByLaws so as to materially adversely affect any of the preferences, rights,
powers or privileges of the Series B Preferred Stock or the holders thereof, (B)
create, authorize or issue any other class or series of preferred stock on a
parity with, or having greater or preferential rights than, the Series B
Preferred Stock with respect to
8
<PAGE> 9
liquidation or dividends, (C) directly or indirectly, redeem, repurchase or
otherwise acquire for value, or set aside for payment or make available for a
sinking fund for the purchase or redemption of, any stock ranking junior to on a
parity with the Series B Preferred Stock, or (D) enter into any agreement which
would prohibit or restrict the Corporation's right to pay dividends on the
Series B Preferred Stock; and
(ii) as otherwise provided by the Delaware General Corporation Law.
(6) Redemption
The shares of Series B Preferred Stock shall be redeemable at any time,
in whole or in part, by the Corporation, at its option, as follows:
(i) The Series B Preferred Stock is redeemable at any time
commencing one year after the Closing at the option of the Company, on not less
than 30 nor more than 60 days written notice to registered holders at a
redemption price equal to $25.00 plus accrued and unpaid dividends, provided (i)
the public sale of the shares of Common Stock issuable upon conversion of the
Preferred Shares (the "Conversion Shares") are covered by an effective
registration statement or are otherwise exempt from registration; and (ii)
during each of the immediately preceding 20 consecutive trading days ending
within 10 days of the date of the notice of redemption, the closing bid price of
the Company's Common Stock is not less than $3.75 per share, subject to
proportionate adjustments for stock splits, stock dividends, combinations of
shares, corporate reorganizations or like events. However, commencing 36 months
after the Closing, the Series B Preferred Stock is redeemable at the option of
the Company, on not less than 30 nor more than 60 days written notice to
registered holders, at a redemption price equal to $25.00 plus accrued and
unpaid dividends, provided the public sale of the Conversion Shares are covered
by an effective registration statement or are otherwise exempt from
registration.
(ii) If less than all of the outstanding shares of Series B
Preferred Stock are to be redeemed, the Company will select those to be redeemed
pro rata or by lot or in such other manner as the Board of Directors may
determine. In the event that the Company has failed to pay accrued and unpaid
dividends on the Series B Preferred Stock, it may not redeem any of the then
outstanding shares of the Series B Preferred Stock, unless all the then
outstanding shares are redeemed, until all such accrued and unpaid dividends and
(except with respect to shares to be redeemed) the then current semi-annual
dividend have been paid in full.
(iii) There shall be no mandatory redemption or sinking fund
obligation with respect to the Series B Preferred Stock.
(iv) Prior to redemption, the Corporation shall deliver to
each record holder of Series B Preferred Stock notice of its intention to redeem
all or part of the shares of Series B Preferred Stock. The notice shall state
the Redemption Date, which date shall be a business day. Notice of redemption
shall be mailed (by United States first class mail) at least 30 days but not
9
<PAGE> 10
more than 60 days before the redemption date to each holder of record of shares
of Series B Preferred Stock to be redeemed at the address shown on the stock
books of the Company. Unless a holder of Series B Preferred Stock elects to
convert his Series B Preferred Stock prior to 5:00 p.m. (Eastern Standard Time)
on the Redemption Date, he shall return any and all original share certificates
representing Series B Preferred Stock to be redeemed to the Corporation (or such
other place at set forth in the notice of redemption). At 5:00 p.m. (Eastern
Standard Time) on the Redemption Date, the right of any holder to convert their
shares of Series B Preferred Stock shall terminate. After the Redemption Date,
dividends will cease to accrue on the shares of Series B Preferred Stock called
for redemption, and all rights of the holders of such shares will terminate
except the right to receive the redemption price without interest (unless the
Company defaults in the payment of the redemption price). The Corporation shall
deliver the Redemption Price within 10 days after receipt by the Corporation of
the original shares of Series B Preferred Stock returned by the holder to the
Corporation. The shares of Series B Preferred Stock redeemed by the Company will
be restored to the status of authorized but unissued shares of preferred stock,
without designation as to series, and may thereafter be issued, but not as
shares of Series B Preferred Stock.
(7) Exclusion of Other Rights
Except as may otherwise be required by law, the shares of Series B
Preferred Stock shall not have any preferences or relative, participating,
optional or other special rights, other than those specifically set forth in
this resolution (as such resolution may be amended from time to time) and in the
Corporation's Certificate of Incorporation.
(8) Headings of Subdivisions
The headings of the various subdivisions hereof are for convenience of
reference only and shall not affect the interpretation of any of the provisions
hereof.
(9) Severability of Provisions
If any right, preference or limitation of the Series B Preferred Stock
set forth in this resolution (as such resolution may be amended from time to
time) is invalid, unlawful or incapable of being enforced by reason of any rule
of law or public policy, all other rights, preferences and limitations set forth
in this resolution (as so amended) which can be given effect without the
invalid, unlawful or unenforceable right, preference or limitation shall,
nevertheless, remain in full force and effect, and no right, preference or
limitation herein set forth shall be deemed dependent upon any other such right,
preference or limitation unless so expressed herein.
(10) Status of Reacquired Shares.
Shares of Series B Preferred Stock which have been issued and
reacquired in any manner or converted shall (upon compliance with any applicable
provisions of the laws of the State of
10
<PAGE> 11
Delaware) not be reissued as Series B Preferred Stock, but shall have the status
of authorized and unissued shares of Preferred Stock issuable in series
undesignated as to series and may be redesignated and reissued.
IN WITNESS WHEREOF, this Certificate has been made under the seal of
the Corporation and the hands of the undersigned on October 1, 1999.
/s/ John Botti
-------------------------------
Name: John Botti
Title: President
Attest:
/s/ Ira Whitman
- -------------------------
Name: Ira Whitman
Title: Secretary
11
<PAGE> 1
EXHIBIT 4.5
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (ii) UPON THE DELIVERY BY THE
HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO
COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH
ACT IS AVAILABLE.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, OCTOBER 1, 2004
NO. SERIES B- ___ ______ WARRANTS
BITWISE DESIGNS, INC.
SERIES B REDEEMABLE COMMON STOCK PURCHASE WARRANT
This warrant certificate (the "Warrant Certificate") certifies that
______________, or registered assigns, is the registered holder of warrants to
purchase up to _____ fully-paid and non-assessable shares, subject to adjustment
in accordance with Article 6 hereof (the "Warrant Shares"), of the common stock
(the "Common Stock"), par value $.001 per share, of BITWISE DESIGNS, INC., a
Delaware corporation (the "Company"), subject to the terms and conditions set
forth herein. The warrants represented by this Warrant Certificate and any
warrants resulting from a transfer or subdivision of the warrants represented by
this Warrant Certificate shall sometimes hereinafter be referred to,
individually, as a "Warrant" and, collectively, as the "Warrants." This Warrant
Certificate is one of a series of Series B Warrant Certificates being issued as
part of a private offering (the "Offering") pursuant to the Company's Unit
Offering Subscription Agreement, dated September 21, 1999.
1. Exercise Period; Exercise Price; Exercise of Warrants.
1.1. Exercise Period. Each Warrant is exercisable at any time
commencing on the date hereof (the "Exercise Date") until 5:00 P.M. New York
City time on October 1, 2004 (the "Expiration Date").
1.2. Initial and Adjusted Exercise Price. Each Warrant is initially
exercisable to purchase one Warrant Share at an initial exercise price equal to
$1.375 per share, subject to
1
<PAGE> 2
adjustment to prevent dilution. The adjusted exercise price shall be the price
which shall result from time to time from any and all adjustments of the initial
exercise price in accordance with the provisions of Section 6 hereof. The term
"Exercise Price" herein shall mean the initial exercise price or the adjusted
exercise price, depending upon the context.
1.3. Method of Exercise. The rights represented by this Warrant are
exercisable upon the terms and conditions set forth herein at the option of the
Holder in whole at any time and in part from time to time. The Exercise Price
shall be payable in cash, by wire transfer or by certified check to the order of
the Company, or any combination of cash, wire transfer or certified check. Upon
surrender of this Warrant Certificate with the annexed Form of Election to
Purchase duly executed, together with payment of the Exercise Price (as
hereinafter defined) for the Warrant Shares purchased, at the Company's
principal offices, 2165 Technology Drive, Schenectady, New York 12308 the
registered holder of the Warrant Certificate ("Holder" or "Holders") shall be
entitled to receive a certificate or certificates for the Warrant Shares so
purchased. The purchase rights represented by this Warrant Certificate are
exercisable at the option of the Holder hereof, in whole or in part (but not as
to fractional shares of Common Stock). In the case of the purchase of less than
all the Warrant Shares purchasable under this Warrant Certificate, the Company
shall cancel this Warrant Certificate upon the surrender thereof and shall
execute and deliver a new Warrant Certificate of like tenor for the balance of
the Warrant Shares purchasable hereunder.
2. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for the Warrant Shares purchased pursuant to such
exercise shall be made forthwith (and in any event within seven business days
thereafter) without charge to the Holder thereof including, without limitation,
any tax which may be payable in respect of the initial issuance thereof, and
such certificates shall (subject to the provisions of Article 3 hereof) be
issued in the name of, or in such names as may be directed by, the Holder
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificates in a name other than that of the Holder and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid
2
<PAGE> 3
and shall have established to the satisfaction of the Company that such transfer
is in compliance with all applicable securities laws.
The Warrant Certificates and, upon exercise of the Warrants, the
certificates representing the Warrant Shares shall be executed on behalf of the
Company by the manual or facsimile signature of those officers required to sign
such certificates under applicable law.
3. Restriction on Transfer of Warrants.
3.1. Agreement that Warrant Acquired for Investment. The Holder of this
Warrant Certificate, by its acceptance thereof, covenants and agrees that the
Warrants and the Warrant Shares issuable upon exercise of the Warrants are being
acquired as an investment and not with a view to the distribution thereof. The
Holder also understands that neither the Warrants nor the Warrant Shares have
been registered under the Securities Act of 1933, as amended (the "Act").
Neither this Warrant nor any Warrant Share may be offered for sale or
sold, or otherwise transferred or disposed of in any transaction which would
constitute a sale thereof within the meaning of the Act, unless (i) such
security has been registered for sale under the Act and registered or qualified
under applicable state securities laws relating to the offer and sale of
securities, or (ii) exemptions from the registration requirements of the Act and
the registration or qualification requirements of all such state securities laws
are available and the Company shall have received an opinion of counsel
satisfactory to the Company that the proposed sale or other disposition of such
securities may be effected without registration under the Act and would not
result in any violation of any applicable state securities laws, such counsel
and such opinion to be reasonably satisfactory to the Company.
3.2. Legend Requirement. This Warrant Certificate and, upon exercise of
the Warrants, in part or in whole, certificates representing the Warrant Shares
shall bear a legend substantially similar to the following:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended
("Act"), and may not be offered or sold except (i) pursuant to
an effective registration statement under the Act or (ii) upon
the delivery by the holder to the Company of an opinion of
counsel, reasonably satisfactory to counsel to the Company,
stating that an exemption from registration under such Act is
available."
3
<PAGE> 4
4. Registration Rights.
4.1. Automatic Registration; Holding Period. The Company shall use its
best efforts to file with the Securities and Exchange Commission (the "SEC") a
registration statement on or before October 30, 1999 to allow the resale by the
holder of this Warrant of the Warrant Shares.
4.2. Covenants of the Company With Respect to Registration. In
connection with any registration under Section 4 hereof, the Company covenants
and agrees as follows:
(a) The Company shall use its best efforts to have any registration
statements filed with the SEC including the Warrant Shares declared effective at
the earliest possible time, and shall furnish each Holder desiring to sell
Warrant Shares such number of prospectuses as shall reasonably be requested. The
Company shall keep effective any registration or qualification contemplated by
this Section 4 and shall from time to time amend or supplement each applicable
registration statement, preliminary prospectus, final prospectus, application,
document and communication for a period of time equal to the earlier of (i) the
date that all of the Warrant Shares have been sold pursuant to the registration
statement or (ii) the date the Holders receive an opinion of counsel that the
Warrant Shares may be sold under Rule 144(k) or (iii) the third anniversary of
the effective date of the registration statement.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s) counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 4 hereof including, without limitation, the Company's legal and
accounting fees, printing expenses, blue sky fees and expenses; provided that
the Company shall not be responsible for transfer taxes, fees and disbursement
of accountants and counsel for Holders, and other related selling expenses
incurred by Holders.
(c) The Company will use reasonable efforts to qualify the Warrant
Shares included in a registration statement for offering and sale under the
securities or blue sky laws of such states as reasonably are requested by the
Holder(s), provided that the Company shall not be obligated to execute or file
any general consent to service of process or to qualify as a foreign corporation
to do business under the laws of any such jurisdiction or to subject itself to
taxation in any such jurisdiction.
(d) (i) Subject to the conditions set forth below, the Company agrees
to indemnify and hold harmless the Holder, any holder of any of the Warrant
Shares, their officers, directors,
4
<PAGE> 5
partners, employees, agents and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all loss, liability, charge, claim, damage and expense
whatsoever (which shall include, for all purposes of this paragraph 4.2(d), but
not be limited to, reasonable attorneys' fees and any and all expense whatsoever
reasonably incurred, and any and all amounts paid in settlement of any claim or
litigation), as and when incurred, arising out of, based upon, or in connection
with (A) any untrue statement or alleged untrue statement of a material fact
contained (Y) in any registration statement, final prospectus, or any amendment
or supplement thereto, or (Z) in any application or other document or
communication (in this paragraph 4.2(d) collectively called an "application")
executed by or on behalf of the Company filed in any jurisdiction in order to
register or qualify any of the Warrant Shares under the securities or blue sky
laws thereof; or any omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, unless such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company with respect to the
Holder or any holder of any of the Warrant Shares by or on behalf of such Holder
or such other holder expressly for inclusion in any such registration or final
prospectus, or any amendment or supplement thereto, or in any application, as
the case may be, or (B) any breach of any representation, warranty, covenant or
agreement of the Company contained in this Warrant.
(ii) Promptly after receipt by any person in respect of which
indemnity may be sought pursuant to this Section 4 (an "Indemnified Party") of
notice of any claim or the commencement of any action, the Indemnified Party
shall, if a claim in respect thereof is to be made against the person against
whom such indemnity may be sought (an "Indemnifying Party") notify the
Indemnifying Party in writing of the claim or the commencement of such action;
provided that the failure to notify the Indemnifying Party shall not relieve it
from any liability which it may have to an Indemnified Party otherwise than
under this Section 4.2(d) except to the extent of any actual prejudice resulting
therefore. If any such claim or action shall be brought against an Indemnified
Party and it shall notify the Indemnifying Party thereof, the Indemnifying Party
shall be entitled to participate therein, and, to the extent that it wishes,
jointly with any other similarly notified Indemnifying Party, to assume the
defense thereof with counsel reasonably
5
<PAGE> 6
satisfactory to the Indemnified Party. After notice from the Indemnifying Party
to the Indemnified Party of its election to assume the defense of such claim or
action, the Indemnifying Party shall not be liable to the Indemnified Party for
any legal or other expenses subsequently incurred by the Indemnified Party in
connection with the defense thereof other than reasonable costs of
investigation; provided that the Indemnified Party shall have the right to
employ separate counsel to represent the Indemnified Party in connection with
any claim in respect of which indemnity may be sought by the Indemnified Party
against the Indemnifying Party, but the fees and expenses of such counsel shall
be for the account of such Indemnified Party unless (A) the Indemnifying Party
and the Indemnified Party shall have mutually agreed in writing to the retention
of such counsel or (B) the Indemnifying Party shall not have assumed the defense
thereof with counsel reasonably satisfactory to the Indemnified Party or (C) in
the opinion of counsel to such Indemnified Party, representation of both parties
by the same counsel would be inappropriate due to actual or potential conflicts
of interest between them, it being understood however, that the Indemnifying
Party shall not, in connection with any one such claim or action or separate but
substantially similar or related claims or actions in the same jurisdiction
arising out of the same allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (together with local
counsel) at any time for all Indemnified Parties. No Indemnifying Party shall,
without the prior written consent of the Indemnified Party, effect any
settlement of any claim or pending or threatened proceeding in respect of which
the Indemnified Party is or could have been a party and indemnity could have
been sought hereunder by such Indemnified Party and such settlement includes an
unconditional release of such Indemnified Party from all liability arising out
of such claim or proceeding. Whether or not the defense of any claim or action
is assumed by the Indemnifying Party, such Indemnifying Party will not be
subject to any liability for any settlement made without its consent, which
consent will not be unreasonably withheld.
(iii) The Holder agrees, severally, and not jointly, to
indemnify and hold harmless the Company, its officers, directors, employees,
accountants, agents or counsel and each other person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, to the same extent as the foregoing indemnity from the Company to
the Holder in paragraph 4.2(d), but only with respect to statements or
omissions, if any, made in any registration statement, preliminary prospectus,
or final prospectus (as from time
6
<PAGE> 7
to time amended and supplemented), or any amendment or supplement thereto, or in
any application, in reliance upon and in conformity with written information
furnished to the Company with respect to the Holder or his plan of distribution,
by or on behalf of the Holder expressly for inclusion in any such registration
statement, preliminary prospectus, or final prospectus, or any amendment or
supplement thereto, or in any application, as the case may be. If any action
shall be brought against the Company or any other person so indemnified based on
any such registration statement, preliminary prospectus, or final prospectus, or
any amendment or supplement thereto, or in any application, and in respect of
which indemnity may be sought against the Holder pursuant to this paragraph
4.2(d) (iii), the Holder shall have the rights and duties given to the Company,
and the Company and each other person so indemnified shall have the rights and
duties given to the indemnified parties, by the provisions of paragraph
4.2(d)(i).
(e) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Warrants prior to the initial filing of any
registration statement or the effectiveness thereof.
(f) The Company as soon as practicable, but in any event not later than
45 days after the end of the 12-month period beginning on the day after the end
of the fiscal quarter of the Company during which the effective date of the
registration statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), shall make generally available
to its security holders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and to the Holder, an earnings statement which will be in the
detail required by, and will otherwise comply with, the provisions of Section
11(a) of the Act and Rule 158(a) of the Rules and Regulations, which statement
need not be audited unless required by the Act, covering a period of at least 12
consecutive months after the effective date of the Registration Statement.
(g) In connection with the registration of the Warrant Shares, the
Holders shall have the following obligations:
(i) It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this
Agreement with respect to the Warrant Shares of a particular
Holder that such Holder shall furnish to the Company such
information in writing regarding itself, the Warrant Shares held
by it, and the intended method of disposition of the Warrant
Shares held by it, as shall be
7
<PAGE> 8
reasonably required to effect the registration of such Warrant
Shares. In addition, each Holder shall execute such other
documents in connection with such registration as the Company may
reasonably request. At least fourteen (14) days prior to the first
anticipated filing date of the Registration Statement, the Company
shall notify each Holder of the information the Company requires
from each such Holder (the "Requested Information"). If at least 5
business days prior to the effective date of the registration
statement the Company has not received the Requested Information
from a Holder (a "Non-Responsive Holder"), then the Company may
request effectiveness of the Registration Statement without
including securities of such Non-Responsive Holder;
(ii) Each Holder, by such Holder's acceptance of the Warrant
Shares, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and
filing of the Registration Statement hereunder; and
(iii) Each Holder agrees that, upon receipt of any notice
from the Company of (A) the happening of any event as a result of
which the prospectus included in the registration statement, as
then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or
necessary to make the statements therein in light of the
circumstances under which they were made, not misleading; or (B)
the issuance by the SEC of any stop order or other suspension of
the effectiveness of the registration statement, such Holder will
immediately discontinue disposition of Warrant Shares pursuant to
the Registration Statement covering such Warrant Shares until such
Holder's receipt of the copies of a supplemented or amended
Prospectus in the case of all event described in clause (A) above,
or a notice of the removal of any suspension in the case of an
event described in clause (B) above. If so directed by the
Company, such Holder shall deliver to the Company or destroy (and
deliver to the Company a certificate of destruction) all copies in
such Holder's possession of the prospectus covering such Warrant
Shares at the time of receipt of such notice. Notwithstanding the
foregoing, however, the Holder may retain his copy of the
8
<PAGE> 9
prospectus covering such Warrant Shares, but must agree in writing
not to use such prospectus to offer securities.
5. Redemption of Warrants. The Company may, subject to the conditions set
forth herein, redeem all the Warrants then outstanding upon not less than thirty
(30) days nor more than sixty (60) days prior written notice to the Warrant
Holders at any time commencing one year from the closing date of the Offering,
provided: (i) the closing bid price of the Company's Common Stock for each of
the twenty (20) consecutive trading days ending within ten (10) days of the date
of the notice of redemption is at least $3.25 per share, as proportionately
adjusted to reflect any stock splits, stock dividends, combination of shares or
like events and (ii) all of the Warrant Shares have been registered for resale
and continue to be covered (for at least one year) by an effective and current
registration statement with the Securities and Exchange Commission. Notice will
be effective upon mailing and the time of mailing is the "Effective Date of the
Notice". The Notice will state a redemption date not less than thirty (30) days
nor more than sixty (60) days from the Effective Date of the Notice (the
"Redemption Date"). No Notice shall be mailed unless all funds necessary to pay
for redemption of all Warrants then outstanding shall have first been set aside
by the Company in trust with an independent third party for the benefit of all
Warrant Holders so as to be and continue to be available therefor. The
redemption price to be paid to the Warrant Holders will be $.05 for each share
of Common Stock of the Company to which the Warrant Holder would then be
entitled upon exercise of the Warrant being redeemed, as adjusted from time to
time as provided herein (the "Redemption Price"). The Warrant Holders may
exercise their Warrants between the Effective Date of the Notice and 5:00 pm on
the Redemption Date, such exercise being effective if done in accordance with
Section 1 hereof, and if the Warrant Certificate, with form of election to
purchase duly executed and the Warrant Price, as applicable for such Warrant
subject to redemption for each share of Common Stock to be purchased is actually
received by the Company at its principal offices prior to 5:00 p.m. eastern
standard time on the Redemption Date.
If any Warrant Holder does not wish to exercise any Warrant being redeemed,
he should mail such Warrant to the Company at its principal offices after
receiving the Notice of Redemption required by this Section 5. If such Notice of
Redemption shall have been so mailed, and if on or before the Effective Date of
the Notice all funds necessary to pay for redemption of
9
<PAGE> 10
all Warrants then outstanding shall have been set aside by the Company for the
benefit of all Warrant Holders so as to be and continue to be available
therefor, then, on and after said Redemption Date, notwithstanding that any
Warrant subject to redemption shall not have been surrendered for redemption,
the obligation evidenced by all Warrants not surrendered for redemption or
effectively exercised shall be deemed no longer outstanding, and all rights with
respect thereto shall forthwith cease and terminate, except only the right of
the holder of each Warrant subject to redemption to receive the Redemption Price
for each share of Common Stock to which he would be entitled if he exercised the
Warrant upon receiving notice of redemption of the Warrant subject to redemption
held by him.
6. Adjustments of Exercise Price and Number of Warrant Shares.
6.1. Dividends and Distributions. In case the Company shall at any time
after the date hereof pay a dividend in Common Stock or make a distribution in
Common Stock, then upon such dividend or distribution, the Exercise Price in
effect immediately prior to such dividend or distribution shall be reduced to a
price determined by dividing an amount equal to the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution
multiplied by the Exercise Price in effect immediately prior to such dividend or
distribution, by the total number of shares of Common Stock outstanding
immediately after such issuance or sale. No adjustments shall be made for any
cash dividends on shares issuable upon exercise of the Warrants. For purposes of
any computation to be made in accordance with the provisions of this Section
6.1, the shares of Common Stock issuable by way of dividend or distribution
shall be deemed to have been issued immediately after the opening of business on
the date following the date fixed for determination of stockholders entitled to
receive such dividend or distribution.
6.2. Subdivision and Combination. In case the Company shall at any time
subdivide or combine the outstanding Common Stock, the Exercise Price shall
forthwith be proportionately decreased on the effective date of any subdivision
or increased on the effective date of any combination.
6.3. Reclassification, Consolidation, Merger. etc. In case of any
reclassification or change of the outstanding Common Stock (other than a change
in 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 the case of any consolidation of the
Company with, or merger of the Company into, another corporation
10
<PAGE> 11
(other than a consolidation or merger in which the Company is the surviving
corporation and which does not result in any reclassification or change of the
outstanding Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in nominal value, as aforesaid), or in
the case of a sale or conveyance to another corporation of the property of the
Company as an entirety, the Holder shall thereafter have the right to purchase
the kind and number of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance as if the Holder were the owner of the Warrant Shares issuable upon
exercise of the Warrants immediately prior to any such events at a price equal
to the product of (x) the number of Warrant Shares issuable upon exercise of the
Warrants and (y) the Exercise Price in effect immediately prior to the record
date for such reclassification, change, consolidation, merger, sale or
conveyance as if such Holder had exercised the Warrants.
6.4. Determination of Outstanding Shares. The number of the shares of
Common Stock at any one time outstanding shall include the aggregate number of
shares issued or issuable upon the exercise of outstanding options, rights,
warrants and upon the conversion or exchange of outstanding convertible or
exchangeable securities.
6.5. Adjustment in Number of Securities. Upon each adjustment of the
Exercise Price of the Warrants, pursuant to the provisions of this Section 6,
the number of shares issuable upon the exercise of the Warrants shall be
adjusted to the nearest full amount by multiplying a number equal to the
exercise prices in effect immediately prior to such adjustment by the number of
shares of Common Stock issuable upon exercise of the Warrants immediately prior
to such adjustment and dividing the product so obtained by the adjusted Exercise
Prices.
7. Exchange and Replacement of Warrant Certificates. This Warrant
Certificate is exchangeable without expense, upon the surrender hereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Warrant Certificate,
and, in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the
11
<PAGE> 12
Warrants, if mutilated, the Company will make and deliver a new Warrant of like
tenor, in lieu thereof and any such lost, stolen, destroyed or mutilated warrant
shall thereupon become void.
8. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of the shares of Common
Stock and shall not be required to issue scrip or pay cash in lieu of fractional
interests, it being the intent of the parties that all fractional interests
shall be eliminated by rounding any fraction up or down to the nearest whole
number of shares of Common Stock.
9. Reservation of Shares. The Company covenants and agrees that it
will at all times reserve and keep available out of its authorized share
capital, solely for the purpose of issuance upon the exercise of the Warrants,
such number of shares of Common Stock as shall be equal to the number of Warrant
Shares issuable upon the exercise of the then outstanding Warrants, for issuance
upon such exercise, and that, upon exercise of the Warrants and payment of the
Exercise Price therefor, all Warrant Shares issuable upon issuance in accordance
with the terms hereof shall be duly and validly issued, fully paid,
nonassessable and not subject to the preemptive rights of any stockholder.
10. Rights of Warrant Holders. Nothing contained in this Agreement
shall be construed as conferring upon the Holder any rights whatsoever as a
stockholder of the Company, either at law or in equity, including without
limitation, or Holders the right to vote or to consent or to receive notice as a
stockholder in respect of any meetings of stockholders for the election of
directors the right to receive dividends or any other matter. Notwithstanding
the foregoing, if at any time prior to the expiration of the Warrants and their
exercise, any of the following events shall occur:
(a) The Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) The Company shall offer to all the holders of its Common
Stock any additional Common Stock or other shares of capital stock of the
Company or securities convertible into or
12
<PAGE> 13
exchangeable for Common Stock or other shares of capital stock of the Company,
or any option, right or warrant to subscribe therefor; or
(c) A dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; or
(d) Reclassification or change of the outstanding Common Stock
(other than a change in par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), consolidation of the
Company with, or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the surviving corporation and
which does not result in any reclassification or change of the outstanding
Common Stock, except a change as a result of a subdivision or combination of
such shares or a change in par value, as aforesaid), or a sale or conveyance to
another corporation of the property of the Company as an entirety is proposed;
or
(e) The Company or an affiliate of the Company shall propose
to issue any rights to subscribe for Common Stock or any other securities of the
Company or of such affiliate to all the stockholders of the Company; then, in
any one or more of said events, the Company shall give written notice of such
event at least fifteen (15) days prior to the date fixed as a record date or the
date of closing the transfer books for the determination of the stockholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, options or warrants, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend or distribution, or the issuance of any convertible or exchangeable
securities or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
11. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants, to the address
of such Holder as shown on the books of the Company; or
13
<PAGE> 14
(b) If to the Company, to the address set forth in Section 1
of this Agreement or to such other address as the Company may designate by
notice to the Holders.
12. Successors. All the covenants and provisions of this Agreement by
or for the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
13. Governing Law. This Agreement shall be deemed to have been made
and delivered in the State of Delaware and shall be governed as to validity,
interpretation, construction, effect and in all other respects by the laws of
the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed, as of the _______day of September, 1999.
[SEAL] BITWISE DESIGNS, INC.
By: _______________________________
John Botti
President
Attest:
__________________
Ira Whitman
Secretary
14
<PAGE> 15
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________ Warrant Shares and
herewith tenders in payment for such Warrant Shares cash or a check payable to
the order of Bitwise Designs, Inc. in the amount of $_________, all in
accordance with the terms hereof. The undersigned requests that a certificate
for such Warrant Shares be registered in the name of ________________________,
whose address is _________________________________________________________ and
that such certificate be delivered to ______________________________ , whose
address is _______________________________.
Dated: Signature:
------------------------- --------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
------------------------------
------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
15
<PAGE> 16
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ________________________________________ hereby
sells, assigns and transfers unto _________________________________________
_____________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________ , Attorney, to
transfer the within Warrant Certificate on the books of Bitwise Designs, Inc.,
with full power of substitution.
Dated:______________________ Signature:_______________________________
_________________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate)
__________________________________________
__________________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
16
<PAGE> 1
EXHIBIT 4.6
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (ii) UPON THE DELIVERY BY THE
HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO
COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH
ACT IS AVAILABLE.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, OCTOBER 1, 2002
NO. SERIES C-__ ___________ WARRANTS
CLASS
BITWISE DESIGNS, INC.
SERIES C REDEEMABLE COMMON STOCK PURCHASE WARRANT
This warrant certificate (the "Warrant Certificate") certifies that __________
or registered assigns, is the registered holder of warrants to purchase up to
_________ fully-paid and non-assessable shares, subject to adjustment in
accordance with Article 6 hereof (the "Warrant Shares"), of the common stock
(the "Common Stock"), par value $.001 per share, of BITWISE DESIGNS, INC., a
Delaware corporation (the "Company"), subject to the terms and conditions set
forth herein. The warrants represented by this Warrant Certificate and any
warrants resulting from a transfer or subdivision of the warrants represented by
this Warrant Certificate shall sometimes hereinafter be referred to,
individually, as a "Warrant" and, collectively, as the "Warrants." This Warrant
Certificate is one of a series of Series C Warrant Certificates designated as
Class __ being issued as part of a private offering (the "Offering") pursuant to
the Company's Subscription Agreement, dated September 21, 1999.
1. Exercise Period; Exercise Price; Exercise of Warrants.
1.1. Exercise Period. Each Warrant is exercisable at any time
commencing on the date hereof (the "Exercise Date") until 5:00 P.M. New York
City time on October 1, 2002 (the "Expiration Date").
1.2. Initial, Increased and Adjusted Exercise Price. Each Warrant is
initially exercisable to purchase one Warrant Share at an initial exercise price
equal to $1.50 per share,
1
<PAGE> 2
subject to adjustment to prevent dilution. In addition to any adjustments which
may be made to the initial exercise price in accordance with the provisions of
Section 6 hereof, the initial exercise price shall be increased by $.75 at the
following times: (1) 60 days after the effective date of the registration
statement covering the underlying Warrant Shares (the "Registration Statement");
(2) seven months after the effective date of the Registration Statement; and (3)
thirteen months after the effective date of the Registration Statement. The
adjusted exercise price shall be the price which shall result from time to time
from any and all adjustments of the initial or increased exercise price in
accordance with the provisions of Section 6 hereof. The term "Exercise Price"
herein shall mean the initial exercise price, the increased exercise price or
the adjusted exercise price, depending upon the context.
1.3. Method of Exercise. The rights represented by this Warrant are
exercisable upon the terms and conditions set forth herein at the option of the
Holder in whole at any time and in part from time to time. The Exercise Price
shall be payable in cash, by wire transfer or by certified check to the order of
the Company, or any combination of cash, wire transfer or certified check. Upon
surrender of this Warrant Certificate with the annexed Form of Election to
Purchase duly executed, together with payment of the Exercise Price (as
hereinafter defined) for the Warrant Shares purchased, at the Company's
principal offices, 2165 Technology Drive, Schenectady, New York 12308 the
registered holder of the Warrant Certificate ("Holder" or "Holders") shall be
entitled to receive a certificate or certificates for the Warrant Shares so
purchased. The purchase rights represented by this Warrant Certificate are
exercisable at the option of the Holder hereof, in whole or in part (but not as
to fractional shares of Common Stock). In the case of the purchase of less than
all the Warrant Shares purchasable under this Warrant Certificate, the Company
shall cancel this Warrant Certificate upon the surrender thereof and shall
execute and deliver a new Warrant Certificate of like tenor for the balance of
the Warrant Shares purchasable hereunder.
2. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for the Warrant Shares purchased pursuant to such
exercise shall be made forthwith (and in any event within seven business days
thereafter) without charge to the Holder thereof including, without limitation,
any tax which may be payable in respect of the initial issuance thereof, and
such certificates shall (subject to the provisions of Article 3 hereof) be
issued in the name of, or in such names as may be directed by, the Holder
thereof; provided, however, that the
2
<PAGE> 3
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid and shall have established to the satisfaction of the Company
that such transfer is in compliance with all applicable securities laws.
The Warrant Certificates and, upon exercise of the Warrants, the
certificates representing the Warrant Shares shall be executed on behalf of the
Company by the manual or facsimile signature of those officers required to sign
such certificates under applicable law.
3. Restriction on Transfer of Warrants.
3.1. Agreement that Warrant Acquired for Investment. The Holder of this
Warrant Certificate, by its acceptance thereof, covenants and agrees that the
Warrants and the Warrant Shares issuable upon exercise of the Warrants are being
acquired as an investment and not with a view to the distribution thereof. The
Holder also understands that neither the Warrants nor the Warrant Shares have
been registered under the Securities Act of 1933, as amended (the "Act").
Neither this Warrant nor any Warrant Share may be offered for sale or
sold, or otherwise transferred or disposed of in any transaction which would
constitute a sale thereof within the meaning of the Act, unless (i) such
security has been registered for sale under the Act and registered or qualified
under applicable state securities laws relating to the offer and sale of
securities, or (ii) exemptions from the registration requirements of the Act and
the registration or qualification requirements of all such state securities laws
are available and the Company shall have received an opinion of counsel
satisfactory to the Company that the proposed sale or other disposition of such
securities may be effected without registration under the Act and would not
result in any violation of any applicable state securities laws, such counsel
and such opinion to be reasonably satisfactory to the Company.
3.2. Legend Requirement. This Warrant Certificate and, upon exercise of
the Warrants, in part or in whole, certificates representing the Warrant Shares
shall bear a legend substantially similar to the following:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended ("Act"),
and may not be offered or sold except
3
<PAGE> 4
(i) pursuant to an effective registration statement under the Act
or (ii) upon the delivery by the holder to the Company of an
opinion of counsel, reasonably satisfactory to counsel to the
Company, stating that an exemption from registration under such
Act is available."
4. Registration Rights.
4.1. Automatic Registration; Holding Period. The Company shall use its
best efforts to file with the Securities and Exchange Commission (the "SEC") a
registration statement on or before October 30, 1999 to allow the resale by the
holder of this Warrant of the Warrant Shares.
4.2. Covenants of the Company With Respect to Registration. In
connection with any registration under Section 4 hereof, the Company covenants
and agrees as follows:
(a) The Company shall use its best efforts to have any registration
statements filed with the SEC including the Warrant Shares declared effective at
the earliest possible time, and shall furnish each Holder desiring to sell
Warrant Shares such number of prospectuses as shall reasonably be requested. The
Company shall keep effective any registration or qualification contemplated by
this Section 4 and shall from time to time amend or supplement each applicable
registration statement, preliminary prospectus, final prospectus, application,
document and communication for a period of time equal to the earlier of (i) the
date that all of the Warrant Shares have been sold pursuant to the registration
statement or (ii) the date the Holders receive an opinion of counsel that the
Warrant Shares may be sold under Rule 144(k) or (iii) the third anniversary of
the effective date of the registration statement.
(b) The Company shall pay all costs (excluding fees and expenses of
Holder(s) counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 4 hereof including, without limitation, the Company's legal and
accounting fees, printing expenses, blue sky fees and expenses; provided that
the Company shall not be responsible for transfer taxes, fees and disbursement
of accountants and counsel for Holders, and other related selling expenses
incurred by Holders.
(c) The Company will use reasonable efforts to qualify the Warrant
Shares included in a registration statement for offering and sale under the
securities or blue sky laws of such states as reasonably are requested by the
Holder(s), provided that the Company shall not be obligated to execute or file
any general consent to service of process or to qualify as a foreign corporation
to
4
<PAGE> 5
do business under the laws of any such jurisdiction or to subject itself to
taxation in any such jurisdiction.
(d) (i) Subject to the conditions set forth below, the Company agrees
to indemnify and hold harmless the Holder, any holder of any of the Warrant
Shares, their officers, directors, partners, employees, agents and counsel, and
each person, if any, who controls any such person within the meaning of Section
15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), from and against any and all loss, liability,
charge, claim, damage and expense whatsoever (which shall include, for all
purposes of this paragraph 4.2(d), but not be limited to, reasonable attorneys'
fees and any and all expense whatsoever reasonably incurred, and any and all
amounts paid in settlement of any claim or litigation), as and when incurred,
arising out of, based upon, or in connection with (A) any untrue statement or
alleged untrue statement of a material fact contained (Y) in any registration
statement, final prospectus, or any amendment or supplement thereto, or (Z) in
any application or other document or communication (in this paragraph 4.2(d)
collectively called an "application") executed by or on behalf of the Company
filed in any jurisdiction in order to register or qualify any of the Warrant
Shares under the securities or blue sky laws thereof; or any omission or alleged
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, unless such statement or omission
was made in reliance upon and in conformity with written information furnished
to the Company with respect to the Holder or any holder of any of the Warrant
Shares by or on behalf of such Holder or such other holder expressly for
inclusion in any such registration or final prospectus, or any amendment or
supplement thereto, or in any application, as the case may be, or (B) any breach
of any representation, warranty, covenant or agreement of the Company contained
in this Warrant.
(ii) Promptly after receipt by any person in respect of which
indemnity may be sought pursuant to this Section 4 (an "Indemnified Party") of
notice of any claim or the commencement of any action, the Indemnified Party
shall, if a claim in respect thereof is to be made against the person against
whom such indemnity may be sought (an "Indemnifying Party") notify the
Indemnifying Party in writing of the claim or the commencement of such action;
provided that the failure to notify the Indemnifying Party shall not relieve it
from any liability which it may have to an Indemnified Party otherwise than
under this Section 4.2(d) except to the
5
<PAGE> 6
extent of any actual prejudice resulting therefore. If any such claim or action
shall be brought against an Indemnified Party and it shall notify the
Indemnifying Party thereof, the Indemnifying Party shall be entitled to
participate therein, and, to the extent that it wishes, jointly with any other
similarly notified Indemnifying Party, to assume the defense thereof with
counsel reasonably satisfactory to the Indemnified Party. After notice from the
Indemnifying Party to the Indemnified Party of its election to assume the
defense of such claim or action, the Indemnifying Party shall not be liable to
the Indemnified Party for any legal or other expenses subsequently incurred by
the Indemnified Party in connection with the defense thereof other than
reasonable costs of investigation; provided that the Indemnified Party shall
have the right to employ separate counsel to represent the Indemnified Party in
connection with any claim in respect of which indemnity may be sought by the
Indemnified Party against the Indemnifying Party, but the fees and expenses of
such counsel shall be for the account of such Indemnified Party unless (A) the
Indemnifying Party and the Indemnified Party shall have mutually agreed in
writing to the retention of such counsel or (B) the Indemnifying Party shall not
have assumed the defense thereof with counsel reasonably satisfactory to the
Indemnified Party or (C) in the opinion of counsel to such Indemnified Party,
representation of both parties by the same counsel would be inappropriate due to
actual or potential conflicts of interest between them, it being understood
however, that the Indemnifying Party shall not, in connection with any one such
claim or action or separate but substantially similar or related claims or
actions in the same jurisdiction arising out of the same allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (together with local counsel) at any time for all Indemnified
Parties. No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any claim or pending or threatened
proceeding in respect of which the Indemnified Party is or could have been a
party and indemnity could have been sought hereunder by such Indemnified Party
and such settlement includes an unconditional release of such Indemnified Party
from all liability arising out of such claim or proceeding. Whether or not the
defense of any claim or action is assumed by the Indemnifying Party, such
Indemnifying Party will not be subject to any liability for any settlement made
without its consent, which consent will not be unreasonably withheld.
(iii) The Holder agrees, severally, and not jointly, to indemnify
and hold harmless the Company, its officers, directors, employees, accountants,
agents or counsel and each
6
<PAGE> 7
other person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to the Holder in paragraph 4.2(d), but only
with respect to statements or omissions, if any, made in any registration
statement, preliminary prospectus, or final prospectus (as from time to time
amended and supplemented), or any amendment or supplement thereto, or in any
application, in reliance upon and in conformity with written information
furnished to the Company with respect to the Holder or his plan of distribution,
by or on behalf of the Holder expressly for inclusion in any such registration
statement, preliminary prospectus, or final prospectus, or any amendment or
supplement thereto, or in any application, as the case may be. If any action
shall be brought against the Company or any other person so indemnified based on
any such registration statement, preliminary prospectus, or final prospectus, or
any amendment or supplement thereto, or in any application, and in respect of
which indemnity may be sought against the Holder pursuant to this paragraph
4.2(d)(iii), the Holder shall have the rights and duties given to the Company,
and the Company and each other person so indemnified shall have the rights and
duties given to the indemnified parties, by the provisions of paragraph
4.2(d)(i).
(e) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Warrants prior to the initial filing of any
registration statement or the effectiveness thereof.
(f) The Company as soon as practicable, but in any event not later than
45 days after the end of the 12-month period beginning on the day after the end
of the fiscal quarter of the Company during which the effective date of the
registration statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), shall make generally available
to its security holders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and to the Holder, an earnings statement which will be in the
detail required by, and will otherwise comply with, the provisions of Section
11(a) of the Act and Rule 158(a) of the Rules and Regulations, which statement
need not be audited unless required by the Act, covering a period of at least 12
consecutive months after the effective date of the Registration Statement.
(g) In connection with the registration of the Warrant Shares, the
Holders shall have the following obligations:
7
<PAGE> 8
(i) It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this
Agreement with respect to the Warrant Shares of a particular
Holder that such Holder shall furnish to the Company such
information in writing regarding itself, the Warrant Shares held
by it, and the intended method of disposition of the Warrant
Shares held by it, as shall be reasonably required to effect the
registration of such Warrant Shares. In addition, each Holder
shall execute such other documents in connection with such
registration as the Company may reasonably request. At least
fourteen (14) days prior to the first anticipated filing date of
the Registration Statement, the Company shall notify each Holder
of the information the Company requires from each such Holder (the
"Requested Information"). If at least 5 business days prior to the
effective date of the registration statement the Company has not
received the Requested Information from a Holder (a
"Non-Responsive Holder"), then the Company may request
effectiveness of the Registration Statement without including
securities of such Non-Responsive Holder;
(ii) Each Holder, by such Holder's acceptance of the Warrant
Shares, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and
filing of the Registration Statement hereunder; and
(iii) Each Holder agrees that, upon receipt of any notice
from the Company of (A) the happening of any event as a result of
which the prospectus included in the registration statement, as
then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or
necessary to make the statements therein in light of the
circumstances under which they were made, not misleading; or (B)
the issuance by the SEC of any stop order or other suspension of
the effectiveness of the registration statement, such Holder will
immediately discontinue disposition of Warrant Shares pursuant to
the Registration Statement covering such Warrant Shares until such
Holder's receipt of the copies of a supplemented or amended
Prospectus in the case of all event described in clause (A) above,
or a notice of the removal of any suspension
8
<PAGE> 9
in the case of an event described in clause (B) above. If so
directed by the Company, such Holder shall deliver to the Company
or destroy (and deliver to the Company a certificate of
destruction) all copies in such Holder's possession of the
prospectus covering such Warrant Shares at the time of receipt of
such notice. Notwithstanding the foregoing, however, the Holder
may retain his copy of the prospectus covering such Warrant
Shares, but must agree in writing not to use such prospectus to
offer securities.
5. Redemption of Warrants. The Company may, subject to the conditions
set forth herein, redeem all the Warrants then outstanding upon not less than
thirty (30) days nor more than sixty (60) days prior written notice to the
Warrant Holders at any time commencing six months from the closing date of the
Offering, provided: (i) the closing bid price of the Company's Common Stock for
each of the twenty (20) consecutive trading days ending within ten (10) days of
the date of the notice of redemption is at least 120% of the current exercise
price of the Series C Warrants and (ii) all of the Warrant Shares have been
registered for resale and continue to be covered (for at least one year) by an
effective and current registration statement with the Securities and Exchange
Commission. Notice will be effective upon mailing and the time of mailing is the
"Effective Date of the Notice". The Notice will state a redemption date not less
than thirty (30) days nor more than sixty (60) days from the Effective Date of
the Notice (the "Redemption Date"). No Notice shall be mailed unless all funds
necessary to pay for redemption of all Warrants then outstanding shall have
first been set aside by the Company in trust with an independent third party for
the benefit of all Warrant Holders so as to be and continue to be available
therefor. The redemption price to be paid to the Warrant Holders will be $.05
for each share of Common Stock of the Company to which the Warrant Holder would
then be entitled upon exercise of the Warrant being redeemed, as adjusted from
time to time as provided herein (the "Redemption Price"). The Warrant Holders
may exercise their Warrants between the Effective Date of the Notice and 5:00
p.m. on the Redemption Date, such exercise being effective if done in accordance
with Section 1 hereof, and if the Warrant Certificate, with form of election to
purchase duly executed and the Warrant Price, as applicable for such Warrant
subject to redemption for each share of Common Stock to be purchased is actually
received by the Company at its principal offices prior to 5:00 p.m. eastern
standard time on the Redemption Date.
9
<PAGE> 10
If any Warrant Holder does not wish to exercise any Warrant being
redeemed, he should mail such Warrant to the Company at its principal offices
after receiving the Notice of Redemption required by this Section 5. If such
Notice of Redemption shall have been so mailed, and if on or before the
Effective Date of the Notice all funds necessary to pay for redemption of all
Warrants then outstanding shall have been set aside by the Company for the
benefit of all Warrant Holders so as to be and continue to be available
therefor, then, on and after said Redemption Date, notwithstanding that any
Warrant subject to redemption shall not have been surrendered for redemption,
the obligation evidenced by all Warrants not surrendered for redemption or
effectively exercised shall be deemed no longer outstanding, and all rights with
respect thereto shall forthwith cease and terminate, except only the right of
the holder of each Warrant subject to redemption to receive the Redemption Price
for each share of Common Stock to which he would be entitled if he exercised the
Warrant upon receiving notice of redemption of the Warrant subject to redemption
held by him.
6. Adjustments of Exercise Price and Number of Warrant Shares.
6.1. Dividends and Distributions. In case the Company shall at any time
after the date hereof pay a dividend in Common Stock or make a distribution in
Common Stock, then upon such dividend or distribution, the Exercise Price in
effect immediately prior to such dividend or distribution shall be reduced to a
price determined by dividing an amount equal to the total number of shares of
Common Stock outstanding immediately prior to such dividend or distribution
multiplied by the Exercise Price in effect immediately prior to such dividend or
distribution, by the total number of shares of Common Stock outstanding
immediately after such issuance or sale. No adjustments shall be made for any
cash dividends on shares issuable upon exercise of the Warrants. For purposes of
any computation to be made in accordance with the provisions of this Section
6.1, the shares of Common Stock issuable by way of dividend or distribution
shall be deemed to have been issued immediately after the opening of business on
the date following the date fixed for determination of stockholders entitled to
receive such dividend or distribution.
6.2. Subdivision and Combination. In case the Company shall at any time
subdivide or combine the outstanding Common Stock, the Exercise Price shall
forthwith be proportionately decreased on the effective date of any subdivision
or increased on the effective date of any combination.
10
<PAGE> 11
6.3. Reclassification, Consolidation, Merger. etc. In case of any
reclassification or change of the outstanding Common Stock (other than a change
in 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 the case of any consolidation of the
Company with, or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the surviving corporation and
which does not result in any reclassification or change of the outstanding
Common Stock, except a change as a result of a subdivision or combination of
such shares or a change in nominal value, as aforesaid), or in the case of a
sale or conveyance to another corporation of the property of the Company as an
entirety, the Holder shall thereafter have the right to purchase the kind and
number of shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance as if the
Holder were the owner of the Warrant Shares issuable upon exercise of the
Warrants immediately prior to any such events at a price equal to the product of
(x) the number of Warrant Shares issuable upon exercise of the Warrants and (y)
the Exercise Price in effect immediately prior to the record date for such
reclassification, change, consolidation, merger, sale or conveyance as if such
Holder had exercised the Warrants.
6.4. Determination of Outstanding Shares. The number of the shares of
Common Stock at any one time outstanding shall include the aggregate number of
shares issued or issuable upon the exercise of outstanding options, rights,
warrants and upon the conversion or exchange of outstanding convertible or
exchangeable securities.
6.5. Adjustment in Number of Securities. Upon each adjustment of the
Exercise Price of the Warrants, pursuant to the provisions of this Section 6,
the number of shares issuable upon the exercise of the Warrants shall be
adjusted to the nearest full amount by multiplying a number equal to the
exercise prices in effect immediately prior to such adjustment by the number of
shares of Common Stock issuable upon exercise of the Warrants immediately prior
to such adjustment and dividing the product so obtained by the adjusted Exercise
Prices.
7. Exchange and Replacement of Warrant Certificates. This Warrant
Certificate is exchangeable without expense, upon the surrender hereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
11
<PAGE> 12
Upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Warrant Certificate,
and, in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant of like tenor, in
lieu thereof and any such lost, stolen, destroyed or mutilated warrant shall
thereupon become void.
8. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of the shares of Common
Stock and shall not be required to issue scrip or pay cash in lieu of fractional
interests, it being the intent of the parties that all fractional interests
shall be eliminated by rounding any fraction up or down to the nearest whole
number of shares of Common Stock.
9. Reservation of Shares. The Company covenants and agrees that it will
at all times reserve and keep available out of its authorized share capital,
solely for the purpose of issuance upon the exercise of the Warrants, such
number of shares of Common Stock as shall be equal to the number of Warrant
Shares issuable upon the exercise of the then outstanding Warrants, for issuance
upon such exercise, and that, upon exercise of the Warrants and payment of the
Exercise Price therefor, all Warrant Shares issuable upon issuance in accordance
with the terms hereof shall be duly and validly issued, fully paid,
nonassessable and not subject to the preemptive rights of any stockholder.
10. Rights of Warrant Holders. Nothing contained in this Agreement
shall be construed as conferring upon the Holder any rights whatsoever as a
stockholder of the Company, either at law or in equity, including without
limitation, or Holders the right to vote or to consent or to receive notice as a
stockholder in respect of any meetings of stockholders for the election of
directors the right to receive dividends or any other matter. Notwithstanding
the foregoing, if at any time prior to the expiration of the Warrants and their
exercise, any of the following events shall occur:
(a) The Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or distribution
payable otherwise than in cash, or a cash dividend or distribution payable
otherwise than out of current or retained earnings, as
12
<PAGE> 13
indicated by the accounting treatment of such dividend or distribution on the
books of the Company; or
(b) The Company shall offer to all the holders of its Common Stock
any additional Common Stock or other shares of capital stock of the Company or
securities convertible into or exchangeable for Common Stock or other shares of
capital stock of the Company, or any option, right or warrant to subscribe
therefor; or
(c) A dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; or
(d) Reclassification or change of the outstanding Common Stock
(other than a change in par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), consolidation of the
Company with, or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the surviving corporation and
which does not result in any reclassification or change of the outstanding
Common Stock, except a change as a result of a subdivision or combination of
such shares or a change in par value, as aforesaid), or a sale or conveyance to
another corporation of the property of the Company as an entirety is proposed;
or
(e) The Company or an affiliate of the Company shall propose to
issue any rights to subscribe for Common Stock or any other securities of the
Company or of such affiliate to all the stockholders of the Company; then, in
any one or more of said events, the Company shall give written notice of such
event at least fifteen (15) days prior to the date fixed as a record date or the
date of closing the transfer books for the determination of the stockholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, options or warrants, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend or distribution, or the issuance of any convertible or exchangeable
securities or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13
<PAGE> 14
11. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 1 of
this Agreement or to such other address as the Company may designate by notice
to the Holders.
12. Successors. All the covenants and provisions of this Agreement by
or for the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
13. Governing Law. This Agreement shall be deemed to have been made and
delivered in the State of Delaware and shall be governed as to validity,
interpretation, construction, effect and in all other respects by the laws of
the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed, as of the 1st day of October, 1999.
[SEAL] BITWISE DESIGNS, INC.
By: _______________________________
John Botti
President
Attest:
_______________________________
Ira Whitman
Secretary
14
<PAGE> 15
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________ Warrant Shares and
herewith tenders in payment for such Warrant Shares cash or a check payable to
the order of Bitwise Designs, Inc. in the amount of $_________, all in
accordance with the terms hereof. The undersigned requests that a certificate
for such Warrant Shares be registered in the name of___________________________,
whose address is _____________________________________________________ and that
such certificate be delivered to ______________________________ , whose address
is ______________________________.
Dated:___________________ Signature:_______________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
________________________________
________________________________
(Insert Social Security or Other
Identifying Number of Holder)
15
<PAGE> 16
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _________________________________________ hereby
sells, assigns and transfers unto _____________________________________________
______________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________, Attorney,
to transfer the within Warrant Certificate on the books of Bitwise Designs,
Inc., with full power of substitution.
Dated:___________________ Signature: ___________________________
___________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate)
________________________________
________________________________
(Insert Social Security or Other
Identifying Number of Assignee)
16
<PAGE> 1
Exhibit 4.7
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
THE TRANSFERABILITY OF THIS WARRANT IS
RESTRICTED AS PROVIDED IN SECTION 2
September 9, 1999
BITWISE DESIGNS, INC.
COMMON STOCK PURCHASE WARRANT
For good and valuable consideration, the receipt of which is hereby
acknowledged by BITWISE DESIGNS, INC., a Delaware corporation (the "Company"),
____________ is hereby granted the right to purchase, at any time from the date
hereof until 5:00 P.M., New York City time, on September 9, 2004 (the
"Warrant Exercise Term"), up to ____________ fully-paid and non-assessable
shares of the Company's Common Stock, $.001 par value per share ("Common
Stock").
This Warrant is exercisable at a per share price of $0.845 (the
"Exercise Price"), subject to adjustment as provided in Section l hereof,
payable in cash or by certified or official bank check in New York Clearing
House funds, or by cashless exercise as provided in paragraph 1.6. Upon
surrender of this warrant certificate with the annexed Subscription Form duly
executed, together with payment of the Exercise Price for the shares of Common
Stock purchased at the Company's principal executive offices (presently located
at 2165 Technology Drive, Schenectady, New York 12308) the registered Holder of
the Warrant ("Holder") shall be entitled to receive a certificate or
certificates for the shares of Common Stock so purchased (the "Warrant Shares").
l. Exercise of Warrant.
l.l The purchase rights represented by this Warrant are exercisable at
the option of the Holder hereof, in whole or in part (but not as to fractional
shares of the Common Stock) during any period in which this Warrant may be
exercised as set forth above. In the case of the purchase of less than all the
shares of Common Stock purchasable under this Warrant, the Company shall cancel
this Warrant upon the surrender thereof and shall execute and deliver a new
Warrant of like tenor for the balance of the shares of Common Stock purchasable
hereunder.
l.2 The issuance of certificates for shares of Common Stock upon the
exercise of this Warrant
<PAGE> 2
shall be made without charge to the Holder hereof including, without limitation,
any tax which may be payable in respect of the issuance thereof, and such
certificates shall be issued in the name of, or in such names as may be directed
by, the Holder hereof; provided, however, that the Company shall not be required
to pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of such certificate in a name other than that of the
Holder and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
l.3 In case at any time or from time to time the Company shall
subdivide as a whole, split its Common Stock or issue a dividend payable in
shares or otherwise, the number of shares of Common Stock then outstanding into
a greater or lesser number of shares, the Warrant Price then in effect shall be
increased or reduced proportionately, and the number of shares issuable upon
exercise of this Warrant shall accordingly be increased or reduced
proportionately.
l.4 In case of any reclassification or change of outstanding shares of
Common Stock issuable upon exercise of this Warrant (other than change in par
value, or from par value to no par value, or from no par value to par value, or
as a result or a subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other than a merger in
which the Company is the continuing corporation and which does not result in any
reclassification or change of outstanding shares of Common Stock, other than a
change in number of the shares issuable upon exercise of the Warrant) or in case
of any sale or conveyance to another corporation of the property of the Company
as an entirety or substantially as an entirety, the Holder of this Warrant shall
have the right thereafter to exercise this Warrant into the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a Holder
of the number of shares of Common Stock of the Company for which the Warrant
might have been exercised immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance. The above provisions of this Section
l.4 shall similarly apply to successive reclassifications and changes of shares
of Common Stock and to successive consolidations, mergers, sales or conveyances.
l.5 The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issuance
upon exercise of this Warrant as herein provided, such number of shares of
Common Stock as shall then be issuable upon the exercise of this Warrant. The
Company covenants that all shares of Common Stock which shall be so issuable
shall be duly and validly issued and fully-paid and non-assessable.
1.6 Cashless Exercise. At any time during the Warrant Exercise
Term, the Holder may, at its option, exchange the Warrants represented by such
Holder's Warrant Certificate, in whole or in part (a "Warrant Exchange"), into
the number of fully paid and non-assessable Warrant Shares determined in
accordance with this Section 1.6, by surrendering such Warrant Certificate at
the principal office of the Company or at the office of its transfer agent,
accompanied by a notice stating such Holder's intent to effect such exchange,
the number of Warrants (the "Total Share Number")
2
<PAGE> 3
to be exchanged and the date on which the Holder requests that such Warrant
Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place
on the date specified in the Notice of Exchange, or, if later, the date the
Notice of Exchange is received by the Company (the "Exchange Date").
Certificates for the Warrant Shares issuable upon such Warrant Exchange and, if
applicable, a new Warrant Certificate of like tenor evidencing the balance of
the Warrant Shares remaining subject to the Holder's Warrant certificate, shall
be issued as of the Exchange Date and delivered to the Holder within three (3)
days following the Exchange Date. In connection with any Warrant Exchange, the
Holder's Warrant certificate shall represent the right to subscribe for and
acquire (I) the number of Warrant Shares (rounded to the next highest integer)
equal to (A) the Total Share Number less (B) the number of Warrant Shares equal
to the quotient obtained by dividing (i) the product of the Total Share Number
and the then current Exercise Price per Warrant Share by (ii) the current Market
Price (as hereafter defined) of a share of Common Stock.
As used herein, the phrase "Market Price" at any date shall be
deemed to be the last reported sale price, or, in case no such reported sale
takes place on such day, the average of the last reported sale prices for the
preceding three trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
trading or as reported in the Nasdaq National Market System, or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
or quoted on the Nasdaq National Market System, the last reported sale price as
furnished by the National Association of Securities Dealers, Inc. through Nasdaq
or similar organization if Nasdaq is no longer reporting such information, or if
the Common Stock is not quoted on Nasdaq, as determined in good faith by
resolution of the Board of Directors of the Company, based on the best
information available to it for the two days immediately preceding the Exchange
Date.
2. Restrictions on Transfer.
The Holder acknowledges that he has been advised by the Company that
this Warrant and the shares of Common Stock (the "Warrant Shares") issuable upon
exercise thereof (collectively the "Securities") have not been registered under
the Securities Act of 1933, as amended (the "Securities Act"), that the Warrant
is being issued, and the shares issuable upon exercise of the Warrant will be
issued, on the basis of the statutory exemption provided by section 4(2) of the
Securities Act relating to transactions by an issuer not involving any public
offering, and that the Company's reliance upon this statutory exemption is based
in part upon the representations made by the Holder contained herein. The Holder
acknowledges that he has been informed by the Company of, or is otherwise
familiar with, the nature of the limitations imposed by the Securities Act and
the rules and regulations thereunder on the transfer of securities. In
particular, the Holder agrees that no sale, assignment or transfer of the
Securities shall be valid or effective, and the Company shall not be required to
give any effect to any such sale, assignment or transfer, unless (i) the sale,
assignment or transfer of the Securities is registered under the Securities Act,
and the Company has no obligations or intention to so register the Securities
except as may otherwise be provided herein, or (ii) the Securities are sold,
assigned or transferred in accordance with all the requirements and
3
<PAGE> 4
limitations of Rule 144 under the Securities Act or such sale, assignment, or
transfer is otherwise exempt from registration under the Securities Act. The
Holder represents and warrants that he has acquired this Warrant and will
acquire the Securities for his own account for investment and not with a view to
the sale or distribution thereof or the granting of any participation therein,
and that he has no present intention of distributing or selling to others any of
such interest or granting any participation therein. The Holder acknowledges
that the securities shall bear the following legend:
"These securities have not been registered under the Securities Act of
1933 Such securities may not be sold or offered for sale, transferred,
hypothecated or otherwise assigned in the absence of an effective
registration statement with respect thereto under such Act or an
opinion of counsel to the Company that an exemption from registration
for such sale, offer, transfer, hypothecation or other assignment is
available under such Act."
3. Registration Rights.
3.1 The Company shall advise the Holder of this Warrant or of the
Warrant Shares or any then Holder of Warrants or Warrant Shares (such persons
being collectively referred to herein as "Holders") by written notice at least
30 days prior to the filing by the Company with the Securities and Exchange
Commission of any registration statement under the Securities Act of 1933 (the
"Act") covering securities of the Company, except on Forms S-4 or S-8 (or
similar successor form), and upon the request of any such Holder within ten days
after the date of such invoice, include in any such registration statement such
information as may be required to permit a public offering of the Warrant
Shares. The Company shall supply such number of prospectuses and other documents
as the Holder may reasonably request in order to facilitate the public sale or
other disposition of the Warrant Shares, qualify the Warrant Shares for sale in
such states as any such Holder reasonably designates and do any and all other
acts and things which may be necessary or desirable to enable such Holders to
consummate the public sale or other disposition of the Warrant Shares, and
furnish indemnification in the manner as set forth in Subsection 3.2 of this
Section 3. Such Holders shall furnish information and indemnification as set
forth in Subsection 3.2 of this Section 3. For the purpose of the foregoing,
inclusion of the Warrant Shares by the Holder in a Registration Statement
pursuant to this sub-paragraph 3.1 under a condition that the offer and/or sale
of such Warrant Shares not commence until a date not to exceed 90 days from the
effective date of such registration statement shall be deemed to be in
compliance with this sub-paragraph 3.1.
3.2 The following provisions of this Section 3 shall also be
applicable to the exercise of the registration rights granted under this Section
3.1:
(A) The foregoing registration rights shall be contingent on the
Holders furnishing the Company with such appropriate information (relating to
the intentions of such Holders) as the Company shall reasonably request in
writing. Following the effective date of such registration, the Company shall
upon the request of any owner of Warrants and/or Warrant Shares forthwith supply
such number of prospectuses meeting the requirements of the Act as shall be
requested by such
4
<PAGE> 5
owner to permit such Holder to make a public offering of all Warrant Shares from
time to time offered or sold to such Holder, provided that such Holder shall
from time to time furnish the Company with such appropriate information
(relating to the intentions of such Holder) as the Company shall request in
writing. The Company shall also use its best efforts to qualify the Warrant
Shares for sale in such states as such Holder shall reasonably designate.
(B) The Company shall bear the entire cost and expense of any
registration of securities initiated by it under Subsection 3.1 of this Section
3 notwithstanding that Warrant Shares subject to this Warrant may be included in
any such registration. Any Holder whose Warrant Shares are included in any such
registration statement pursuant to this Section 3 shall, however, bear the fees
of his own counsel and any registration fees, transfer taxes or underwriting
discounts or commissions applicable to the Warrant Shares sold by him pursuant
thereto.
(C) The Company shall indemnify and hold harmless each such Holder and
each underwriter, if any, within the meaning of the Act, who may purchase from
or sell for any such Holder any Warrant Shares from and against any and all
losses, claims, damages and liabilities caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any post-effective amendment thereto or any registration statement
under the Act or any prospectus included therein required to be filed or
furnished by reason of this Section 3 or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or alleged untrue statement or omission or alleged omission based upon
information furnished or required to be furnished in writing to the Company by
such Holder or underwriter expressly for use therein, which indemnification
shall include each person, if any, who controls any such underwriter within the
meaning of such Act; provided, however, that the Company shall not be obliged so
to indemnify any such Holder or underwriter or controlling person unless such
Holder or underwriter shall at the same time agree to indemnify the Company, its
directors, each officer signing the related registration statement and each
person, if any, who controls the Company within the meaning of such Act, from
and against any and all losses, claims, damages and liabilities caused by any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement or any prospectus required to be filed or furnished by
reason of this Section 3 or caused by any omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading insofar as such losses, claims, damages or liabilities are caused
by any untrue statement or alleged untrue statement or omission based upon
information furnished in writing to the Company by any such Holder or
underwriter expressly for use therein.
(D) The Company may withdraw the registration at any time.
4. Miscellaneous.
4.1 All the covenants and agreements made by the Company in this
Warrant shall bind its successors and assigns.
5
<PAGE> 6
4.2 No recourse shall be had for any claim based hereon or otherwise
in any manner in respect hereof, against any incorporator, stockholder, officer
or director, past, present or future, of the Company or of any predecessor
corporation, whether by virtue of any constitutional provision or statute or
rule of law, or by the enforcement of any assessment or penalty or in any other
manner, all such liability being expressly waived and released by the acceptance
hereof and as part of the consideration for the issue hereof.
4.3 No course of dealing between the Company and the Holder hereof
shall operate as a waiver of any right of any Holder hereof, and no delay on the
part of the Holder in exercising any right hereunder shall so operate.
4.4 This Warrant may be amended only by a written instrument executed
by the Company and the Holder hereof. Any amendment shall be endorsed upon this
Warrant, and all future Holders shall be bound thereby.
4.5 All communications provided for herein shall be sent, except as
may be otherwise specifically provided, by registered or certified mail: if to
the Holder of this Warrant, to the address shown on the books of the Company;
and if to the Company, to 2165 Technology Drive, Schenectady, New York 12308,
attention: Office of the President, or to such other address as the Company may
advise the Holder of this Warrant in writing. Notices shall be deemed given when
mailed.
4.6 The provisions of this Warrant shall in all respects be
constructed according to, and the rights and liabilities of the parties hereto
shall in all respects be governed by, the laws of the State of New York. This
Warrant shall be deemed a contract made under the laws of the State of New York
and the validity of this Warrant and all rights and liabilities hereunder shall
be determined under the laws of said State.
4.7 The headings of the Sections of this Warrant are inserted for
convenience only and shall not be deemed to constitute a part of this Warrant.
6
<PAGE> 7
IN WITNESS WHEREOF, BITWISE DESIGNS, INC. has caused this Warrant to
be executed in its corporate name by its officer, and its seal to be affixed
hereto.
Dated: September 9, 1999
Schenectady, New York
BITWISE DESIGNS, INC.
By:_____________________________
John Botti
President
7
<PAGE> 8
SUBSCRIPTION FORM
TO: BITWISE DESIGNS, INC.
2165 Technology Drive
Schenectady, New York 12308
The undersigned Holder hereby irrevocably elects to exercise the right
to purchase shares of Common Stock covered by this Warrant according to the
conditions hereof and herewith makes full payment of the Exercise Price of such
shares.
Kindly deliver to the undersigned a certificate representing the
Shares.
INSTRUCTIONS FOR DELIVERY
Name: ____________________________________________________________
(please typewrite or print in block letters)
Address: __________________________________________________________
Dated: _________________________
Signature ________________________________
8
<PAGE> 1
Exhibit 4.8
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY
NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.
SERIES B PREFERRED STOCK
$.10 PAR VALUE
CERTIFICATE FOR SHARES
BITWISE DESIGNS, INC.
(A Delaware Corporation)
WHEREAS, Bitwise Designs, Inc. is authorized to issue an
aggregate of 5,000,000 shares of Preferred Stock, $.10 par value, which may be
issued in classes or in series, and whose respective rights, designations and
preferences may be designated from time to time by a Certificate of Designation
by the Board of Directors of Bitwise Designs, Inc.; and
WHEREAS, the Board of Directors of Bitwise Designs, Inc. have
designated 50,000 shares of Preferred Stock as "Series B Preferred Stock"
pursuant to a Designation attached hereto and which Designation sets forth the
rights, preferences and limitations of such Series B Preferred Stock.
NOW, THEREFORE, this certifies that _________________ is the
owner of ________________ Shares of Series B Preferred Stock of Bitwise Designs,
Inc., which Preferred Shares are fully paid and non-assessable.
IN WITNESS WHEREOF, the said Corporation has caused this
Certificate to be signed by its duly authorized officers and its Corporate Seal
to be hereunto affixed this 5th day of October 1999.
______________________________ _________________________________
Victor J. DiGioia John Botti
Assistant Secretary President
(Corporate Seal)
<PAGE> 1
Exhibit 10.9
Dated as of September 21, 1999
Bitwise Designs, Inc.
2165 Technology Drive
Schenectady, New York 12308
Attention: Mr. John Botti
Chief Executive Officer
Dear Mr. Botti:
This Agreement, when executed by the parties hereto, will constitute an
agreement between Bitwise Designs, Inc. ("Bitwise") and Corporate Funding Group,
LLC ("Corporate Funding") pursuant to which Bitwise agrees to retain Corporate
Funding and Corporate Funding agrees to be retained by Bitwise under the terms
and conditions set forth below.
1. Bitwise hereby retains Corporate Funding to perform financial
consulting services related to the corporate finance and other financial service
matters of Bitwise. In this regard, subject to the terms set forth below,
Corporate Funding shall furnish to Bitwise (i) furnish advice and
recommendations with respect to such aspects of the business and affairs of
Bitwise as Bitwise shall, from time to time, reasonably request upon reasonable
notice; and (ii) assume responsibility for consenting, or withholding the
consent for, as market conditions warrant, the sale by certain security holders
and certain Bitwise officers of Bitwise securities, pursuant to private offering
subscription documents of even date. Nothing herein shall require Bitwise to
utilize Corporate Funding's services in any particular transactions.
2. Bitwise hereby grants Corporate Funding an irrevocable preferential
right for a period of three years from the date hereof to purchase for its
account or the accounts of its affiliates, agents, or associates, any securities
of Bitwise which Bitwise may seek to privately sell in an offering exempt from
the registration requirements of the Securities Act of 1933, as amended, up to
an aggregate of $5,000,000. Bitwise will consult Corporate Funding with regard
to any such offering and will offer Corporate Funding the opportunity to
purchase such securities on terms not more favorable to Bitwise, than it can
secure elsewhere. If Corporate Funding fails to accept such offer within 10
business days after the mailing of a notice containing such offer by registered
mail addressed to Corporate Funding, then Corporate Funding shall have no
further claim or right with respect to the financing proposal contained in such
notice. If, however, the terms of such proposal are subsequently modified in any
material respect, the preferential right referred to herein shall apply to such
modified proposal as if the original proposal had not been made. Corporate
Funding's
<PAGE> 2
failure to exercise its preferential right with respect to any particular
proposal shall not affect its preferential rights relative to future proposals.
3. As compensation for the services outlined in paragraph one above,
Bitwise shall sell to Corporate Funding (or its designated affiliates) 20,000
Series B Common Stock Purchase Warrants (the "Warrants"), at a price of $.001
per warrant.
4. (i) Bitwise and Corporate Funding further acknowledge and agree that
Corporate Funding may act as a finder, investment banker or financial consultant
in various Strategic Transactions (defined below as a Merger or Sale) in which
the Company may be involved. The Company hereby agrees that in the event a
Strategic Transaction, other than Financing, is consummated, Bitwise shall pay
to Corporate Funding a fee (the "Transaction Fee") equal to the aggregate of
five percent of the amount of the consideration paid in such transaction up to
$2 million of consideration, four percent of the amount of such consideration
above $2,000,000 up to $4 million, three percent of the amount of such
consideration above $4,000,000 up to $6 million, two percent of the amount of
such consideration amount above $6,000,000 up to $8 million, and one percent of
the amount of such consideration over $ 8 million. The Transaction Fee shall be
paid in cash at the closing of the transaction to which it relates, and shall be
payable whether or not the transaction involves stock, or a combination of stock
and cash, or is made on the installment sale basis. In addition, if Bitwise
shall, within 12 months immediately following the termination of this Agreement,
consummate a transaction with any party introduced by Corporate Funding to
Bitwise and with which Bitwise was engaged in substantial negotiations for a
Strategic Transaction prior to such termination, Bitwise shall pay to Corporate
Funding a Transaction Fee with respect to such transaction calculated in
accordance with this paragraph.
(ii) For purposes hereof, "Consideration" shall mean the value of
all cash, securities and other property or other assets paid, received, payable
or receivable, including debt assumed, in connection with a Strategic
Transaction, including, without limitation: (a) any distributions made to
shareholders in anticipation of the closing; (b) any employment contract
enhancements or non-competition payments (other than ordinary and customary
compensation in connection with bona fide employment agreements); (c) any
payments in connection with any separate transactions affecting another business
entity or any of its assets or securities (e.g., purchase or lease of any real
estate or other assets, but in the case of a lease, Consideration shall include
only sums in excess of current rentals paid to unrelated or unaffiliated third
parties); (d) any indebtedness for money borrowed, including receivables,
pension liabilities and guarantees, which are assumed; and (e) other business
considerations (e.g. business discounts and/or credits for services and/or
products). For purposes of determining Consideration, the value of any
securities (whether debt or equity) shall be deemed to be the greater of: (i)
the fair market value thereof as of the day the definitive agreement is executed
by all parties; or (ii) the average of the last reported sales prices of the
securities on the twenty (20) consecutive business days prior to the
consummation of the Strategic Transaction as reported on the principal exchange
on which the security is listed, or, as the case may be, the NASDAQ National
Market System; provided that the value of securities that are not freely
tradable or have no established public market shall be the fair market value
thereof as
2
<PAGE> 3
reasonably agreed-upon by the parties hereto. If any part of the Consideration
shall be deferred or contingent upon future earnings or other contingencies,
then Corporate Funding shall be entitled to a Transaction Fee on such additional
Consideration, and the term Consideration shall include such additional
compensation which shall be payable on the basis of the payment when made by the
payor. The Transaction Fee for such Consideration paid or received in the future
shall be payable when such Consideration is paid and shall be calculated using
the formula set forth in Section 4(i) by adding this subsequent Consideration to
all other Consideration previously paid.
(iii) For the purposes of this paragraph 4: (a) a "Merger" shall
mean an acquisition, combination, joint venture or other like transaction with
another entity; and (b) a "Sale" shall mean the sale of all or a material
portion of the assets of the company.
5. All obligations of Corporate Funding contained herein shall be
subject to reasonable notice. Corporate Funding shall devote such time and
effort to the performance of its duties hereunder as Corporate Funding shall
determine is reasonably necessary for such performance. Corporate Funding may
look to such others for such factual information, investment recommendations,
economic advice and/or research, upon which to base its advice to Bitwise
hereunder, as it shall deem appropriate. Bitwise shall furnish to Corporate
Funding all information reasonably relevant to the performance by Corporate
Funding of its obligations under this Agreement, or particular projects as to
which Corporate Funding is acting as advisor, which will permit Corporate
Funding to know all facts material to the advice to be rendered, and all
material or information reasonably requested by Corporate Funding. In the event
that Bitwise fails or refuses to furnish any such material or information
reasonably requested by Corporate Funding, and thus prevents or impedes
Corporate Funding's performance hereunder, any inability of Corporate Funding to
perform shall not be a breach of its obligations hereunder. Nothing contained in
this Agreement shall limit or restrict the right of Corporate Funding or of any
partner, employee, agent or representatives of Corporate Funding, to be a
partner, director, officer, employee, agent or representative of, or to engage
in, any other business, whether of a similar nature or not, nor to limit or
restrict the right of Corporate Funding to render services of any kind to any
other corporation, firm, individual or association.
6. Corporate Funding shall hold in confidence any confidential
information, which Bitwise provided to Corporate Funding pursuant to this
Agreement unless Bitwise gives Corporate Funding permission to in writing to
disclose such confidential information to a specific third party.
Notwithstanding the foregoing, Corporate Funding shall not be required to
maintain confidentiality with the respect to information (i) which is or becomes
part of the public domain; (ii) of which it had independent knowledge prior to
disclosure; (iii) which comes into the possession of Corporate Funding in the
normal routine course of its own business from and through independent non-
confidential sources; or (iv) which is required to be disclosed by Corporate
Funding by governmental requirements. If Corporate Funding is requested or
required (by oral questions, interrogatories, requests for information or
document subpoenas, civil investigative demands, or similar process) to disclose
any confidential information supplied to it by Bitwise, Corporate Funding shall,
unless prohibited by law, promptly notify Bitwise of such request(s) so that
Bitwise
3
<PAGE> 4
may seek an appropriate protective order.
7. Each party agrees to indemnify and hold harmless the other, their
employees, agents, representatives and controlling persons (and the officers,
directors, employees, agents, representatives and controlling persons of each of
them) from and against any and all losses, claims, damages, liabilities, cost
and expenses (and all actions, suits, proceeding or claims in respect thereof)
and any legal or other expenses in giving testimony or furnishing documents in
response to a subpoena or otherwise, as and when incurred, directly or
indirectly, caused by, relating to, based upon or arising out of the services
pursuant to this Agreement. Bitwise further agrees that Corporate Funding shall
incur no liability to Bitwise or any other party on account of this Agreement or
any acts or omissions arising out of or related to the actions of Corporate
Funding relating to this Agreement or the performance or failure to perform any
services under this Agreement except for Corporate Funding's intentional or
willful misconduct. This paragraph shall survive the termination of this
Agreement.
8. This Agreement may not be transferred, assigned or delegated by any
of the parties hereto without the prior written consent of the other party
hereto.
9. The failure or neglect of the parties hereto to insist in any one or
more instances, upon the strict performance of any of the terms and conditions
of this Agreement, or their waiver of strict performance of any of the terms and
conditions of this agreement, shall be construed as a waiver of strict
performance of any of the terms or conditions of this Agreement, shall not be
construed as a waiver or relinquishment in the future of such term and
condition, but the same shall continue in full force and effect.
10. The term of this Agreement is for 36 months. This agreement may be
terminated by Bitwise in the event that Frank Skelly ceases to be principal
executive officer of Corporate Funding.
11. Any notices hereunder shall be sent to Bitwise and Corporate
Funding at their respective addresses set forth above. Any notice shall be given
by registered or certified mail, postage prepaid, and shall be deemed to have
been given when deposited in the United States mail. Either party may designate
any other address to which notice shall be given, by giving written notice to
the other of such change of address in the matter herein provided.
12. This Agreement has been made in the State of New York and shall be
construed and governed in accordance with the laws thereof without giving effect
to principles governing conflicts of law.
13. This Agreement contains the entire agreement between the parties,
may not be altered or modified, except in writing, signed by the party to be
changed thereby, and supersedes any and all previous agreements between the
parties relating to the subject or matter hereof.
4
<PAGE> 5
14. This Agreement shall be binding upon the parties hereto, the
indemnified parties and their respective heirs, administrators, successors and
permitted assigns.
If you are in agreement with the foregoing, please execute two copies
of this letter in the space provided below and return them to the undersigned.
Very truly yours,
CORPORATE FUNDING
GROUP, LLC
By: GATEWAY NETWORK, LLC
(Manager Member)
By: /s/ Craig Gross
-----------------------
Name: Craig Gross
Title: Manager/Member
ACCEPTED AND AGREED TO AS OF
THE DATE FIRST ABOVE WRITTEN
BITWISE DESIGNS, INC.
By: /s/ John T. Botti
-------------------------
John T. Botti
President
5
<PAGE> 1
Exhibit 10.10
BITWISE DESIGNS, INC.
2165 Technology Drive
Schenectady, New York 12308
(518) 346-7799
Dated: September 23, 1999
Nicholas Themelis
14 Serenite Lane
Muttontown, New York 11791
Mr. Themelis:
This letter, when executed by the parties hereto, will
constitute an agreement between Bitwise Designs, Inc., Authentidate.Com, LLC
(collectively referred to as the "Company") and Mr. Nicholas Themelis
("Themelis"), pursuant to which the Company agrees to retain Themelis and
Themelis agrees to be retained by the Company under the terms and conditions set
forth below:
l. The Company hereby retains Themelis to perform general
advisory services related to the development of an Internet service company
under the name Authentidate.Com and the implementation of the business plan of
Authentidate, and Themelis hereby accepts such retention. In this regard,
subject to the terms set forth below, Themelis shall furnish to the Company
advice and recommendations with respect to such aspects of the business and
affairs of the Company as the Company shall, from time to time, reasonably
request upon reasonable notice. Nothing contained herein shall impose any
obligation on the Company to accept or adopt any proposal recommended by
Themelis.
2. As compensation for the services described in paragraph "l"
above, the Company shall issue to Themelis 20,000 Series B Common Stock Purchase
Warrants to purchase the common stock of Bitwise Designs, Inc., exercisable at
$1.375 per share. In addition to its compensation hereunder, the Company will
reimburse Themelis for any and all expenses incurred by Themelis, which has been
approved in writing by the Company, in the performance of its duties hereunder
and, Themelis shall account for such expenses to the Company. Such reimbursement
shall cumulate and be paid on a monthly basis.
3. In addition, Themelis shall hold itself ready to assist the
Company in evaluating and negotiating particular contracts or transactions, if
requested to do so by the Company, upon reasonable notice, and will undertake
such evaluations and negotiations upon prior written agreement as to additional
compensation to be paid by the Company to Themelis with respect to such
evaluations and negotiations.
<PAGE> 2
4. All obligations of Themelis contained herein shall be
subject to Themelis's reasonable availability for such performance, in view of
the nature of the requested service and the amount of notice received. Themelis
shall devote such time and effort to the performance of its duties hereunder as
Themelis shall determine is reasonably necessary for such performance.
5. Nothing contained in this Agreement shall limit or restrict
the right of Themelis to be a partner, director, officer, employee, agent or
representative of, or to engage in, any other business, whether of a similar
nature or not, nor to limit or restrict the right of Themelis to render services
of any kind to any other corporation, firm, individual or association.
6. Themelis will hold in confidence any confidential
information which the Company provides to Themelis pursuant to this Agreement
which is designated by an appropriate stamp or legend as being confidential.
Notwithstanding the foregoing, Themelis shall not be required to maintain
confidentiality with respect to information (i) which is or becomes part of the
public domain; (ii) of which it had independent knowledge prior to disclosure
not through any wrongful means; (iii) which comes into the possession of
Themelis in the normal and routine course of its own business from and through
independent non-confidential sources; or (iv) which is required to be disclosed
by Themelis by governmental requirements. If Themelis is requested or required
(by oral questions, interrogatories, requests for information or document
subpoenas, civil investigative demands, or similar process) to disclose any
confidential information supplied to it by the Company, or the existence of
other negotiations in the course of its dealings with the Company or its
representatives, Themelis shall, unless prohibited by law, promptly notify the
Company of such request(s) so that the Company may seek an appropriate
protective order.
7. This Agreement may not be transferred, assigned or
delegated by any of the parties hereto without the prior written consent of the
other party hereto except Themelis may assign this agreement to another
broker-dealer or delegate responsibilities hereunder to one or more employees or
agents.
8. The failure or neglect of the parties hereto to insist, in
any one or more instances, upon the strict performance of any of the terms or
conditions of this Agreement, or their waiver of strict performance of any of
the terms or conditions of this Agreement, shall not be construed as a waiver or
relinquishment in the future of such term or condition, but the same shall
continue in full force and effect.
9. This Agreement may be terminated by either party at any
time upon 30 days' notice. All obligations of the parties arising under
Paragraph 6, as well as any accrued obligations of the Company, shall survive
the termination of this Agreement.
10. Any notices hereunder shall be sent to the Company and to
Themelis at their respective addresses set forth above. Any notice shall be
given by registered or certified mail, postage prepaid, and shall be deemed to
have been given when deposited in the United States mail. Either party may
designate any other address to which notice shall be given, by giving written
notice to the other of such change of address in the manner herein provided.
<PAGE> 3
11. This agreement has been made in the state of New York and
shall be construed and governed in accordance with the laws thereof without
giving effect to principles governing conflicts of law.
12. This Agreement contains the entire agreement between the
parties, may not be altered or modified, except in writing and signed by the
party to be charged thereby, and supercedes any and all previous agreements
between the parties relating to the subject matter hereof.
13. This Agreement shall be binding upon the parties hereto
and their respective heirs, administrators, successors and permitted assigns.
If you are in agreement with the foregoing, please execute two
copies of this letter in the space provided below and return them to the
undersigned.
Yours truly,
BITWISE DESIGNS, INC.
By: /s/ John Botti
--------------------------
Name: John Botti
Title: President
ACCEPTED AND AGREED TO
AS OF THE DATE FIRST
ABOVE WRITTEN:
/s/ Nicholas Themelis
- ---------------------
NICHOLAS THEMELIS
<PAGE> 1
Exhibit 10.11
[BANK OF AMERICA LETTERHEAD]
October 1, 1999
Mr. Dennis Bunt
Chief Financial Officer
Bitwise Designs, Inc.
Building 50
Rotterdam Industrial Park
Schenectady, NY 12306
Dear Mr. Bunt:
Bitwise Designs, Inc. ("Company") is party to an Amended and Restated Loan and
Security Agreement ("Agreement"), dated July 19, 1999 with Bank of America (dba
NationsCredit Distribution Finance, Inc.) ("Bank").
The Company is in default of the Agreement due to violations of the financial
covenants contained in the Agreement and for non-payment of amounts due and
payable under the terms of the Agreement. The Bank is willing to forbear from
the exercise of any rights or remedies under the Agreement due to the defaults
provided the Company agrees to the following conditions:
- - Provide Bank with a partial payment of $600,000, via wire transfer, no later
than October 4, 1999, such payment to be applied to the outstanding principal
balance of $1,212,451.52.
- - Provide Bank with a weekly payment equal to $11,778 plus interest on each
Monday commencing October 11, 1999 with all remaining amounts due and payable
September 30, 2000. Interest is to accrue at the Bank's Prime rate as it
changes from time to time plus 4%. In addition to the above payment the
Company will pay any collateral shortfall shown on the weekly Borrowing Base
Certificate, after making allowance for the normal weekly payment by December
31, 1999, based on ??? advance on current receivables in accordance with the
formulas set forth in the Agreement.
- - Pay to the Bank 50% of the proceeds received by the Company from the sale of
equity, including the exercise of warrants and the sale of additional
securities, until the balance of the loan is paid in full; and provided
further, that, in the event Company secures a new credit facility to replace
the loan, Company will pay the balance of the principal and interest of the
loan upon closing of the new credit facility.
- - Provide Bank by the 5th day of each month a detailed inventory report,
detailed accounts receivable aging and detailed accounts payable aging as of
the end of the prior month and all other reports and financial statements as
required under Section 10 of the Agreement.
- - In the event that the Company ceases to be publicly traded, provide Bank on a
monthly basis within 30 days of month end a consolidated income statement and
balance sheet containing the operating results and balance sheet accounts of
the Company and any subsidiaries or affiliates. These financial statements
are to be prepared in accordance with GAAP using a presentation format
consistent with the format used in the fiscal year and audited financial
statement previously provided to Bank.
- - The Company's management will use all best efforts by fully cooperating with
the Bank's field auditors during the collateral Audit to take place on
October 4, 1999 and any subsequent audits Bank
<PAGE> 2
- - deems necessary. Any audit which discovers a material irregularity in the
Company's financial accounting or in the computation of the Borrowing Base
Certificate will cause this forbearance to cease.
- - Mr. John Botti executes the Guaranty attached.
Provided Company agrees to and complies with the matters set forth herein,
Guarantor agrees to the matters set forth herein, and no further defaults occur
or exist under the Agreement, Bank will forbear from the exercise of any rights
or remedies under the Agreement at this time. This letter is not a waiver of any
rights or remedies by Bank, and does not establish a precedent or obligate Bank
in its future dealings with Company. By signing below, Company and Guarantor
acknowledge that they have no actual or potential claims or causes of action
against Bank, and hereby waive and release any right to assert same. The
foregoing does not affect in any way the process of (a) adjusting and
reconciling credits, debits, payments and charges under the Agreement or (b)
calculating amounts due and owing from time to time to NationsCredit under the
Agreement.
Please sign below to evidence your agreement to the matters set forth in this
letter. Feel free to contact me with any questions you may have.
Sincerely,
Bank of America, NA
By: /s/ Michael H. Hill
-----------------------------
Michael H. Hill
Senior Vice President
Acknowledged and agreed on 10/1/ , 1999:
----------------
Company:
Bitwise Designs, Inc.
By: /s/ John Botti
------------------------------
Title:
Guarantor:
/s/ John Botti
------------------------------
John Botti
<PAGE> 3
[Bank of America Logo]
GUARANTY
Obligee: Bank of America, N.A. Debtor: Bitwise Designs, Inc.
Address: 1355 Windward Concourse Address: Building 50,
City: Alpharetta State: GA Roefordam Industrial Park
Zip: 30005 City: Schenectady State: NY
Zip: 12306
To induce you to extend credit to the debtor named above ("Debtor"), and in
consideration of the benefits to accrue to each undersigned guarantor
("Guarantor"), Guarantor hereby unconditionally guarantees and promises to pay
to you on demand as indebtedness of Debtor. As used herein, "Indebtedness" means
any and all amounts owing to you from time to time by Debtor, whether principal,
interest, fees, charges, expenses or other amounts. The term "you," as used
herein, shall include you and your subsidiaries and other affiliates.
Demand for payment may be made hereunder at any time that any Indebtedness is
due and unpaid or at any time that Debtor is in default under any conditions or
obligations in any agreement of any kind with you. Guarantor further agrees that
all Indebtedness of Debtor shall, for the purposes hereof, be deemed immediately
due and payable, and shall be forthwith payable by Guarantor, if Debtor or
Guarantor is unable to pay its debts as they mature, makes an assignment for the
benefit of creditors or becomes subject to any proceeding under any state or
federal bankruptcy, reorganization, insolvency, dissolution, liquidation or
debtor relief law, if a receiver, trustee or similar official is appointed or
petitioned for Debtor or Guarantor or any part of their property, or if a
material adverse change occurs in the financial condition, business operations,
assets or prospects of Debtor or Guarantor.
This is a continuing Guaranty covering all present and future Indebtedness of
Debtor to you and shall include Indebtedness revived after being satisfied. This
Guaranty shall apply to all Indebtedness funded or committed on or before your
actual receipt of written notice of revocation as to future transactions, but
revocation by Guarantor shall not affect the continuing liability of Guarantor
with respect to Indebtedness created or committed prior to your receipt of such
notice, nor the liability of any of the undersigned that have not given notice.
If, due to a bankruptcy proceeding, lawsuit or any other circumstances, you ever
return or otherwise disgorge any Indebtedness previously paid, then Guarantor
shall remain obligated to you hereunder for the amount so repaid or recovered to
the same extent as if such amount had never been received by you.
Guarantor agrees that you may, without notice or demand, from time to time
renew, compromise, extend, accelerate or otherwise change the time for payment
of, or otherwise change the terms of the Indebtedness or any part thereof, take
and hold security for the payment of this Guaranty or the Indebtedness,
exchange, enforce, waive, impair or release any such security, apply such
security and direct the order or manner of sale thereof as you in your
discretion may determine, and release, compound or substitute any one or more
endorsers or guarantors; that you shall not be required to proceed against
Debtor or any other person, proceed against or exhaust any security held for the
Indebtedness, or pursue any other remedy available to you before making demand
hereunder and proceeding against Guarantor; that until payment in full of all
obligations of Debtor to you, Guarantor shall not have any right of subrogation,
contribution, assignment of Indebtedness or reimbursement for payments made by
Guarantor hereunder, nor any right to participate in any security now or
hereafter held by you; that you may offset against any deposit, investment, or
other account or claim of Guarantor with or against you or any of your
affiliates for any obligations due and payable hereunder, that any act by you
that injures or increases the risk of Guarantor or exposes Guarantor to greater
liability shall not discharge any obligations hereunder, and that all
presentments, demands for performance, notices of non-performance, protests,
notices of protest, notices of dishonor and notices of acceptance of this
Guaranty and of the existence or creation of additional Indebtedness are hereby
waived. Guarantor waives all rights and defenses arising out of an election of
remedies, such as nonjudicial foreclosure with respect to security for any
Indebtedness, even though that election of remedies has destroyed Guarantor's
rights of subrogation and reimbursement against Debtor. Guarantor acknowledges
that this Guaranty is necessary to the conduct and promotion of the business of
Guarantor, and can be expected to benefit such business. Guarantor's obligation
hereunder shall not be discharged, impaired or affected by, the power or
authority or lack thereof of Debtor to incur the Indebtedness, the validity or
invalidity of any documents evidencing or securing the Indebtedness, the effect
of any statute of limitations, your failure to disclose any information that may
be available to you regarding any defaults by Debtor or Debtor's ability to
repay the Indebtedness, or any offsets, counterclaims or defenses (other than
payment in full of the Indebtedness) that Guarantor may have to its obligations
hereunder, all of which are hereby waived by Guarantor. Guarantor agrees to pay
reasonable attorneys' fees and other costs and expenses incurred by you in the
enforcement of the Indebtedness or this Guaranty. If any amount owing hereunder
by Guarantor shall not be paid when due, you may offset against any deposit,
investment, or other account or claim of Guarantor with or against you or any of
your affiliates.
This Guaranty shall be governed by and construed in accordance with the laws of
the State of Georgia, without giving effect to conflict of law principles.
Guarantor agrees that courts located in Atlanta, Georgia, including the United
States District Court of the Northern District of Georgia, shall have
jurisdiction to hear and determine any claim or dispute pertaining to this
Guaranty. Guarantor expressly consents to such jurisdiction, waives any claims
of inconvenient forum, waives personal service of any summons, complaint or
other process in any action relating hereto, and agrees that service may be made
by certified mail to Guarantor at the address set forth below (or such other
address as Guarantor shall from time to time specify to you in writing as a
notice address). Nothing herein shall affect your right to serve process in any
other manner as provided by law, or to commence legal proceedings or otherwise
proceed against Guarantor in any other jurisdiction.
This Guaranty shall inure to the benefit of transferees and assignees of any
part or all of the Indebtedness, and shall extend to loans made by such
transferees or assignees. If more than one Guarantor is party hereto, each
agrees that its obligations are joint and several with each other Guarantor, and
you may demand and receive payment from each Guarantor in any order. Any married
individual signing this Guaranty agrees that recourse may be had against that
individual's separate as well as joint property for obligations hereunder.
TO THE MAXIMUM EXTENT PERMITTED BY THE LAWS OF ANY FORUM STATE GUARANTOR WAIVES
ANY RIGHT TO A TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING RELATING TO THIS
GUARANTY OR ANY RELATED MATTERS. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.
Witnesses:
Signature: /s/ John T. Botti (L.S.) Date: 10/1/99
_____________________________ Name: John T. Botti
_____________________________ Address: 325 Loudon Road, Loudonville, NY 12211
Signature: (L.S.) Date:
_____________________________ Name:
_____________________________ Address:
<PAGE> 1
Exhibit 10.12
WEB SITE DESIGN AND SERVICE CONTRACT
This Agreement made as of the 15th day of September, 1999, by and
between Shore Venture Group L.L.C., a New Jersey Limited Liability Company,
having its principal offices at 54 Hilltop Drive, Palermo, New Jersey 08223
(hereinafter "Shore Venture"), Authentidate.Com LLC, a Delaware Limited
Liability Company having its principal offices at 2165 Technology Drive,
Schenectady, NY 12308 (hereinafter "Authentidate") and BitWise Designs, Inc., a
Delaware corporation having its principal offices at 2165 Technology Drive,
Schenectady, NY 12308 (hereinafter "BitWise").
WITNESSETH
WHEREAS, Shore Venture is engaged in the business of designing and
maintaining sites and home pages for use in the Internet and World Wide Web and
in connection therewith develops certain software and related technology;
WHEREAS, BitWise is desirous of establishing a World Wide Web site for
its "Authentidate" business and desires to retain Shore Venture to design and
develop the Authentidate site;
WHEREAS, Shore Venture has been assisting BitWise in the design,
development, and implementation of the Authentidate site;
WHEREAS, BitWise has established Authentidate.Com LLC as a limited
liability company under the laws of the State of Delaware in order to operate
the Authentidate business and BitWise is the sole member of Authentidate.Com LLC
as of the date hereof;
WHEREAS, although there can be no assurance, it is the intention of
BitWise that Authentidate shall become a "public" company by way of a public
offering in the future; and
WHEREAS, the parties desire to enter into this Agreement (i) to provide
for the establishment of the Authentidate site, and (ii) establish the
consideration to Shore Venture for its services and for certain related matters.
NOW THEREFORE, having considered the foregoing premises, the mutual
promises and understandings contained herein and INTENDING TO BE LEGALLY BOUND
HEREBY, the parties hereby warrant and covenant as follows:
1. SERVICES PROVIDED BY THE PARTIES
a) Shore Venture shall design and develop the Authentidate
site in accordance with Exhibit "A" annexed hereto. The design
and development services include the design and development of
any and all computer software in order to insure that the
1
<PAGE> 2
Authentidate site performs in the manner contemplated by the
parties as outlined in Exhibit "A" annexed hereto. Without
limiting the foregoing, Shore Venture understands and agrees
that the Authentidate site will be required to (i) accept and
store e-mail from networks and personal computers throughout
the world and from different operating systems via the
Internet; (ii) allow for confirmation of acceptance of all
e-mails sent to the system; (iii) allow for a secure payment
system, including use of credit cards; and (iv) produce
confirmations of receipt of e-mail.
b) Shore Venture shall meet with personnel of BitWise from
time to time during the period of development to discuss the
status of design and development of the Authentidate site as
depicted in Exhibit "A".
c) Shore Venture shall use commercially reasonable efforts,
giving effect to its expertise in designing and developing web
sites, to complete the Authentidate site by September 30,
1999.
d) BitWise shall provide the support and services set forth on
Exhibit "A" in order to assist Shore Venture in the
performance of its duties hereunder.
2. OWNERSHIP OF TECHNOLOGY/TRADENAME
All software and related technology created by Shore Venture in
connection with the development of the Authentidate site shall be the property
of Authentidate. All work provided or created by Shore Venture in accordance
with this Agreement shall be deemed "work for hire" and shall remain the sole
property of Authentidate. Authentidate shall have all right, title and interest
in and to the tradenames "Authentidate" and "Authentidate.Com".
Neither Shore Venture nor BitWise, nor their respective personnel shall
file any patent application. All patent applications shall be filed by and
granted in the name of Authentidate.com LLC, provided, however, Shore Venture
shall be named as an "inventor". All employees, officers and directors of
Authentidate and BitWise shall assign all rights to any of the software and
technology to Authentidate.com LLC. Shore Venture shall assist Authentidate.com
LLC in the filing of any and all patent applications. Notwithstanding the
foregoing, in the event that BitWise or Authentidate.com LLC fails to make
payment to Shore Venture as required hereunder, Shore Venture shall have a lien
and security interest in any patents granted to Authentidate.com LLC with
respect to the Authentidate site.
3. COMPENSATION.
In consideration of the software development and all rights associated
thereto, BitWise shall compensate Shore Venture in the following manner:
a) BitWise has previously agreed to issue One Hundred Thousand
(100,000) common stock warrants at an exercise price of $.69 per share,
based upon the market price of the BitWise common stock on the date
that BitWise agreed to issue the warrants. The Warrants
2
<PAGE> 3
shall be issued in the name or names listed in Exhibit "B" as
determined by Shore Venture in its sole discretion and delivered within
five (5) days of execution of this Agreement. The warrants shall have
an exercise term of five (5) years from the date of grant and be
exchangeable into the underlying, unrestricted common stock of BitWise
or any successor thereof on a one for one basis at any time beginning
with date of issue and extending for a five (5) year period thereafter.
b) BitWise and Authentidate agree that Shore Venture shall receive a
guaranteed minimum of Two Hundred Thousand Dollars ($200,000) of
service fees related to enhancements to, and service of, the
Authentidate site during a one (1) year period commencing on September
30, 1999. Payment shall be made monthly in twelve (12) equal
installments. Shore Venture is to be in receipt of said installment
payments on or before the 15th of each corresponding month. Payment
shall be made to Shore Venture regardless of whether services or
enhancements are actually required to be made to the Authentidate site.
Shore Venture agrees that all service and enhancement requests shall be
made as promptly as possible and in good faith.
c) Within five (5) days of execution of this Agreement, BitWise shall
pay to Shore Venture the sum of Fifteen Thousand Dollars ($15,000)
representing payment in full of cash sums owed by BitWise to Shore
Venture for past design and development services provided by Shore
Venture for the Authentidate site as outlined in Exhibit "A".
d) BitWise shall also pay Shore Venture Forty Thousand Dollars
($40,000.00) for design and development of the fax portion of the
Authentidate site as outlined in Exhibit "C" annexed hereto. Said
payments are to be made according to the following schedule:
1. Within five (5) days of execution of this Agreement, an
initial cash payment of Twenty Thousand Dollars ($20,000.00).
2. Upon demonstration to BitWise and Authentidate.com LLC of
functionality of the fax portion of the Authentidate.com site
reasonably satisfactory to BitWise and Authentidate, an additional cash
payment of Ten Thousand Dollars ($10,000.00).
3. Within 10 days of demonstration of functionality of the fax
portion of the Authentidate site as provided in clause 2 above, an
additional cash payment of Ten Thousand Dollars ($10,000.00).
e) Shore Venture shall be deemed an equity owner of 7.5% of the
membership interests of Authentidate as of the date hereof.
Authentidate shall issue to Shore Venture membership interests
representing 7.5% of the outstanding membership interests as of the
date hereof. Shore Venture agrees to execute any such reasonable
subscription agreements or other documents as counsel to Authentidate
may require in order to issue the membership interests. In addition,
Shore Venture shall be required to execute a mutually agreeable
operating agreement governing the membership interests in Authentidate.
BitWise and/or Authentidate agree to provide written notice to Shore
Venture of the terms of all equity or other financing
3
<PAGE> 4
received by Authentidate within five (5) days of receipt of such
financing; it being understood and agreed by Shore Venture that nothing
contained in this Agreement shall be construed to provide Shore Venture
with any rights of first refusal with respect to such financing.
f) In the event that Authentidate.Com LLC has not, prior to March 31,
2001, entered into a bona fide and verifiable letter of
intent/engagement with an underwriter for an underwritten initial
public offering by Authentidate, then the membership interests of Shore
Venture in Authentidate set forth in clause e) above shall be
permitted, upon written request by Shore Venture, to be converted into
Common Stock of BitWise or any successor thereof. The rights granted to
Shore Venture in this clause f) shall be a one time option exercisable
on or before April 10, 2001. In order to determine the amount of
BitWise shares which may be issued to Shore Venture, the parties shall
determine the value of the ownership interest of Shore Venture in
Authentidate as follows.
1. The value of the ownership interests shall be based upon
the valuation of Authentidate established by the managers of
Authentidate and the third party investor in the most recent financing
completed by Authentidate within 180 days of the date of this
Agreement. By way of example, if a third party investor purchases 10%
of Authentidate ownership interests for $1,000,000, then the valuation
of Authentidate shall be deemed to be $10,000,000.
2. Upon determination of the value of the Shore Venture
interests, such sum shall be divided by average of the closing bid
prices of the Common Stock of BitWise or any successor thereof for the
30 trading days ending March 31, 2001 less a discount of 15%; provided,
however, in no event shall the conversion price be less than $.25 per
share.
BitWise hereby agrees to use its best efforts to file a registration
statement with the Securities and Exchange Commission ("SEC") with
respect to the shares of BitWise delivered under this clause f) to
allow the resale of the shares by Shore Venture under the Securities
Act of 1933, as amended on or before May 30, 2001 and to use its best
efforts to have the registration statement declared effective by the
SEC as soon as possible thereafter. BitWise shall not impose any lockup
period on the shares to be issued to Shore Venture.
g) Shore Venture shall have the right, subject to applicable Internal
Revenue Code rules and regulations, to participate in any stock option
plan (or similar plan) which may be established by Authentidate, or, in
the alternative, to receive warrants to purchase additional membership
interests in Authentidate. In the event that Shore Venture does not
receive any options or warrants in accordance with the foregoing, then
Shore Venture shall be entitled to receive 20% of the total amount of
the Authentidate options (or similar rights) received by John Botti,
which John Botti hereby agrees to assign to Shore Venture.
h) BitWise shall reimburse Shore Venture for all reasonable printing,
mailing, travel and lodging expenses and other out-of -pocket expenses
incurred by Shore Venture in connection with the services provided
under this agreement.
4
<PAGE> 5
i) Authentidate.com LLC hereby grants to Shore Venture the preferential
right to use the technology owned by Authentidate.com LLC in Shore
Venture's Internet auction site "ReverseBid.com" (or any successor
thereof) as a transparent service to buyers and sellers to
confirm/timestamp all offers and acceptances. Authentidate.com LLC
agrees that it shall not issue any license to any other Internet
auction site which competes with ReverseBid.com or any successor
thereof. The parties shall negotiate the terms of the fees of the
master account transaction discount. In addition, Authentidate.com LLC
hereby agrees to allow Shore Venture the right to serve as a reseller
of the Authentidate technology and the parties shall negotiate in good
faith the terms of such reseller arrangement.
j) BitWise shall provide to Shore Venture at no cost, four (4) Pentium
166 MHz computers with modems as outlined in the BitWise invoice
#12587, dated 08/19/99, and marked as Exhibit "D" annexed hereto.
k) BitWise and Authentidate.com LLC hereby agree to indemnify and hold
harmless Shore Venture, its officers, directors, agents and employees,
Matthew J. Dye, Terrence J. Kepner and Ernest Ostro (together an
"Indemnified party") with respect to actions, suits, proceedings,
claims, demands, damages, penalties, fines, and costs asserted by
Norman Berman, Gregory M. McCauley and/or entities controlled by them
against the Indemnified Parties with respect to this Agreement and the
development of the Authentidate technology and site. If any third party
shall notify any Indemnified Party with respect to a third party claim
which may give rise to a claim for indemnification against the
Indemnified Parties, then the Indemnified Party shall promptly (and in
any event within five (5) business days after receiving notice of the
third party claim) notify BitWise or Authentidate.com LLC thereof in
writing. BitWise will have the right to defend the Indemnified Party
against the third party claim with counsel of its choice. BitWise shall
have the right to settle the third party claim in its sole discretion.
l) BitWise, Authentidate and Shore Venture shall provide mutual "links"
to each other's Internet sites (including Reverse.Bid.com) for a period
of three (3) years from the date hereof.
5
<PAGE> 6
4. REPRESENTATIONS AND WARRANTIES
a) Representations and Warranties of Shore Venture.
1. Shore Venture hereby warrants and covenants that it's
personnel have the necessary expertise in software design and are fully
capable of developing the Authentidate site as outlined in Exhibit "A",
including all necessary software.
2. The Authentidate site will meet the specifications set
forth on Exhibit "A" and all software developed by Shore Venture will
be free from all foreseeable defects, malfunctions and errors.
3. Shore Venture shall own all right, title and interest in
and to all software developed for the Authentidate site, or with
respect to software not developed by Shore Venture but required for
operation and use of the Authentidate site, it will have sufficient
rights or licenses in the software to fulfill its obligations
hereunder, and such rights shall be assigned to Authentidate.com LLC as
provided in Section 2.
4. To the best of its knowledge, all software developed by
Shore Venture will not infringe upon any patents, copyrights, trade
secrets or licenses of any third parties.
5. Shore Venture shall not, throughout the duration of this
Agreement, offer and/or grant, assign or sell an Authentidate.com
license or licensing rights to another person or entity unless such
action becomes lawful through a failure by BitWise and/or Authentidate
to pay the consideration described above.
6. Shore Venture has the full corporate power to enter into
this Agreement and to perform its obligations hereunder.
b) Representations and Warranties of BitWise.
1. BitWise has the full corporate power and authority to enter
into this Agreement and to perform its obligations hereunder.
2. BitWise is the sole owner of membership interests in
Authentidate.com LLC as of the date hereof. Upon execution of this
Agreement, BitWise shall be the holder of 92.5% of the outstanding
membership interests and Shore Venture shall be the owner of 7.5% of
the outstanding membership interests.
3. BitWise and/or Authentidate shall make no representations
or warranties regarding the Authentidate site and services except those
authorized and/or made by Shore Venture.
4. In the event of a default consisting of non-payment of any
consideration outlined above, BitWise hereby agrees that it shall be
liable for costs of action including but
6
<PAGE> 7
not limited to attorney's fees, twelve percent (12%) interest on any
unpaid balance of/from date of default and five percent (5%) penalty.
If non-payment involves any form of securities, BitWise also will bear
the dollar equivalent in lost opportunity, the value of which is to be
determined by the market.
5. BitWise assumes and bears full and exclusive liability in
any legal or regulatory action against any product sold by BitWise
and/or Authentidate (except with respect to paragraphs 4(a)(3) and (4)
and agrees to indemnify and defend Shore Venture against any action
taken by any person, governmental authority or other entity if such
action involves a product developed by Shore Venture.
5. COVENANTS OF BITWISE
a) BitWise intends to market the Authentidate site through traditional
advertising methods as well as through Internet advertising including
but not limited to e-mail solicitation, banner advertising campaigns,
site exchange programs and search engine placement strategy. BitWise
shall use its best efforts to begin to market the Authentidate site by
September 30, 1999, provided that Shore Venture has delivered a
functional site satisfactory to BitWise prior to such date.
b) BitWise shall conduct sales of the Authentidate site and services in
such a manner as to bring no disrepute to Shore Venture, Authentidate
and/or BitWise.
6. TERM OF AGREEMENT; TERMINATION
This Agreement shall be considered in full force and
non-terminable at all times during the period that BitWise or any
successor thereof is employing Authentidate or any modification
thereof. Sections 2, 3, 4(b)(4), 4(b)(5), 6, 8 and 10 shall survive
expiration or termination of this Agreement under all circumstances.
7. NOTICE
All notices required under the terms of this Agreement shall be made in
writing, certified mail, postage prepaid.
If to Shore Venture: With a copy to:
Shore Venture Group, L.L.C. Terrence J. Kepner, Esquire
54 Hill Top Drive 5700 Atlantic Avenue
Palermo, NJ 08223 Ventnor, NJ 08406
If to BitWise: With a copy to:
BitWise Designs, Inc. Brian Daughney, Esquire
7
<PAGE> 8
Technology Drive Goldstein & DiGioia LLP
Schenectady, NY 12308 369 Lexington Avenue
New York, NY 10017
If to Authentidate: With a copy to:
c/o BitWise Designs, Inc. Brian Daughney, Esquire
Technology Drive Goldstein & DiGioia LLP
Schenectady, NY 12308 369 Lexington Avenue
New York, NY 10017
8. NON-DISCLOSURE/NON-COMPETITION.
a) BitWise, Authentidate.com LLC and Shore Venture agree that neither
they nor their respective employees, shareholders, officers, directors or agents
shall disclose, without the consent of the other party, any of the terms of this
Agreement, including compensation, to any third party unless required under
applicable law, including federal securities laws, or unless such third party is
considering an investment in Authentidate.com LLC or BitWise. Violation of this
provision shall be construed as a material breach of this Agreement, and each
party shall be entitled to damages sustained as a result of such breach.
b) Each of the parties shall protect and not disclose any "confidential
information" of the other party to any third party. For purposes of this
Agreement "confidential information" shall mean all written or oral trade
secrets, information, data, software, research, development, concepts, methods,
processes, technology, patents, customer pricing and information. Violation of
this provision shall be construed as a material breach of this Agreement, and
each party shall be entitled to damages sustained as a result of such breach.
9. ENTIRE AGREEMENT
The parties agree that this Agreement constitutes the entire agreement
between the parties and that the Agreement may not be altered except in writing
signed by all parties.
10. MISCELLANEOUS
a) In the event of a dispute between the signatories, the parties
hereby agree to submit the dispute to binding arbitration and
further agree that the proper jurisdiction for disputes under
this Agreement shall be the United States District Court for the
Southern District of New Jersey.
b) Governing Law. The parties hereto acknowledge that this
Agreement shall be construed under the substantive laws of the
State of New Jersey.
c) Nothing contained in this Agreement shall limit or restrict
the right of Shore Venture or of any partner, employee, agent or
representative of Shore Venture, to be
8
<PAGE> 9
a partner, director, officer, employee, agent or representative
of, or to engage in, any other business, whether of a similar
nature or not, nor to limit or restrict the right of Shore
Venture to render services of any kind to any other corporation,
firm, individual or association, except with respect to the
technology regarding the Authentidate site.
d) Waiver. Failure of either party at any time to require
performance of any provision of this Agreement shall not limit
the party's right to enforce the provision, nor shall any waiver
of any breach of any provision be a waiver of any succeeding
breach of any provision or a waiver of the provision itself for
any other provision.
e) Titles and Captions. All article, section and paragraph titles
or captions contained in this Agreement are for convenience only
and shall not be deemed part of the context nor affect the
interpretation of this Agreement.
f) Counterparts. This Agreement may be executed in several
counterparts and all so executed shall constitute one Agreement,
binding on all the parties hereto even though all the parties are
not signatories to the original or the same counterpart.
g) This agreement shall inure to the benefit of the parties,
their heirs, successors and assigns. The parties hereby agree
that in the event that the managers of Authentidate.com LLC
determine it to be in the best interests of Authentidate.com LLC
to change from a limited liability company to a corporation, that
all rights, obligations and interests of the parties, including
without limitation, the equity interests of Shore Venture, shall
be assigned and assumed by the new entity.
[remainder of page intentionally left blank]
9
<PAGE> 10
WHEREFORE, having reviewed and accepted the foregoing terms, agreements
and covenants, the parties have affixed their signatures the date first written
above.
SHORE VENTURE GROUP, L.L.C.
A New Jersey Limited Liability Company
By:_______________________________
Name:
Title:
BITWISE DESIGNS, INC.
A Delaware Corporation
By:_______________________________
Name:
Title:
AUTHENTIDATE.COM, LLC
A Delaware Limited Liability Corporation
By:_______________________________
Name:
Title:
Solely for purposes of Section 3 g) hereof:
__________________________________________
John Botti
10
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated August 23, 1999, except for Note 5 and Note 18 for which the date
is October 4, 1999 relating to the financial statements of Bitwise Designs,
Inc., which appears in such Registration Statement. We also consent to the
references to us under the headings "Experts" in such Registration Statement
(SIGNATURE)
PricewaterhouseCoopers LLP
Albany, New York
November 19, 1999
