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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File No. 0-20190
BITWISE DESIGNS, INC.
(Exact Name of Issuer as Specified in Its Charter)
Delaware 14-1673067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2165 Technology Drive Schenectady, N.Y. 12308
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (518) 346-7799
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of Each Exchange on
Title of Each Class Which Registered
Common Stock, $.001 par value Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of class)
(Title of class)
[Cover Page 1 of 2 Pages]
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Check whether Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The Issuer's revenues for its most recent fiscal ended June
30, 2000 were $15,289,738.
On September 25, 2000, the aggregate market value of the
voting stock of Bitwise Designs, Inc. (consisting of Common Stock, $.001 par
value) held by non-affiliates of the Registrant (approximately 14,035,536
shares) was approximately $60,215,435.31 based on the closing price for such
Common Stock ($4.0625) on said date as reported by the Nasdaq National Market
System.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
On September 25, 2000, there were 14,822,261 shares
of Common Stock, $.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
[Cover Page 2 of 2 Pages]
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Table of Contents
<TABLE>
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PART I
PAGE
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<S> <C> <C>
Item 1. Business 1
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market For the Company's Common Equity and Related Stockholder 16
Matters
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and 19
Results of Operations
Item 8. Financial Statements and Supplemental Data 25
Item 9. Changes in and Disagreements With Accountants on Accounting 25
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Company 26
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and 35
Management
Item 13. Certain Relationships and Related Transactions 37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 37
8-K
</TABLE>
iii
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PART I
THIS ANNUAL REPORT ON FORM 10-KSB, INCLUDING ITEM 1 ("BUSINESS") AND ITEM 7
("MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"), CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. WHEN USED IN THIS REPORT, THE WORDS "BELIEVE,"
"ANTICIPATE," "THINK," "INTEND," "PLAN," "WILL BE," "EXPECT", AND SIMILAR
EXPRESSIONS IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REGARDING
FUTURE EVENTS AND/OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES, WHICH COULD CAUSE ACTUAL EVENTS OR THE
ACTUAL FUTURE RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM ANY
FORWARD-LOOKING STATEMENT. SUCH RISKS AND UNCERTAINTIES INCLUDE AMONG OTHER
THINGS, THE AVAILABILITY OF ANY NEEDED FINANCING, THE COMPANY'S ABILITY TO
IMPLEMENT ITS BUSINESS PLAN FOR VARIOUS APPLICATIONS OF ITS TECHNOLOGIES, THE
IMPACT OF COMPETITION, THE MANAGEMENT OF GROWTH, AND OTHER RISKS AND
UNCERTAINTIES THAT MAY BE DETAILED FROM TIME TO TIME IN THE COMPANY'S REPORTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. IN LIGHT OF THE SIGNIFICANT
RISKS AND UNCERTAINTIES INHERENT IN THE FORWARD-LOOKING STATEMENTS INCLUDED
HEREIN, THE INCLUSION OF SUCH STATEMENTS SHOULD NOT BE REGARDED AS A
REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES AND PLANS
OF THE COMPANY WILL BE ACHIEVED.
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Bitwise Designs, Inc. ("Bitwise"), and its subsidiaries DJS Marketing
Group, Inc. ("DJS"), Authentidate, Inc. and Authentigraph.com, Inc. (sometimes
collectively referred to herein as the "Company"), are engaged in the
manufacture and distribution of document imaging systems, computer systems and
related peripheral equipment, components, and accessories, network and internet
services and Internet-based authentication services.
In March 1996, the Company acquired DJS (d.b.a. Computer
Professionals), a system integrator, and computer reseller in Albany, New York.
DJS is an authorized sales and support provider for Novell, Microsoft Solutions
and Lotus Notes.
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The Company established its Authentidate subsidiary during the fiscal
year ended June 30, 2000 to engage in the business of providing end users with a
service providing for the storage, confirmation and authentication of electronic
data and images. Authentigraph, also established during the fiscal year ended
June 30, 2000, applies the Authentidate technology to the field of signature
authentication as it relates to sports memorabilia and entertainment
collectibles.
The Company was organized in August 1985 and reincorporated under the
laws of the state of Delaware in May 1992. The Company's executive offices are
located at 2165 Technology Drive, Schenectady, New York 12308, and its telephone
number is (518) 346-7799.
GENERAL BUSINESS DEVELOPMENTS DURING THE PREVIOUS FISCAL YEARS
In June 1998, the Company sold System Solutions Technology, Inc. to
United Strategies, Inc. ("USI") for $4,000,000. The Company 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, the Company received certain claims from
USI for indemnification under the agreements governing the sale. The Company
agreed to pay USI $341,000 to settle these claims to be paid over 15 months
accruing interest of 6%. The Company paid the note in full in March, 2000
and received a $10,000 discount on the principle balance of the note. The
Company realized an aggregate loss of approximately $505,000 on the sale.
INDUSTRY OVERVIEW
The market for the Company's products is highly competitive and rapidly
changing. A primary focus of the Company is the manufacturing and distribution
market for document imaging systems, personal computers, workstations and
portable personal computers as well as microcomputer peripherals, networks,
components accessories, Internet/Intranet development and Internet services.
These markets have experienced significant growth over the last decade, and the
Company believes such growth will continue, particularly in the document imaging
market.
.....Document Imaging and Management
In January, 1996, the Company, on a national level, introduced its
document imaging system called DocStar ("DocStar"). The Company designs and
manufactures DocStar which enables a user to
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scan paper documents onto an optical disk, hard disk drive or other storage
medium. The Company's DocStar product line consists of a personal computer,
proprietary software and a scanner. This system can be utilized as a
"stand-alone" system or as part of a network installation.
The Company believes that the document imaging market will be one of
its primary businesses and a basis for growth during the next few years. This is
an evolving market which is expected to experience significant growth in the
future. The Company believes that this market can provide the Company with
significant profits. However, there can be no assurance that the Company's
efforts in this emerging market will result in profits, income or significant
revenues to the Company.
.....Internet Authentication Services
During the fiscal year ended June 30, 2000 the Company formed two
Internet authentication service companies. The first, Authentidate, Inc.,
provides a service to accept and store electronic files from around the world
and from different operating systems via the Internet and date and time stamps
those files with a secure clock to proved content, date and time authenticity.
The service allows users to also send notarized E-mail. The second company,
Authentigraph.com, Inc., provides similar authentication services to the sports
memorabilia and collectibles industries.
.....Computer Products and Integration Services
DJS purchases personal computers and peripheral computer products from
many different suppliers. Peripheral computer products are products that operate
in conjunction with computers, including but not limited to, printers, monitors,
scanners, modems and software. A systems integrator, such as DJS, configures
various computer hardware and peripheral products such as software together, to
satisfy a customer's individual needs. The Company believes the market for
personal computers and computer integration services will continue to grow the
next several years.
.....Networks
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. Although
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Management believes that designing and installing network systems may be an area
of growth for DJS, there can be no assurance that growth in the network market
will be realized.
.....Internet/Intranet Development
The Internet/Intranet is a computer based communication system, with
international applicability, which provides 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. The Company, through
DJS, provides customer Internet installation services, including installation of
web pages.
BITWISE DESIGNS, INC.
PRODUCTS
Document Imaging and Management
In January 1996, Bitwise, on a national level, introduced its document
imaging management system under the tradename DocStar which enables users to
scan paper documents onto an optical disk, hard drive or other storage medium
from which they can be retrieved in seconds. This system allows users to
eliminate or significantly reduce paper filing systems. The Company believes
that 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 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
timesaving tool to the modern office.
The main components of a document management system are a personal
computer, a high speed electronic document scanner, a laser printer capable of
reproducing documents quickly, and a software package which controls scanning,
indexing, storage and reproduction. Bitwise purchases scanners, laser printers
and other essential hardware from unaffiliated third parties and manufactures
the PC's for the system. The software utilized in DocStar consists
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of various versions of existing software from other developers, as well as
software developed by the Company. The Company offers the DocStar System in
mainly four models: System 15, Model C3000, System 50, and the DocStar DCL. The
DocStar System 15 is the base model. The System 50 offers faster advanced
processors or scanners, and increased storage capacity. Options and accessories
include a raid unit, a jukebox, an optical disk tower, additional software,
scanner upgrades, monitor upgrades and hardware upgrades. The DCL and C3000
connect DocStar electronic imaging capabilities with the network scanning and
printing functions of Xerox Corporation's digital copiers and Canon, Inc.'s
digital scanners, respectively.
The Company markets the document management system under the tradename
DocStar through a national dealer network. The Company owns one dealership in
the Albany, New York region, which also serves as a test market for new
applications and software.
BACKLOG
The Company normally ships products within 5 days after receipt of an
order and typically has no more than two weeks of sales in backlog at any time.
The amount of backlog fluctuates but usually is not material.
RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapid
technological change involving the application of a number of advanced
technologies, including those relating to computer hardware and software, mass
storage devices, and other peripheral components. The Company's ability to be
competitive depends upon its ability to anticipate and effectively react to
technological change, as well as the application requirements of its customers.
Since inception, the Company has devoted efforts to research and
development activities in an effort to improve its 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 for document imaging was $291,791 and $248,801 for
fiscal years 2000 and 1999, respectively. The Company will continue to improve
its document imaging products in an effort to satisfy the needs of a dynamic
marketplace.
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QUALITY CONTROL AND SERVICE
Quality control by the Company is administered 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 operation, management
believes that the burn-in process reveals nearly all faulty components before
they reach the end user.
The Company's dealers provide service to the end users. All dealers
receive service training from the national service staff. The Company provides
the dealer with replacement parts free of charge for 13 months after date of
shipment. The Company's vendors provide a similar warranty for failed
components. The Company offers liberal telephone support service to its dealers.
MANUFACTURING AND SUPPLIERS
The Company's products have been designed to enable a variety of system
configurations to be assembled from a few basic modules. The Company's
manufacturing operations consist primarily of the assembly, test and quality
control of all parts, components, subassemblies and systems.
The Company uses standard parts and components in its existing product
lines which it purchases from unaffiliated third party suppliers. The Company,
however, does not have any contractual arrangements with its current suppliers.
Although the Company has never experienced material delays in deliveries from
its suppliers, shortages of component parts could occur and delay or interrupt
the Company's manufacture and delivery of products and adversely affect the
Company's operating results. The Company believes adequate alternative suppliers
are available to mitigate the potentially adverse effect of supply
interruptions, but there can be no
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assurance that such components will be available as and when needed.
All peripheral computer products available through the Company, such as
monitors and scanner/printer units, are manufactured by third parties. The
Company only assembles the computer which is part of the DocStar system and the
optical disk tower option.
PATENTS AND TRADEMARKS
The Company, along with Authentidate, has three patents pending
concerning the technology underlying the Authentidate product line and has
registered the logo "BitWise Designs" and Bitwise's associated trademark,
"DocStar." No assurance can be given that registration will be effective to
protect the Company's trademarks. The Company believes the tradenames and
patents are material to its business.
SALES AND MARKETING
The Company's products are primarily being distributed through a
national dealer network and through a dealership owned by the Company in its
local market area. The Company believes that it 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, the Company offers 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 it will be successful in
such efforts.
The Company's 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. The Company currently employs five regional sales directors to cover
the significant markets of the country.
COMPETITION
The market for the Company's 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 are
not direct competitors of the Company). The Company competes with major document
imaging manufacturers such as Panasonic, Sharp and Mita. Many of the Company's
current and prospective competitors have significantly
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greater financial, technical, manufacturing and marketing resources, as well as
a larger installed base, than the Company.
EMPLOYEES
Bitwise employs 40 full-time employees including its executive
officers. No employees are covered by a collective bargaining agreement, and the
Company believes its employee relations are satisfactory.
AUTHENTIDATE, INC. AND AUTHENTIGRAPH.COM, INC.
The Company has recently established a majority owned subsidiary named
Authentidate, Inc. to engage in a new business line of providing end users with
a service which will (a) accept and store electronic files from networks and
personal computers throughout the world and from different operating systems via
the Internet; (b) time and date stamp those files using a secure clock; (c)
allow users to transmit only the "secure codes" to Authentidate fileservers
while maintaining the original within the customers "firewall"; and (d) allow
users to prove authenticity of time, date and content of stored electronic
documents.
Authentigraph was also recently created to market Authentidate services
to the sports memorabilia and collectibles industries.
The Company formed a joint venture in March, 2000, known as
Authentidate International AG, with a German company to develop the Authentidate
Software in foreign languages and to market that product in countries outside of
the Americas, Japan, Australia, New Zealand and India. The Company owns 39% of
the joint venture.
PRODUCTS
Authentidate is in the process of developing a Business to Business ("B to
B") product. There currently exists a Retail version on the Internet which was
developed in large part to generate interest and to publicize the B to B
version. Only minor income is expected from the retail version. The Company
retained a third party consulting firm, Cap Gemini America, Inc., to program and
develop the B to B version. This version is currently being tested and the
Company anticipates a general release in early 2001.
RESEARCH AND DEVELOPMENT
The Internet market is characterized by rapid technological change
involving software, hardware and communication technologies. The Company's
ability to be competitive depends upon its ability to anticipate and effectively
react to technological change on the Internet as well as constantly changing
market conditions for the evolving Internet market place. Current development
efforts are directed to the development of B to B products. The Company has a
policy of capitalizing product development expenses and amortizing
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those expenses over the anticipated useful life. However, because of market
uncertainty software development costs related to the Authentidate Retail
Version were fully amortized during the fourth quarter of the year ended June
30, 2000. The Company has expensed a total of $373,742 as product development
expenses related to its Authentidate technology in the year ended June 30, 2000.
DEVELOPMENT AND SUPPLIERS
The Company has retained an international consulting firm, Cap Gemini
America, Inc., to develop the B to B product line. The Company has also retained
AT&T, Inc., to maintain all hardware at an AT&T facility in New York, New York,
from where the Authentidate product line will operate. The Company believes that
there are sufficient alternative suppliers of these services. The Company
eventually may bring all development activities in-house.
PATENT AND TRADEMARKS
Along with Bitwise, Authentidate has three patents pending concerning the
technology underlying the Authentidate product line and has registered the
trademark "Authentidate" and has filed a motion with the United States Patent
and Trademark Office to permit it to register the trademark "Authentigraph." No
assurances can be given that the registration will be effective to protect the
Company's trademarks.
SALES AND MARKETING
Authentidate plans to market the service directly to corporate accounts
using a combination of direct sales, Internet advertising, media advertising and
indirect sales. Authentidate also plans to market the product to application
software companies to be included as an "added feature" in their products using
the same sales model as corporate accounts. Authentidate expects to use a
combination of terms, usage fees, flat fees and license fees.
COMPETITION
This product concept is new and competition is currently limited.
Authentidate may, however, experience competition from much larger Internet
companies that have greater financial, technological and marketing resources
then it does.
EMPLOYEES
Currently, Authentidate has only six employees. Authentidate shares numerous
employees from Bitwise. Additional staff are currently being recruited.
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DJS MARKETING GROUP, INC.
DJS (d/b/a "Computer Professionals") is a network and systems
integrator of computer and peripheral products to a variety of customers,
including corporations, schools, government agencies, manufacturers and
distributors. DJS is one of the largest systems integrators 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.
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.
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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 the
Company'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 33 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.
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CAUTIONARY STATEMENTS
As provided for under the Private Securities Litigation Reform Act of
1995, the Company wishes to caution stockholders and investors that the
following important factors, among others discussed throughout this Report on
Form 10-KSB, in some cases have affected and in some cases could affect the
Company's actual results of operations and cause such results to differ
materially from those anticipated in forward looking statements made herein.
WE HAVE INCURRED LOSSES AND MAY CONTINUE TO INCUR LOSSES IN THE FUTURE.
We incurred losses of $5,274,043 and $3,166,488, respectively, for its
fiscal years ended June 30, 2000 and 1999. We have incurred significant costs
developing our Authentidate services as well as continued costs to develop a
national market for our DocStar systems. We will continue to incur these costs
in the future as we attempt to increase market awareness and sales. Moreover,
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 AND MAY NEED ADDITIONAL FUNDS TO FINANCE FUTURE
OPERATIONS.
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 the Authentidate and DocStar products. Due to
these expenditures, we have incurred significant losses to date. In the future,
we may need additional funds from loans and/or the sale of equity securities to
fully implement our business plans. 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 will be forced
to reduce its current and proposed operations.
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IF OUR PRODUCTS ARE NOT COMPETITIVE, OUR BUSINESS WILL SUFFER.
Bitwise and its subsidiaries are engaged in the highly competitive
businesses of manufacturing and distributing document imaging systems, Internet
products, computer hardware and software as well as technical support services
for such businesses. The document imaging business is competitive and we compete
with major manufacturers. Many of these companies have substantially more
experience, greater sales, as well as greater financial and distribution
resources than do we. The most significant aspects of competition are the
quality of products, including advanced capabilities, and price. There can be no
assurance the Company can effectively continue to compete in the future.
The Authentidate business is a new business line and the level of
competition in unknown at this point in time. There can be no assurances,
however, that Authentidate products will achieve market acceptance.
Our DJS subsidiary 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.
OUR PRODUCTS MAY NOT BE ACCEPTED BY OUR CONSUMERS WHICH WOULD SERIOUSLY HARM
OUR BUSINESS.
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 Authentidate product
line is a new product line and 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.
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IF WE CANNOT CONTINUOUSLY ENHANCE OUR PRODUCTS IN RESPONSE TO RAPID CHANGES IN
THE MARKET, OUR BUSINESS WILL BE HARMED.
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 WHICH COULD HARM OUR
COMPETITIVE POSITION.
We do not currently hold any patents and the technology embodied in our
current products cannot be patented. We have three patents 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 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.
14
<PAGE> 18
Other companies operating within our business segment may independently
develop substantially equivalent proprietary information or otherwise obtain
access to 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.
WE DEPEND ON OTHERS FOR COMPONENTS OF OUR PRODUCTS, WHICH MAY RESULT IN DELAYS
AND QUALITY-CONTROL ISSUES.
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.
IF WE LOSE OUR PRESIDENT, OUR BUSINESS WILL BE HARMED.
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. In January 2000, we
entered into a three-year employment agreement with Mr. Botti. We have obtained,
for our benefit, "key man" life insurance in the amount of $1,000,000 on Mr.
Botti's life.
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<PAGE> 19
SINCE WE HAVE NOT PAID DIVIDENDS ON OUR COMMON STOCK, HOLDERS MAY NOT RECEIVE
INCOME FROM AN INVESTMENT IN OUR COMMON STOCK.
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.
SINCE THE HOLDERS OF OUR OUTSTANDING SERIES A PREFERRED STOCK CONTROL OUR BOARD
OF DIRECTORS, OTHER SHAREHOLDERS MAY NOT BE ABLE TO INFLUENCE OUR DIRECTION.
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. In addition, we issued 50,000
shares of our Series B Preferred Stock in our October, 1999 private offering.
OUR PREFERRED STOCK FINANCING MAY RESULT IN DILUTION TO OUR COMMON SHAREHOLDERS.
Dilution of the per share value of our common shares could result from the
conversion of most or all of the Series B Preferred Stock we sold in a private
placement in October 1999. Holders of our Series B Preferred Stock may convert
these shares into shares of our common stock at a conversion price of $1.875
beginning one year after the issuance of the Series B Preferred Stock. However,
after three years from the closing, the conversion price is subject to a
floating rate equal to the lower of $1.875 or the average of the closing bid
and asked prices of our common stock for the immediately preceding ten
consecutive trading days ending one day prior to the notice of conversion.
Regardless of the date of exercise, dilution could occur from the
widespread conversion of the Series B Preferred Stock. The following scenarios
could result in dilution to our common shareholders:
- In either period, the conversion price could be lower than the actual
trading price on the day of conversion. This could result in the holder
immediately selling all of its converted common shares, which would have
a dilutive effect on the value of the outstanding common shares.
- After three years, if the average trading price falls below $1.875, the
lower the average trading price, the greater the number of common shares
that a holder of our Series B Preferred Stock will receive upon conversion.
This might further encourage the holders of the Series B Preferred Stock to
convert their shares into common shares. The increased number of common
shares would further depress the average trading price of our common
stock.
- The significant downward pressure on the trading price of our common stock
as Series B Preferred Stock holders converted these securities and sell the
common shares received on conversion could encourage short sales by the
holders of Series B Preferred Stock or other shareholders. This would place
further downward pressure on the trading price of our common stock. Even
the mere perception of eventual sales of common shares issued on the
conversion of the Series B Preferred Stock could lead to a decline in the
trading price of our common stock.
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<PAGE> 20
WE HAVE SOLD RESTRICTED SHARES WHICH MAY DEPRESS OUR STOCK PRICE WHEN IT IS
SELLABLE UNDER RULE 144.
Approximately 2,290,862 shares of Common Stock currently outstanding 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 June 30, 2000, there were outstanding immediately exercisable stock
options to purchase an aggregate of 2,316,173 shares of Common Stock at exercise
prices ranging from $0.34 to $11.25 per share, and outstanding immediately
exercisable warrants to purchase an aggregate of 3,025,477 shares of Common
Stock at exercise prices ranging from $.88 to $11.25 per share. 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. 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.
IF WE CANNOT OFFSET FUTURE TAXABLE INCOME OUR TAX LIABILITIES WILL INCREASE.
At June 30, 2000, the date of our most recent fiscal year end, we had net
operating loss carryforwards ("NOLS") for federal income tax purposes of
approximately $17,600,000 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.
17
<PAGE> 21
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's executive offices and production facilities are located
at 2165 Technology Drive, Schenectady, New York 12308. The Company owns the
26,000 square foot building, subject to a mortgage with a remaining balance of
$1,380,768 as of June 30, 2000.
A New York State agency awarded the Company a $1,000,000 grant to build
this facility. The grant includes several requirements concerning the Company's
business and the number of individuals employed. If these requirements are not
fulfilled, the Company will be required to repay the grant to New York State.
ITEM 3. LEGAL PROCEEDINGS
The Company believes that it is not a party to any legal proceedings
which could have a material adverse effect on its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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<PAGE> 22
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Upon the effectiveness of the Company's public offering on May 13,
1992, its Common Stock commenced trading in the over-the-counter market and was
listed on the SmallCap Market of the Nasdaq Stock Market ("NASDAQ") under the
symbol "BTWS." On August 11, 1994, the Common Stock commenced trading on the
Boston Stock Exchange under the symbol BTW. On June 25, 1996, the Company
withdrew its listing on the Boston Stock Exchange. On April 24, 1996, the
Company's Common Stock commenced trading on the Pacific Stock Exchange. In
April, 2000 the Company commenced trading on the National Market of the NASDAQ.
The following is the range of high and low closing prices for the
Company's Common Stock on the Nasdaq SmallCap Market for the periods indicated
below:
<TABLE>
<CAPTION>
High Low
---- ---
Common Stock
Fiscal Year 2000
<S> <C> <C>
1st Quarter....................................................................... 1-15/32 7/8
2nd Quarter....................................................................... 19-7/8 1-1/8
3rd Quarter....................................................................... 18-1/4 11-1/4
4th Quarter....................................................................... 13-11/16 5-7/8
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
</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.
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<PAGE> 23
As of September 25, 2000, there were approximately 382 holders of
record of the Company's Common Stock. The Company believes there are more than
500 beneficial holders of the Company's Common Stock.
DIVIDEND POLICY
The Company has not paid any dividends upon its Common Stock since its
inception. The Company does not expect to pay any dividends upon its Common
Stock in the foreseeable future and plans to retain earnings, if any, to finance
the development and expansion of its business. Further, the Company's
Certificate of Incorporation authorizes the Company's Board of Directors to
issue Preferred Stock with a preferential right to dividends. There are no
outstanding shares of Preferred Stock with dividend rights.
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<PAGE> 24
ITEM 6. 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,
2000 1999 1998 1997 1996
STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net Sales $15,289,738 $17,094,765 $33,755,625 $ 53,109,469 $ 30,611,258
Gross Profit 3,365,157 5,615,468 8,092,566 10,006,736 4,826,693
Net (Loss)/Net Income (5,274,043) (3,166,488) (5,464,059) (2,143,159) (2,961,039)
Basic and Diluted
Net(Loss)/Net Income
Per Common Share (0.49) (0.43) (0.74) (0.30) (0.55)
BALANCE SHEET DATA:
Current Assets 15,232,894 9,857,681 12,138,995 13,622,171 13,101,722
Current Liabilities 1,809,264 6,225,966 4,789,896 7,730,498 7,234,849
Working Capital 13,423,630 3,631,715 7,349,099 5,891,673 5,866,873
Total Assets 21,128,335 14,484,984 14,708,454 18,924,765 19,880,037
Total Long Term Liabilities 2,351,253 5,327,901(1) 3,975,000(2) 1,297 17,949
Stockholders' Equity 16,967,818 3,335,705 6,478,226 11,192,970 12,627,239
</TABLE>
(1) Long-term liabilities excluding discount of $404,588.
(2) Long-term liabilities excluding discount of $534,668.
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<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following analysis of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
financial statements, including the notes thereto, contained elsewhere in this
Report on Form 10-KSB.
RESULTS OF OPERATIONS
Fiscal Year 2000 Compared to Fiscal Year 1999
The Company realized a consolidated net loss of $5,274,043 ($.49 per
share) compared to a consolidated net loss of $3,166,488 ($.43 per share) for
the fiscal years ended June 30, 2000 and 1999, respectively. Consolidated net
sales totaled $15,289,738 and $17,094,765 for the fiscal years ended June 30,
2000 and 1999, respectively.
The consolidated sales decrease is due to a decrease in sales of the
DocStar product line for the year ended June 30, 2000 to $5,589,830, compared to
$7,674,451 for the year ended June 30, 1999. Sales for DJS increased from
$9,536,994 for the fiscal year ended June 30, 1999 to $9,949,707 for the fiscal
year ended June 30, 2000.
The Company's net loss increase is due to losses incurred by the
Company's new subsidiary, Authentidate, Inc., which incurred significant
development, marketing and start-up costs. Even though the sales of the DocStar
product line decreased, the Company's operating loss decreased substantially, as
the Company instituted cost cutting measures in an effort to reduce the
breakeven point. DJS operating profits decreased slightly due to competitive
pressures.
Consolidated gross profit for the fiscal years ended June 30, 2000 and
1999 was $3,365,157 and $5,615,468 respectively. This reduction is due to the
reduction in DocStar sales. The consolidated profit margin was 22.0% and 32.8%
for the fiscal years ended June 30, 2000 and 1999, respectively. Gross profit
margin is defined as gross profit as a percentage of sales. The decrease in
gross profit margin is due to decreases in DocStar sales and competitive
pressures.
Selling, general and administrative expenses (S,G&A) consist of all
other Company expenses except product development costs and
22
<PAGE> 26
interest. S,G&A expenses amounted to $8,016,192 and $7,765,234 for the fiscal
years ended June 30, 2000 and 1999, respectively. S,G&A expenses increased as a
result of Authentidate marketing and general start-up costs.
As a percentage of sales, S,G&A costs increased from 45.4% in 1999 to
52.4% in 2000 as a result of Authentidate's S,G&A expenditures.
Interest expense totaled $299,994 and $630,396 for fiscal years ended
June 30, 2000 and 1999, respectively. The decrease is due to the conversion of
long-term debt to equity and the payoff of the Company's line of credit.
Interest rates increased during the fiscal year ended June 30, 2000 compared to
the prior year.
Product development expenses, excluding capitalized costs and including
amortization of capitalized costs relate to software development for the
DocStar, Authentidate and Authentigraph product lines. These costs increased
from $248,801 to $665,533 for the fiscal years ended June 30, 1999 and 2000,
respectively. Bitwise has a policy of capitalizing qualified software
development costs and amortizing those costs over three years as product
development expense.
Fourth Quarter Adjustments
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.
Fiscal Year 1999 Compared to Fiscal Year 1998
The Company 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.
The consolidated sales decrease is due to the sale of one of the
Company's subsidiaries, System Solutions Technology, Inc. (SST) 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
23
<PAGE> 27
addition, the Company 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. The Company's subsidiary DJS Marketing
Group, Inc. (DJS) sales were $9,536,994 and $11,219,497 for the fiscal years
ended June 30, 1999 and 1998, respectively.
The Company's net loss improvement was 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 have 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
other Company 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.
24
<PAGE> 28
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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds to date have been the issuance
of equity and the incurrence of third party debt. The principal balance of
long-term debt at June 30, 2000 totaled $1,380,768, all of which relates to a
mortgage loan.
During the quarter ending December 31, 1999, the Company's convertible
debt holders converted approximately $4.0 million of debt into approximately 1.2
million common shares.
The Company's subsidiary, DJS has a wholesale line of credit facility
totaling $625,000, of which $602,293 was outstanding (included in accounts
payable) at June 30, 2000. This line is non-interest bearing and payment terms
are net 40. The line is collateralized by all assets of DJS.
During fiscal 2000, 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 loan covenants. The Company entered into an agreement with the
lender to extend repayment of the outstanding balance until September 30, 2000,
in weekly installments. In December 1999, the Company paid the balance off in
full.
Property, plant and equipment expenditures totaled $358,554 for the
year ended June 30, 2000. There were no purchase commitments outstanding.
25
<PAGE> 29
The Company was awarded a grant totaling $1,000,000 from an agency of
New York State to be used towards the construction of a new facility in
Schenectady, New York. 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. The
facility was completed in August, 1999.
In October and November 1999, the Company completed three private
equity offerings for approximately $2,100,000 (approximately $1,900,000 after
expenses). The investment was structured as follows. In the first offering the
Company sold 740,000 units for $740,000, each unit consisting of two shares of
common stock and two Series B Common Stock Purchase Warrants. Each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $1.375 for five years.
In the second offering the Company sold 50,000 shares of Series B
Convertible Cumulative Preferred Stock for $1,250,000. Dividends on the Series B
Preferred Shares are payable at the rate of 10% per annum, semi-annually. Each
of the shares of the Series B Preferred Stock is convertible into such number of
shares of the Company's common stock as shall equal $25 divided by the
conversion price of $1.875 per shares, subject to adjustment in certain
circumstances.
In November 1999, the Company completed the third offering by selling
a 20% interest for $100,000 in its new subsidiary, Authentidate, Inc. In
addition, the Company issued to the purchasers 999,999 Series C Common Stock
Purchase Warrants. The Series C Warrants are divided into three classes of
333,333 warrants per class which have varying exercise prices, starting at $1.50
per common share and increasing over time to $3.75 after the effectiveness of a
registration statement covering the underlying shares, subject to adjustment for
stock splits and corporate reorganizations. The registration statement was
declared effective by the Commission on February 14, 2000.
In March 2000, Authentidate formed a joint venture known as
Authentidate International Holdings, AG, with a German company, Windhorst New
Technologies, Agi.G.,to market Authentidate in countries outside of the
Americas, Japan, Australia, New Zealand and India. Authentidate retained the
rights to market the service in these territories. The Company invested DM
250,000, which is equal to approximately $124,000 and also granted a license to
the Authentidate technology to the joint venture vehicle. Additionally, the
Company issued 250,000 Common Stock Purchase Warrants to Windhorst in connection
with the joint venture.
26
<PAGE> 30
Windhorst contributed DM 3,000,000 to the joint venture. Authentidate, Inc. owns
39% of the joint venture and Windhorst owns 60% of the joint venture. The joint
venture will be accounted for under the equity method of accounting by
Authentidate.
During the fiscal year ended June 30, 2000, the Company incurred a net
loss of $5,274,043, and cash used by operating activities totaled $5,078,674.
The Company's available cash balance at June 30, 2000 totaled approximately
$8,000,000. 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 launch the Authentidate and
AuthentiGraph product lines, 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 control overhead costs. If the Company is unable to attain
projected sales levels for DocStar, Authentidate and other products, 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.
EFFECTS OF INFLATION AND CHANGING PRICES
The impact of general inflation on the Company's operations has not
been significant to date and the Company believes inflation will continue to
have an insignificant impact on the Company. However, price deflation in the
major categories of components purchased by the Company has been substantial and
is anticipated to continue through fiscal 2001. 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, the
Company earns lower margins on its products. As the life cycle progresses
competitive pressures could force vendor prices down and thus improve the
Company's profit margins. The Company does not believe that competitive
pressures will require it to lower its DocStar 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, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 has subsequently been amended by SFAS No. 137,
issued in June, 1999, which delays the effective date for implementation of SFAS
No. 133 until fiscal quarters of fiscal years beginning after June 15, 2000.
Management does not expect the adoption of SFAS No. 133 to have a significant
impact on the Company's financial condition or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company is required to adopt
SAB 101 in the quarter ended May 27, 2001. Management does not expect the
adoption of SAB 101 to have a material effect on the Company's financial
condition or results of operations.
27
<PAGE> 31
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation - an interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
definition of an employee for purposes of applying APB Opinion No. 25, the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards, and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The Company has applied the
applicable provisions of FIN 44 which did not have a material effect on the
Company's Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Financial Statements and Supplementary Data Schedule
are annexed hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
28
<PAGE> 32
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
<S> <C> <C>
John T. Botti 36 President, Chief Executive
Officer and Chairman of the
Board
Robert Van Naarden 53 Director and Chief Executive
Officer of Authentidate, Inc.
Nicholas Themelis 37 Chief Technology Officer, Vice
President and Director
Ira C. Whitman 37 Senior Vice-President--Research
and Development, Secretary and
Director
Steven A. Kriegsman 57 Director
J. Edward Sheridan 63 Director
Charles C. Johnston 64 Director
Dennis H. Bunt 46 Chief Financial Officer
</TABLE>
All directors hold office until the next annual meeting of shareholders
or until their successors are elected and qualify. Officers are elected annually
by, and serve at the discretion of, the Board of Directors. There are no
familial relationships between or among any officers or directors of the
Company.
In 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. Whale
has selected Steven Kriegsman as its representative on the Board.
John T. Botti, a co-founder, has served as President, Chief Executive
Officer and Director since the incorporation of the Company in August 1985. Mr.
Botti graduated from Rensselaer Polytechnic Institute ("RPI") with a B.S.
degree in electrical
29
<PAGE> 33
engineering in 1994 with a concentration in computer systems design and in 1996
earned a Master of Business Administration degree from RPI.
Robert Van Naarden joined Bitwise in July 2000. Mr. Van Naarden has
more than 33 years experience in general management, marketing, sales and
engineering with computer related companies. Most recently he was Vice President
of Sales, Marketing, Business Development and Professional Services with Sensar,
Inc. He has also held senior positions with Netframe, Firepower Systems,
Supermac Technology and Digital. Mr. Van Naarden was also a founder of Stardent
and Convergent Technologies. He has a M.S. in Electrical Engineering from
Northeastern University and a B.S. in Physics from the University of Pittsburgh.
Nicholas Themelis joined the Board of Directors in January 2000 and
became its Chief Technology Officer in April 2000. Mr. Themelis has over 16
years of experience working with high technology systems and assisting new
technology ventures in implementing their business plans. Prior to joining the
Company, Mr. Themelis was Senior Vice President of the e-Commerce Technology
Group and the Private Client Technology Group at Lehman Brothers. Mr. Themelis
also served in various international executive positions including Chief
Information Officer of Lehman Brothers Asia. Previously he was the co-founder of
a technology consulting company.
Ira C. Whitman, a co-founder, is Senior Vice-President of Research and
Development and a Director of the Company since the incorporation of the Company
in August 1985. Mr. Whitman graduated from RPI in 1984 with a B.S. 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.
30
<PAGE> 34
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 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.
Dennis H. Bunt has been the Chief Financial Officer of the Company
since September 1992. Mr. Bunt has more than 24 years of financial management
experience, primarily with high-technology companies. Mr. Bunt is a certified
public accountant and worked for the Boston office of KPMG Peat Marwick from
1976 to 1979. Mr. Bunt received his M.B.A. from Babson College in 1979 and
received his B.S. in Accounting from Bentley College in 1976.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has three Committees: Audit, Compensation and
Executive Committee.
Audit Committee. The members of the Audit Committee are J. Edward
Sheridan, Steven Kriegsman and Charles Johnston. The Audit Committee acts to:
(i) acquire a complete understanding of the Corporation's audit functions; (ii)
review with management the finances, financial condition and interim financial
statements of the Corporation; (iii) review with the Corporation's independent
auditors the year-end financial statements; and (iv) review implementation with
the independent auditors and management any action recommended by the
independent auditors. During the fiscal year ended June 30, 2000, 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)
31
<PAGE> 35
amend the Certificate of Incorporation or Bylaws; (ii) enter into agreements to
borrow money in excess of $250,000; (iii) to grant security interests to secure
obligations of more than $250,000; (iv) authorize private placements or public
offerings of the Company's securities; (v) authorize the acquisition of any
major assets or business or change the business of the Corporation; or (vi)
authorize any employment agreements in excess of $75,000. The Executive
Committee meets when actions must be approved in an expedient manner and a
meeting of the Board of Directors cannot be convened. During Fiscal 2000, 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 the Corporation's 1992 Employee Stock Option Plan and
Non-Executive Director Stock Option Plan and negotiation and review of all
employment agreements of executive officers of the Corporation. During the
fiscal year ended June 30, 2000, the Compensation Committee held no meetings and
voted by unanimous written consent on two occasions.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended June 30, 2000, the Board of Directors of
the Company met on four occasions and voted by unanimous written consent on two
occasions. No member of the Board of Directors attended less than 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 the Company's Directors and officers, and persons who own, directly or
indirectly, more than 10% of a registered class of the Corporation's equity
securities, to file with the Securities and Exchange Commission ("SEC") reports
of ownership and reports of changes in ownership of common stock and other
equity securities of the Company. Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms that they file. Based solely on review of the copies
of such reports received by the Company, the Company believes that all Section
16(a) filing requirements applicable to officers, directors and 10% shareholders
were complied with during the 2000 fiscal year.
32
<PAGE> 36
ITEM 11. EXECUTIVE COMPENSATION
The following table provides certain information concerning all Plan
and Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation
awarded to, earned by, paid by the Company during the years ended June 30, 2000,
1999 and 1998 to each of the named executive officers of the Company.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
NO. OF
SECURITIES
NAME AND OTHER RESTRICTED UNDERLYING
PRINCIPAL FISCAL ANNUAL STOCK OPTIONS/
POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) SARS
<S> <C> <C> <C> <C> <C> <C>
John Botti 2000 $ 203,665 $60,000 $ 1,702(1) 0(2) 890,000
Chairman, 1999 $ 132,794 0 $ 1,702 0 0
President and 1998 $ 121,000 0 $ 1,702 0 0
Chief Executive
Officer
Nicholas Themelis 2000 $71,923(3) $ 0 $ 5,000(3) 0 270,000(4)
Vice-President,
Chief Technology
Officer and
Director
</TABLE>
(1) Includes: (i) for 2000, an automobile and expenses of $1,500 and the
payment of premiums on term life insurance policy of $202; (ii) for
1999, an automobile and expenses of $1,500 and the payment of premiums
on a term life insurance policy of $202; and (iii) for 1998, an
automobile and expenses of $1,500 and the payment of premiums on a term
life insurance policy of $202.
(2) No restricted stock awards were granted to Mr. Botti in fiscal 2000.
Mr. Botti, however, owned 409,391 restricted shares of the Company's
Common Stock on June 30, 2000, the market value of which was
$2,405,172.12 on such date, without giving effect to the diminution in
value attributed to the restriction on such shares.
(3) Represents salary earned by the employee and paid by the Company during
the fiscal year ended June 30, 2000. Mr. Themelis commenced employment
with the Company on April 3, 2000. The Company also contributed $5,000
towards a life insurance policy for Mr. Themelis.
(4) Includes 50,000 options granted pursuant to the Company's Internet
Advisory Board Stock Option Plan, which plan and option grants are
subject to shareholder's approval.
33
<PAGE> 37
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
Percent of
Total
Number of Option/
Securities SARs Granted
Underlying To Employees Exercise of
Option/SARs In Fiscal Base Price Expiration
Name Granted (#) Year (S/Sh) Date
(a) (b) (c) (d) (c)
<S> <C> <C> <C> <C>
John Botti 50,000 3.2% $ 9.125 4/20/05
John Botti 840,000 54.5% $ 5.875 6/30/05
Nicholas Themelis 20,000 1.2% $0.96875 9/20/04
Nicholas Themelis 200,000 12.9% $ 11.25 2/28/05
Nicholas Themelis(1) 50,000 3.2% $ 8.875 5/05/05
</TABLE>
No Stock Appreciation Rights were granted to any of the named executive
officers during the last fiscal year.
----------------------
(1) Listed option grant subject to shareholders' approval.
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, 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Shares Number of Unexercised Value of Unexercised In-the-
Acquired Options as of June 30, Money Options
on Value 2000 at June 30, 2000(1)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C> <C>
John T. Botti 320,000 $500,000 1,065,000/50,000 $618,750/0
Nicholas Themelis 20,000 $ 26,250 50,000/200,000 $ 0/0
</TABLE>
------------------------
(1) Based upon the closing bid price ($5.875 per share) of the Company's
Common Stock on June 30, 2000 less the exercise price for the aggregate
number of shares subject to the options.
EMPLOYMENT AGREEMENTS
In January, 2000, the Company entered into a new three year employment
agreement with its Chief Executive Officer, expiring on January 1, 2003. The
agreement provides for (i) a base salary of
34
<PAGE> 38
$250,000 in the first year of the agreement, increasing by 10% in each year
thereafter; (ii)a bonus equal to 3% of the Company's pre-tax net income, with
such additional bonuses as may be awarded in the discretion of the Board of
Directors;(iii)certain insurance and severance benefits; and (iv) automobile and
expenses.
In February 2000, the Company entered into an employment agreement with
its new Chief Technology Officer and Vice President of Technology for a one-year
term. The employment agreement provides for (i) annual salary of $240,000 with
an increase to $260,000 one month after the one-year anniversary of the
employment agreement; (ii) annual salary of $50,000 from Authentigraph for
service in the capacity of Chief Executive Officer of Authentigraph; (iii) a
bonus as determined by the Board of Directors; (iv) $5,000 for life insurance;
(v) the award of 200,000 employee stock options to purchase the Company's common
stock at an exercise price of $11.25 per share, with 50,000 vested immediately
and 50,000 vesting in six month increments; (vi) the award of stock options to
purchase such number of shares of Authentigraph as shall equal 10% of the total
issued and outstanding shares of Authentigraph, at an aggregate exercise price
of $50,000, vesting immediately; and (vii) the award of stock options to
purchase 2% of the issued and outstanding shares of common stock of Authentidate
at the aggregate exercise price of $400,000, vesting 25% immediately and the
balance vesting in six month increments of 25% of the total grant.
In July 2000, Authentidate entered into an employment agreement with
its new Chief Executive Officer for a three year term. The employment agreement
provides for (i) annual salary of $250,000; (ii) an annual bonus of up to
$200,000, with a minimum bonus of $80,000 during the first year; (iii) a
severance agreement equal to twelve months salary in the event employment
agreement is terminated without cause; (iv) the award of such number of shares
of common stock of Authentidate as shall equal 5% of the shares outstanding on
the date of the employment agreement, vesting in equal amounts over a four year
period, commencing one year from the date of the agreement; and (v) the award of
employee stock options to purchase 200,000 shares of common stock of Bitwise
Designs, Inc., vesting in equal amounts over a four year period, at an exercise
price of $6.3125 per share.
COMPENSATION OF DIRECTORS
Directors were 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
35
<PAGE> 39
Options") and are reimbursed for expenses incurred in order to attend meetings
of the Board of Directors. Directors also receive 20,000 Stock Options upon
being elected to the Board.
STOCK OPTION PLANS
In April 1992, the Company adopted the 1992 Employees Stock Option Plan
(the "1992 Plan") which provided for the grant of options to purchase up to
600,000 shares of the Company's Common Stock. On January 26, 1995, the
stockholders of the Company approved an amendment to the 1992 Plan to increase
the number of shares of Common Stock available under the 1992 Plan to 3,000,000
shares. Under the terms of the 1992 Plan, options granted thereunder may be
designated as options which qualify for incentive stock option treatment
("ISOs") under Section 422A of the Code, or options which do not so qualify
("Non-ISOs"). As of June 30, 2000, there were outstanding 2,186,173 options
under the 1992 Plan with exercise prices ranging from $0.34 to $11.25.
The 1992 Plan is administered by a Compensation Committee designated by
the Board of Directors. The Compensation Committee has the discretion to
determine the eligible employees to whom, and the times and the price at which,
options will be granted. Whether such options shall be ISOs or Non-ISOs; the
periods during which each option will be exercisable; and the number of shares
subject to each option, shall be determined by the Committee. The Board or
Committee shall have full authority to interpret the 1992 Plan and to establish
and amend rules and regulations relating thereto.
Under the 1992 Plan, the exercise price of an option designated as an
ISO shall not be less than the fair market value of the Common Stock on the date
the option is granted. However, in the event an option designated as an ISO is
granted to a ten percent stockholder (as defined in the 1992 Plan) such exercise
price shall be at least 110% of such fair market value. Exercise prices of
Non-ISOs options may be less than such fair market value. The aggregate fair
market value of shares subject to options granted to a participant which are
designated as ISOs which become exercisable in any calendar year shall not
exceed $100,000. The "fair market value" will be the closing NASDAQ bid price,
or if the Company's Common Stock is not quoted by NASDAQ, as reported by the
National Quotation Bureau, Inc., or a market maker of the Company's Common
Stock, or if the Common Stock is not quoted by any of the above, by the Board of
Directors acting in good faith.
The Compensation Committee may, in its sole discretion, grant bonuses
or authorize loans to or guarantee loans obtained by an
36
<PAGE> 40
optionee to enable such optionee to pay any taxes that may arise in connection
with the exercise or cancellation of an option.
Unless sooner terminated, the 1992 Plan will expire in April, 2002.
In April, 1992, the Board of Directors adopted the Non-Executive
Director Stock Option Plan (the "Director Plan") which was approved by the
Company's stockholders in May, 1992. 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 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 the Company's Common Stock, providing such person has served as a director of
the advisory board for the previous 12 month period.
As of June 30, 2000, there are outstanding 130,000 options under the
Director Plan with exercise prices from $0.84375 to $3.875.
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 receive options or the
number of shares subject to the option, the term of the option or the
exercisability of the
37
<PAGE> 41
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.
In May 2000, the Board of Directors established an Internet Advisory
Board (the "Advisory Board") to advise the Company in evaluating prospective
ventures and adopted the Internet Advisory Board Stock Option Plan (the
"Advisory Plan"). The Advisory Plan has not yet been approved by the Company's
stockholders and will be presented to the Company's stockholders for their
approval at the next scheduled meeting of the Company's stockholders. The
Advisory Plan, assuming its approval by the Company's stockholders, will permit
the Company to grant to members of the Advisory Board options to purchase the
Company's Common Stock in order to attract and retain qualified persons to
serve on the Advisory Board. The Advisory Plan provides that each member of the
Advisory Board will be granted options to purchase 50,000 shares of the
Company's Common Stock plus such number of shares of common stock of any
company acquired by Bitwise as shall equal 0.5% of the investment by Bitwise in
such acquisition target.
As of June 30, 2000, the Company granted an aggregate of 150,000 options
under the Advisory Plan with an exercise price of $8.875. These grants,
however, are subject to the approval of the Company's stockholders.
The exercise price for options granted under the Advisory Plan is 100% of
the fair market value of the Common Stock on the date of the 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 Advisory 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
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 Advisory
Plan. Options granted under the Advisory Plan are not qualified for incentive
stock option treatment.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 25,
2000 with respect to (i) each director and each executive officer, (ii) all
directors and officers as a group, and (iii) the persons (including any "group"
as that term is used in Section l3(d)(3) of the Securities Exchange Act of
l934), known by the Corporation to be the beneficial owner of more than five
(5%) percent of the Corporation's Common Stock and Series A Preferred Stock.
<TABLE>
<CAPTION>
TYPE OF NAME AND ADDRESS OF AMOUNT AND NATURE PERCENTAGE
CLASS BENEFICIAL HOLDER OF BENEFICIAL OF CLASS
OWNERSHIP (1) (*)
<S> <C> <C> <C>
Common John T. Botti 1,474,391 (2) 9.0%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common Ira C. Whitman 610,381 (3) 3.7%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common Steven Kriegsman 40,000 (4) 0.2%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common Dennis Bunt 52,883 (5) 0.3%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common J. Edward Sheridan 50,000 (9) 0.3%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common Charles Johnston 118,570 (6) 0.7%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common Nicholas Themelis 131,500 (7) 0.8%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
</TABLE>
38
<PAGE> 42
<TABLE>
<S> <C> <C> <C>
Common Robert Van Naarden 0 (8) 0%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Series A John T. Botti 100 (10) 50%
Preferred c/o Bitwise Designs
Stock 2165 Technology Drive
Schenectady, NY 12308
Series A Ira C. Whitman 100 (11) 50%
Preferred c/o Bitwise Designs
Stock 2165 Technology Drive
Schenectady, NY 12308
Directors/Officers as a group 2,447,725 14.9%
(2)(3)(4)(5)(6)(7)(8)
</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 1,065,000 shares of Common
Stock.
(3) Includes vested stock options to purchase 225,000 shares of Common
Stock.
(4) Includes vested options to purchase 40,000 shares of Common Stock.
(5) Includes vested options to purchase 51,000 shares of Common Stock and
excludes nonvested options to purchase 25,000 shares of Common Stock.
Includes 1,000 shares of Common Stock owned by Mr. Bunt's wife.
(6) Includes vested options to purchase 60,000 shares of Common Stock.
(7) Includes vested options to purchase 100,000 shares of Common Stock and
excludes 100,000 non-vested options.
(8) Excludes 200,000 non-vested options.
(9) Includes vested options to purchase 50,000 shares of Common Stock.
(10) See footnote (2). Each share of Series A Preferred Stock is entitled to
ten (10) votes per share.
(11) See footnote (3). Each share of Series A Preferred Stock is entitled to
ten (10) votes per share.
* Based on 14,822,261 shares of Common Stock outstanding as of September
25, 2000.
39
<PAGE> 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as disclosed herein, the Company has not entered into any
material transactions or series of similar transactions with any director,
executive officer or any security holder owning 5% or more of the Company's
Common Stock.
On July 17, 1995, the Company entered into an agreement with Whale
Securities Co., L.P. pursuant to which Whale Securities has been retained as the
Company's financial consultant and investment banker for a one-year period.
Under the terms of the consulting agreement, Whale Securities received five-year
warrants to purchase 200,000 shares of Common Stock at an exercise price of
$1.50 per share.
In connection with the December 1995 private offering, the Company
issued to Whale Securities Co. L.P. and its designees, for services Whale
provided as placement agent, warrants (the "Placement Agent Warrants") to
purchase (i) 214,884 shares of common Stock and (ii) Warrants to purchase
214,884 Unit Warrants. The terms of the Warrants issued to Whale are similar to
those sold to the investors in the December private offering, in that they are
exercisable for a period of five years, and have an exercise price of $4.50 per
share. The Warrants issued to Whale and its designees are not redeemable by the
Company. The Warrants issued to Whale contain certain anti-dilution provisions.
For information concerning employment agreements with, and compensation
of, the Company's executive officers and directors, see "MANAGEMENT -- Executive
Compensation."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
a)(1) Financial Statements
The following Financial Statements of the Company
are included in Part II, Item 8 of this report:
Report of Independent Accountants
Consolidated Balance Sheets as of June 30, 2000
and 1999
Consolidated Statements of Operations for the years
ended June 30, 2000 and 1999
Consolidated Statements of Shareholders' Equity for
the years ended June 30, 2000 and 1999
40
<PAGE> 44
Consolidated Statements of Cash Flows for the years
ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements
a)(2) Financial Statement Schedules
The following consolidated financial statements
schedule for each of the two years in the period ended June 30, 2000 is included
pursuant to item 14 (d):
Schedule II, Valuation and Qualifying Accounts
(b) Reports on Form 8-K
During the quarter ended June 30, 2000 the Company
filed the following reports: None
(c) Exhibits
The following exhibits, designated by an asterisk
(*), have been previously filed with the Commission
and, pursuant to 17 C.F.R. Section 230.411, are
incorporated by reference to the document referenced
in brackets following the descriptions of such
exhibits.
Exhibit No. Description
2.1* Agreement and Plan of Merger between Bitwise Designs, Inc. and
Electrograph Systems, Inc. dated February 7, 1994
2.2* Agreement and Plan of Merger between Bitwise Designs, Inc. and
Systems Solutions, Inc. dated April 29, 1994
3.1* Certificate of Incorporation of Bitwise Designs, Inc.-
Delaware (Exhibit 3.3.1 to Registration Statement on Form
S-18, File No. 33-46246-NY)
3.1.1* Certificate of Designation of Series B Preferred Stock
3.2* By-Laws (Exhibit 3.2 to Registration Statement on Form S-18,
File No. 33-46246-NY)
41
<PAGE> 45
4.1* Form of Common Stock Certificate (Exhibit 4.1 to Registration
Statement on Form S-18, File No. 33-46246-NY)
4.2* Form of Series A Preferred Stock Certificate (Exhibit 4.2
to Registration Statement on Form S-18, File No. 33-46246-NY)
4.3* Form of Warrant issued to Berkeley Securities Corp. (Exhibit
4.3 to Registration Statement on Form S-18, File No.
33-46246-NY)
4.4* Form of Warrant issued to certain individuals in April, 1992
(Exhibit 4.4 to Registration Statement on Form S-18, File No.
33-46246-NY)
4.5* Form of Series B Preferred Stock Certificates (Exhibit 4.5 to
the Registration Statement on form SB-2, File No. 33-76494)
4.6* Form of Warrant to be issued to Berkeley Securities
Corp.(Exhibit 4.6 to the Registration Statement on form SB-2,
File No. 33-76494)
4.7* Form of 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).
4.8* Terms of 8% Convertible Notes due August 11, 2002 (Exhibit 4.8
to the Company's Form 10-KSB dated June 30, 1997).
4.9* Terms of Warrants and Global Warrant expiring August 11, 2002
(Exhibit 4.9 to the Company's Form 10-KSB dated June 30,
1997).
4.10 Form of Warrant issued to Windhart New Technologies, AGi.G and
PFK Development Group I, LLC
10.1* Lease agreement with Rotterdam Industrial Park, dated August
7, 1991 (Exhibit 10.1 to Registration Statement on Form S-18,
File No. 33-46246-NY)
10.1.1* Lease warrant waiver agreement (Exhibit 10.1.1 to Registration
Statement on Form S-18, File No. 33-46246-NY)
10.2* Lease with Siemens Credit Corporation for telephone system
dated November 25, 1991 (Exhibit 10.2 to
42
<PAGE> 46
Registration Statement on Form S-18, File No. 33-46246-NY)
10.3* Lease agreement with Apple Commercial Credit for laser
printer, dated June 23, 1987 (Exhibit 10.3 to Registration
Statement on Form S-18, File No. 33-46246-NY)
10.4* Leases with Adirondack Leasing Associates, Ltd. (Exhibit 10.4
to Registration Statement on Form S-18, File No. 33- 46246-NY)
10.5* Loan agreement with U.S. Small Business Administration and
Norstar Bank, dated April 4, 1991 (Exhibit 10.5 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.6* Loan agreement with Schenectady Economic Development
Corporation, dated August 7, 1991 (Exhibit 10.6 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.8* Employment agreement with John T. Botti, dated April, 1992
(Exhibit 10.8 to Registration Statement on Form S-18, File No.
33-46246-NY)
10.9* Employment agreement with Ira C. Whitman, dated April, 1992
(Exhibit 10.9 to Registration Statement on Form S-18, File No.
33-46246-NY)
10.10* 1992 Employee stock option plan (Exhibit 10.10 to Registration
Statement on Form S-18, File No. 33-46246-NY)
10.11* 1992 Nonexecutive Directors stock option plan (Exhibit 10.11
to Registration Statement on Form S-18, File No. 33-46246-NY)
10.13* Loan agreement with Norstar Bank dated February 6, 1992
(Exhibit 10.13 to Registration Statement on Form S-18, File
No. 33-46246-NY)
10.13.1* Norstar Bank waiver agreement (Exhibit 10.13.1 to Registration
Statement on Form S-18, File No. 33-46246-NY)
43
<PAGE> 47
10.14* Agreement with Prime Computer, Inc. (Exhibit 10.14 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.15* Agreement with Mentor Computer Graphics Ltd. (Exhibit 10.15 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.16* Agreement with Robert W. Schwartz, Inc. dated February 10,
1992 (Exhibit 10.16 to Registration Statement on Form S-18,
File No. 33-46246-NY)
10.17* Form of Financial Consulting Agreement with the Underwriter
(Exhibit 10.17 to the Registration Statement on form SB-2,
File No. 33-76494)
10.18* Financing Agreement by and among Maryland Industrial
Development Financing Authority, JED Associates, State
National Bank of Maryland, Electronic Marketing Associates,
Inc. (name was changed to System Solutions Technology, Inc.),
Trimarc Systems Incorporated and Intermec Mid-Atlantic
Corporation dated December 11, 1985 (Exhibit 10.18 to the
Registration Statement on form SB-2, File No. 33-76494)
10.19* Maryland Industrial Development Financing Authority Limited
Obligation Economic Development Revenue Bond (Exhibit 10.19 to
the Registration Statement on form SB-2, File No. 33-76494)
10.20* Cross-Collateral Security Agreement between NationsCredit
Corporation, Bitwise Designs, Electrograph Systems, Inc. and
System Solutions Technology, Inc. dated July 18, 1995.
10.21* Subcontract dated September 28, 1995 between PRC, Inc. and
System Solutions Technology, Inc.
10.22* Financial Consulting Agreement dated July 17, 1995 between the
Company and Whale Securities, Co.
10.23* Agreement and Plan of Merger by and among Bitwise Designs,
Inc., Bitwise DJS, Inc., certain individuals and DJS Marketing
Group, Inc. dated March 6, 1996 (Exhibit 2 to Form 8-K dated
March 22, 1996)
10.24* Form of Conversion Agency Agreement between the Company and
Banca del Gottardo dated as of August 8, 1997 (Exhibit 10.24
to Form 10-KSB dated June 30, 1997).
44
<PAGE> 48
10.25* 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).
10.26* Stock Purchase and Merger Agreement dated April 7, 1998
between the Company USI and SST. (Exhibit A to Proxy Statement
dated May 8, 1998).
10.27 Employment Agreement between John Botti and the Company dated
January 1, 2000.
10.28 Employment Agreement between Nicholas Themelis and the Company
dated February 28, 2000.
10.29 Employment Agreement between Robert Van Naarden and
Authentidate.com, Inc. dated July 5, 2000.
10.30** Joint Venture Agreement between The Company,
Authentidate, Inc. and Windhorst New Technologies, AGi.G
10.31** Technology License Agreement between The Company,
Authentidate, Inc. and Windhorst New Technologies, AGi.G.
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of Registrant
23 Consent of PricewaterhouseCoopers, LLP
27 Financial Data Schedule
-----------------
** Portions of exhibit omitted and request for confidential treatment filed
with the Commission
45
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BITWISE DESIGNS, INC.
By: /s/ John T. Botti
-------------------------------------
John T. Botti
President, Chairman of the
Board and Chief Executive Officer
Dated: September 27, 2000
Pursuant to the requirements of the Securities Act of 1933, this Report
has been signed below by the following persons in the capacities and on the
dates indicated:
Signature Capacity Date
/s/John T. Botti President, Chairman September 27, 2000
------------------------ of the Board and Chief ------------------
John T. Botti Executive Officer
/s/Ira C. Whitman Senior Vice President September 27, 2000
------------------------ and Director ------------------
Ira C. Whitman
/s/Nicholas Themelis Vice President, Chief September 27, 2000
------------------------ Technology Officer and ------------------
Nicholas Themelis Director
/s/Robert Van Naarden Director and September 27, 2000
------------------------ Chief Executive Officer ------------------
Robert Van Naarden Of Authentidate, Inc.
/s/Steven A. Kriegsman Director September 27, 2000
------------------------ ------------------
Steven A. Kriegsman
/s/J. Edward Sheridan Director September 27, 2000
------------------------ ------------------
J. Edward Sheridan
/s/Charles C. Johnston Director September 27, 2000
------------------------ ------------------
Charles C. Johnston
/s/Dennis H. Bunt Chief Financial September 27, 2000
------------------------ Officer and Principal ------------------
Dennis H. Bunt Accounting Officer
46
<PAGE> 50
BITWISE DESIGNS, INC. AND SUBSIDIARIES
VALUATIONS AND QUALIFYING ACCOUNTS SCHEDULE II
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged Charged to Balance At
Beginning To Other End Of
Description of Period Expense Accounts (a) Deductions (b) Period
----------- ---------- --------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts
Year ended June 30: 421,018 175,799 (186,056) 410,761
2000 . . . . . . .
1999 . . . . . . . 480,229 145,983 (205,194) 421,018
Reserve for slow moving
or obsolete inventory
Year ended June 30: 275,634 593,001 (131,709) 736,926
2000 . . . . . . .
1999 . . . . . . . 714,385 258,854 (697,605) 275,634
</TABLE>
--------------------------
(a) Additions related to acquisition of subsidiaries
(b) Deductions due to writedowns and sales of subsidiaries
48
<PAGE> 51
BITWISE DESIGNS, INC. AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS (AND REPORTS OF
INDEPENDENT ACCOUNTANTS)
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<PAGE> 52
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONTENTS
--------------------------------------------------------------------------------
PAGE(S)
REPORT OF INDEPENDENT ACCOUNTANTS.................................... 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets................................................ 2
Statements of operations...................................... 3
Statements of shareholders' equity............................ 4
Statements of cash flows...................................... 5
Notes to consolidated financial statements.................... 6-24
<PAGE> 53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and shareholders
of Bitwise Designs, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a)(1) present fairly, in all material respects, the
financial position of Bitwise Designs, Inc. and its subsidiaries at June 30,
2000 and 1999, and the results of their operations and their cash flows for each
of two years in the period ended June 30, 2000 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14 (a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedules are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
Albany, New York
August 25, 2000
1
<PAGE> 54
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 7,965,496 $ 549,097
Accounts receivable, net of allowance for doubtful accounts of
$410,761 and $421,018 on June 30, 2000 and 1999 4,274,148 5,141,178
Due from related parties 7,866 48,094
Inventories 2,352,387 3,824,387
Income taxes receivable 15,471 12,130
Prepaid expenses and other current assets 617,526 282,795
------------ ------------
Total current assets 15,232,894 9,857,681
Property and equipment, net 3,033,864 2,949,458
Other assets
Software development costs, net of accumulated amortization of
$756,347 and $300,510 on June 30, 2000 and 1999 167,059 129,993
Excess of cost over net assets of companies acquired, net 1,254,952 1,341,239
Investment in Authentidate International AG 1,350,775
Patent costs, net 44,077 16,099
Deferred financing costs 165,989
Other assets 44,714 24,525
------------ ------------
Total assets $ 21,128,335 $ 14,484,984
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,228,618 $ 3,852,032
Current portion of long-term debt 29,515 23,781
Accrued expenses and other current liabilities 448,091 1,075,374
Due to related parties 103,040 --
Borrowings under lines of credit -- 1,274,779
------------ ------------
Total current liabilities 1,809,264 6,225,966
Long-term debt, net 1,351,253 4,781,124
Deferred grant 1,000,000 142,189
------------ ------------
Total liabilities 4,160,517 11,149,279
------------ ------------
Commitments
Shareholders' equity
Preferred stock $.10 par value, 5,000,000 shares authorized:
Series A - 200 shares issued and outstanding 20 20
Series B - 50,000 shares issued and outstanding 5,000 --
Common stock, $.001 par value; 20,000,000 shares authorized; 14,421,758
shares issued at June 30, 2000 and
7,410,745 shares issued at June 30, 1999 14,422 7,411
Additional paid-in capital 38,740,271 19,846,126
Accumulated deficit (21,715,176) (16,441,133)
------------ ------------
17,044,537 3,412,424
Less cost of 28,082 shares of common stock in treasury (76,719) (76,719)
------------ ------------
Total shareholders' equity 16,967,818 3,335,705
------------ ------------
Total liabilities and shareholders' equity $ 21,128,335 $ 14,484,984
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
2
<PAGE> 55
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net sales $ 15,289,738 $ 17,094,765
Cost of goods sold 11,924,581 11,479,297
------------ ------------
Gross profit 3,365,157 5,615,468
------------ ------------
Selling, general and administrative expenses 8,016,192 7,765,234
Product development expenses 665,533 248,801
------------ ------------
Total operating expenses 8,681,725 8,014,035
------------ ------------
Loss from operations (5,316,568) (2,398,567)
------------ ------------
Other income (expense):
Interest and other income 311,493 107,208
Interest expense (299,994) (630,396)
Net loss of Authentidate International AG (5,715) --
Loss on sale of subsidiary (249,568)
------------ ------------
5,784 (772,756)
------------ ------------
Loss before income taxes (5,310,784) (3,171,323)
Income tax benefit (102) (4,835)
------------ ------------
Net loss before minority interest (5,310,682) (3,166,488)
Minority interest 36,639 --
------------ ------------
Net loss $ (5,274,043) $ (3,166,488)
============ ============
Per share amounts:
Net loss per common share $ (.49) $ (.43)
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE> 56
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000 AND 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, 1998 200 $ 20 7,410,745 $ 7,411 $ 19,822,159 $(13,274,645) $ (76,719) $ 6,478,226
Warrants issued for
non-employee 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
Warrants issued for
non-employee services 390,221 390,221
Private equity offering 50,000 5,000 1,480,000 1,480 1,890,466 1,896,946
Conversion of debt to equity 1,223,075 1,223 3,384,484 3,385,707
Exercise of stock warrants 3,753,922 3,754 10,780,447 10,784,201
Warrants issued for interest
in Authentidate
International AG 1,119,814 1,119,814
Stock issued for
non-employee services 72,750 73 105,641 105,714
Exercise of stock options 481,266 481 1,297,559 1,298,040
Investment in
Authentidate, Inc. 98,861 98,861
Costs to register common shares (79,945) (79,945)
Dividends (93,403) (93,403)
Net loss (5,274,043) (5,274,043)
--------- ------- ---------- -------- ------------ ------------- ---------- ------------
Balance, June 30, 2000 50,200 $5,020 14,421,758 $14,422 $38,740,271 $(21,715,176) $ (76,719) $ 16,967,818
========= ======= ========== ======== ============ ============= ========== ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE> 57
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash flows from operating activities
Net loss $ (5,274,043) $ (3,166,488)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 916,532 637,186
Provision for doubtful accounts receivable 175,799 (60,694)
Loss on sale of subsidiary -- 249,568
Non-cash selling, general and administrative expenses 173,405
Changes in operating assets and liabilities
Accounts receivable and due from related parties 731,458 (470,349)
Inventories 1,472,000 (613,519)
Prepaid expenses and other current assets (122,928) 7,409
Accounts payable and accrued expenses (3,147,656) 1,561,217
Income taxes receivable (3,341) (8,839)
Other 100
------------ ------------
Net cash used in operating activities (5,078,674) (1,864,509)
------------ ------------
Cash flows from investing activities
Purchases of property and equipment (358,554) (2,402,661)
Trademarks acquired (23,331) (2,500)
Patent costs (30,796) (17,105)
Software development costs (485,293) (156,293)
Investment in Authentidate International AG (230,961)
Other -- 13,609
------------ ------------
Net cash used in investing activities (1,128,935) (2,564,950)
------------ ------------
Cash flows from financing activities
(Decrease) in borrowings under line of credit, net (1,274,779) (398,496)
Proceeds from borrowings on long-term debt 165,152 1,234,493
Principal payments on long-term debt (18,876)
Receipt of deferred revenue from economic development grant 857,811 142,189
Stock warrants exercised 10,784,201 --
Stock options exercised 1,298,040 --
Dividends (93,403) --
Proceeds from private equity offering 1,896,946 --
Outside investment in Authentidate, Inc. 98,861 --
Costs of conversion of debt to equity (10,000) --
Payment of registration costs (79,945) --
------------
Net cash provided by financing activities 13,624,008 978,186
------------ ------------
Net increase (decrease) in cash and cash equivalents 7,416,399 (3,451,273)
Cash and cash equivalents, beginning of period 549,097 4,000,370
------------ ------------
Cash and cash equivalents, end of period $ 7,965,496 $ 549,097
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE> 58
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 subsidiaries Authentidate, Inc.,
Authentigraph.com, Inc. and DJS Marketing Group, Inc. (DJS), collectively
referred to as the "Company", are engaged in the manufacture and
distribution of document imaging systems, as well as providing
authentication services over the internet. The Company, through DJS also
markets network integration services, internet services and related
computer hardware.
Bitwise acquired System Solutions Technology, Inc. (SST), in August 1994,
a value-added distributor of advanced technology industrial computers and
computer peripherals. In June 1999 Bitwise sold SST in a stock sale.
In June 1999, Bitwise established a majority owned subsidiary,
Authentidate, Inc. (Authentidate), to engage in a new business line of
providing end users with a service which will (a) provide a technology
that can verify the authenticity of digital images by employing a secure
clock that will date stamp the images when received providing proof of
time, date and content, (b) accept and store e-mail from networks and
personal computers throughout the world and from different operating
systems via the internet, (c) allow for confirmation of acceptance of all
e-mails sent to the system, (d) produce confirmation of receipt of
e-mail. To date, Authentidate's operations have been primarily limited to
developing the technology for its services and to develop a Retail
Version and a Business to Business Version (B to B). The Retail Version,
which may be accessed over the Internet, was in large part developed to
generate interest and to publicize the B to B Version. Sales of the
Retail Version were not significant in fiscal 2000. The B to B Version
will be marketed directly to business customers and will be available
early in 2001. In January 2000, Bitwise established another subsidiary,
Authentigraph.com, Inc. (Authentigraph) to provide similar authentication
services to the collectibles and sports memorabilia industries.
During the fiscal year ended June 30, 2000 the Company incurred a net
loss of $5,274,043, and cash used in operating activities totaled
$5,078,674. The Company's available cash balance at June 30, 2000 totaled
approximately $8,000,000. 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 Authentidate,
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Bitwise
Designs, Inc. and its subsidiaries. The accounts of the subsidiaries have
been consolidated since the acquisition date. All material intercompany
balances and transactions have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities not exceeding three months to be cash equivalents. At June 30,
2000 and 1999, cash equivalents were composed primarily of investments in
commercial paper and overnight interest bearing deposits.
6
<PAGE> 59
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INVENTORIES
Inventories are stated at the lower of average cost or market. The
Company increased its reserve for obsolescence by $405,817 in the fourth
quarter of the year ended June 30, 2000 due to DocStar model upgrades and
improvements which raised the uncertainty of marketability of certain
outdated DocStar components.
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). However,
because of market uncertainty the software development costs related to
the Authentidate Retail Version were fully amortized during the fourth
quarter of the fiscal year ended June 30, 2000. Software development
costs capitalized during 2000 and 1999 amounted to $522,903 and $156,293,
respectively. Amortization expense related to software development costs
for the years ended June 30, 2000 and 1999 was $522,903 and $114,692,
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 2000 and 1999 was $86,287 and $81,287, respectively.
Accumulated amortization at June 30, 2000 and 1999 was $368,289 and
$282,002, respectively.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
7
<PAGE> 60
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVENUE RECOGNITION AND WARRANTY PROVISIONS
Revenue from the sale of products and services 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 and
service revenue is recognized as it is earned. 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,"
which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 has subsequently been
amended by SFAS No. 137, issued in June, 1999, which delays the effective
date for implementation of SFAS No. 133 until fiscal quarters of fiscal
years beginning after June 15, 2000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101), "Revenue Recognition in Financial Statements." SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company is
required to adopt SAB 101 in the quarter ended May 27, 2001. Management
does not expect the adoption of SAB 101 to have a material effect on the
Company's financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation - an interpretation of APB Opinion No. 25."
FIN 44 clarifies the application of APB Opinion No. 25 and, among other
issues clarifies the definition of an employee for purposes of applying
APB Opinion No. 25, the criteria for determining whether a plan qualifies
as a non-compensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards,
and the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000. The Company has applied the
applicable provisions of FIN 44 which did not have a material effect on
the Company's Consolidated Financial Statements.
ADVERTISING EXPENSES
The Company recognizes advertising expenses as incurred. Advertising and
promotion expense for 2000 and 1999, was approximately $1,363,105 and
$331,000, respectively. Included in prepaid expense and other current
assets are approximately $250,000 and $0 at June 30, 2000 and 1999,
respectively, related to prepaid advertising costs.
FOURTH QUARTER ADJUSTMENTS DURING FISCAL YEAR ENDED JUNE 30, 1999
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.
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.
8
<PAGE> 61
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RECLASSIFICATIONS
It is the Company's policy to reclassify, where appropriate, prior year
financial statements to conform to the current year presentation.
2. LOSS PER SHARE
The following is basic and diluted loss per share information:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net loss $(5,274,043) $(3,166,488)
Preferred stock dividends paid (93,403) -
------------ ------------
Net loss applicable to common shareholders $(5,367,446) $(3,166,488)
============ ============
Weighted average shares 10,953,284 7,410,745
Basic and diluted loss per share (.49) (.43)
</TABLE>
The impact of options, warrants and convertible notes was antidilutive to
the calculation of dilutive loss per share, and were accordingly excluded
from the calculation.
3. INVENTORIES
Inventories at June 30, 2000 and 1999 consist of:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Purchased components and raw materials $1,608,034 $1,197,192
Finished goods - in stock 744,353 559,508
- held by resellers - 2,067,687
----------- -----------
$2,352,387 $3,824,387
=========== ===========
</TABLE>
9
<PAGE> 62
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2000 and 1999 consists of the
following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
2000 1999 IN YEARS
<S> <C> <C> <C>
Building $ 1,611,325 $ 1,580,191 40
Land 698,281 651,932 N/A
Machinery and equipment 1,682,716 1,433,904 3-6
Demonstration and rental computers 188,792 179,752 5-6
Furniture and fixtures 262,599 247,273 5-7
Leasehold improvements 11,198 83,692 6
Vehicles 15,090 15,090 5
------------ ------------
4,470,001 4,191,834
Less accumulated depreciation and
amortization (1,436,137) (1,242,376)
------------ ------------
$ 3,033,864 $ 2,949,458
============ ============
</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 was 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,
2000, $1,000,000 had been received and is recorded as deferred revenue.
The remainder of the financing for the new facility, totaling
approximately $1,400,000, was provided by a local financial institution
in the form of a mortgage loan (See Note 6).
Depreciation and amortization expense on property and equipment for the
years ended June 30, 2000 and 1999 was $274,148 and $230,127,
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 $602,293 was outstanding at June 30,
2000. This facility is a wholesale inventory credit facility. The line is
non-interest bearing and payment terms are net 40. The line is
collateralized by all assets of DJS. This facility is included with
accounts payable on the balance sheet.
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. The Company entered into
an agreement with the lender to extend repayment of the outstanding
balance until September 30, 2000 making monthly payments to the lender.
In December 1999 the Company paid the line of credit in full.
10
<PAGE> 63
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. LONG-TERM DEBT
Long-term debt at June 30, 2000 and 1999 consists of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Convertible notes payable with 400,000 detachable common stock purchase
warrants. Interest accrued 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 fiscal 2000, 1,223,075 shares were
issued upon conversion of the outstanding debt. In connection with the
conversion, the unamortized discount in the amount of $361,228 and
deferred financing costs in the amount of $218,065 were written off to
paid in capital. $ - $3,975,000
Mortgage payable with Central National Bank in the original amount of
$1,400,000 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, 2000), payable in monthly installments through October 2019.
The mortgage is collateralized by a first mortgage
lien on the Company's headquarters. 1,380,768 1,234,493
----------- -----------
1,380,768 5,209,493
Less current portion (29,515) (23,781)
Less unamortized discount - (404,588)
----------- -----------
Long-term debt, net of current portion $1,351,253 $4,781,124
=========== ===========
</TABLE>
The aggregate principle maturities of long-term debt for each of the
subsequent five years and thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 29,515
2001 32,926
2002 35,747
2003 38,810
2004 42,136
Thereafter 1,201,634
------------
$ 1,380,768
============
</TABLE>
11
<PAGE> 64
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. INCOME TAXES
Income tax expense (benefit) for the years ended June 30, 2000 and 1999
consists of currently payable state and local income taxes.
At June 30, 2000, the Company has federal net operating loss
carryforwards for tax purposes approximating $17,071,000. The years in
which the net operating loss carryforwards expire are as follows:
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
2019-$1,350,000; and 2020-$5,900,000
Because of significant changes in ownership during the year, the use of
net operating loss carry forwards may be subject to limitation.
The following table reconciles the expected tax benefit at the federal
statutory rate of 34% to the effective tax rate.
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Computed expected tax benefit $(1,805,666) $(1,078,250)
Increase in valuation allowance 1,550,443 1,198,438
Nondeductible goodwill amortization 27,638 27,638
Adjustment to prior years' taxes 220,104 (167,436)
State income taxes, net of federal benefit (67) (3,191)
Other nondeductible expenses 7,446 17,966
------------ ------------
$ (102) $ (4,835)
============ ============
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of June 30, 2000 and 1999 are
presented below:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Deferred income tax asset:
Allowance for doubtful accounts $ 139,659 $ 143,146
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 and inventory reserves 202,715 176,026
Other liabilities 165,802 186,790
Deferred revenue 53,607 639,904
Net operating loss carryforward 6,182,781 3,970,517
------------ ------------
Total gross deferred tax assets 6,744,564 5,116,383
Less valuation allowance (6,645,717) (5,095,274)
------------ ------------
Net deferred tax asset 98,847 21,109
Deferred income tax liability:
Software development costs (79,438) -0-
Equipment, principally due to differences in
depreciation methods (19,409) (21,109)
------------ ------------
Net deferred income taxes $ -0- $ -0-
============ ============
</TABLE>
12
<PAGE> 65
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. INCOME TAXES, CONTINUED
The valuation allowance for deferred tax assets as of July 1, 2000 and
1999 was $6,458,717 and $5,095,274, respectively. The net change in the
total valuation allowance for the years ended June 30, 2000 and 1999 was
an increase of $1,363,443 and $1,198,438, respectively.
8. LEASE COMMITMENTS
The Company is obligated under operating leases for certain equipment and
facilities expiring at various dates through the year 2003.
As of June 30, 2000, 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>
2001 $ 112,934
2002 15,722
2003 713
---------
$ 129,369
=========
</TABLE>
Rental expense was approximately $69,370 and $216,000 for the years ended
June 30, 2000 and 1999, 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 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 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.
13
<PAGE> 66
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE OPTION
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding at July 1, 1998 2,338,870 $ 2.99
Options granted equal to market price 50,500 1.39
Options canceled or surrendered (404,500) 3.48
---------
Outstanding at June 30, 1999 1,984,870 2.85
Options granted equal to market price 1,337,000 6.97
Options exercised (801,529) 2.55
Options canceled or surrendered (334,168) 1.86
---------
Outstanding at June 30, 2000 2,186,173 5.67
=========
</TABLE>
14
<PAGE> 67
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
A) 1992 EMPLOYEES STOCK OPTION PLAN, CONTINUED
The following is a summary of the status of employee stock options at
June 30, 2000:
<TABLE>
<CAPTION>
EXERCISABLE
OUTSTANDING OPTIONS OPTIONS
---------------------------------- -------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
-------------------- --------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
$ .34-2.00 111,205 3.0 $ 1.21 45,759 $ 1.02
2.01-6.00 1,473,737 3.8 4.67 1,453,827 4.70
6.01-11.25 601,231 3.6 8.94 227,231 7.55
</TABLE>
As of June 30, 2000 and 1999, 1,726,817 shares and 1,792,703 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
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 additional option to purchase 5,000
shares of the Company's common stock, providing additional 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. If the
common stock is not quoted by any of the above the Board of Directors
acting in good faith will determine the fair market value. Until
otherwise provided in the Stock Option Plan, the exercise price of
options granted under the Director Plan must be paid at the time of
exercise, either in cash, by delivery of shares of common stock of the
Company or by a combination of each. The term of each option commences on
the date it is granted and unless terminated sooner, as provided in the
Director Plan, expires five years from the date of grant. The Director
Plan is administered by a committee of the board of directors composed of
not fewer than three persons who are officers of the Company (the
"Committee"). The Committee has no discretion to determine which
non-executive director or advisory board member will receive options or
the number of shares subject to the option, the term of the option or the
exercisability of the option. However, the Committee will make all
determinations of the interpretation of the Director Plan. Options
granted under the Director Plan are not qualified for incentive stock
option treatment.
15
<PAGE> 68
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
B) NON-EXECUTIVE DIRECTOR STOCK OPTION PLAN, CONTINUED
A schedule of director stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OPTION
OF PRICE
SHARES PER SHARE
--------- ---------
<S> <C> <C>
Outstanding July 1, 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
Options granted equal to market price 50,000 0.89
Options cancelled or surrendered (10,000) 5.13
Options exercised (40,000) 1.83
--------
Outstanding June 30, 2000 130,000 1.92
========
</TABLE>
The options range in exercise price from $.84 to $3.88 per share and have
a weighted average remaining contractual life of 3.0 years.
C) COMMON STOCK WARRANTS
A schedule of common stock warrant activity is as follows:
<TABLE>
<CAPTION>
NUMBER WARRANT
OF PRICE
SHARES PER SHARE
----------- ----------
<S> <C> <C>
Outstanding July 1, 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 3.88
Warrants granted equal to market price 970,000 4.67
Warrants granted greater than market price 2,949,999 2.44
Warrants granted lower than market price 25,000 3.00
Warrants cancelled or surrendered (30,000) 5.00
Warrants exercised (3,788,517) 3.11
-----------
Outstanding June 30, 2000 3,025,477 3.87
===========
</TABLE>
16
<PAGE> 69
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
C) COMMON STOCK WARRANTS, CONTINUED
In October 1999, the Company issued 2,479,999 detachable common stock
purchase warrants in connection with a private equity financing further
described in footnote 18. Other warrants issued during the years ended
June 30, 2000 and 1999 were generally to various firms and individual
providing services to the Company.
The following is a summary of the status of common stock warrants at June
30, 2000:
<TABLE>
<CAPTION>
OUTSTANDING WARRANTS EXERCISABLE WARRANTS
--------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
-------------------- ---------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ .87-4.00 1,751,906 3.8 $ 1.60 1,751,906 $ 1.60
4.01-11.25 1,273,571 2.4 7.00 1,273,571 7.00
</TABLE>
D) OPTIONS VALUATION
The weighted average fair value of each option granted under the
Company's option plans during fiscal 2000 and 1999 was $5.21 and $2.79,
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. The dividend yield was zero in 2000
and 1999. 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 94.2% and 75.0% for 2000 and 1999,
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 6.3% to 6.5% in 2000 and 4.3%
to 5.4% in 1999, respectively. The expected life of the option was
estimated based on the exercise history from previous grants and is
estimated to be five years.
17
<PAGE> 70
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
10. STOCK OPTION PLANS AND STOCK WARRANTS, CONTINUED
D) OPTIONS VALUATION, CONTINUED
The Company applies APB No. 25 in accounting for its stock option 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, net loss
and loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
<S> <C> <C>
Net loss
As reported $(5,274,043) $(3,166,488)
Pro forma (5,599,269) (2,960,231)
Basic and diluted loss per share
As reported $ (.49) $ (.43)
Pro forma (.51) (.40)
</TABLE>
Under SFAS No. 123, stock options 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 2000 and 1999.
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
In January, 2000, the Company entered into a new three year employment
agreement with its Chief Executive Officer, expiring on January 1, 2003.
The agreement provides for (i) a base salary of $250,000 in the first
year of the agreement increasing by 10% in each year thereafter; (ii) a
bonus equal to 3% of the Company's pre-tax net income, with such
additional bonuses as may be awarded in the discretion of the Board of
Directors, (iii) certain insurance and servance benefits; and
(iv)automoble and expenses.
In February 2000, the Company entered into an employment agreement with
its new Chief Technology Officer and Vice President of Technology for a
one year term. The employment agreement provides for (i) annual salary of
$240,000 with an increase to $260,000 one month after the one year
anniversary of this agreement, (ii) annual salary of $50,000 from
Authentigraph in the capacity of Chief Executive Officer of
Authentigraph, (iii) a bonus as determined by the Board of Directors,
(iv) $5,000 for life insurance, (v) the award of 200,000 employee stock
options to purchase the Company's common shares at an exercise price of
$11.25 per share, with 50,000 vested immediately and 50,000 vesting in
six month increments from February 2000, (vi) the award of stock options
to purchase such number of shares of Authentigraph, at an aggregate
exercise price of $50,000, as shall equal 10% of the total issued and
outstanding shares of Authentigraph, vested immediately, (vii) the award
of stock options to purchase 2% of Authentidate of the issued and
outstanding shares of Authentidate at the aggregate exercise price of
$400,000, vesting 25% immediately and the rest vesting in 6 month
increments of 25% of the aggregate grant.
18
<PAGE> 71
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
11. COMMITMENTS - EMPLOYMENT AGREEMENTS, CONTINUED
In July 2000, Authentidate entered into an employment agreement with its
new Chief Executive Officer for a three year term. The employment
agreement provides for (i) annual salary of $250,000, (ii) annual bonus
up to $200,000 with a minimum bonus of $80,000 paid with the regular
payroll during the first year, (iii) a severance agreement equal to 12
months salary in the event the Company terminates this agreement without
cause, (iv) the award of Authentidate common shares equal to 5% of the
shares outstanding on the date of the employment agreement, vesting in
equal amounts over a four-year period commencing one year from the date
of the agreement, (v) the award of employee stock options to purchase
200,000 Bitwise common shares vesting in equal amounts over a four-year
period, at an exercise price of $6.3125 per share.
12. CASH FLOWS - SUPPLEMENTAL INFORMATION
CASH FLOWS
The Company paid interest in the amounts of $364,954 and $451,387 for the
years ended June 30, 2000 and 1999, respectively. Income taxes paid
aggregated $133 and $4,304 during the years ended June 30, 2000 and 1999,
respectively.
NONCASH INVESTING AND FINANCING ACTIVITIES
During the fiscal year ended June 30, 2000, the Company issued 1,223,075
common shares of the Company's stock pursuant to the conversion of
$3,975,000 of convertible debt into common stock.
13. EMPLOYEE BENEFIT PLAN
Effective July 1, 1993, the Company implemented a qualified defined
contribution 401(k) profit sharing plan for all eligible employees. The
Company can make contributions in percentages of compensation, or amounts
as determined by the Company. The Company contributed $25,878 and $-0- to
the plan during the years ended June 30, 2000 and 1999, respectively.
14. SALE OF BUSINESS
In June 1999, 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 2000, 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%. This required 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. In March 2000, the Company agreed to
pay off the settlement in full for a $10,000 discount off the original
settlement of $341,000.
19
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BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
15. 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 accrued expenses and other current liabilities
approximates fair value because of the short maturity of these
instruments.
LONG-TERM DEBT
The remaining balance of long-term debt approximates fair value based on
its discounted face amount. Consequently, the carrying value of the
borrowings under long-term debt approximates fair value.
16. 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 four reportable segments: Bitwise, a document imaging
company, DJS Marketing Group, Inc. (DJS), a computer systems integrator,
Authentidate, Inc., an Internet authentication company, and
Authentigraph.com, Inc., a collectibles authentication company. 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. Authentidate and Authentigraph market digital authentication
services over the Internet.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies.
20
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BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
16. SEGMENT REPORTING, CONTINUED
The Company's reportable segments are separate companies which are
managed separately. Included in the All Other column in the year ended
June 30, 2000 are the Company's other two subsidiaries, Authentidate and
Authentigraph, which both commenced business late in the fiscal year
ending June 30, 2000 and therefore did not have material revenue or
assets.
<TABLE>
<CAPTION>
Segment Information:
June 30, 2000 Bitwise DJS All Other Totals
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from external customers $ 5,589,830 $9,699,764 $ 144 $15,289,738
Intersegment revenues 249,943 249,943
Interest and other revenue 313,084 87 313,171
Interest expense 292,600 7,394 299,994
Depreciation and amortization 358,478 48,858 124,867 532,203
Segment profit/(loss) (2,535,550) 231,357 (2,342,198) (4,646,391)
Segment assets 16,675,343 2,637,368 1,827,971 21,140,682
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) (3,061,728) 392,854 (2,668,874)
Segment assets 11,831,310 2,667,161 14,498,471
</TABLE>
21
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BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
16. SEGMENT REPORTING, CONTINUED
<TABLE>
<CAPTION>
RECONCILIATIONS JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Revenues
Total revenues for reportable segments $ 15,539,681 $17,211,445
Elimination of intersegment revenues (249,943) (116,680)
------------- -------------
Total consolidated revenues $ 15,289,738 $17,094,765
============= =============
Profit or (loss)
Total profit or loss for reportable segments $ (4,646,391) $(2,688,874)
Product development expenses (665,533) (248,801)
Loss on sale of subsidiary (249,568)
Elimination of intersegment profits
1,140 15,920
------------- -------------
Loss before income taxes $ (5,310,784) $(3,171,323)
============= =============
Assets
Total assets for reportable segments $ 21,140,682 $14,498,471
Elimination of intersegment profit (12,347) (13,487)
------------- -------------
Consolidated total assets $ 21,128,335 $14,484,984
============= =============
</TABLE>
17. PRIVATE EQUITY OFFERING
During fiscal 2000, 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.
22
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BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
17. PRIVATE EQUITY OFFERING, CONTINUED
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; 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 the
option of the Company 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.
23
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BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
17. PRIVATE EQUITY OFFERING, CONTINUED
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 $2,100,000,
approximately $1,900,000 after expenses. The Company utilized the
proceeds of the three offerings as follows: approximately $600,000 was
utilized to repay a portion of the Company's line of credit;
approximately $160,000 was utilized to make a past due interest payment
on the Company's outstanding 8% convertible notes, and the remainder was
reserved for working capital.
18. INTERNATIONAL JOINT VENTURE
In March 2000, Authentidate, Inc. formed a joint venture known as
Authentidate International Holdings, AG, with a German company, Windhorst
New Technologies, Agi.G., to market Authentidate in countries outside of
the Americas, Japan, Australia, New Zealand and India. Authentidate
retained the rights to market the service in these territories. The
Company invested DM 250,000, which is equal to approximately $124,000 and
also granted a license to the Authentidate technology to the joint
venture vehicle. Additionally, the Company issued 250,000 Common Stock
Purchase Warrants to Windhorst in connection with the joint venture. Fees
related to the joint venture agreement approximated $100,000. Windhorst
contributed DM 3,000,000 to the joint venture. Authentidate, Inc. owns
39% of the joint venture and Windhorst owns 60% of the joint venture. The
joint venture will be accounted for under the equity method of accounting
by Authentidate. In connection with this investment, Authentidate
recorded an excess of cost over the underlying equity in the net assets
in the amount of approximately $727,000, which will be amortized over a
period of 5 years.
24
<PAGE> 77
EXHIBIT INDEX
Item No. Description
-------- -----------
2.1* Agreement and Plan of Merger between Bitwise Designs, Inc. and
Electrograph Systems, Inc. dated February 7, 1994
2.2* Agreement and Plan of Merger between Bitwise Designs, Inc. and
Systems Solutions, Inc. dated April 29, 1994
3.1* Certificate of Incorporation of Bitwise Designs, Inc.-Delaware
(Exhibit 3.3.1 to Registration Statement on Form S-18, File
No. 33-46246-NY)
3.1.1* Certificate of Designation of Series B Preferred Stock
3.2* By-Laws (Exhibit 3.2 to Registration Statement on Form S-18,
File No. 33-46246-NY)
4.1* Form of Common Stock Certificate (Exhibit 4.1 to Registration
Statement on Form S-18, File No. 33-46246-NY)
4.2* Form of Series A Preferred Stock Certificate (Exhibit 4.2 to
Registration Statement on Form S-18, File No. 33-46246-NY)
4.3* Form of Warrant issued to Berkeley Securities Corp. (Exhibit
4.3 to Registration Statement on Form S-18, File No.
33-46246-NY)
4.4* Form of Warrant issued to certain individuals in April, 1992
(Exhibit 4.4 to Registration Statement on Form S-18, File No.
33-46246-NY)
4.5* Form of Series B Preferred Stock Certificates (Exhibit 4.5 to
the Registration Statement on form SB-2, File No. 33-76494)
4.6* Form of Warrant to be issued to Berkeley Securities
Corp.(Exhibit 4.6 to the Registration Statement on form SB-2,
File No. 33-76494)
4.7* Form of 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).
4.8* Terms of 8% Convertible Notes due August 11, 2002 (Exhibit 4.8
to the Company's Form 10- KSB dated June 30, 1997).
4.9* Terms of Warrants and Global Warrant expiring August 11, 2002
(Exhibit 4.9 to the Company's Form 10-KSB dated June 30,
1997).
4.10 Form of Warrant issued to Windhorst New Technologies and PFK
Development Gray II, LLCS
10.1* Lease agreement with Rotterdam Industrial Park, dated August
7, 1991 (Exhibit 10.1 to Registration Statement on Form S-18,
File No. 33-46246-NY)
10.1.1* Lease warrant waiver agreement (Exhibit 10.1.1 to Registration
Statement on Form S-18, File No. 33-46246-NY)
10.2* Lease with Siemens Credit Corporation for telephone system
dated November 25, 1991 (Exhibit 10.2 to Registration
Statement on Form S-18, File No. 33-46246-NY)
10.3* Lease agreement with Apple Commercial Credit for laser
printer, dated June 23, 1987 (Exhibit 10.3 to Registration
Statement on Form S-18, File No. 33-46246-NY)
10.4* Leases with Adirondack Leasing Associates, Ltd. (Exhibit 10.4
to Registration Statement on Form S-18, File No. 33-46246-NY)
10.5* Loan agreement with U.S. Small Business Administration and
Norstar Bank, dated April 4, 1991 (Exhibit 10.5 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.6* Loan agreement with Schenectady Economic Development
Corporation, dated August 7, 1991 (Exhibit 10.6 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.8* Employment agreement with John T. Botti, dated April, 1992
(Exhibit 10.8 to Registration Statement on Form S-18, File No.
33-46246-NY)
<PAGE> 78
10.9* Employment agreement with Ira C. Whitman, dated April, 1992
(Exhibit 10.9 to Registration Statement on Form S-18, File No.
33-46246-NY)
10.10* 1992 Employee stock option plan (Exhibit 10.10 to Registration
Statement on Form S-18, File No. 33-46246-NY)
10.11* 1992 Nonexecutive Directors stock option plan (Exhibit 10.11
to Registration Statement on Form S-18, File No. 33-46246-NY)
10.13* Loan agreement with Norstar Bank dated February 6, 1992
(Exhibit 10.13 to Registration Statement on Form S-18, File
No. 33-46246-NY)
10.13.1* Norstar Bank waiver agreement (Exhibit 10.13.1 to Registration
Statement on Form S-18, File No. 33-46246-NY)
10.14* Agreement with Prime Computer, Inc. (Exhibit 10.14 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.15* Agreement with Mentor Computer Graphics Ltd. (Exhibit 10.15 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.16* Agreement with Robert W. Schwartz, Inc. dated February 10,
1992 (Exhibit 10.16 to Registration Statement on Form S-18,
File No. 33-46246-NY)
10.17* Form of Financial Consulting Agreement with the Underwriter
(Exhibit 10.17 to the Registration Statement on form SB-2,
File No. 33-76494)
10.18* Financing Agreement by and among Maryland Industrial
Development Financing Authority, JED Associates, State
National Bank of Maryland, Electronic Marketing Associates,
Inc. (name was changed to System Solutions Technology, Inc.),
Trimarc Systems Incorporated and Intermec Mid- Atlantic
Corporation dated December 11, 1985 (Exhibit 10.18 to the
Registration Statement on form SB-2, File No. 33-76494)
10.19* Maryland Industrial Development Financing Authority Limited
Obligation Economic Development Revenue Bond (Exhibit 10.19 to
the Registration Statement on form SB-2, File No. 33-76494)
10.20* Cross-Collateral Security Agreement between NationsCredit
Corporation, Bitwise Designs, Electrograph Systems, Inc. and
System Solutions Technology, Inc. dated July 18, 1995.
10.21* Subcontract dated September 28, 1995 between PRC, Inc. and
System Solutions Technology, Inc.
10.22* Financial Consulting Agreement dated July 17, 1995 between the
Company and Whale Securities, Co.
10.23* Agreement and Plan of Merger by and among Bitwise Designs,
Inc., Bitwise DJS, Inc., certain individuals and DJS Marketing
Group, Inc. dated March 6, 1996 (Exhibit 2 to Form 8-K dated
March 22, 1996)
10.24* Form of Conversion Agency Agreement between the Company and
Banca del Gottardo dated as of August 8, 1997 (Exhibit 10.24
to Form 10-KSB dated June 30, 1997).
10.25* 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).
10.26* Stock Purchase and Merger Agreement dated April 7, 1998
between the Company USI and SST. (Exhibit A to Proxy Statement
dated May 8, 1998).
10.27 Employment Agreement between John Botti and the Company dated
January 1, 2000.
10.28 Employment Agreement between Nicholas Themelis and the Company
dated February 28, 2000.
10.29 Employment Agreement between Robert Van Naarden and
Authentidate.com, Inc. dated July 5, 2000.
10.30** Joint Venture Agreement between The Company,
Authentidate, Inc. and Windhorst New Technologies, AGi.G
10.31** Technology License Agreement between the Company.
Authentidate, Inc. and Windhorst New Technologies, AGi.G.
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of Registrant
23 Consent of PricewaterhouseCoopers, LLP
<PAGE> 79
27 Financial Data Schedule
___________
** Portions of exhibit omitted and request for confidential treatment filed with
the Commission.
