<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 2000
FILE NO. [333-91475]
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-[2/A
AMENDMENT NO. 2
TO]
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BITWISE DESIGNS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3571 14-1673067
(STATE OF INCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER
INDUSTRIAL CLASSIFICATION NO.) IDENTIFICATION NUMBER)
</TABLE>
------------------------
<TABLE>
<S> <C>
2165 TECHNOLOGY DRIVE JOHN T. BOTTI
SCHENECTADY, NEW YORK 12308 CHIEF EXECUTIVE OFFICER
(518)346-7799 BITWISE DESIGNS, INC.
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, 2165 TECHNOLOGY DRIVE
INCLUDING AREA CODE, OF COMPANY'S PRINCIPAL EXECUTIVE SCHENECTADY, NEW YORK 12308
OFFICES) (518)346-7799
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
------------------------
WITH COPIES TO:
VICTOR J. DIGIOIA, ESQ.
MICHAEL A. GOLDSTEIN, ESQ.
GOLDSTEIN & DIGIOIA, LLP
369 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
TELEPHONE (212) 599-3322
FACSIMILE (212) 557-0295
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SECTION 8(a) MAY
DETERMINE.
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<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED
AMOUNT MAXIMUM PROPOSED AMOUNT OF
TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION
TITLE OF SHARES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
<S> <C> <C> <C> <C>
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Common Stock, par value $.001.......... 1,552,750 $ 5.75 $ 8,928,312.50 $ 2,482.07
Common Stock underlying Privately
Issued Warrants, par value
$.001(2)............................. 777,000 $ 5.75 $ 4,467,750 $ 1,242.03
Common Stock underlying Series B
Preferred Stock, par value
$.001(3)............................. 666,667 $ 5.75 $ 3,833,335.25 $ 1,065.67
Common Stock underlying Series C
Warrants, par value $.001(4)......... 999,999 $ 5.75 $ 5,749,994.50 $ 1,598.50
Common Stock underlying Series B
Warrants, par value $.001(5)......... 1,520,000 $ 5.75 [$ 8,740,000] $ 2,429.72
[COMMON STOCK UNDERLYING PRIVATELY
ISSUED WARRANTS, PAR VALUE
$.001(2)............................. 370,000 $14.375(6) $ 5,318,750 $ 1,404.15]
- -------------------------------------------------------------------------------------------------------
Total.................................. [5,886,416 $43,688,142.50 $12,070.84]
- -------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Total estimated solely for the purpose of determining the registration fee.
Based upon the average high and low prices of Bitwise's Common Stock as
reported on the Nasdaq SmallCap Market on November 16, 1999 ($5.75).
(2) Represents Shares of Common Stock issuable upon exercise of outstanding
privately issued Common Stock purchase warrants held by certain security
holders. Pursuant to Rule 416 of the Securities Act of 1933, as amended (the
"Act"), there are being registered such additional number of shares of
Common Stock as may become issuable pursuant to the anti-dilution provisions
of the Warrants.
(3) Represents Shares of Common Stock issuable upon exercise of the conversion
of outstanding shares of Series B Preferred Stock held by certain security
holders. [BITWISE IS REGISTERING A MAXIMUM OF 666,667 SHARES ISSUABLE UPON
CONVERSION, BASED ON THE RATE OF THE ISSUE PRICE OF $25 PER SHARE DIVIDED BY
$1.875.] Pursuant to Rule 416 of the Securities Act of 1933, as amended (the
"Act"), there are being registered such additional number of shares of
Common Stock as may become issuable pursuant to the anti-dilution provisions
of the [SERIES B PREFERRED STOCK AS IT RELATES TO STOCK SPLITS,
RECAPITALIZATIONS AND THE LIKE].
(4) Represents Shares of Common Stock issuable upon exercise of outstanding
Series C Common Stock purchase warrants held by certain security holders.
Pursuant to Rule 416 of the Securities Act of 1933, as amended (the "Act"),
there are being registered such additional number of shares of Common Stock
as may become issuable pursuant to the anti-dilution provisions of the
Warrants.
(5) Represents Shares of Common Stock issuable upon exercise of outstanding
Series B Common Stock purchase warrants held by certain security holders.
Pursuant to Rule 416 of the Securities Act of 1933, as amended (the "Act"),
there are being registered such additional number of shares of Common Stock
as may become issuable pursuant to the anti-dilution provisions of the
Warrants.
(6) [TOTAL ESTIMATED SOLELY FOR THE PURPOSE OF DETERMINING THE REGISTRATION FEE.
BASED UPON] the average high and low prices of Bitwise's Common Stock as
reported on the Nasdaq SmallCap Market on [JANUARY 28, 2000 ($14.375)].
<PAGE> 3
PROSPECTUS
[5,886,416] SHARES
BITWISE DESIGNS, INC.
COMMON STOCK
We are registering (1) [3,646,999] shares of Bitwise's common stock, par
value $.001, which will be issued upon the exercise of (a) 1,520,000 Series B
Warrants; (b) 999,999 Series C Warrants; and (c) [1,127,000] privately issued
common stock purchase warrants; (2) 666,667 shares of our common stock which
will be issued upon the conversion of 50,000 shares of our Series B Preferred
Stock; and (3) the resale of 1,572,750 shares held by certain selling
shareholders.
We will not receive any of the proceeds from the sale of the Shares by the
Selling Security Holders.
Bitwise's common stock is traded in the over-the counter market and is
quoted on the Nasdaq SmallCap Market under the symbol "BTWS" and on the Pacific
Stock Exchange under the symbol "BTWS". On [JANUARY 28, 2000], the closing price
for the common stock as reported on Nasdaq was [$14.00].
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE [5] TO READ ABOUT CERTAIN FACTORS
YOU SHOULD CONSIDER BEFORE BUYING SHARES OF COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Shares of common stock, including the Shares underlying the Series B,
Series C and Private Warrants [AND] the Shares issuable upon the conversion of
the Series B Preferred Stock will be issued by Bitwise upon exercise or
conversion by the holders of the warrants or preferred stock, or the transferees
of the holders. The shares of common stock will be offered and sold from time to
time by the Selling Security Holders and their transferees in the
over-the-counter market, or otherwise, at prices and terms then prevailing or at
prices related to the then-current market price, or in [PRIVATELY] negotiated
transactions.
Prospectus dated , [2000]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.......................................... 1
THE OFFERING................................................ 3
SELECTED FINANCIAL DATA..................................... 4
RISK FACTORS................................................ 5
USE OF PROCEEDS............................................. [11]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. [12]
DESCRIPTION OF BUSINESS..................................... [20]
LEGAL PROCEEDINGS........................................... [25]
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS................................................... [25]
EXECUTIVE COMPENSATION...................................... [28]
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ [31]
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. [33]
SELLING SECURITY HOLDERS.................................... [34]
SELLING SECURITY HOLDERS AND TRANSACTIONS WITH SELLING
SECURITY HOLDERS.......................................... [34]
DESCRIPTION OF SECURITIES................................... [38]
EXPERTS..................................................... [42]
DISCLOSURE OF COMMISSION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES........................................... [42]
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.... [43]
PLAN OF DISTRIBUTION........................................ [44]
ADDITIONAL INFORMATION...................................... [44]
FORWARD LOOKING STATEMENTS.................................. [45]
</TABLE>
i
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and Bitwise's consolidated financial statements and the notes to
those statements appearing elsewhere in this prospectus.
BITWISE DESIGNS, INC.
OUR BUSINESS
Bitwise Designs, Inc., with our wholly-owned subsidiary, DJS Marketing
Group, Inc., designs, assembles and distributes document imaging systems,
computer systems and related peripheral equipment, components and accessories,
and network and Internet services. We also recently established a majority-owned
subsidiary named Authentidate.com, Inc. Authentidate will engage in a new
business line of providing end users with a service which will:
- accept and store electronic images from networks and personal computers
throughout the world and from different operating systems via the
Internet;
- indelibly date and time stamp all electronic images received via the
Internet;
- allow for confirmation of acceptance of all e-mails sent through the
system (notarized e-mail);
- produce confirmations of receipt of e-mail by third parties;
- certify transmission and receipt of electronic documents to facsimile
machines around the world;
- verify the authenticity of all captured digital images; and
- allow for a secure payment system, including use of credit cards.
Our Products and Services
In developing and marketing our products and services, along with DJS, we
primarily market the following different products and services:
- THE DOCSTAR DOCUMENT IMAGING SYSTEM -- enables a user to scan paper
documents onto an optical disk, hard disk drive or other storage medium.
The DocStar product line consists of a personal computer, proprietary
software and a scanner and can be utilized as a "stand-alone" system or
as part of a network installation;
- COMPUTER PRODUCTS AND INTEGRATION SERVICES -- we market personal
computers and peripheral computer products which we purchase from many
different suppliers. In addition, DJS, as a systems integrator,
configures various computer hardware and peripheral products such as
software together, to satisfy a customer's individual needs.
- NETWORK SERVICES -- DJS also designs and installs network systems which
involves network software being installed on a fileserver computer with
less powerful computers sharing information from the fileserver.
Applications that the network system provides include E-mail, accounting
systems, word processing, communication and any other applications that
require the sharing of information.
- INTERNET/INTRANET DEVELOPMENT SERVICES -- Through DJS, we provide our
customers with the ability to advertise products, provide news and stock
market products, provide educational data bases, as well as one on one
and Group Communications through the Internet or intranet. Our services
include web page installation.
- AUTHENTIDATE.COM -- Through Authentidate, we will provide a service
allowing customers to time and date stamp all electronic images to verify
authenticity. The service will be sold over the Internet.
1
<PAGE> 6
Our Approach to the Market
In January 1996, we introduced, on a national level, the DocStar system. We
believe that a broad spectrum of businesses and governmental agencies experience
the problem of storage, management and security of paper documents. The DocStar
product line is intended to provide a cost effective method of reducing the
space necessary to store documents while granting a user the ability to
instantly retrieve documents.
DJS markets its products and services to a variety of customers, including
corporations, schools, government agencies, manufacturers and distributors. In
addition to the products and services noted above, DJS also provides accounting
solutions, consultation, document management and video conferencing services.
DJS also services the products it sells by employing factory trained computer
technicians and network engineers.
We anticipate that Authentidate will commence offering services through its
Authentidate.Com Internet site within the next 30 to 60 days. We intend to
market the Authentidate services through traditional print and media advertising
and banner advertising and links on other Internet provider home pages. To date,
Authentidate's operations have been limited to developing the technology for its
services and home page [AND NEGOTIATING THE TERMS AND CONDITIONS OF MARKETING
AND OPERATING THE AUTHENTIDATE.COM SITE WITH POTENTIAL JOINT VENTURERS].
Our Offices
We were initially organized in August 1985 and reincorporated under the
laws of the state of Delaware in May 1992. Our executive offices are located at
2165 Technology Drive, Schenectady, New York 12308, our telephone number is
(518) 346-7799, and our Internet address is www.docstar.com.
2
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Selling Security
Holders............................................ [5,886,416]
Common Stock Outstanding Prior to Offering(1)........ [12,149,154]
Common Stock Outstanding After the Offering(2)....... [18,035,570]
Use of Proceeds(3)................................... Bitwise will not receive any proceeds from the
sales of the Selling Shareholders. We
anticipate that proceeds received from the
exercise of any of privately issued Warrants
will be used for working general corporate
purposes. Please see "Use of Proceeds."
Nasdaq Smallcap Market Symbol (Common Stock):........ "BTWS"
Pacific Stock Exchange Symbol (Common Stock):........ "BTWS"
</TABLE>
- ---------------
(1) Based on the number of shares actually outstanding as of [JANUARY 28, 2000].
Unless otherwise specifically stated, information throughout this prospectus
excludes as of [JANUARY 31, 2000]:
- 3,000,000 shares of Common Stock reserved for issuance under our 1992
Employee Stock Option Plan, of which [1,802,225] shares have been
reserved for currently outstanding options and [1,197,775] shares are
available for future issuances, and
- [150,000] shares of Common Stock reserved for currently outstanding
options under our Directors Plan.
(2) This assumes the exercise of all of the Series B Warrants, Series C Warrants
and Private Warrants for which underlying shares are being registered and
the conversion of all shares of Series B Preferred Stock for which the
Conversion Shares are hereby being registered.
(3) We will receive up to approximately [$7,587,961] in proceeds upon the
exercise of all of the Series B Warrants, Series C Warrants (within 30 days
of the effective date of this registration statement) and Private Warrants.
We plan to use all such proceeds for working capital and general corporate
purposes. Please see "Use of Proceeds."
3
<PAGE> 8
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements, including the related notes, and
"Managements's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales........................................... $17,094,765 $33,755,625 $53,109,469
Gross Profit........................................ 5,615,468 8,092,566 10,006,736
Net (Loss)/Net Income............................... (3,166,488) (5,464,059) (2,143,159)
Basic and Diluted Net(Loss)/Net Income Per Common
Share............................................. (0.43) (0.74) (0.30)
BALANCE SHEET DATA:
Current Assets...................................... 9,857,681 12,138,995 13,622,171
Current Liabilities................................. 6,225,966 4,789,896 7,730,498
Working Capital..................................... 3,631,715 7,349,099 5,891,673
Total Assets........................................ 14,484,984 14,708,454 18,924,765
Total Long Term Liabilities......................... 5,327,901(1) 3,975,000(2) 1,297
Stockholders' Equity................................ 3,335,705 6,478,226 11,192,970
</TABLE>
- ---------------
(1) Long-term liabilities excluding discount of $404,588.
(2) Long-term liabilities excluding discount of $534,668.
4
<PAGE> 9
RISK FACTORS
The securities offered hereby are speculative in nature and involve a high
degree of risk, including, but not limited to, the risk factors described below.
Each prospective investor should carefully consider the following risk factors
before making an investment decision.
IF WE CONTINUE TO FACE UNCERTAINTIES IN MARKETING THE DOCSTAR SYSTEM WE MAY
CONTINUE TO LOSE MONEY.
We face uncertainties in marketing the DocStar system and are losing money.
We incurred losses of $3,166,488; $5,464,059 and $2,143,159 for the fiscal years
ended June 30, 1999, 1998 and 1997[, RESPECTIVELY]. Furthermore, for the last
three years we have been expanding our marketing and sales efforts of the
DocStar line of document imaging systems which has led to increased costs
associated with the product line. We have also been investing in new
technologies, namely Authentidate.com. We will continue to incur these costs in
the future as we attempt to increase market awareness and sales of DocStar and
Authentidate.com. Our prospects should be considered in light of the
difficulties frequently encountered in connection with the establishment of a
new business line and the competitive environment in which we operate. There can
be no assurance that we will be able to achieve profitable operations in future
operating periods.
WE HAVE LIMITED WORKING CAPITAL AND MAY NEED ADDITIONAL FUNDS TO FINANCE FUTURE
OPERATION.
Our capital requirements have been and will continue to be significant. We
have been substantially dependent upon public offerings and private placements
of our securities and on short-term and long-term loans from lending
institutions to fund such requirements. We are expending significant amounts of
capital to promote and market DocStar and due to these expenditures, have
incurred significant losses to date. [AS OF DECEMBER 31, 1999 WE HAD $6,536,138
OF AVAILABLE CASH AND CASH EQUIVALENTS.] In the future, we will need additional
funds from loans and/or the sale of equity securities. No assurance can be given
that such funds will be available or, if available, will be on commercially
reasonable terms satisfactory to us. In the event such funds are not available,
we may be forced to curtail operations, or, in an extreme situation, cease
operations.
SINCE WE HAVE PREVIOUSLY GRANTED SECURITY INTERESTS ON MOST OF OUR ASSETS, OUR
CREDITORS MAY BE ABLE TO FORECLOSE ON OUR ASSETS.
We have granted security interests with respect to substantially all of our
assets to secure certain of our indebtedness, which will continue following this
offering. In the event of a default by us on our secured obligations, a secured
creditor could declare our indebtedness to be immediately due and payable and
foreclose on the assets securing the defaulted indebtedness. Moreover, to the
extent that all of our assets continue to be pledged to secure outstanding
indebtedness, such assets will not be available to secure additional
indebtedness. Our line of credit for $1,500,000 was recently terminated by our
lender as a result of our not being in compliance with all of its loan
covenants. On June 30, 1999 the balance of the line of credit was approximately
$1,300,000. On October 1, 1999, we entered into an agreement with the lender to
extend repayment of the outstanding balance until September 30, 2000. We were
required to make a partial payment to the lender of $600,000 on October 4, 1999
for the repayment of the remaining balance from the proceeds of our recently
completed private offering. The remaining balance is being paid in weekly
installments over one year with interest at prime plus 4%. Our President, John
Botti, also agreed to guarantee repayment of the loan balance. The line of
credit is secured by our account receivables and inventory, and does not include
our new office building which is secured by a mortgage. We are attempting to
locate a new lender for our inventory financing. There can be no assurance that
we will be successful in its efforts to obtain alternative inventory financing,
and the failure to obtain inventory financing may have an adverse material
effect upon our operations.
OUR PRODUCTS MAY NOT BE ACCEPTED BY OUR CONSUMERS WHICH WOULD SERIOUSLY HARM OUR
OPERATIONS.
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
5
<PAGE> 10
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.com product line
is a brand new product line with no sales to date. We expect to commence sales
in this product line in the next 30-60 days over the Internet. Moreover, there
can be no assurance that these products will ever achieve widespread market
acceptance or increased sales or that the sale of such products will be
profitable.
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 (1) have a patent pending for the
innovative technology underlying the Authentidate business plan that can verify
the authenticity of digital images by employing a secure clock to stamp the date
and time on each image captured and (2) have registered as trademarks the logo
"BitWise Designs," "DocStar" and "Authentidate". We rely on confidentiality
agreements with our key employees to the extent we deem it to be necessary. We
further intend to file a patent application for any new products we may develop,
to the extent any technology included in such products is patentable, if any.
There can be no assurance that any patents in fact, will be issued or that such
patents will be effective to protect our products from duplication by other
manufacturers. In addition, there can be no assurance that any patents that may
be issued will be effective to protect our products from duplication by other
developers.
Other companies operating within our business segment may independently
develop substantially equivalent proprietary information or otherwise obtain
access to the our know-how. In addition, there can be no assurance that we will
be able to afford the expense of any litigation which may be necessary to
enforce its rights under any patent. Although we believe that the products we
sell do not and will not infringe upon the patents or violate the proprietary
rights of others, it is possible that such infringement or violation has or may
occur.
In the event that products we sell are deemed to infringe upon the patents
or proprietary rights of others, we could be required to modify our products or
obtain a license for the manufacture and/or sale of such products. There can be
no assurance that, in such an event, we would be able to do so in a timely
manner, upon acceptable terms and conditions, or at all, and the failure to do
any of the foregoing could have a material adverse effect upon our business.
Moreover, there can be no assurance that we will have the financial or other
resources necessary to enforce or defend a patent infringement or proprietary
rights violation action. In addition, if our products or proposed products are
deemed to infringe upon the patents or proprietary rights of
6
<PAGE> 11
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 OUR PRODUCTS ARE NOT COMPETITIVE, OUR BUSINESS WILL SUFFER.
Along with our subsidiaries, we are engaged in the highly competitive
businesses of manufacturing and distributing document imaging systems, computer
hardware and software as well as technical support services for such products.
The document imaging business is competitive and we compete with major
manufacturers such as Sharp, Panasonic and Mita. All of these companies have
substantially more experience, greater sales, as well as greater financial and
distribution resources than do we. We also compete with many independent imaging
software companies, smaller than those mentioned, many of which also have
substantially greater sales, financial resources and experience than us. The
most significant aspects of competition are the quality of products, including
advanced capabilities, and price. There can be no assurance that we can
effectively continue to compete in the future.
Our subsidiary, DJS, is engaged in the highly competitive business of
systems integration, computer services and computer reselling. DJS competes with
many small and local companies which provide similar technical services to those
offered by DJS. Additionally, DJS must compete with other computer resellers,
many of whom have greater financial and technical resources. There can be no
assurance that DJS will be able to compete successfully with these competitors.
IF WE LOSE OUR PRESIDENT, OUR BUSINESS MAY 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. We have entered into a
five-year employment agreement with Mr. Botti expiring in June 2000. We haves
obtained, for our benefit, "key man" life insurance in the amount of $1,000,000
on Mr. Botti's life.
IF WE CANNOT INTEGRATE THE OPERATIONS FROM OUR PREVIOUS AND FUTURE ACQUISITIONS,
OUR BUSINESS AND OPERATION WILL BE HARMED.
As part of our business strategy, we have completed and expect to enter
into additional business combinations and acquisitions. Acquisition transactions
are accompanied by a number of risks, including, among others:
- The difficulty of assimilating the operations and personnel of the
acquired companies;
- The potential disruption of our ongoing business;
- The inability of management to maximize our financial and strategic
position through the successful incorporation of acquired technology with
our products;
- Expenses associated with the transactions;
- Additional expenses associated with amortization of intangible assets;
- The difficulty of maintaining uniform standards, controls, procedures and
policies;
7
<PAGE> 12
- The impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
- The potential unknown liabilities associated with acquired businesses.
Our failure to adequately address these issues could have a material
adverse effect on our business, results of operations and financial condition.
We may at times become involved in discussions with potential acquisition
candidates. Accordingly, we may use a portion of the proceeds of this offering
which may be realized upon the exercise of the Warrants in connection with the
acquisitions of compatible product lines and businesses. However, there can be
no assurance that we will identify and/or consummate an acquisition, or that
such acquisitions, if completed, will be profitable. Further, there can be no
assurance that our cash flow, will be sufficient to finance any acquisitions.
In addition, should we consummate an acquisition, such acquisition could
have an adverse affect on our liquidity and earnings. We are currently not
considering any acquisition and we cannot give any assurances that any business
acquisition opportunities may be obtained in the future or if obtained, may be
negotiated on terms favorable to us.
SINCE WE HAVE NOT PAID DIVIDENDS ON OUR COMMON STOCK, YOU MAY NOT RECEIVE INCOME
FROM AN INVESTMENT IN US.
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.
IF OUR COMMON STOCK IS DELISTED FROM NASDAQ, LIQUIDITY IN OUR COMMON STOCK MAY
BE AFFECTED.
Our Common Stock is listed for trading on the Nasdaq SmallCap Market. In
order to continue to be listed on Nasdaq, however, we must meet certain
criteria[,] including one of the following:
- maintaining $2,000,000 in net tangible assets or
- having a market capitalization of at least $35,000,000 or
- having net income of $500,000.
In addition, the minimum bid price of our Common Stock must be at least $1.00
per share and the market value of the public float must be at least $1,000,000.
[ON JANUARY 31, 2000, OUR BID PRICE WAS $13.50. THE DILUTION TO OUR SHAREHOLDERS
WHICH COULD BE CAUSED BY THE WIDESPREAD CONVERSION OF THE SERIES B PREFERRED
STOCK COULD CAUSE THE PER SHARE VALUE OF OUR COMMON STOCK TO DROP BELOW THE
MINIMUM BID OF $1.00 REQUIRED FOR CONTINUED LISTING.]
As of June 30, 1999, we had net tangible assets of $1,994,000 and did not
satisfy the requirements for market capitalization or net income. As of
[DECEMBER 31], 1999, we had net tangible assets of approximately [$17,809,148].
The failure to meet Nasdaq maintenance criteria may result in the delisting of
the our Common Stock from Nasdaq, and trading, if any, in our securities would
thereafter be conducted in the non-Nasdaq over-the-counter market. As a result
of such delisting, an investor could find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of, our securities.
Although we anticipate that our Common Stock will continue to be listed for
trading on Nasdaq, if the Common Stock were to become delisted from trading on
Nasdaq and the trading price of the Common Stock were to fall below $5.00 per
share on the date the Common Stock was delisted, trading in such securities
would also be subject to the requirements of certain rules promulgated under the
Exchange Act, which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any non-Nasdaq equity security that has a market price of less than
$5.00 per share, subject to certain exceptions). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales
8
<PAGE> 13
practice requirements on broker-dealers who sell penny stocks to persons other
than established customers and accredited investors (generally institutions).
For these types of transactions, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. The additional burdens imposed
upon broker-dealers by such requirements may discourage broker-dealers from
effecting transactions in our securities, which could severely limit the market
price and liquidity of such securities and the ability of purchasers to sell
their securities in the secondary market.
WE MAY BE HELD IN VIOLATION OF CERTAIN OF NASDAQ'S CORPORATE GOVERNANCE RULES
AND MAY BE DELISTED, WHICH WOULD AFFECT THE LIQUIDITY OF OUR COMMON STOCK.
We are subject to Nasdaq's corporate governance rules, including Stock
Market Rule 4310(c)(25)(i)(b), which requires the prior approval of stockholders
of a private placement of more than 20% of the outstanding shares. Because our
Series B Preferred Stock was issued without prior shareholder approval and may
be convertible into more than 20% of our outstanding shares of common stock
after October 5, 2002, we may be in violation of this rule, and may be delisted
from the Nasdaq Small Cap Market. Such delisting could adversely affect the
market price and liquidity of our common stock.
[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.
THE FOLLOWING CHART PRESENTS THE MAXIMUM NUMBER OF COMMON SHARES ISSUABLE
ON CONVERSION OF THE SERIES B PREFERRED STOCK BASED ON DIFFERENT CONVERSION
RATES.] WHILE WE EXPECT TO ISSUE A MAXIMUM OF 666,667 SHARES OF COMMON STOCK
UPON CONVERSION OF THE SERIES B PREFERRED STOCK DURING THE FIRST THREE YEARS
FOLLOWING THE PRIVATE PLACEMENT, WE COULD ISSUE A SIGNIFICANTLY GREATER NUMBER
OF COMMON SHARES UPON CONVERSION OF THE SERIES B PREFERRED STOCK AFTER OCTOBER
5, 2002, WHEN THE FLOATING CONVERSION RATE IS TRIGGERED.
<TABLE>
<CAPTION>
MAXIMUM NUMBER
OF PERCENTAGE OF TOTAL
SHARES OF COMMON SHARES OF COMMON
[CONVERSION PERIOD CONVERSION RATE STOCK ISSUABLE STOCK OUTSTANDING
------------------ --------------- ---------------- -------------------
<S> <C> <C> <C>
10/5/1999 - 10/5/2000 N/A 0 0
10/6/2000 - 10/5/2002 $1.875 666,667 4.9%
10/6/2002 - $1.875 666,667 4.9%
10/6/2002 - $1.50 833,333 6.1%
10/6/2002 - $1.00 1,250,000 8.9%
10/6/2002 - $0.75 1,666,667 11.5%]
</TABLE>
[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 COVERT
9
<PAGE> 14
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.]
WE HAVE SOLD RESTRICTED SHARES WHICH MAY DEPRESS OUR STOCK PRICE WHEN IT IS
SELLABLE UNDER RULE 144.
Approximately 5,923,472 shares of Common Stock currently outstanding,
including the 4,891,666 Shares being registered for resale pursuant to this
Prospectus, may be deemed "restricted securities" as that term is defined under
the Securities Act of 1933 (the "Act"), and in the future, may be sold pursuant
to a registration under the Act, in compliance with Rule 144 under the Act, or
pursuant to another exemption therefrom. Rule 144 provides, that, in general, a
person holding restricted securities for a period of one year may, every three
months thereafter, sell in brokerage transactions an amount of shares which does
not exceed the greater of one percent of our then outstanding Common Stock or
the average weekly trading volume of the Common Stock during the four calendar
weeks prior to such sale. Rule 144 also permits, under certain circumstances,
the sale of shares without any quantity limitations by a person who is not an
affiliate of ours and was not an affiliate at any time during the 90 day period
prior to sale and who has satisfied a two year holding period. Sales of our
Common Stock by certain present stockholders under Rule 144 may, in the future,
have a depressive effect on the market price of our securities. In addition, the
sale of shares by officers and directors and other affiliated shareholders, may
also have a depressive effect on the market for our securities.
OUR OUTSTANDING OPTIONS AND WARRANTS MAY DEPRESS OUR STOCK PRICE.
As of [JANUARY 31, 2000], there were outstanding immediately exercisable
stock options to purchase an aggregate of [1,802,225] shares of Common Stock at
exercise prices ranging from $0.34 to [$7.50] per share, and outstanding
immediately exercisable warrants to purchase an aggregate of [4,328,850] shares
of Common Stock at exercise prices ranging from $.69 to [$11.25] per share,
including the Shares underlying the Series B Warrants and the Private Warrants
being registered for resale pursuant to this Prospectus. In addition, there are
outstanding 50,000 shares of our Series B Preferred Stock, which is convertible
into an aggregate of 666,667 Shares of Common Stock. These Conversion Shares are
also being registered for resale pursuant to this Prospectus. To the extent that
outstanding stock options and warrants are exercised or the Series B Preferred
Stock is converted, dilution to our shareholders will occur. Moreover, the terms
upon which we will be able to obtain additional equity capital may be adversely
affected, since the holders of the outstanding options and warrants can be
expected to exercise or convert them at a time when we would, in all likelihood,
be able to obtain any needed capital on terms more favorable to us than the
exercise and conversion terms provided by the outstanding options, warrants and
preferred stock.
IF WE CANNOT OFFSET FUTURE TAXABLE INCOME OUR TAX LIABILITIES WILL INCREASE.
At June 30, 1999, [THE DATE OF OUR MOST RECENT FISCAL YEAR END,] we had net
operating loss carryforwards ("NOLS") for federal income tax purposes of
approximately $13,000,000 available to offset future taxable income. Under
Section 382 of the Internal Revenue Code of 1986, as amended, utilization of
prior NOLS is limited after an ownership change, as defined in Section 382, to
an annual amount equal to the value of the corporation's outstanding stock
immediately before the date of the ownership change multiplied by the federal
long-term exempt tax rate. Use of our NOLS could also be limited as a result of
grants of stock options under stock option plans and other events. In the event
we achieve profitable operations, any significant limitation on the utilization
of NOLS would have the effect of increasing our current tax liability.
10
<PAGE> 15
SINCE THE HOLDERS OF OUR OUTSTANDING SERIES A PREFERRED STOCK CONTROL OUR BOARD
OF DIRECTORS, OTHER SHAREHOLDERS MAY NOT BE ABLE TO INFLUENCE OUR DIRECTORS.
Our Certificate of Incorporation authorizes our Board of Directors to issue
up to 5,000,000 shares of Preferred Stock, from time to time, in one or more
series. The Board of Directors is authorized, without further approval of the
stockholders, to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, and any other
rights, preferences, privileges and restrictions applicable to each new series
of Preferred Stock. We previously established 200 shares of Series A Preferred
Stock which are owned by John Botti and Ira Whitman, our founders and officers.
The Series A Preferred Stock entitles the holders to elect a majority of the
Board of Directors. The existence of such stock could adversely affect the
voting power of the holders of Common Stock and, under certain circumstances,
make it more difficult for a third party to gain control of us, discourage bids
for the Common Stock at a premium, or otherwise adversely affect the market
price of the Common Stock.
USE OF PROCEEDS
Some of the Shares being registered will be acquired from us upon the
exercise of currently outstanding Series B, Series C and Private Warrants. We
would receive approximately [$7,587,961] in proceeds if all of the Series B,
Series C (if exercised within 30 days from the effective date of this
registration statement) and Private Warrants are exercised. We plan to use all
proceeds generated from the exercise of warrants for working capital and general
corporate purposes. We will receive none of the proceeds from the sale of the
Shares.
11
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following analysis of our results of operations and financial condition
should be read in conjunction with our Financial Statements, including the notes
thereto, contained elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Fiscal Year 1999 Compared to Fiscal Year 1998
We realized a consolidated net loss of $3,166,488 ($.43 per share) compared
to a consolidated net loss of $5,464,059 ($.74 per share) for the fiscal years
ended June 30, 1999 and 1998, respectively. Consolidated net sales totaled
$17,094,765 and $33,755,625 for the fiscal years ended June 30, 1999 and 1998,
respectively. During the fourth quarter of 1999, we recorded an adjustment
increasing the net loss for sales made with the right of return by approximately
$1,350,000 for which income will not be recognized until sale of the product by
the customer. Additionally, a reserve of approximately $186,000 was recorded for
claims arising from the sale of SST.
The consolidated sales decrease is due to the sale of one of our
subsidiaries, System Solutions Technology, Inc. in June 1998 and reductions in
DocStar sales. SST had sales of $13,915,029 for the fiscal year ended June 30,
1998. Bitwise sales of the DocStar product line were $7,674,451 and $9,002,203
for fiscal years ended June 30, 1999 and 1998, respectively. In addition, we had
returnable sales of $3,829,052 which were not recognized as sales. These
returnable sales will be recognized when the customers accept the sales as
final. Sales by our subsidiary DJS Marketing Group, Inc., were $9,536,994 and
$11,219,497 for the fiscal years ended June 30, 1999 and 1998, respectively.
Our net loss improvement is due to a combination of a reduction in Bitwise
operating costs and increase in profits from DJS. DJS realized a reduction in
sales, however profits increased due to an increase in gross profit margins as
DJS shifted its business from hardware sales to a business model that produced
more service revenue such as network and Internet services in addition to
hardware sales. DJS was also able to reduce operating costs.
Consolidated gross profit for the fiscal years ended June 30, 1999 and 1998
was $5,615,468 and $8,092,566, respectively. This reduction is mainly due to the
sale of SST in June 1998. The consolidated profit margin was 32.8% and 24.0% for
the fiscal years ended June 30, 1999 and 1998, respectively. Gross profit margin
is defined as gross profit as a percentage of sales. The increase in gross
profit margin is due to the sale of SST. Bitwise and its DocStar product has
significantly higher gross profit margins than products and services provided by
both SST and DJS.
Selling, general and administrative expenses (S,G&A) consist of all our
other expenses except product development costs and interest. S,G&A expenses
amounted to $7,765,234 and $12,251,515 for the fiscal years ended June 30, 1999
and 1998, respectively. S,G&A expenses decreased as a result of the sale of SST,
which incurred S,G&A expenses of $2,891,409 for the fiscal year ended June 30,
1998. The remainder of the decrease is due to cost cutting by Bitwise and DJS.
As a percentage of sales, S,G&A costs increased from 36.3% in 1998 to 45.4%
in 1999. This increase is due to the sale of SST. Bitwise historically has had
higher S,G&A expenses than any of the subsidiary companies because of its
organization structure which includes sales, training and service personnel
stationed around the country to serve the national dealer network. This has
resulted in high payroll and travel and living expenses. In addition, Bitwise
incurs significant advertising and marketing costs to market DocStar nationally.
The subsidiaries typically sell in a localized area and only employ personnel in
their local region and incur minimal advertising and marketing costs.
Interest expense totaled $630,396 and $939,595 for fiscal years ended June
30, 1999 and 1998, respectively. The decrease is due to the sale of SST which
incurred $202,198 of interest expense during the
12
<PAGE> 17
fiscal year ended June 30, 1998. The decrease was also due to lower borrowing
levels for DJS offset by higher borrowing levels for Bitwise. Interest rates
decreased during the fiscal year ended June 30, 1999 compared to the prior year.
Product development expenses, excluding capitalized costs and including
amortization of capitalized costs relate to software development for the DocStar
product line incurred by Bitwise. These costs increased from $230,652 to
$248,801 for the fiscal years ended June 30, 1998 and 1999, respectively.
Bitwise has a policy of capitalizing qualified software development costs and
amortizing those costs over three years as product development expense.
Fiscal Year 1998 Compared to Fiscal Year 1997
We realized a consolidated net loss of $5,464,059, $.74 per share compared
to $2,143,159, $.30 per share for the years ended June 30, 1998 and 1997,
respectively. Consolidated net sales totaled $33,755,625 and $53,109,469 for the
years ended June 30, 1998 and 1997, respectively. During the fourth quarter, we
recognized some unusual expenses, including the loss on the sale of SST
($256,000), an increase in the reserves for obsolete inventory ($588,000), and
an increase in the allowance for bad debts ($170,000). In addition, net sales
for the fourth quarter 1998 aggregated $5,708,000, approximately $6,600,000
below net sales for the fourth quarter 1997.
The sales decrease is due to the sale of ESI in April 1997. During the
fiscal year ended June 30, 1997 ESI had sales of $17,156,187. The sales decrease
is offset somewhat by the growth in our DocStar product line. DocStar sales
totaled $9,002,203 for the year ended June 30, 1998 compared to $7,792,125 for
the prior year.
Gross profit for the fiscal year ended June 30,1998 was $8,092,566 compared
to $10,006,736 for the prior year. The gross profit margin was 24.0% and 18.8%
for years ended June 30, 1998 and 1997, respectively. The gross profit margin
increased in fiscal 1998 compared to the prior year due to the growth of our
DocStar product line which has significantly higher margins than our other
product lines. Additionally, the sale of ESI resulted in a lower gross profit.
Selling, general and administrative expenses ("S,G&A") consist of all our
other expenses except product development costs and interest. S,G&A expenses
amounted to $12,251,515 and $11,834,173 for the years ended June 30, 1998 and
1997, respectively. S,G&A expenses increased mainly due to increased selling and
marketing expenses for the DocStar product line. The increase was offset
somewhat by the sale of ESI. There were also increases in S,G&A expenses in our
other divisions as well.
As a percentage of sales, S,G&A costs increased from 22.3% to 36.3% from
fiscal 1997 to fiscal 1998. Our DocStar product line has not yet achieved
sufficient sales volume to cover all S,G&A expenses and thereby generate a
profit.
Interest expenses totaled $939,595 and $444,918 for the years ended June
30, 1998 and 1997, respectively. The increase in interest costs is due to the
issuance of $4 million of convertible notes in August 1997. The increase is also
due to increased borrowing on our lines of credit during the year. Interest
rates increased slightly compared to the prior year.
Product development expenses relate primarily to software development of
our DocStar product line and increased from $176,539 to $230,652 for the year
ended June 30, 1998 compared to the prior year. We have a policy of capitalizing
software development costs and amortizing those costs over three years as
product development expense.
[THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
WE REALIZED A CONSOLIDATED NET LOSS OF $1,107,490 ($.15 PER SHARE) FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO A CONSOLIDATED NET LOSS OF
$348,211 ($.05 PER SHARE) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998. WE HAD
CONSOLIDATED NET SALES OF $3,071,766 AND $5,415,527 FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998, RESPECTIVELY.
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<PAGE> 18
THE CONSOLIDATED SALES DECREASE FOR THE QUARTER ENDED SEPTEMBER 30, 1999 IS
PRIMARILY DUE TO A DECLINE IN SALES OF DOCSTAR DOCUMENT IMAGING SYSTEMS DUE TO
WEAK DEALER DEMAND DURING THE QUARTER.
CONSOLIDATED GROSS PROFIT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998 WAS $589,443 AND $1,898,224, RESPECTIVELY. THIS REDUCTION IS DUE TO THE
DECREASE IN SALES OF DOCUMENT IMAGING SYSTEMS. THE CONSOLIDATED PROFIT MARGIN
WAS 19.2% AND 35.1% FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998,
RESPECTIVELY. GROSS PROFIT MARGIN IS DEFINED AS GROSS PROFIT AS A PERCENTAGE OF
SALES. THE DECREASE IN GROSS PROFIT MARGIN IS DUE THE REDUCTION IN DOCSTAR SALES
BECAUSE FIXED OVERHEAD COSTS REPRESENT A LARGER PERCENTAGE OF SALES WHEN SALES
DECLINE.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES CONSIST OF ALL OF OUR OTHER
EXPENSES EXCEPT PRODUCT DEVELOPMENT COSTS AND INTEREST. THESE EXPENSES AMOUNTED
TO $1,437,510 AND $2,086,754 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998, RESPECTIVELY. THESE EXPENSES DECLINED AS A RESULT OF COST CUTTING ON
DOCSTAR, WHICH WAS OFFSET SOMEWHAT BY SPENDING ON AUTHENTIDATE.COM, INC., OUR
NEW INTERNET COMPANY.
AS A PERCENTAGE OF SALES, SELLING, GENERAL AND ADMINISTRATIVE COSTS
INCREASED FROM 38.5% FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 TO 46.8% FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 1999. THIS INCREASE IS DUE TO THE FACT THAT
SALES DECLINED AND DURING THE QUARTER THESE EXPENSES REPRESENTED A LARGER
PERCENTAGE OF A SMALLER SALES AMOUNT.
INTEREST EXPENSE INCREASED FROM $150,910 FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 TO $192,979 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999.
THE INCREASE WAS DUE TO HIGHER BORROWING LEVELS. INTEREST RATES DECREASED
SLIGHTLY DURING THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE SAME
PERIOD LAST YEAR.
PRODUCT DEVELOPMENT EXPENSES, EXCLUDING CAPITALIZED COSTS AND INCLUDING
AMORTIZATION OF CAPITALIZED COSTS, RELATE TO SOFTWARE DEVELOPMENT FOR THE
DOCSTAR AND AUTHENTIDATE PRODUCT LINES INCURRED BY BITWISE. THESE COSTS REMAINED
ABOUT THE SAME AT $64,547 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND
$68,278 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998. WE HAVE A POLICY OF
CAPITALIZING QUALIFIED SOFTWARE DEVELOPMENT COSTS AND AMORTIZING THOSE COSTS
OVER THREE YEARS AS PRODUCT DEVELOPMENT EXPENSE.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
WE REALIZED A CONSOLIDATED NET LOSS OF $348,211 ($.05 PER SHARE) AND
$512,556 ($.07 PER SHARE) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997, RESPECTIVELY. THE COMPANY HAD CONSOLIDATED NET SALES OF $5,415,527 AND
$9,368,855 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997, RESPECTIVELY.
THE CONSOLIDATED SALES DECREASE IS DUE TO THE SALE OF ONE OF OUR
SUBSIDIARIES, SYSTEM SOLUTIONS TECHNOLOGY, INC. IN JUNE 1998. SYSTEM SOLUTIONS
HAD SALES OF $4,363,597 FOR THE QUARTER ENDED SEPTEMBER 30, 1997. OUR REMAINING
BUSINESSES EXPERIENCED A COMBINED INCREASE IN SALES OF $410,269 FOR THE QUARTER
ENDED SEPTEMBER 30, 1998 COMPARED TO THE PRIOR YEAR. OUR SALES OF THE DOCSTAR
PRODUCT LINE EXPERIENCED A 34% INCREASE IN SALES FROM $2,220,156 FOR THE QUARTER
ENDED SEPTEMBER 30, 1997 TO $2,965,970 FOR THE QUARTER ENDED SEPTEMBER 30, 1998.
FOR OUR SUBSIDIARY DJS MARKETING GROUP, INC., SALES DECREASED FROM $2,785,102
FOR THE QUARTER ENDED SEPTEMBER 30, 1997 TO $2,449,557 FOR THE QUARTER ENDED
SEPTEMBER 30, 1998.
THE CURRENT QUARTER LOSS IS DUE TO LOSSES INCURRED BY BITWISE AND THE
DOCSTAR PRODUCT LINE. DJS HOWEVER, REALIZED A PRE-TAX PROFIT OF $75,520 FOR THE
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO $23,735 FOR THE SAME PERIOD LAST
YEAR. WE INCURRED A PRE-TAX LOSS OF $423,231 FOR THE QUARTER ENDED SEPTEMBER 30,
1998 COMPARED TO A PRE-TAX LOSS OF $760,131 FOR THE SAME PERIOD LAST YEAR. THE
DOCSTAR PRODUCT LINE HAS NOT YET ACHIEVED SUFFICIENT SALES VOLUME TO GENERATE A
PROFIT. WE EXPECT TO INCUR ADDITIONAL LOSSES IN THE SHORT-TERM UNTIL WE ACHIEVE
A HIGHER MARKET ACCEPTANCE RESULTING IN HIGHER SALES LEVELS.
CONSOLIDATED GROSS PROFIT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997, WAS $1,898,224 AND $2,550,825, RESPECTIVELY. THE CONSOLIDATED PROFIT
MARGIN WAS 35.1% FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO 27.2%
FOR THE SAME PERIOD LAST YEAR. 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
SYSTEMS SOLUTIONS AND THE
14
<PAGE> 19
CONTINUED GROWTH OF BITWISE AND OUR DOCSTAR PRODUCT WHICH HAS SIGNIFICANTLY
HIGHER GROSS PROFIT MARGINS THAN PRODUCTS AND SERVICES PROVIDED BY BOTH SYSTEMS
SOLUTIONS AND DJS.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES CONSIST OF ALL OF OUR OTHER
EXPENSES EXCEPT PRODUCT DEVELOPMENT COSTS AND INTEREST. THESE EXPENSES AMOUNTED
TO $2,086,754 AND $2,911,956 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND
1997, RESPECTIVELY, A DECREASE OF $825,202. THESE EXPENSES DECREASED BY $792,059
AS A RESULT OF THE SALE OF SYSTEMS SOLUTIONS.
AS A PERCENTAGE OF SALES, SELLING, GENERAL AND ADMINISTRATIVE COSTS
INCREASED FROM 31.1% FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 TO 38.5% FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 1998. THIS INCREASE IS DUE TO THE SALE OF
SYSTEMS SOLUTIONS. WE HISTORICALLY HAVE HAD HIGHER SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES THAN ANY OF OUR SUBSIDIARY COMPANIES BECAUSE OF OUR
ORGANIZATIONAL 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, WE INCUR
SIGNIFICANT ADVERTISING AND MARKETING COSTS TO MARKET DOCSTAR NATIONALLY. OUR
SUBSIDIARIES TYPICALLY SELL IN A LOCALIZED AREA AND ONLY EMPLOY PERSONNEL IN
THEIR LOCAL REGION AND INCUR MINIMAL ADVERTISING AND MARKETING COSTS.
INTEREST EXPENSE TOTALED $150,910 AND $131,414 FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997, RESPECTIVELY. THE INCREASE IS DUE TO AN OFFERING
CONCLUDED IN AUGUST 1997 WITH AN OFFSHORE BANK FOR $4,000,000 WORTH OF TERM
CONVERTIBLE DEBT WHICH ACCRUES INTEREST AT 8% PER ANNUM. THIS NEW INTEREST COST
WAS OFFSET BY REDUCED BORROWINGS ON OUR LINE OF CREDIT DURING THE QUARTER ENDED
SEPTEMBER 30, 1998 AS COMPARED TO THE SAME PERIOD LAST YEAR. INTEREST RATES WERE
UNCHANGED DURING THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE SAME
PERIOD LAST YEAR.
PRODUCT DEVELOPMENT EXPENSES RELATE TO SOFTWARE DEVELOPMENT FOR OUR DOCSTAR
PRODUCT LINE WHICH WE INCUR. THESE COSTS INCREASED FROM $43,103 FOR THE QUARTER
ENDED SEPTEMBER 30, 1997 TO $68,278 FOR THE QUARTER ENDED SEPTEMBER 30, 1998. WE
HAVE A POLICY OF CAPITALIZING QUALIFIED SOFTWARE DEVELOPMENT COSTS AND
AMORTIZING THOSE COSTS OVER THREE YEARS AS PRODUCT DEVELOPMENT EXPENSE.]
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds to date have been the issuance of equity and
the incurrence of third party debt. The principal balance of long-term debt at
June 30, 1999 totaled approximately $4,947,000, net of discounts; $3,975,000 of
this amount, undiscounted, relates to convertible notes payable which mature on
August 11, 2002 and $1,210,712 relates to a mortgage loan.
Our subsidiary, DJS may utilize a line of credit facility totaling
$625,000, of which approximately $256,000 was available at June 30, 1999. This
facility is a wholesale inventory credit facility which is supported by a
guaranty furnished by one of DJS's vendors and expressly limited for purchase
from this vendor. This line is non-interest bearing and payment terms are net
40. The line is collateralized by all assets of DJS.
Our other line of credit for $1,500,000 was terminated by our lender as a
result of our not being in compliance with all of our loan covenants. At June
30, 1999 the balance was approximately $1,300,000. Subsequent to year end, we
entered into an agreement with the lender to extend repayment of the outstanding
balance until September 30, 2000. We were required to make a partial payment to
the lender of $600,000 on October 4, 1999 for the repayment of the remaining
balance from the proceeds of its recently completed private offering. See
"Recently Completed Private Offering." The remaining balance is being paid in
weekly installments over one year with interest at prime plus 4%. Our President,
John Botti, also agreed to guarantee repayment of the loan balance. The line of
credit is secured by our account receivables and inventory, and does not include
its new office building which is secured by a mortgage. We are attempting to
locate a new lender for our inventory financing. There can be no assurance that
we will be successful in its efforts to obtain alternative inventory financing,
and the failure to obtain inventory financing may have an adverse material
effect upon our operations.
In August 1997, we concluded an offering with an offshore bank for
$4,000,000 in gross proceeds ($3,600,000 net proceeds after expenses) in the
form of unsecured, convertible, bearer notes, payable in its entirety on August
11, 2002, with 400,000 detachable Common Stock Purchase Warrants. The $650,411
value
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<PAGE> 20
of the warrants has been recorded as discount on the debt and is being amortized
over the term of the debt. The Notes accrue interest at 8%, payable semiannually
in arrears. The holder of $25,000 principal amount or more may convert the notes
into common stock commencing November 1, 1997 until August 11, 2002 at the rate
of $3.25 per share. As of [JANUARY 28, 2000 THIS NOTE WAS CONVERTED IN FULL AND
1,230,769 SHARES OF COMMON STOCK HAVE BEEN ISSUED TO THE HOLDER. THERE IS NO
BALANCE PAYABLE ON THIS NOTE].
In June 1998, we sold SST for $4,000,000 in a stock sale. We received
approximately $3,600,000 in cash and approximately $400,000 worth of inventory
and receivables. In 1999, we received a claim for indemnity from the purchaser
of SST under the terms of the agreement. We have agreed to pay $341,000 over the
next fifteen months to settle this claim.
Property, plant and equipment expenditures totaled $2,402,661 for the year
ended June 30, 1999. There were no purchase commitments outstanding. We
completed the construction of a new office/production facility for approximately
$2,300,000 in Schenectady, N.Y. We were awarded a grant totaling $1,000,000 from
an agency of New York State to be used towards the construction of the facility.
The funding is being received in stages as costs are incurred and submitted for
reimbursement. The grant stipulates that we are obligated to achieve certain
annual employment levels at the new site between January 1, 2001 and January 1,
2005 or some or all other grant will have to be repaid. As of June 30, 1999,
$142,189 had been received and is recorded as deferred revenue. The remainder of
the financing, $1,400,000, was provided by a local financial institution in the
form of a mortgage loan. [THIS LOAN IS DUE IN OCTOBER, 2018 AND WE MUST PAY
INTEREST AT HE RATE OF THE 5-YEAR TREASURE BILL PLUS 2.5%, CURRENTLY 8.25%. THIS
FINANCING IS SECURED BY OUR NEW BUILDING.]
During the fiscal year ended June 30, 1999, we incurred a net loss of
$3,166,488, and cash used by operating activities totaled $1,864,509. Our
available cash balance at June 30, 1999 totaled approximately $549,000. At
September 30, 1999 our available cash balance was approximately $415,000. [ON
JANUARY 28, 2000 OUR CASH BALANCE WAS $6,358,000, DUE PRIMARILY TO THE EXERCISE
OF OUTSTANDING OPTIONS AND WARRANTS.] One of our lines of credit has been
terminated by its lender and we are currently paying off the outstanding
balance. To date, we have been largely dependent on our ability to sell
additional shares of our common stock or other financing to fund our operating
deficits. Under our current operating plan to obtain a national acceptance of
the DocStar product line and to launch the Authentidate product line, our
ability to improve operating cash flow is highly dependent on the market
acceptance of its products and our ability to reduce overhead costs. If we are
unable to attain projected sales levels for DocStar and other products, or is
unable to implement cost reduction strategies, it may be necessary to raise
additional capital to fund operations and meet its obligations. There is no
assurance that such funding will be available, if needed.
RECENTLY COMPLETED PRIVATE OFFERING
On October 4, 1999, we closed two concurrent private offerings. In the
first offering, we sold 740,000 units at an aggregate offering price of
$740,000. Each unit consisted of two shares of common stock and two Series B
Common Stock Purchase Warrants. The Series B Warrants entitle the holder to
purchase one share of common stock at an exercise price of $1.375 per share
during the offering period commencing on the date of issuance and terminating
five years thereafter.
The Series B Warrants are redeemable at any time commencing one year after
issuance at our option with not less than 30 nor more than 60 days written
notice to the registered holders at a redemption price of $.05 per warrant
provided; (1) The public sale of the shares of common stock issuable upon
exercise of the Series B warrants are covered by a tentative registration
statement; and (2) During each of the immediately preceding 20 consecutive
trading days ending within 10 days of the date of the notice of redemption, the
closing bid price of our common stock is at least $3.25 per share.
In the second offering, we sold 50,000 shares of a newly created class of
Series B convertible cumulative Preferred Stock. The Series B Preferred Stock
was sold at $25.00 per share for an aggregate offering price of $1,250,000. The
following terms apply to the Series B Preferred Stock:
- - DIVIDENDS Dividends on the Series B Preferred Stock are
payable at the rate of 10% per annum,
semi-annually in cash.
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<PAGE> 21
- - CONVERSION Each share of Series B Preferred Stock is
convertible into the number of shares of our
common stock as shall equal $25.00 divided by
the conversion price of $1.875 per share,
subject to adjustment under certain
circumstances.
- - ADJUSTMENT TO CONVERSION
PRICE Commencing three years after the closing, the
conversion price shall be the lower of $1.875
per share or the average of the closing bid and
asked price of our common stock for the 10
consecutive trading days immediately ending one
trading day prior to the notice of the date of
conversion; provided, however, that the holders
are not entitled to convert more than 20% of
the Series B preferred shares held by such
holder on the third anniversary of the date of
issuance per month.
- - REDEMPTION The Series B Preferred Stock is redeemable at
any time commencing one year after issuance or
not less than 30 nor more than 60 days written
notice at a redemption price of $25 plus
accrued and unpaid dividends provided;
- the public sale of the shares of common
stock issuable upon conversion of the
Series B Preferred Stock are covered by
an effective registration statement or
are otherwise exempt from registration;
and
- during the immediately preceding 20
consecutive trading days ending within
10 days of the date of the notice of
redemption, the closing bid price of our
Common Stock is not less than $3.75 per
share. Commencing 34 months after the
Closing, the Series B Preferred Stock is
redeemable at our option without regard
to the closing price of our Common
Stock.
We also created a new subsidiary, Authentidate.com, Inc. through which we
will market our new Internet service which allows for the verification of the
authenticity of digital images. In connection with the above offerings, [ON
NOVEMBER 19, 1999,] the purchasers [CLOSED ON] the [PRIVATE] purchase [OF] 20%
of Authentidate.com, Inc. [AND] an aggregate of 999,999 [BITWISE DESIGNS] Series
C Common Stock Purchase Warrants [FOR A TOTAL PRICE OF $100,000].
The Series C Warrants are redeemable at any time commencing six months
after issuance, on not less than 30 nor more than 60 days written notice to
registered holders at a redemption price equal to $.05 per Warrant, provided (1)
the public sale of the shares of common stock issuable upon exercise of the
Series C Warrants are covered by an effective registration statement or are
otherwise exempt from registration; and (2) during each of the immediately
preceding 20 consecutive trading days ending within 10 days of the date of the
notice of redemption, the closing bid price of our common stock is not less than
120% of the current exercise price of the Series C Warrants.
The Series C Warrants were also divided into three equal classes of
333,3333 each to provide for varying exercise prices. The exercise price of the
Series C Warrants is as follows:
<TABLE>
<S> <C>
Class I $1.50 per share of Common Stock, increasing (i) $.75 per
share 30 days after the effective date of the registration
statement covering the underlying shares; (ii) an additional
$.75 per share 7 months after the effective date; and (iii)
an additional $.75 per share 13 months after the effective
date, subject to adjustment for stock splits and corporate
reorganizations.
</TABLE>
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<PAGE> 22
<TABLE>
<S> <C>
Class II $1.50 per share of Common Stock, increasing (i) $.75 per
share 60 days after the effective date of the registration
statement; (ii) an additional $.75 per share 7 months after
the effective date; and (iii) an additional $.75 per share
13 months after the effective date, subject to adjustment
for stock splits and corporate reorganizations.
Class III $1.50 per share of Common Stock, increasing (i) $.75 per
share 90 days after the effective date of the registration
statement; (ii) an additional $.75 per share 7 months after
the effective date; and (iii) an additional $.75 per share
13 months after the effective date, subject to adjustment
for stock splits and corporate reorganizations.
</TABLE>
We received gross proceeds of approximately [$2,090,000 FROM THE UPON
CLOSING OF ALL OF THE ABOVE PRIVATE OFFERINGS].
We have utilized the proceeds of the three offerings as follows:
- approximately $600,000 has been utilized to repay a portion of our line
of credit;
- approximately $400,000 will be utilized to develop the Authentidate.com
business;
- approximately $160,000 was utilized to make a past due interest payment
on our outstanding 8% convertible notes; and
- the remainder has been reserved for working capital.
We incurred offering expenses of approximately $60,000.
EFFECTS OF INFLATION AND CHANGING PRICES
The impact of general inflation on our operations has not been significant
to date and we believe inflation will continue to have an insignificant impact
on our operations. However, price deflation in the major categories of
components we purchase has been substantial and is anticipated to continue
through fiscal 2000. Typically, new components such as new generations of
microprocessors and new optical disk drive technologies etc. are introduced at
premium prices, by its vendors. During this period, we earn lower margins on our
products. As the life cycle progresses competitive pressures could force vendor
prices down and thus improve our profit margins. We do not believe that
competitive pressures will require us to lower our DocStar selling price.
Because much of DJS's business is service-related, price deflation has less of
an impact on DJS's profits.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 requires reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. This statement became
effective for annual and interim financial statements beginning the fiscal year
ending June 30, 1999, and will require reclassifications of prior periods. We
had no other comprehensive income to report for the years ended June 30, 1999
and 1998.
In June 1997, The Financial Accounting Standards Board also issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 requires expanded reporting of information about operating segments in
interim and annual financial statements, including certain descriptive
information about products and services, geographic areas, and major customers.
This statement became effective for annual financial statements beginning the
fiscal year ending June 30, 1999, and for interim periods beginning the fiscal
year ending 2000.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes a new model for accounting for derivatives and hedging activities.
This Statement is effective for fiscal years beginning June 30, 2000. The
adoption of this standard is not expected to have a significant impact on our
consolidated financial statements.
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<PAGE> 23
YEAR 2000 COMPLIANCE
[PRIOR TO JANUARY 1, 2000 WE SURVEYED] all of our desktops and servers to
ensure Year 2000 compliance. The survey concluded that all of our in-house work
systems use hardware that is that 100% Year 2000 compliant. Most of our software
and operating systems are Microsoft(TM) based and are believed to be Year 2000
compliant. Our product hardware is fully Year 2000 compliant and the software is
Year 2000 compliant in the latest version 2.30. Because the DocStar System is a
relatively new system, it was designed to handle a four (4) digit year. In
addition, we are in the process of surveying our critical vendors for Year 2000
compliance. However, we do not believe there would be significant difficulties
finding alternate supply services should the need arise. [AS OF JANUARY 31, 2000
ALL OF OUR OPERATIONS WERE UNAFFECTED BY THE CHANGE TO THE YEAR 2000].
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<PAGE> 24
DESCRIPTION OF BUSINESS
INTRODUCTION
Bitwise, and its wholly-owned subsidiary DJS Marketing Group, Inc. are
engaged in the manufacture and distribution of document imaging systems,
computer systems and related peripheral equipment, components, and accessories
and network and internet services.
We have also recently established a majority owned subsidiary named
Authentidate.Com LLC to engage in a new business line of providing end users
with a service which will:
- accept and store e-mail from networks and personal computers throughout
the world and from different operating systems via the Internet;
- allow for confirmation of acceptance of all e-mails sent to the system;
- allow for a secure payment system, including use of credit cards; and
- produce confirmations of receipt of e-mail.
In June 1998, we sold a subsidiary, System Solutions Technology, Inc.,
which had been acquired by the Company in August 1994. SST is a value added
distributor of advanced technology industrial computers and computer peripheral.
In April 1997, we sold a subsidiary, Electrograph Systems, Inc. ESI had been
acquired in August 1994 and is a value-added distributor of monitors and other
microcomputer peripherals, components and accessories. Our financial statements
and discussion under the heading "Management Discussion and Analysis" includes
the results of operations for both ESI and SST to the date of their divestiture.
In March 1996, we acquired DJS, a system integrator, computer reseller and
personal computer manufacturer in Albany, New York. DJS is an authorized sales
and support provider for Novell, Microsoft Solutions and Lotus Notes, as well as
a member of Microage Infosystems. The financial statements include operations
from the date of the acquisition of DJS.
We were organized in August 1985 and reincorporated under the laws of the
state of Delaware in May 1992. Our executive offices are located at 2165
Technology Drive, Schenectady, New York 12308, and our telephone number is (518)
346-7799.
GENERAL BUSINESS DEVELOPMENTS DURING THE LAST FISCAL YEAR
In June 1998, we sold SST to United Strategies, Inc. for $4,000,000. We
received approximately $3,600,000 in cash and approximately $400,000 worth of
SST inventory and receivables. The transaction was in the form of a stock
purchase. During the year ended June 30, 1999, we received certain claims from
USI for indemnification under the agreements governing the sale. We agreed to
pay USI $341,000 to settle these claims to be paid over 15 months accruing
interest of 6%. We realized a loss of approximately $597,000 on the sale.
BITWISE'S PRODUCTS
Document Imaging and Management
In January 1996, Bitwise, on a national level, introduced its document
imaging management system under the tradename DocStar. Our DocStar system
enables users to scan paper documents onto an optical disk, hard drive or other
storage medium, from which they can be retrieved in seconds. This system allows
users to eliminate or significantly reduce paper filing systems. We believe that
a broad spectrum of businesses and governmental agencies experience the problem
of storage, management and security of paper documents. The DocStar product line
is intended to provide a cost effective method of reducing the space necessary
to store documents while granting a user the ability to instantly retrieve
documents.
The operation of a document management system is similar to the operation
of a facsimile machine. Documents are fed into an optical scanner that reads the
documents and stores the information on one of
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<PAGE> 25
several alternative mass storage devices. Documents can also be transmitted from
or to the system via facsimile machine or modem. Documents can be retrieved
almost instantaneously for viewing, printing or faxing thereby offering a
significant time-saving tool to the modern office.
The main components of a document management system are:
- a personal computer;
- a high speed electronic document scanner;
- a laser printer capable of reproducing documents quickly; and
- a software package which controls scanning, indexing, storage and
reproduction.
We purchase scanners, laser printers and other essential hardware from
unaffiliated third parties and manufacture the PC's for the system.
The software utilized in DocStar consists of various versions of existing
software from other developers, as well as software which we developed. We offer
the DocStar System in four models: System 15, System 25X2, System 50, and the
DocStar DCL. The DocStar System 15 is the base model. The Systems 25X2 and 50
offer faster advanced processors or scanners, and increased storage capacity.
Options and accessories include a jukebox, an optical disk tower, additional
software, scanner upgrades, monitor upgrades and hardware upgrades. The DCL
connects DocStar electronic imaging capabilities with the network scanning and
printing functions of Xerox Corporation's Document Centre digital copiers.
We market the document management system under the tradename DocStar
through a national dealer network. We own one dealership in the Albany, New York
region, which also serves as a test market for new applications and software.
BACKLOG
We normally ship products within 5 days after receipt of an order and
typically have no more than two weeks of sales in backlog at any time. The
amount of backlog fluctuates but usually is not material.
RESEARCH AND DEVELOPMENT
The market for our products is characterized by rapid technological change
involving the application of a number of advanced technologies, including those
relating to computer hardware and software, mass storage devices, and other
peripheral components. Our ability to be competitive depends upon our ability to
anticipate and effectively react to technological change, as well as the
application requirements of our customers.
Since inception, we have devoted efforts to research and development
activities in an effort to improve our current products and introduce new
products. Current development efforts are directed toward improving ease of use,
adding system enhancements and increasing performance. Product development
expense was $248,801 and $230,652 for fiscal years 1999 and 1998, respectively.
We will continue to improve our document imaging products in an effort to
satisfy the needs of an ever changing marketplace.
QUALITY CONTROL AND SERVICE
We administer quality control at each of the three levels of the production
process. First, components considered for use in standard systems are tested for
compatibility by the research staff. Second, incoming components receive a
physical damage inspection on receipt and again at the start of the production
process. Each memory module is electronically tested prior to assembly. Each
complete unit is then functionally tested at the end of the assembly process to
demonstrate that all components are engaged and fully operational.
Third, each complete unit is "burned-in" from eight to twelve hours. This
process involves running a component test program which sequentially tests each
memory bit, processor circuit, and drive memory track to verify correct
operation in a temperature-controlled chamber. This test is repeated
continuously over the burn-in period. Since electronic components have their
greatest failure risk during the first few hours of active
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<PAGE> 26
operation, management believes that the burn-in process reveals nearly all
faulty components before they reach the end user.
Our dealers provide service to the end users. All dealers receive service
training from the national service staff. We provide the dealer with replacement
parts free of charge for 13 months after date of shipment. Our vendors provide a
similar warranty for failed components. We offer liberal telephone support
service to our dealers.
MANUFACTURING AND SUPPLIERS
Our products have been designed to enable a variety of system
configurations to be assembled from a few basic modules. Our manufacturing
operations consist primarily of the assembly, test and quality control of all
parts, components, subassemblies and systems.
We use standard parts and components in its existing product lines which we
purchase from unaffiliated third party suppliers. We, however, do not have any
contractual arrangements with our current suppliers. Although we have never
experienced material delays in deliveries from our suppliers, shortages of
component parts could occur and delay or interrupt our manufacture and delivery
of products and adversely affect our operating results. We believe adequate
alternative suppliers are available to mitigate the potentially adverse effect
of supply interruptions, but there can be no assurance that such components will
be available as and when needed.
All peripheral computer products available through us, such as monitors and
scanner/printer units, are manufactured by third parties. We only assemble the
computer which is part of the DocStar system and the optical disk tower option.
PATENTS AND TRADEMARKS
We have one patent pending and have registered the logo "BitWise Designs"
and Bitwise's associated trademarks, "DocStar" and "Authentidate." The patent
pending is for innovative technology that can verify the authenticity of digital
images by employing a secure clock to stamp the date and time on each image
captured. The product name is Authentidate(TM) Image Marking. No assurance can
be given that registration will be effective to protect our trademarks. We
believe the tradenames are material to our business.
SALES AND MARKETING
Our products are primarily being distributed through a national dealer
network and through a dealership which we own in our local market area. We
believe that we has achieved a national sales presence through national
advertising, favorable reviews in industry publications, newspapers, magazines,
press releases and other periodicals utilized by the document imaging industry.
Moreover, we offer direct mail and tele-marketing services to selected qualified
dealers in their market area. Management intends to increase the number of
dealer locations for the current fiscal year, although there can be no assurance
that we will be successful in such efforts.
Our products are usually sold on credit terms or through a floor planning
finance company (to qualified accounts), and are warranted against defects in
materials and workmanship for a period of 13 months from purchase. We currently
employ five regional sales directors, one district sales manager and three
direct sales managers, to cover the significant markets of the country.
COMPETITION
The market for our products is rapidly changing and highly competitive. The
competition is direct (i.e., companies that make similar products) and indirect
(i.e., companies that participate in the market, but do not directly compete
with us). We compete with major document imaging manufacturers such as
Panasonic, Sharp and Mita. Many of our current and prospective competitors have
significantly greater financial, technical, manufacturing and marketing
resources, as well as a larger installed base, than do we.
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<PAGE> 27
EMPLOYEES
We employ 40 full-time employees including our executive officers. No
employees are covered by a collective bargaining agreement, and we believe our
employee relations are satisfactory.
FORMATION OF NEW AUTHENTIDATE BUSINESS LINE
We have recently established a majority owned subsidiary named
Authentidate.Com LLC to engage in a new business line of providing end users
with a service which will:
- accept and store e-mail from networks and personal computers throughout
the world and from different operating systems via the Internet;
- allow for confirmation of acceptance of all e-mails sent to the system;
- allow for a secure payment system, including use of credit cards; and
- produce confirmations of receipt of e-mail.
We anticipate that Authentidate will commence offering services through its
Authentidate.Com Internet site within the next 45 to 90 days. We intend to
market the Authentidate services through traditional print and media advertising
and banner advertising and links on other Internet provider home pages. To date,
Authentidate's operations have been limited to developing the technology for its
services and home page.
DJS PRODUCTS AND SERVICES
DJS (d/b/a "Computer Professionals") is a network and systems integrator of
computer and peripheral products to a variety of customers, including
corporations, schools, government agencies, manufacturers and distributors. DJS
is the largest systems integrator in the Albany, New York region.
DJS provides network integration, Internet/Intranet development, accounting
solutions, service, consultation, document management and video conferences. DJS
also services the products it sells by employing factory trained computer
technicians and network engineers.
PRODUCTS
Network Integration
DJS' network integration group designs, implements, installs, manages and
supports enterprise networks with products from Novell, Microsoft, UNIX,
Tricord, Synoptics, Compaq, Cisco and others.
DJS designs customized solutions for its clients with precise objectives
and its engineers analyze hardware, software, and cabling to ensure effective
and affordable solutions.
Internet/Intranet Development
DJS offers services related to the Internet, including Internet
connectivity, web page development, and hardware installation. Additionally, DJS
assists its clients through the buying and implementation process with
Internet/Intranet training and ongoing support.
Accounting Solutions
DJS also markets accounting systems from State-of-the-Art to various
end-users such as distributors, manufacturers and wholesalers. DJS analyzes each
particular client's needs and custom designs an accounting system to satisfy
these needs.
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<PAGE> 28
Service and Consultation
DJS's service department is authorized to repair and maintain all major
brand products sold by DJS, including warranty and post-warranty equipment. DJS
generally guarantees a four (4) hour response time for all service calls, with
an average resolution time of next day.
DJS's engineers also provide complete system configuration services, which
includes installation of all hardware, including memory, disk drives, network or
communication adapters, as well as any associated software or driver. All units
are thoroughly tested after configuration and all malfunctioning units are
eliminated.
Document Management
DJS also offers document imaging services which it believes is an efficient
and financially attainable alternative to conventional, costly paper trails.
Management believes digital documents can be stored, searched, retrieved and
edited in a fraction of the time with complete access to the network and quality
control features. Among other product lines, DJS offers customers Biwise's
DocStar line.
SALES AND MARKETING
DJS markets its products and services throughout New York State, parts of
Vermont and Massachusetts. DJS intends to expand its national and international
sales and marketing departments. Clients include corporations, small office/home
office owners, schools, government agencies, manufacturers and distributors.
COMPETITION
DJS is one of the oldest and largest network and systems integrators in the
Capital District of Albany, New York, and works on many diverse platforms. While
management believes that no other computer company in the Albany, New York
region offers the extensive services that DJS offers, competitors in computer
sales, service and support in general, include Computerland, Computers Etc.,
CompUSA, Entex and Ameridata.
EMPLOYEES
DJS has 34 full-time staff members, including two (2) executive officers.
None of the employees of DJS are represented by a collective bargaining
agreement. DJS believes that its employee relations are good.
DESCRIPTION OF PROPERTIES
Our executive offices and production facilities are located at 2165
Technology Drive, Schenectady, New York 12308. We own the 26,000 square foot
building.
A New York State agency awarded us a $1,000,000 grant to build a this
facility, which was recently completed. The grant is subject to a requirement
regarding our employment practices [, WHICH STIPULATES THAT MUST HAVE A TOTAL OF
71 EMPLOYEES BY JANUARY 2001, A TOTAL OF 121 EMPLOYEES BY JANUARY 2002, 200
EMPLOYEES BY JANUARY 2003 AND 300 EMPLOYEES BY JANUARY 2004. FAILURE TO SATISFY
THIS REQUIREMENT COULD RESULT IN OUR HAVING TO REPAY THE GRANT]. We expect to be
in compliance with this requirement.
GOVERNMENT REGULATION
Compliance with laws and regulations governing our business can be
complicated, expensive, and time-consuming and may require significant
managerial and legal supervision. [SUCH REGULATION INCLUDES THE RADIO FREQUENCY
EMISSION REGULATORY ACTIVITIES OF THE U.S. FEDERAL COMMUNICATIONS COMMISSION,
THE IMPORT/ EXPORT REGULATORY ACTIVITIES OF THE U.S. DEPARTMENT OF COMMERCE AND
THE PRODUCT SAFETY REGULATORY ACTIVITIES OF THE U.S. CONSUMER PRODUCTS SAFETY
COMMISSION.] Failure to comply with such laws and regulations could have a
materially adverse effect on our business. Further, any changes in any of these
laws and regulations
24
<PAGE> 29
could materially and adversely affect our business. There is no assurance that
we will be able to secure on a timely basis, or at all, necessary regulatory
approvals in the future.
Our suppliers must comply with federal, state and local environmental laws
and regulations relating to air quality, waste management, water quality and
related land use matters. They may need to maintain various permits concerning
waste handling and discharges of waste water. We believe that our suppliers are
in compliance with all required permits relating to environmental regulations.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings which could have a material
adverse effect on our operations.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
MANAGEMENT
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
- ---- --- ------
<S> <C> <C>
John T. Botti................................ [36] President, Chief Executive Officer and Chairman
of the Board
Ira C. Whitman............................... 36 Senior Vice-President -- Research and
Development, Secretary and Director
Steven A. Kriegsman.......................... 56 Director
J. Edward Sheridan........................... 62 Director
Charles C. Johnston.......................... 63 Director
Nicholas Themelis............................ 36 Director
[DENNIS H. BUNT.............................. 46 CHIEF FINANCIAL OFFICERS]
</TABLE>
All directors hold office until the next annual meeting of shareholders or
until their successors are elected and qualify. Officers are elected annually
by, and serve at the discretion of, the Board of Directors. There are no
familial relationships between or among any of our officers or directors.
In connection with [OUR] private placement through Whale Securities Co.,
L.P. ("Whale"), completed in December 1995, the Company granted Whale the right
to nominate one person to the Company's Board of Directors, or in the
alternative, a person to attend meetings of the Board of Directors for a period
of three years from the date of the closing of the private placement. In
December, 1997, Whale selected Steven Kriegsman as its representative on the
Board and Mr. Kriegsman continues to serve on the Board. [WE ARE NOT OBLIGATED
TO CONTINUE HIS APPOINTMENT.]
In connection with [OUR] recent private placement which closed on October
4, 1999, the Board of Directors appointed Nicholas Themelis to serve as a
director to fill a vacancy on the Board.
JOHN T. BOTTI, a co-founder, has served as President, Chief Executive
Officer and Director since our incorporation in August 1985. Mr. Botti graduated
from Rensselaer Polytechnic Institute ("RPI") with a B.S. degree in electrical
engineering in 1994 with a concentration in computer systems design and in 1996
earned a Master of Business Administration degree from RPI.
IRA C. WHITMAN, a co-founder, is our Senior Vice-President of Research and
Development and one of our Directors since our incorporation in August 1985. Mr.
Whitman graduated from RPI in 1984 with a B.S. in Computer and Systems
Engineering and in 1990 he earned a Masters in Engineering from RPI.
J. EDWARD SHERIDAN joined the Board of Directors in June, 1992. From 1985
to the present, Mr. Sheridan served as the President of Sheridan Management
Corp. From 1975 to 1985, Mr. Sheridan served as the Vice President of Finance
and Chief Financial Officer of AMF. From 1973 to 1975, he was Vice President and
Chief Financial Officer of Fairchild Industries. From 1970 to 1973 he was the
Vice President, Corporate Finance of F.S. Smithers. From 1967 to 1970 Mr.
Sheridan was the Director of Acquisitions of Westinghouse
25
<PAGE> 30
Electric. From 1964 to 1967 he was employed by Corporate Equities, Inc., a
venture capital firm, Mr. Sheridan holds an M.B.A. from Harvard University and a
B.A. from Dartmouth College.
STEVEN A. KRIEGSMAN joined the Board of Directors in December, 1997. In
1989, Mr. Kriegsman founded The Kriegsman Group, a private financial consulting
services firm and has served as its President since such time. In 1981 Mr.
Kriegsman co-founded ANA Financial Services, Inc., a holding company engaged,
through its subsidiaries, in securities brokerage, financial planning and
investment advisory services and franchising of certified public accountants.
Mr. Kriegsman served as Chairman and Chief Executive Officer of ANA Financial
until 1989. Mr. Kriegsman is a former Certified Public Accountant. Mr. Kriegsman
holds a B.S. from New York University.
CHARLES C. JOHNSTON joined the Board of Directors in December, 1997. Mr.
Johnston has been the Chairman of Ventex Technology, Inc., a privately-held neon
light transformer company since July 1993. Mr. Johnston has also served as
Chairman of AFD Technologies, a private corporation since 1994 and J&C Resources
a private corporation, a position that he has held since 1987. Mr. Johnston
serves as a Trustee of Worcester Polytechnic Institute ("WPI") and earned his
B.S. degree from WPI in 1957.
NICHOLAS THEMELIS joined the Board of Directors in October, 1999. Mr.
Themelis has been a Senior Vice President of Lehman Brothers since 1991 and has
worked out of its New York, Hong Kong and Tokyo offices. He is currently
developing the firm's E-commerce technology group and is responsible for
developing technical strategy and system architecture. While working in Asia at
Lehman Brothers, he founded the firm's Internet committee in Asia. Mr. Themelis
also co-founded Nutrisserie, Inc in 1991, a retail health food store. Prior to
that, in 1986, Mr. Themelis was a co-founder of Bentley, Themelis and
Associates, a software consulting company.
[** 1] DENNIS H. BUNT has been our Chief Financial Officer since September
1992. From January to September 1992 Mr. Bunt was an independent financial
consultant. From 1986 to January 1992, Mr. Bunt was Chief Financial Officer for
The Michaels Group Inc., a homebuilding/development company. Prior to that, Mr.
Bunt was a Division Controller for Mechanical Technology Inc. a high tech
manufacturing company where he was employed from 1980 to 1986. Mr. Bunt is a
certified public accountant and was employed by KPMG Peat Marwick from
1976-1979. He graduated with an M.B.A. from Babson College in 1979 and a B.S. in
Accounting from Bentley College in 1976.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has three (3) Committees: Audit, Compensation and
Executive Committee.
Audit Committee. The members of the Audit Committee are J. Edward Sheridan
and Charles Johnston. The Audit Committee acts to: (i) acquire a complete
understanding of our audit functions; (ii) review with management our finances,
financial condition and interim financial statements; (iii) review with our
independent auditors the year-end financial statements; and (iv) review
implementation with the independent auditors and management any action
recommended by the independent auditors. During the fiscal year ended June 30,
1999, the Audit Committee met on one occasion.
Executive Committee. The members of the Executive Committee are John Botti
and Ira C. Whitman. The Executive Committee has all of the powers of the Board
of Directors except it may not; (i) amend the Certificate of Incorporation or
Bylaws; (ii) enter into agreements to borrow money in excess of $250,000; (iii)
to grant security interests to secure obligations of more than $250,000; (iv)
authorize private placements or public offerings of our securities; (v)
authorize the acquisition of any major assets or business or change our
business; or (vi) authorize any employment agreements in excess of $75,000. The
Executive Committee meets when actions must be approved in an expedient manner
and a meeting of the Board of Directors cannot be convened. During Fiscal 1999,
the Executive Committee did not deem it necessary to meet.
Compensation Committee. The members of the Compensation Committee are
Steven Kriegsman and J. Edward Sheridan. The Compensation Committee functions
include administration of our 1992 Employee Stock Option Plan and Non-Executive
Director Stock Option Plan and negotiation and review of all
26
<PAGE> 31
employment agreements with our executive officers. During the fiscal year ended
June 30, 1999, the Compensation Committee held one meeting.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended June 30, 1999, our Board of Directors met on
three occasions and voted by unanimous written consent on two occasions. No
member of the Board of Directors attended less than 50% of the aggregate number
of (i) the total number of meetings of the Board of Directors or (ii) the total
number of meetings held by all Committees of the Board of Directors.
CERTAIN REPORTS
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our Directors and officers, and persons who own, directly or indirectly, more
than 10% of a registered class of our equity securities, to file with the
Securities and Exchange Commission reports of ownership and reports of changes
in ownership of our common stock and other equity securities. Officers,
directors and greater than 10% shareholders are required by SEC regulations to
furnish us with copies of all Section 16(a) forms that they file. Based solely
on review of the copies of such reports that we have received, we believe that
all Section 16(a) filing requirements applicable to officers, directors and 10%
shareholders were complied with during the 1999 fiscal year.
[* 1 moved from here; text not shown]
[* 2 moved from here; text not shown]
SIGNIFICANT EMPLOYEE
[** 2] JOHN MATYKA has been Vice President of Marketing of the Imaging
Division since November 1995. Mr. Matkya brings over 25 years of management
experience in marketing, sales and communication for the office equipment
industry with Ricoh Corp., IBM and Savin Corp. Mr. Matyka has an M.B.A. from
Fairleigh Dickinson University and a B.B.A degree from Pace University.
27
<PAGE> 32
EXECUTIVE COMPENSATION
The following table provides certain information concerning all Plan and
Non-Plan (as defined in Item 402(a)(ii) of Regulation S-B) compensation awarded
to, earned by, and which we paid during the years ended June 30, 1999, 1998 and
1997 to the named executive officers.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
--------------------------
NO. OF
OTHER RESTRICTED SECURITIES
FISCAL ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS
- --------------------------- ------ -------- ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
John Botti................. 1999 $132,794(1) 0(1) $1,702(2) 0(3) 0
Chairman, President and 1998 $121,000 0 $1,702 0 0
Chief Executive Officer 1997 $110,000 0 $1,415 0 0
</TABLE>
- ---------------
(1) Pursuant to the terms of his employment agreement dated July 1, 1995, Mr.
Botti is to receive a cash bonus each year during the term of agreement
equal to 3% of our pre-tax profits, which criteria was not met in 1999, 1998
or 1997, therefore, no bonuses were issued. Additionally, Mr. Botti is
entitled to receive approximately $132,000 in salary per year. See
"Employment Agreements."
(2) Includes: (i) for 1999, an automobile and expenses of $1,500 and the payment
of premiums on term life insurance policy of $202; (ii) for 1998, an
automobile and expenses of $1,500 and the payment of premiums on a term life
insurance policy of $202; and (iii) for 1997, an automobile and expenses of
$1,213 and the payment of premiums on a term life insurance policy of $202.
(3) No restricted stock awards were granted to Mr. Botti in fiscal 1999. Mr.
Botti, however, owned 233,853 restricted shares of our Common Stock on June
30, 1999, the market value of which was approximately $226,604 on such date,
without giving effect to the diminution in value attributed to the
restriction on such shares.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE ALTERNATIVE TO
VALUE AT (F) AND (G)
ASSUMED ANNUAL GRANT DATE
PERCENT OF INDIVIDUAL GRANTS RATES OF VALUE
TOTAL ------------------------ STOCK PRICE --------------
NUMBER OF OPTIONS/SARS APPRECIATION
SECURITIES GRANTED TO FOR
UNDERLYING EMPLOYEES EXERCISE OF OPTION TERM GRANT DATE
OPTION/SARS IN FISCAL BASE PRICE EXPIRATION -------------- PRESENT
NAME GRANTED(#) YEAR (S/SH) DATE 5%($) 10%($) VALUE $
(A) (B) (C) (D) (C) (F) (G) (H)
- ---- ----------- ------------ ----------- ---------- ----- ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
John Botti............... 0 N/A N/A N/A 0 0
</TABLE>
No Stock Appreciation Rights were granted to any of the named executive
officers during the last fiscal year.
28
<PAGE> 33
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table contains information with respect to the named
executive officers concerning options held as of the year ended June 30, 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AS OF IN-THE-MONEY OPTIONS
ACQUIRED VALUE JUNE 30, 1999 AT JUNE 30, 1999(1)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
John T. Botti.............. 0 -- 835,185/0 6,406/0
</TABLE>
- ---------------
(1) Based upon the closing bid price ($.969 per share) of our Common Stock on
June 30, 1999 less the exercise price for the aggregate number of shares
subject to the options.
EMPLOYMENT AGREEMENTS
Effective July 1, 1995, we entered into a new employment agreement with Mr.
Botti for a five year term ending June 30, 2000. The employment agreement
provides for:
- annual compensation of $100,000 for the first year of the agreement,
increasing by 10% in each year thereafter;
- a bonus of 3% of our pre-tax net income, with such additional bonuses as
may be awarded in the discretion of the Board of Directors;
- the award of non-qualified stock options to purchase 600,000 shares of
our common stock at an exercise price of $1.5625 per share of which
100,000 vested in on June 30, 1995, 125,000 vested on June 30, 1996 and
125,000 vested on each of June 30, 1997, 1998 and 1999;
- certain insurance and severance benefits; and
- automobile and expenses.
COMPENSATION OF DIRECTORS
Directors are compensated for their services during the last fiscal year in
the amount of $5,000 annually. The Directors receive options to purchase 10,000
shares for each year of service under the Non-Executive Director Stock Option
Plan ("Stock Options") and are reimbursed for expenses incurred in order to
attend meetings of the Board of Directors. Directors also receive 20,000 Stock
Options upon being elected to the Board.
STOCK OPTION PLANS
1992 Employees Stock Option Plan
In April 1992, we adopted the 1992 Employees Stock Option Plan (the "1992
Plan") which provided for the grant of options to purchase up to 600,000 shares
of our Common Stock. On January 26, 1995, our stockholders approved an amendment
to the 1992 Plan to increase the number of shares of Common Stock available
under the 1992 Plan to 3,000,000 shares. Under the terms of the 1992 Plan,
options granted thereunder may be designated as options which qualify for
incentive stock option treatment ("ISOs") under Section 422A of the Code, or
options which do not so qualify ("Non-ISOs"). As of [JANUARY 31, 2000], there
were outstanding [1,802,225] options under the 1992 Plan with exercise prices
ranging from $.34 to $7.125.
The 1992 Plan is administered by a Compensation Committee designated by the
Board of Directors. The Compensation Committee has the discretion to determine
the eligible employees to whom, and the times and
29
<PAGE> 34
the price at which, options will be granted. Whether such options shall be ISOs
or Non-ISOs; the periods during which each option will be exercisable; and the
number of shares subject to each option, shall be determined by the Committee.
The Board or Committee shall have full authority to interpret the 1992 Plan and
to establish and amend rules and regulations relating thereto.
Under the 1992 Plan, the exercise price of an option designated as an ISO
shall not be less than the fair market value of the Common Stock on the date the
option is granted. However, in the event an option designated as an ISO is
granted to a ten percent stockholder (as defined in the 1992 Plan) such exercise
price shall be at least 110% of such fair market value. Exercise prices of
Non-ISOs options may be less than such fair market value. The aggregate fair
market value of shares subject to options granted to a participant which are
designated as ISOs which become exercisable in any calendar year shall not
exceed $100,000. The "fair market value" will be the closing Nasdaq bid price,
or if our Common Stock is not quoted by Nasdaq, as reported by the National
Quotation Bureau, Inc., or a market maker of our Common Stock, or if the Common
Stock is not quoted by any of the above, by the Board of Directors acting in
good faith.
The Compensation Committee may, in its sole discretion, grant bonuses or
authorize loans to or guarantee loans obtained by an optionee to enable such
optionee to pay any taxes that may arise in connection with the exercise or
cancellation of an option.
Unless sooner terminated, the 1992 Plan will expire in April, 2002.
Non-Executive Director Stock Option Plan
In April, 1992, the Board of Directors adopted the Non-Executive Director
Stock Option Plan (the "Director Plan") which was approved by our stockholders
in May, 1992. With the approval of the shareholders, the Director Plan was
amended in December, 1997. Options are granted under the Director Plan until
April, 2002 to (1) non-executive directors as defined and (2) members of any
advisory board established by us who are not full-time employees of us or any of
our subsidiaries.
The Director Plan provides that each non-executive director will
automatically be granted an option to purchase 20,000 shares, upon joining the
Board of Directors, and 10,000 shares on each September 1st thereafter, provided
such person has served as a director for the 12 months immediately prior to such
September 1st. Each eligible director of an advisory board will receive, upon
joining the advisory board, and on each September 1st thereafter, an option to
purchase 5,000 shares of the our Common Stock, providing such person has served
as a director of the advisory board for the previous 12 month period.
As of [JANUARY 31, 2000], there are outstanding [150,000] options under the
Director Plan with exercise prices from $1.00 to $5.13.
The exercise price for options granted under the Director Plan is 100% of
the fair market value of the Common Stock on the date of grant. The "fair market
value" is the closing bid price, or if our Common Stock is not quoted by Nasdaq,
as reported by the National Quotation Bureau, Inc., or a market maker of our
Common Stock, or if the Common Stock is not quoted by any of the above by the
Board of Directors acting in good faith. Until otherwise provided in the Stock
Option Plan the exercise price of options granted under the Director Plan must
be paid at the time of exercise, either in cash, by delivery of shares of our
common Stock or by a combination of each. The term of each option commences on
the date it is granted and unless terminated sooner as provided in the Director
Plan, expires five years from the date of grant. The Director Plan is
administered by a committee of the board of directors composed of not fewer than
three persons who are our officers (the "Committee"). The Committee has no
discretion to determine which non-executive director or advisory board member
will receive options or the number of shares subject to the option, the term of
the option or the exercisability of the option. However, the Committee will make
all determinations of the interpretation of the Director Plan. Options granted
under the Director Plan are not qualified for incentive stock option treatment.
30
<PAGE> 35
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of [JANUARY 28, 2000]
with respect to (1) each director and each executive officer, (2) all directors
and officers as a group, and (3) the persons (including any "group" as that term
is used in Section l3(d)(3) of the Securities Exchange Act of l934), known by
the Corporation to be the beneficial owner of more than five (5%) percent of our
Common Stock and Series A Preferred Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENTAGE
TYPE OF CLASS BENEFICIAL HOLDER OWNERSHIP(1) OF CLASS[(*)]
- ------------- ---------------------------- ----------------- -------------
<S> <C> <C> <C>
Common.............................. John T. Botti 1,049,683(2) [8.6%]
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common.............................. Ira C. Whitman 660,829(3) [5.4%]
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common.............................. Steven Kriegsman 40,000(4) [0.32%]
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common.............................. Dennis Bunt 50,550(5) [0.42%]
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common.............................. J. Edward Sheridan 40,000(4) [0.32%]
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common.............................. Charles Johnston 50,000(4) [0.41%]
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common.............................. Nicholas Themelis 20,000(8) [0.16%
14 Serenite Lane
Muttontown, NY 11791
COMMON.............................. GATEWAY NETWORK, LLC 799,998(9) 6.6%
165 EAB PLAZA,
6TH FLOOR WEST UNIONDALE, NY
11556
COMMON.............................. TAMI SKELLY 800,001(10) 6.6%
12 SERENITE LANE
MUTTONTOWN, NY 11791
COMMON.............................. AZURE CAPITAL, LLC 680,001(11) 5.6%
416 TOFTREE
ROSLYN, NY 11576
COMMON.............................. RW CAPITAL, LLC 679,998(12) 5.6%]
53 SALISBURY RUN
MOUNT SINAI, NY 11766
Series A Preferred Stock............ John T. Botti 100(6) 50%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
</TABLE>
31
<PAGE> 36
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENTAGE
TYPE OF CLASS BENEFICIAL HOLDER OWNERSHIP(1) OF CLASS[(*)]
- ------------- ---------------------------- ----------------- -------------
<S> <C> <C> <C>
Series A Preferred Stock............ Ira C. Whitman 100(7) 50%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Directors/Officers as a group
(2)(3)(4)(5)(6)(7)(8)(9)[(10)(11)(12)........................... 4,871,060 40.09%]
</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 835,185 shares of Common Stock.
(3) Includes vested stock options to purchase 434,634 shares of Common Stock.
(4) All listed shares represent vested options to purchase Common Stock.
(5) Includes vested options to purchase 47,667 shares of Common Stock and
excludes nonvested options to purchase 6,667 shares of Common Stock.
Includes 1,000 shares of Common Stock owned by Mr. Bunt's wife.
(6) See footnote (2). Each share of Series A Preferred Stock is entitled to
ten (10) votes per share.
(7) See footnote (3). Each share of Series A Preferred Stock is entitled to
ten (10) votes per share.
(8) Includes vested options to purchase 20,000 shares of Common Stock and
excludes a Series B Common Stock Purchase Warrant to purchase 20,000
shares of Common Stock.
[(9) INCLUDES 499,998 SHARES OF COMMON STOCK UNDERLYING CERTAIN COMMON STOCK
PURCHASE WARRANTS AND 10,000 SHARES ISSUABLE UPON CONVERSION OF SERIES B
PREFERRED STOCK, ALL OF WHICH SHARES OF COMMON STOCK ARE BEING REGISTERED
BY THIS REGISTRATION STATEMENT.
(10) INCLUDES 300,000 SHARES OWNED BY BANTRY BAY, LLC AND 200,001 SHARES OWNED
BY BEARA GROUP, LLC, OF WHICH MS. SKELLY IS A MANAGING MEMBER AND MEMBER,
RESPECTIVELY. OF ALL LISTED SHARES, 500,001 SHARES ARE UNDERLYING CERTAIN
COMMON STOCK PURCHASE WARRANTS AND 5,000 SHARES ARE ISSUABLE UPON
CONVERSION OF SERIES B PREFERRED STOCK, ALL OF WHICH SHARES OF COMMON
STOCK ARE BEING REGISTERED BY THIS REGISTRATION STATEMENT.
(11) INCLUDES 440,001 SHARES UNDERLYING CERTAIN COMMON STOCK PURCHASE WARRANTS,
ALL OF WHICH SHARES ARE BEING REGISTERED BY THIS REGISTRATION STATEMENT.
(12) INCLUDES 439,998 SHARES UNDERLYING CERTAIN COMMON STOCK PURCHASE WARRANTS,
ALL OF WHICH SHARES ARE BEING REGISTERED BY THIS REGISTRATION STATEMENT.
* PERCENTAGES BASED ON 12,149,154 SHARES OF COMMON STOCK OUTSTANDING AS OF
JANUARY 28, 2000.]
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<PAGE> 37
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Except as disclosed herein, we have not entered into any material
transactions or series of similar transactions with any director, executive
officer or any security holder owning 5% or more of our Common Stock.
Pursuant to an agreement dated October 1, 1999 with Bank of America, Mr.
Botti personally guaranteed the Company's repayment of its line of credit with
Bank of America. [BITWISE AND BANK OF AMERICA AGREED THAT BITWISE WILL REPAY THE
OUTSTANDING PRINCIPAL AMOUNT OF $1,212,451.52 BY MAKING WEEKLY PAYMENTS OF
$11,778 WITH ALL REMAINING AMOUNTS DUE AND PAYABLE BY SEPTEMBER 30, 2000.
INTEREST WILL ACCRUE AT BANK OF AMERICA'S PRIME RATE PLUS 4%.] IN DECEMBER 1999
WE PAID THE BALANCE IN FULL AND MR. BOTTI WAS RELEASED FROM THE PERSONAL
GUARANTEE.
In connection with our October 1999 private offering, we entered into an
agreement with Corporate Funding Group, LLC, pursuant to which Corporate Funding
Group has been retained to provide us with financial consulting services related
to our corporate finance and other financial service matters. As part of this
agreement, we granted Corporate Funding Group an irrevocable preferential right
for a period of three years to purchase up to $5,000,000 of our securities that
we may seek to sell in a private offering. In consideration for these services,
we agreed to sell to Corporate Funding 20,000 Series B Warrants at a price of
$.001 per warrant. [SEE "SELLING SECURITY HOLDERS", PAGE 48.]
In connection with the founding of Authentidate, we retained Nicholas
Themelis to perform general advisory services concerning the development of
Authentidate and the implementation of the Authentidate business plan. In
consideration for rendering these services, we have issued to Mr. Themelis
20,000 Series B Warrants and have agreed to reimburse Mr. Themelis for his
expenses incurred in the performance of his duties.
Pursuant to an agreement dated September 15, 1999, we retained Shore
Venture Group, L.L.C., to design and develop a site on the World Wide Web for
our Authentidate business. The design and development services include the
design and development of any and all computer software in order to ensure that
the Authentidate site performs in the manner contemplated by the parties. In
consideration for these services:
- we agreed to issue 100,000 common stock warrants at an exercise price of
$.69 per share, with an exercise term of five (5) years from the date of
grant and which are exchangeable into the underlying, unrestricted common
stock of Bitwise on a one for one basis at any time beginning with the
date of issue and extending for a five (5) year period thereafter;
- we agreed that Shore Venture shall receive a guaranteed minimum of
$200,000 of service fees related to enhancements to, and service of, the
Authentidate site during a one (1) year period commencing on September
30, 1999;
- we paid to Shore Venture the sum of $15,000 representing payment in full
of cash sums owed by us to Shore Venture for past design and development
services;
- we also agreed to pay Shore Venture $40,000.00 for design and development
of the fax portion of the Authentidate site; and
- Authentidate agreed to issue to Shore Venture equity interests
representing 7.5% of the outstanding equity as of the date of agreement.
For information concerning employment agreements with, and compensation of,
our executive officers and directors, see "MANAGEMENT -- Executive
Compensation."
33
<PAGE> 38
SELLING SECURITY HOLDERS
We have agreed to register the resale of outstanding Shares of Common Stock
and the Shares underlying the Series B and Private Warrants and the Shares into
which the Series B Preferred Stock is convertible under the Securities Act and
to pay all expenses in connection therewith. An aggregate of [5,886,416] Shares
and may be offered and sold pursuant to this prospectus by the Selling
Shareholders. Except as set forth below, none of the Selling Shareholders has
ever held any position or office with us or had any other material relationship
with us.
SELLING SECURITY HOLDERS AND
TRANSACTIONS WITH SELLING SECURITY HOLDERS
<TABLE>
<CAPTION>
SHARES/ SHARES/
WARRANT SHARES/ SHARES/ WARRANT SHARES/ PERCENTAGE OF
CONVERSION SHARES WARRANT SHARES/ CONVERSION SHARES SHARES
NAME AND ADDRESS OF BENEFICIALLY OWNED CONVERSION SHARES OWNED AFTER OWNED AFTER
SELLING SECURITY HOLDER PRIOR TO OFFERING OFFERED OFFERING OFFERING(1)
- ----------------------- ------------------ ------------------ ------------------ -------------
<S> <C> <C> <C> <C>
Nicholas Themelis(2)....... [0/20,000/0 0/20,000/0] 0 ++
Corporate Funding Group,
LLC(3)................... [0/0/26,667 0/0/26,667] 0 ++
Shore Venture Group,
LLC(4)................... [0/300,000/0 0/300,000/0] 0 ++
Tami Skelly(5)............. 150,000/150,000/ 150,000/150,000/ 0 ++
[66,667] [66,667]
Interpacific Capital
Corp.(6)................. [400,000/0/0 400,000/0/0] 0 ++
Bantry Bay Associates,
LLC(7)................... 150,000/150,000/ 150,000/150,000/ 0 ++
[66,667] [66,667]
Gateway Network, LLC(8).... 300,000/499,998/ 300,000/499,998/ 0 ++
[133,333] [133,333]
Azure Capital, LLC(9)...... [240,000/440,001/0] [240,000/440,001/0] 0 ++
RW Capital, LLC(10)........ [240,000/439,998/0 240,000/439,998/0] 0 ++
Beara Group, LLC(11)....... [0/200,001/0 0/201,001/0] 0 ++
[CONTINENTAL] Capital &
Equity Corp.(12)......... [72,750/200,000/0 72,750/200,000/0] 0 ++
Stonewall Capital,
Inc.(13)................. [0/120,000/0 0/120,000/0] 0 ++
Canterbury Companies,
Inc.(14)................. [20,000/20,000/0 20,000/20,000/0] 0 ++
Robert Raffa(15)........... [0/10,000/0 0/10,000/0] 0 ++
Candle Business Systems,
Inc.(16)................. [0/10,000/0 0/10,000/0] 0 ++
2B Systems, Inc.(17)....... [0/5,000/0 0/5,000/0] 0 ++
B.E. Associates,
Inc.(18)................. [0/7,000/0 0/7,000/0] 0 ++
Jack Erlanger(19).......... [0/174,286/0 0/160,000/0] 0/14,286/0 ++
[JACK FERRARO](20)......... [0/160,000/0 0/160,000/0] 0 ++
[KEVIN KELLY](21).......... [0/20,000/0 0/20,000/0] 0 ++
[ADVANCED IMAGING, INC.
(22)..................... 0/10,000/0 0/10,000/0 0 ++
GREENER FAIRWAYS,
INC.](23)................ [0/100,001/ 0/100,001/ 0 ++
373,333 373,333
NEW PERSPECTIVES,
INC.(24)................. 0/500,000/0 0/500,000/0] 0 ++
Michael [WU(25)............ 0/2,500/0 0/2,500/0 0 ++
JERB ASSOCIATES,
INC.(26)................. 0/40,000/0 0/40,000/0 0 ++
VICTOR DIGIOIA(27)......... 1,000/47,500/0 0/47,500/0 1,000/0/0/0 ++
</TABLE>
34
<PAGE> 39
<TABLE>
<CAPTION>
SHARES/ SHARES/
WARRANT SHARES/ SHARES/ WARRANT SHARES/ PERCENTAGE OF
CONVERSION SHARES WARRANT SHARES/ CONVERSION SHARES SHARES
NAME AND ADDRESS OF BENEFICIALLY OWNED CONVERSION SHARES OWNED AFTER OWNED AFTER
SELLING SECURITY HOLDER PRIOR TO OFFERING OFFERED OFFERING OFFERING(1)
- ----------------------- ------------------ ------------------ ------------------ -------------
<S> <C> <C> <C> <C>
BRIAN DAUGHNEY(28)......... 0/20,000/0 0/20,000/0 0 ++
BARRY LAX(29).............. 0/2,000/0 0/2,000/0 0 ++
MICHAEL] Goldstein[(30).... 0/11,500/0 0/11,500/0] 0 ++
Barbara Cereghino[(31)..... 0/750/0 0/750/0] 0 ++
Dorothy Philipps[(31)...... 0/750/0 0/750/0] 0 ++
------------------ ------------------ ------ --
</TABLE>
- ---------------
++ Percentage is less than 1%.
(1) Computed for purposes herein to give effect to the exercise of all
Warrants held by such Selling Security Holder and not any other Selling
Security Holder. Figures are computed based upon [17,819,513] shares of
Common Stock outstanding on the effective date of this Registration
Statement.
(2) Mr. Themelis is a director of Bitwise and entered into an agreement,
dated September 23, 1999 to provide business advisory services to
Bitwise. Includes 20,000 Shares issuable upon exercise of Series B
Warrants which are being registered pursuant to this Registration
Statement. Does not include options to purchase 20,000 shares.
(3) Corporate Funding Group LLC entered into an agreement dated September 21,
1999 to provide financial consulting services to Bitwise. Includes 20,000
Shares issuable upon exercise of Series B Warrants which are being
registered pursuant to this Registration Statement. Also includes
[26,667] Shares issuable upon Conversion of Series B Preferred Stock.
[MR. CRAIG GROSS POSSESSES INVESTMENT CONTROL OF THESE SHARES.]
(4) Shore Venture Group, LLC has entered into a contract with Bitwise to
perform services related to the formation of the web-site for
Authentidate.com, Inc.
(5) Includes 150,000 Shares issuable upon exercise of Series B Warrants which
are being registered pursuant to this Registration Statement. Also
includes [66,667] Shares issuable upon Conversion of Series B Preferred
Stock.
(6) [MR. DOUGLAS LUCE POSSESSES INVESTMENT CONTROL OF THESE SHARES.
(7) INCLUDES 150,000] Shares issuable upon exercise of Series B Warrants
which are being registered pursuant to this Registration Statement. Also
includes [66,667] Shares issuable upon Conversion of Series B Preferred
Stock. [MS. TAMI SKELLY POSSESSES INVESTMENT CONTROL OF THESE SHARES.]
(8) Includes 300,000 Shares issuable upon exercise of Series B Warrants [AND]
199,998 Shares issuable upon exercise of Series C Warrants, both of which
are being registered pursuant to this Registration Statement. Also
includes [133,333] Shares issuable upon Conversion of Series B Preferred
Stock. [MR. CRAIG GROSS POSSESSES INVESTMENT CONTROL OF THESE SHARES.]
(9) Includes 240,000 Shares issuable upon exercise of Series B Warrants [AND]
200,001 Shares issuable upon exercise of Series C Warrants [, BOTH] of
which are being registered pursuant to this Registration Statement.
(10) Includes 240,000 Shares issuable upon exercise of Series B Warrants [AND]
199,998 Shares issuable upon exercise of Series C Warrants [, BOTH] of
which are being registered pursuant to this Registration Statement.
(11) Includes 200,001 Shares issuable upon exercise of Series C Warrants which
are being registered pursuant to this registration statement.
(12) Continental Capital will provide certain financial consulting services to
Bitwise. Includes 25,000 warrants to purchase common stock at an exercise
price of $3.00 per share; 25,000 warrants to purchase common stock at an
exercise price of $5.50 per share; 50,000 warrants to purchase common
stock at an exercise price of $6.88 per share; 50,000 warrants to
purchase common stock at an exercise
35
<PAGE> 40
price of $8.25 per share; and 50,000 warrants to purchase common stock at
an exercise price of $11.25 per share.
(13) Includes three warrants each to purchase 40,000 shares of common stock at
exercise prices of $1.56, $2.07, and $3.58. All three warrants are
exercisable until September 1, 2000.
(14) Includes warrants to purchase [20,000] shares of common stock at an
exercise price of $3.4375 and is exercisable until August15, 2002.
(15) Includes warrants to purchase 10,000 shares of common stock at an
exercise price of $4.4375 and is exercisable until September 12, 2001.
(16) Includes warrants to purchase 10,000 shares of common stock at an
exercise price of $6.4375 and is exercisable until February 26, 2001.
(17) Includes warrants to purchase 5,000 shares of common stock at an exercise
price of $7.00 and is exercisable until December 22, 2000.
(18) Includes warrants to purchase 7,000 shares of common stock at an exercise
price of $5.3125 and is exercisable until November 21, 2000.
(19) Includes warrants to purchase [160,000] shares of common stock at an
exercise price of $3.25 and which expire [ON AUGUST 8, 2002.]
[(20) INCLUDES WARRANTS TO PURCHASE 160,000 SHARES OF COMMON STOCK AT AN
EXERCISE PRICE OF $3.25 AND WHICH EXPIRE ON AUGUST 8, 2002.
(21) INCLUDES 20,000 SHARES ISSUABLE UPON EXERCISE OF SERIES B WARRANTS.
(22) INCLUDES WARRANTS TO PURCHASE 10,000 SHARES OF COMMON STOCK AT AN
EXERCISE PRICE OF $1.00.
(23) INCLUDES 100,001 SHARES UNDERLYING SERIES C COMMON STOCK PURCHASE
WARRANTS AND 373,333 SHARES ISSUABLE UPON CONVERSION OF SERIES B
PREFERRED STOCK. MR. PAUL SAVAGE POSSESSES INVESTMENT CONTROL OF THESE
SECURITIES.
(24) INCLUDES 400,000 SHARES UNDERLYING SERIES B COMMON STOCK PURCHASE
WARRANTS AND 100,000 SHARES UNDERLYING SERIES C COMMON STOCK PURCHASE
WARRANTS. MS. JANE LUCCI POSSESSES INVESTLMENT CONTROL OF THESE SHARES.
(25) INCLUDES WARRANTS TO PURCHASE 2,500 SHARES AT AN EXERCISE PRICE OF $0.875
AND EXPIRE ON SEPTEMBER 9, 2004.
(26) JERB ASSOCIATES IS OWNED BY STANLEY R. GOLDSTEIN, ESQ.,] a principal of
Goldstein & DiGioia, LLP, counsel to Bitwise. The 40,000 Shares are
underlying warrants exercisable at $0.875 and expire on September 9, 2004
[AND ARE BENEFICIALLY OWNED BY JERB ASSOCIATES. MR. GOLDSTEIN DISCLAIMS
BENEFICIAL OWNERSHIP OF THESE SECURITIES.
(27)] Mr. DiGioia is a principal of Goldstein & DiGioia, LLP, counsel to
Bitwise. The [47,500] Shares are underlying warrants exercisable at
$0.875 and expire on September 9, 2004.
[(28)] Mr. Daughney is a principal of Goldstein & DiGioia, LLP, counsel to
Bitwise. The 20,000 Shares are underlying warrants exercisable at $0.875
and expire on September 9, 2004.
[(29)] Mr. Lax is an associate with of Goldstein & DiGioia, LLP, counsel to
Bitwise. The 2,000 Shares are underlying warrants exercisable at $0.875
and expire on September 9, 2004.
[(30)] Mr. Goldstein is an associate with Goldstein & DiGioia, LLP, counsel to
Bitwise. The 11,500 Shares are underlying warrants exercisable at $0.875
and expire on September 9, 2004.
[(31) IS] an employee of Goldstein & DiGioia, LLP, counsel to Bitwise. The 750
Shares are underlying warrants exercisable at $0.875 and expire on
September 9, 2004.
ABOUT THIS PROSPECTUS
The Securities registered hereby will be issued by Bitwise upon exercise or
conversion by the holders of the warrants or preferred stock, or the transferees
of the holders. The shares of common stock will be offered and sold from time to
time by the Selling Security Holders and their transferees in the
over-the-counter market, or otherwise, at prices and terms then prevailing or at
prices related to the then-current market price,
36
<PAGE> 41
or in [PRIVATELY] negotiated transactions. No underwriting arrangements have
been entered into by the Selling Security Holders.
The distribution of the Securities by the Selling Security Holders and/or
their transferees may be effected in one or more transactions that may take
place on the over-the-counter market, including
- ordinary brokers transactions;
- privately negotiated transactions; or
- through sales to one or more dealers for resale of the Securities as
principals, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices.
The Securities may be sold by the Selling Security Holders either
- to a broker or dealer as principal for resale as such broker or dealer
for its account pursuant to this prospectus (e.g. in a transaction with a
"market maker");
- in brokerage transactions, including transactions in which the broker
solicits purchasers or
- in privately negotiated transactions pursuant to any applicable exemption
under the Securities Act of 1933, as amended.
Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Security Holders in connection with such
sales. The Selling Security Holders and intermediaries through whom such
Securities are sold may be deemed "underwriters" within the meaning of the
Securities Act, with respect to the Securities offered.
[NONE OF THE SELLING SECURITY HOLDERS LISTED IN THIS PROSPECTUS ARE
BROKER-DEALERS. HOWEVER, AZURE CAPITAL, LLC AND RW CAPITAL, LLC ARE AFFILIATES
OF A BROKER-DEALER REGISTERED WITH THE COMMISSION. BOTH ENTITIES, HOWEVER,
PURCHASED THE SECURITIES WHICH THEY BENEFICIALLY OWN IN THE ORDINARY COURSE OF
BUSINESS. AT THE TIME OF THE PURCHASE, THESE ENTITIES HAD NO AGREEMENTS OR OTHER
UNDERSTANDINGS, DIRECTLY OR INDIRECTLY, WITH ANY PERSON TO DISTRIBUTE THE COMMON
SHARES TO BE RECEIVED UPON CONVERSION OR EXERCISE OF THE SERIES B PREFERRED
STOCK OR WARRANTS.]
37
<PAGE> 42
DESCRIPTION OF SECURITIES
COMMON SHARES
Subject to the rights of the holders of any classes of Preferred Stock,
holders of shares of our Common Stock are entitled to cast one vote for each
share held at all stockholders' meetings for all purposes, including the
election of directors. The holders of our outstanding Series A Preferred Stock
have the right to elect a majority of the Board of Directors. Directors are
elected each year at our annual meeting of stockholders to serve for a period of
one year and until their respective successors have been duly elected and
qualified.
Common stockholders have the right to share ratably in such dividends on
shares of Common Stock as may be declared by the Board of Directors out of funds
legally available therefor. Upon liquidation or dissolution, each outstanding
share of Common Stock will be entitled to share equally in our assets legally
available for distribution to stockholders after the payment of all debts and
other liabilities, subject to any superior rights of the holders of Preferred
Stock.
Common stockholders have no pre-emptive rights. There are no conversion or
redemption privileges or sinking fund provisions with respect to the Common
Stock. All of the outstanding shares of Common Stock, par value $.001, are, and
all of the shares of Common Stock offered hereby will be, validly issued, fully
paid and nonassessable. The Common Stock does not have cumulative voting rights
so holders of more than 50% of the outstanding Common Stock can elect all of our
Directors as to which Common Stock holders are entitled to elect.
SERIES A PREFERRED STOCK
The Board of Directors has designated 200 shares of Preferred Stock as
Series A Preferred Stock, of which 100 shares have been issued to each of John
T. Botti and Ira C. Whitman, the President and Senior Vice President,
respectively, of the Company. The holders of the Series A Preferred Shares have
the right to elect a majority of the Board of Directors as long as such holder
remains, subject to certain conditions, an officer, director and 5% stockholder
of the Company. During such time as the Series A Preferred Stock is outstanding,
the Board of Directors will consist of an odd number of directors, a majority of
whom will be designated as "Preferred Directors" and be elected solely by the
holders of Series A Preferred Stock voting separately as a group. The holders of
the Series A Preferred Stock have a preference on liquidation of $1.00 per share
and no dividend or conversion rights.
SERIES B PREFERRED STOCK
Pursuant to the terms of the recently completed private offering, we filed
a Certificate of Designation designating 50,000 shares of Preferred Stock as
"Series B Convertible Redeemable Preferred Stock." The following is a summary of
the rights, preferences and privileges of the Series B Preferred Stock and is
qualified in its entirety by the provisions of our Certificate of Incorporation
and the Certificate of Designation. [THE ISSUANCE OF THE SERIES B PREFERRED
STOCK COULD RESULT IN DILUTION TO THE HOLDERS OF OUR COMMON STOCK. SEE THE "RISK
FACTORS" SECTION OF THIS PROSPECTUS.]
DIVIDENDS. Subject to the limitations described below, holders of shares
of the Series B Preferred Stock will be entitled to receive, when, as and if
declared by the Board, out of our funds legally available for payment, dividends
in cash at an annual rate of 10% per share.
- Dividends are payable semi-annually, commencing on December 31, 1999 and
thereafter on June 30th and December 31st of each year. Dividends will be
cumulative from the date of original issuance of the Series B Preferred
Stock and will be payable to holders of record as they appear on our
stock books on the tenth business day prior to the dividend payment date.
- The Series B Preferred Stock will be junior to dividends to any series or
class of our stock hereafter issued which ranks senior as to dividends to
the Series B Preferred Stock. If at any time any dividend on Senior
Dividend Stock is in default, we may not pay any dividend on the Series B
Preferred Stock until all accrued and unpaid dividends on the Senior
Dividend Stock for all prior periods and the
38
<PAGE> 43
current period are paid or declared and set aside for payment. No such
Senior Dividend Stock shall be issued without the approval of holders of
a majority of the Series B Preferred Stock.
- The Series B Preferred Stock will have priority as to dividends over the
Common Stock and any other series or class of our stock hereafter issued
which ranks junior as to dividends to the Series B Preferred Stock. We
may not pay any dividend on (other than dividends payable solely in
Junior Dividend Stock), and we may not purchase, redeem or consummate any
other acquisition of, any Junior Dividend Stock unless all accrued and
unpaid dividends on the Series B Preferred Stock for all prior periods
and the current period have been paid or declared and set apart for
payment.
- We may not pay dividends on any class or series of our stock having
parity with the Series B Preferred Stock as to dividends, unless we have
paid or declared and set apart for payment or contemporaneously pay or
declare and set apart for payment all accrued and unpaid dividends for
all prior periods on the Series B Preferred Stock. We may not pay
dividends on the Series B Preferred Stock unless we have paid or declared
and set apart for payment or contemporaneously pay or declare and sets
apart for payment all accrued and unpaid dividends for all prior periods
on the parity dividend stock. Whenever all accrued dividends are not paid
in full on the Series B Preferred Stock or any parity dividend stock, all
dividends declared on the Series B Preferred Stock and such parity
dividend stock will be declared or made pro rata so that the amount of
dividends declared per share on the Series B Preferred Stock and such
parity dividends stock will bear the same ratio that accrued and unpaid
dividends per share on the Series B Preferred Stock and such parity
dividend stock bear to each other.
- The amount of dividends payable for the initial dividend period and for
any period shorter than a full year dividend period will be computed on
the basis of a 360-day year of twelve 30-day months. No interest will be
payable in respect of any dividend payment on the Series B Preferred
Stock which may be in arrears.
See "Redemption" below for information regarding restrictions on our
ability to redeem the Series B Preferred Stock when dividends on the Series B
Preferred Stock are in arrears.
VOTING RIGHTS. The holders of the Series B Preferred Stock will be
entitled to no voting rights except with respect to:
- the establishment of another class of preferred stock with rights equal
to or senior to the Series B Preferred Stock;
- any proposed changes in the rights of the Series B Preferred holders; or
- as required by Delaware law.
REDEMPTION AT OUR OPTION. The Series B Preferred Stock is redeemable at
any time commencing one year after the Closing at our option, on not less than
30 nor more than 60 days written notice to registered holders at a redemption
price equal to $25.00 per share plus accrued and unpaid dividends, provided:
- the public sale of the shares of Common Stock issuable upon conversion of
the Preferred Shares (the "Conversion Shares") are covered by an
effective registration statement or are otherwise exempt from
registration; and
- during the immediately preceding 20 consecutive trading days ending
within 10 days of the date of the notice of redemption, the closing bid
price of our Common Stock is not less than $3.75 per share, subject to
proportional adjustments for stock splits, stock dividends, combinations
of shares, corporate reorganizations or like events.
However, commencing 36 months after the Closing, the Series B Preferred
Stock is redeemable at our option, on not less than 30 nor more than 60 days
written notice to registered holders at a redemption price equal to $25.00 plus
accrued and unpaid dividends, provided the public sale of the Conversion Shares
are covered by an effective registration statement or are otherwise exempt from
registration.
39
<PAGE> 44
- If less than all of the outstanding shares of Series B Preferred Stock
are to be redeemed, we will select those to be redeemed pro rata or by
lot or in such other manner as the Board of Directors may determine.
- There is no mandatory redemption or sinking fund obligation with respect
to the Series B Preferred Stock.
- In the event that we have failed to pay accrued and unpaid dividends on
the Series B Preferred Stock, we may not redeem any of the then
outstanding shares of the Series B Preferred Stock, unless all the then
outstanding shares are redeemed, until all such accrued and unpaid
dividends and (except with respect to shares to be redeemed) the then
current semi-annual dividend have been paid in full.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of shares of Series B
Preferred Stock to be redeemed at the address shown on our stock books. After
the redemption date, dividends will cease to accrue on the shares of Series B
Preferred Stock called for redemption, and all rights of the holders of such
shares will terminate except the right to receive the redemption price without
interest (unless we default in the payment of the redemption price). Shares of
Series B Preferred Stock which we have redeemed will be restored to the status
of authorized but unissued shares of preferred stock, without designation as to
series, and may thereafter be issued, but not as shares of Series B Preferred
Stock unless used to pay dividends on the then outstanding Series B Preferred
Stock.
CONVERSION RIGHTS. The holders of Series B Preferred Stock will be
entitled at any time to convert their shares of Series B Preferred Stock into
one share of Common Stock (the "Conversion Shares"), at any time commencing one
year after the closing of the Offering, at the option of the holder, into such
number of shares of our Common Stock as shall equal $25.00 divided by the
conversion price of $1.875 per share, subject to adjustment to for stock splits,
stock dividends, combinations of shares, corporate reorganizations or like
events.
However, commencing three years after the Closing, the Conversion Price
shall be the lower of:
- $1.875 per share, subject to adjustment for stock splits and corporate
reorganizations; and
- the average of the closing bid and asked prices of our Common Stock for
the immediately preceding 10 consecutive trading days ending one trading
day prior to the date of the notice of conversion;
- provided, however, that the holder shall not be entitled to convert more
than 20% of the Series B Preferred Shares held by such holder on the
third anniversary of the Closing during any period of thirty days. For
purposes of conversion, each share of Series B Preferred Stock shall be
valued at $25.00 per share. Conversion rights will expire after 5:00 p.m.
on the redemption date for any shares of Series B Preferred Stock which
we have called for redemption.
- No payment or adjustment will be made in respect of dividends for Series
B Preferred Stock that may be accrued or unpaid or in arrears upon
conversion of shares of Series B Preferred Stock.
- No fractional shares will be issued and, in lieu of any fractional share,
cash in an amount based on the then current market price, determined as
provided in the Certificate of Designation, of the Common Stock will be
paid.
[ACCORDINGLY, FROM OCTOBER 5, 2000 TO OCTOBER 5, 2002, A HOLDER MAY CONVERT
ITS PREFERRED SHARES INTO COMMON SHARES AT A RATE OF $1.875 PER SHARE.
THEREAFTER, IF NOT PREVIOUSLY CONVERTED AND STILL OUTSTANDING, A HOLDER MAY
CONVERT THE PREFERRED SHARES INTO COMMON SHARES AT THE LOWER OF $1.875 PER SHARE
OR THE AVERAGE TRADING PRICE AS STATED ABOVE.]
In case of any consolidation or merger of us with any other corporation
(other than a wholly owned subsidiary), or in case of sale or transfer of all or
substantially all of our assets, or in the case of any share exchange whereby
the Common Stock is converted into other securities or property, we will be
required to make appropriate provision so that the holder of each share of
Series B Preferred Stock then outstanding will have the right thereafter to
convert such share of Series B Preferred Stock into the kind and amount of
shares of stock and other securities and property receivable upon such
consolidation, merger, sale, transfer or share
40
<PAGE> 45
exchange by a holder of the number of shares of Common Stock into which such
share of Series B Preferred Stock might have been converted immediately prior to
such consolidation, merger, sale, transfer or share exchange.
LIQUIDATION RIGHTS. In case of our voluntary or involuntary liquidation,
dissolution or winding up, holders of shares of Series B Preferred Stock are
entitled to receive the liquidation price of $25.00 per share, plus an amount
equal to any accrued and unpaid dividends to the payment date, before any
payment or distribution is made to the holders of the Common Stock or any other
series or class of our stock hereafter issued which ranks junior as to
liquidation rights to the Series B Preferred Stock.
- The holders of the shares of the Series B Preferred will not be entitled
to receive the liquidation price of such shares until the liquidation
price of any other series or class of our stock hereafter issued which
ranks senior as to the liquidation rights to the Series B Preferred Stock
has been paid in full. No such senior liquidation stock shall be issued
without the approval of holders of a majority of the Series B Preferred
Stock. See "Voting Rights."
- The holders of Series B Preferred Stock and all series or classes of our
stock hereafter issued which rank on a parity as to liquidation rights
with the Series B Preferred Stock are entitled to share ratably, in
accordance with the respective preferential amounts payable on such
stock, in any distribution (after payment of the liquidation price of the
senior liquidation stock) which is not sufficient to pay in full the
aggregate of the amounts payable thereon. After payment in full of the
liquidation price of the shares of the Series B Preferred Stock, the
holders of such shares will not be entitled to any further participation
in any distribution of assets by us. Neither a consolidation or merger of
us with another corporation, nor a sale or transfer of all or part of our
assets for cash, securities or other property will be considered to be
our liquidation, dissolution or winding up.
NO SINKING FUND. We are not required to provide for the retirement or
redemption of the Series B Preferred Stock through the operation of a sinking
fund.
OTHER PROVISIONS. The shares of Series B Preferred Stock, when issued,
will be duly and validly issued, fully paid and nonassessable. The holders of
the shares of the Series B Preferred Stock have no preemptive rights with
respect to any shares of our capital stock or any of our other securities
convertible into or carrying rights or options to purchase any such shares.
SERIES B COMMON STOCK PURCHASE WARRANTS
THE FOLLOWING DISCUSSION IS SUBJECT TO THE TERMS AND CONDITIONS OF THE
SERIES B WARRANTS, AND SUBSCRIBERS ARE REFERRED TO THE FORM OF SERIES B WARRANT
FOR MORE DETAILED INFORMATION.
EXERCISE PRICE. Each Series B Warrant will entitle the holder to purchase
one share of Common Stock during the period commencing on the date of issuance
and terminating five years thereafter, unless redeemed, at an exercise price of
$1.375 per share of Common Stock, subject to adjustment to for stock splits and
corporate reorganizations.
REDEMPTION. The Series B Warrants are redeemable at any time commencing
one year after the Closing at our option, on not less than 30 nor more than 60
days written notice to registered holders at a redemption price equal to $.05
plus, provided:
- the public sale of the Warrant Shares are covered by an effective
registration statement or are otherwise exempt from registration; and
- during each of the immediately preceding 20 consecutive trading days
ending within 10 days of the date of the notice of redemption, the
closing bid price of our Common Stock is not less than $3.25 per share,
as proportionately adjusted to reflect any stock splits, stock dividends,
combination of shares, corporate reorganizations or like events.
41
<PAGE> 46
SERIES C COMMON STOCK PURCHASE WARRANTS
THE FOLLOWING DISCUSSION IS SUBJECT TO THE TERMS AND CONDITIONS OF THE
SERIES C WARRANT, AND SUBSCRIBERS ARE REFERRED TO THE SERIES C WARRANT FOR MORE
DETAILED INFORMATION.
TERMS. Each Warrant will entitle the holder to purchase one share of
Common Stock of Bitwise during the three year exercise period which commences on
the date of issue and expires three years from such date.
CLASSES/EXERCISE PRICE. The Warrants [HAVE BEEN] divided into three equal
classes, Class I, Class II and Class III. Each Class shall have an initial
exercise price of $1.50 (subject to adjustment to for stock splits and corporate
reorganizations) which shall increase in $0.75 increments according to the
following schedule:
<TABLE>
<S> <C>
First increase -- 30 days after the effective date of a
registration statement covering the underlying Warrant
Shares (the "Effective Date");
Class
I --
Second increase -- 7 months after the Effective Date;
Third increase -- 13 months after the Effective Date;
First increase -- 60 days after the Effective Date;
Class
II --
Second increase -- 7 months after the Effective Date;
Third increase -- 13 months after the Effective Date;
First increase -- 90 days after the Effective Date;
Class
III --
Second increase -- 7 months after the Effective Date; and
Third increase -- 13 months after the Effective Date.
</TABLE>
LEGAL MATTERS
Certain legal matters relating to our common stock will be passed upon for
us by the law firm of Goldstein & DiGioia, LLP, New York, New York. Members of
the firm of Goldstein & DiGioia, LLP own warrants to purchase 125,000 Shares of
our common stock registered in this prospectus.
EXPERTS
The consolidated financial statements and schedules included in this
prospectus have been audited by PricewaterhouseCoopers, LLP, independent
certified public accountants, to the extent and for the periods indicated in
their reports, appearing elsewhere herein and are included in reliance upon such
reports given upon the authority of said firm as experts in auditing and
accounting.
INDEMNIFICATION UNDER DELAWARE LAW AND OUR BY-LAWS
Our By-Laws provide for indemnification of our officers and directors to
the greatest extent permitted by Delaware law for any and all fees, costs and
expenses incurred in connection with any action or proceeding, civil or
criminal, commenced or threatened, arising out of services by or on behalf of
us, providing such officer's or director's acts were not committed in bad faith.
The By-Laws also provide for advancing funds to pay for anticipated costs and
authorizes the Board to enter into an indemnification agreement with each
officer or director.
In accordance with Delaware law, our Certificate of Incorporation contains
provisions eliminating the personal liability of directors, except for breach of
a director's fiduciary duty of loyalty to the us or to our stockholders, acts or
omission not in good faith or which involve intentional misconduct or a knowing
violation of the law, and in respect of any transaction in which a director
receives an improper personal benefit. These provisions only pertain to breaches
of duty by directors as such, and not in any other corporate capacity, e.g., as
an officer. As a result of the inclusion of such provisions, neither Bitwise nor
our stockholders may be able to recover monetary damages against directors for
actions taken by them which are ultimately found to have constituted negligence
or gross negligence, or which are ultimately found to have been in violation of
their fiduciary duties, although it may be possible to obtain injunctive or
equitable relief with respect to such
42
<PAGE> 47
actions. If equitable remedies are found not to be available to stockholders in
any particular case, stockholders may not have an effective remedy against the
challenged conduct.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and therefore is unenforceable.
Except for the payment by us of expenses incurred or paid by any of our
directors, officers or controlling persons in the successful defense of any
action, suit or proceeding, in the event that a claim for indemnification
against liabilities is asserted by a director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter is settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
final adjudication of the issue.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Upon the effectiveness of our public offering on May 13, 1992, our Common
Stock commenced trading in the over-the-counter market and was listed on the
SmallCap Market of the Nasdaq Stock Market under the symbol "BTWS." On August
11, 1994, the Common Stock commenced trading on the Boston Stock Exchange under
the symbol BTW. On June 25, 1996, we withdrew our listing on the Boston Stock
Exchange. On April 24, 1996, our Common Stock commenced trading on the Pacific
Stock Exchange [UNDER THE SYMBOL "BTWS."]
The following is the range of high and low closing prices for our Common
Stock on the Nasdaq SmallCap Market for the periods indicated below:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Common Stock
FISCAL YEAR 1999
1st Quarter................................................. 1 1/2 7/8
2nd Quarter................................................. 1 7/8 23/32
3rd Quarter................................................. 1 5/8 7/8
4th Quarter................................................. 1 1/2 15/16
FISCAL YEAR 1998
1st Quarter................................................. 4 2 3/4
2nd Quarter................................................. 4 5/16 2 3/32
3rd Quarter................................................. 3 3/4 2 7/16
4th Quarter................................................. 2 7/8 1 9/16
FISCAL YEAR 1997
1st Quarter................................................. 5 13/16 3 1/4
2nd Quarter................................................. 6 1/4 4 1/4
3rd Quarter................................................. 6 1/2 3 1/8
4th Quarter................................................. 3 9/16 2 3/4
</TABLE>
The above quotations represent prices between dealers and do not include
retail mark-ups, mark-downs, or commissions, and do not necessarily represent
actual transactions.
As of September 23, 1999, there were approximately 372 holders of record of
our Common Stock. We believe there are more than 500 beneficial holders of our
Common Stock.
43
<PAGE> 48
DIVIDEND POLICY
We have not paid any dividends upon our Common Stock since our inception.
We do not expect to pay any dividends upon its Common Stock in the foreseeable
future and plans to retain earnings, if any, to finance the development and
expansion of its business. Further, our Certificate of Incorporation authorizes
our Board of Directors to issue Preferred Stock with a preferential right to
dividends. Holders of our Series B Preferred Stock are entitled to a preference
on dividends, which are cumulative and payable semi-annually. See "Description
of Securities -- Series B Preferred Stock."
PLAN OF DISTRIBUTION
The Shares of common stock, including the Shares underlying the Series B,
Series C and Private Warrants, the Shares issuable upon the conversion of the
Series B Preferred Stock, and the Series B Warrants will be issued by Bitwise
upon exercise or conversion by the holders of the warrants or preferred stock or
the transferees of the holders. The shares of common stock will be offered and
sold from time to time by the Selling Security Holders or their transferees in
the over-the-counter market, or otherwise, at prices and terms then prevailing
or at prices related to the then-current market price, or in negotiated
transactions.
The Securities registered hereby may be sold by one or more of the
following methods, without limitation:
- a block trade in which a broker or dealer so engaged will attempt to sell
the securities as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus;
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
- face-to-face transactions between sellers and purchasers without a
broker-dealer.
In effecting sales, brokers or dealers engaged by the Selling Security
Holders may arrange for other brokers or dealers to participate. Brokers or
dealers may receive commissions or discounts from the Selling Security Holders
in amounts to be negotiated immediately prior to the sale. These brokers and
dealers and any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, in connection
with such sales.
[NONE OF THE SELLING SECURITY HOLDERS LISTED IN THIS PROSPECTUS ARE
BROKER-DEALERS. HOWEVER, AZURE CAPITAL, LLC AND RW CAPITAL, LLC ARE AFFILIATES
OF A BROKER-DEALER REGISTERED WITH THE COMMISSION. BOTH ENTITIES, HOWEVER,
PURCHASED THE SECURITIES WHICH THEY BENEFICIALLY OWN IN THE ORDINARY COURSE OF
BUSINESS. AT THE TIME OF THE PURCHASE, THESE ENTITIES HAD NO AGREEMENTS OR OTHER
UNDERSTANDINGS, DIRECTLY OR INDIRECTLY, WITH ANY PERSON TO DISTRIBUTE THE COMMON
SHARES TO BE RECEIVED UPON CONVERSION OR EXERCISE OF THE SERIES B PREFERRED
STOCK OR WARRANTS.]
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form SB-2 under the Securities Act of 1933,
with respect to the common stock offered hereby. This prospectus does not
contain all of the information in the registration statement and the exhibits
and schedules. For further information about us and our common stock, please
refer to the registration statement and the exhibits and schedules filed.
Statements contained in this prospectus as to the contents of any contract or
document filed as an exhibit to the registration statement are qualified to such
exhibit as filed.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and file reports, proxy statements and other
information with the Securities and Exchange Commission. In addition to the
registration statement, and the exhibits and schedules thereto, our reports,
proxy statements and other information filed with the Securities and Exchange
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
44
<PAGE> 49
and at the following Regional Offices of the Commission: New York Regional
Office, 7 World Trade Center, New York, New York 10048; and Chicago Regional
Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois,
60661. Copies of such material may be obtained from the public reference section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a Website that contains reports,
proxy statements and other information regarding issuers that file
electronically with the Commission. The address of that Website is:
http://www.sec.gov.
FORWARD LOOKING STATEMENTS
Certain statements in this Prospectus constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. We desire to avail ourselves of certain "safe harbor" provisions of the
1995 Reform Act and are therefore including this special note to enable us to do
so. Forward-looking statements included in this Prospectus orhereafter included
in other publicly available documents filed with the Securities and Exchange
Commission, reports to our stockholders and other publicly available statements
issued or released by us involve known and unknown risks, uncertainties, and
other factors which could cause our actual results, performance (financial or
operating) or achievements to differ from the future results, performance
(financial or operating) achievements expressed or implied by those forward
looking statements. These future results are based upon management's best
estimates of current conditions and the most recent results of our operations.
The statements appear in a number of places in this Prospectus and include
statements regarding our intent, belief or current expectations, and those of
our directors or officers with respect to: (i) future revenues,(ii) product
development, (iii) the future of the wide format document system industry, and
(iv) other matters. Our actual results could differ materially from those
anticipated in the forward looking statements as a result of certain factors,
including those discussed throughout this Prospectus. These risks include, but
are not limited to, risks associated with recent and accumulated losses,
competition, conflicts of interest, limited operating history, dependence upon
one product line, and other risks detailed in this Prospectus and our Securities
and Exchange Commission filings, including our Annual Report on Form 10-KSB,
Form 10-QSB as well as recently filed Reports on Form 8-K, if any, each of which
could adversely affect our business and the accuracy of the forward looking
statements contained herein.
45
<PAGE> 50
CONTENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS........................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets............................................ F-3
Statements of operations.................................. F-4
Statements of shareholders' equity........................ F-5
Statements of cash flows.................................. F-6
Notes to consolidated financial statements................ F-7 - F-21
</TABLE>
F-1
<PAGE> 51
[LETTERHEAD TO COME]
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Bitwise Designs, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Bitwise Designs, Inc. and its subsidiaries at June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the two years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
[PRICEWATERHOUSECOOPERS, L.L.P.
SIGNATURE]
August 23, 1999, except for Note 5 and Note 18,
for which the date is October 4, 1999
F-2
<PAGE> 52
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998 AND SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
JUNE 30,
--------------------------- SEPTEMBER, 30
1999 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 549,097 $ 4,000,370 $ 377,004
Accounts receivable, net of allowance for doubtful
accounts of $421,018 on June 30, 1999, $480,229
on June 30, 1998 and $428,937 on September 30,
1999............................................ 5,141,178 4,609,807 4,081,680
Due from related parties........................... 48,094 48,422 55,256
Inventories........................................ 3,824,387 3,210,868 3,589,469
Income taxes receivable............................ 12,130 3,291 13,246
Prepaid expenses and other current assets.......... 282,795 266,237 290,434
------------ ------------ ------------
Total current assets....................... 9,857,681 12,138,995 8,407,089
Property and equipment, net.......................... 2,949,458 776,925 2,964,900
Other assets:
Software development costs, net of accumulated
amortization of $300,510 on June 30, 1999,
$185,818 on June 30, 1998 and $330,510 on
September 30, 1999.............................. 129,993 88,391 180,755
Excess of cost over net assets of companies
acquired, net................................... 1,341,239 1,422,526 1,320,916
Deferred financing costs........................... 165,989 244,109 146,459
Other assets....................................... 40,624 37,508 39,779
------------ ------------ ------------
Total assets............................... $ 14,484,984 $ 14,708,454 $ 13,059,898
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under lines of credit................... $ 1,274,779 1,673,275 $ 1,212,452
Current portion of long-term debt.................. 23,781 343,929
Accounts payable................................... 3,852,032 2,294,192 2,950,776
Accrued expenses and other current liabilities..... 1,075,374 822,429 373,513
------------ ------------ ------------
Total current liabilities.................. 6,225,966 4,789,896 4,880,670
Long-term debt, net.................................. 4,781,124 3,440,332 4,971,341
Deferred grant....................................... 142,189 900,000
------------ ------------ ------------
Total liabilities.......................... 11,149,279 8,230,228 10,752,011
------------ ------------ ------------
Commitments
Shareholders' equity
Preferred stock, Series A -- $.10 par value,
5,000,000 shares authorized; 200 shares issued
and outstanding ($1.00 liquidation value)....... 20 20 20
Common stock, $.001 par value; 20,000,000 shares
authorized; 7,410,745 shares issued at June 30,
1999 and 7,460,745 at September 30, 1999........ 7,411 7,411 7,461
Additional paid-in capital......................... 19,846,126 19,822,159 19,925,748
Accumulated deficit................................ (16,441,133) (13,274,645) (17,548,623)
------------ ------------ ------------
3,412,424 6,554,945 2,384,606
Less cost 28,082 shares of common stock in
treasury........................................ (76,719) (76,719) (76,719)
------------ ------------ ------------
Total shareholders' equity................. 3,335,705 6,478,226 2,307,887
------------ ------------ ------------
Total liabilities and shareholders'
equity................................... $ 14,484,984 $ 14,708,454 $ 13,059,898
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 53
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998 AND THE THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- SEPTEMBER 30,
1999 1998 1999
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales........................................... $17,094,765 $33,755,625 $ 3,071,766
Cost of goods sold.................................. 11,479,297 25,663,059 2,482,323
----------- ----------- -----------
Gross profit................................... 5,615,468 8,092,566 589,443
----------- ----------- -----------
Selling, general and administrative expenses........ 7,765,234 12,251,515 1,437,510
Product development expenses........................ 248,801 230,652 64,547
----------- ----------- -----------
Total operating expenses....................... 8,014,035 12,482,167 1,502,057
----------- ----------- -----------
Loss from operations........................... (2,398,567) (4,389,601) (912,614)
----------- ----------- -----------
Other income (expense):
Interest and other income......................... 107,208 163,126 (1,897)
Loss on sale of subsidiary........................ (249,568) (255,888)
Interest expense.................................. (630,396) (939,595) (192,979)
----------- ----------- -----------
(772,756) (1,032,357) (194,876)
----------- ----------- -----------
Loss before income taxes....................... (3,171,323) (5,421,958) (1,107,490)
Income tax (benefit) expense........................ (4,835) 42,101 --
----------- ----------- -----------
Net loss....................................... $(3,166,488) $(5,464,059) $(1,107,490)
=========== =========== ===========
Per share amounts:
Net loss per common share.................... $ (.43) $ (.74) (.15)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 54
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998 AND THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- ---------------------- TOTAL
NUMBER OF $.10 PAR NUMBER OF $.001 PAR PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL DEFICIT STOCK EQUITY
--------- -------- ---------- --------- ----------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997..... 200 $20 7,367,720 $7,368 $18,996,591 $ (7,810,586) $ (423) $11,192,970
Stock options exercised... 35,333 35 82,255 82,290
Detachable warrants issued
in connection with
convertible note........ 650,411 650,411
Warrants issued for
non-employee services... 67,910 67,910
Acquisition of shares
through note default
(27,744 shares)......... (76,296) (76,296)
Conversion of debt to
common shares........... 7,692 8 24,992 25,000
Net loss.................. (5,464,059) (5,464,059)
--- --- ---------- ------ ----------- ------------ -------- -----------
Balance, June 30, 1998.... 200 $20 7,410,745 $7,411 $19,822,159 $(13,274,645) $(76,719) $ 6,478,226
Warrants issued for
non-employee services... 23,967 23,967
Net loss.................. (3,166,488) (3,166,488)
--- --- ---------- ------ ----------- ------------ -------- -----------
Balance, June 30, 1999.... 200 $20 7,410,745 $7,411 $19,846,126 $(16,441,133) $(76,719) $ 3,335,705
Stock issued for
non-employee services
(unaudited)............. 50,000 50 35,992 36,042
Warrants issued for
non-employee services
(unaudited)............. 45,130 45,130
Deferred offering costs
(unaudited)............. (1,500) (1,500)
Net loss (unaudited)...... (1,107,490) (1,107,490)
--- --- ---------- ------ ----------- ------------ -------- -----------
Balance, September 30,
1999 (unaudited)........ 200 $20 $7,460,745 $7,461 $19,925,748 $(17,548,623) $(76,719) $ 2,307,887
=== === ========== ====== =========== ============ ======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 55
BITWISE DESIGNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998 AND THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- SEPTEMBER 30,
1999 1998 1999
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(3,166,488) $(5,464,059) $(1,107,490)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................. 637,186 813,392 168,051
Provision for doubtful accounts receivable..... (60,694) 416,780 18,000
Loss on sale of subsidiary..................... 249,568 255,888
Non-cash compensation expense.................. 67,910
Non-cash selling, general and administrative
expenses..................................... 36,042
Changes in operating assets and liabilities:
Accounts receivable and due from related
parties................................... (470,349) (741,608) 1,034,336
Inventories.................................. (613,519) (1,482,031) 234,918
Prepaid expenses and other current assets.... 7,409 (113,863) 33,730
Accounts payable and accrued expenses........ 1,561,217 1,301,813 (1,603,117)
Income taxes receivable and other............ (8,839) 5,359 (717)
----------- ----------- -----------
Net cash used in operating activities..... (1,864,509) (4,940,419) (1,186,247)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment............... (2,402,661) (250,162) (78,730)
Trademarks acquired............................... (2,500)
Patent costs...................................... (17,105)
Software development costs........................ (156,293) (77,392) (78,945)
Proceeds from sale of businesses.................. 3,600,000
Other............................................. 13,609 (1,500)
----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. (2,564,950) 3,270,946 (157,675)
----------- ----------- -----------
Cash flows from financing activities:
Increase (decrease) in borrowings under line of... (398,496) (873,836) (62,327)
Proceeds from borrowings on long-term debt........ 4,000,000 525,973
Proceeds from borrowings on mortgage obligation... 1,234,493
Principal payments on long-term debt.............. (1,601) (48,128)
Receipt of deferred revenue from economic
development grant.............................. 142,189 757,811
Principal payments on capital lease obligations... (10,277)
Stock options exercised........................... 82,290
Payment of deferred offering and financing
costs.......................................... (390,580) (1,500)
----------- ----------- -----------
Net cash provided by financing
activities.............................. 978,186 2,805,996 1,171,829
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... (3,451,273) 1,136,523 (172,093)
Cash and cash equivalents, beginning of period...... 4,000,370 2,863,847 549,097
----------- ----------- -----------
Cash and cash equivalents, end of period............ $ 549,097 $ 4,000,370 $ 377,004
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 56
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business and business continuity:
Bitwise Designs, Inc. (Bitwise) and its subsidiary DJS Marketing Group,
Inc. (DJS), collectively referred to as the "Company," are engaged in the
manufacture and distribution of document imaging systems, personal computers and
related peripheral equipment, components and accessories as well as network
integration and Internet services and products. Bitwise sells a line of document
imaging systems which it markets nationally under the tradename "DocStar."
In August 1994, Bitwise acquired Electrograph Systems, Inc. (Electrograph),
a value-added distributor of microcomputer peripherals, components and
accessories throughout the East Coast of the United States. In April 1997,
Bitwise sold Electrograph, which was structured as an asset sale with all
liabilities assumed by the purchaser. Simultaneously with its acquisition of
Electrograph in 1994, Bitwise acquired System Solutions Technology, Inc. (SST),
a value-added distributor of advanced technology industrial computers and
computer peripherals. In June 1998 Bitwise sold SST in a stock sale.
In March 1996, Bitwise acquired DJS Marketing Group, Inc. DJS distributes
personal computer systems, workstations and peripheral equipment. In addition,
DJS offers systems integration, network, internet and hardware repair services.
Subsequent to the acquisition of DJS, Bitwise transferred its personal computer
division to DJS.
In June 1999, Bitwise established a majority owned subsidiary,
Authentidate.com LLC (Authentidate), to engage in a new business line of
providing end users with a service which will (a) accept and store e-mail from
networks and personal computers throughout the world and from different
operating systems via the internet, (b) allow for confirmation of acceptance of
all e-mails sent to the system, (c) produce confirmation of receipt of e-mail,
and (d) provide a technology that can verify the authenticity of digital images
by employing a secure clock that will date stamp the images when received. To
date, Authentidate's operations have been limited to developing the technology
for its services and home page.
During the fiscal year ended June 30, 1999 the Company incurred a net loss
of $3,166,488, and cash used by operating activities totaled $1,864,509. The
Company's available cash balance at June 30, 1999 totaled approximately
$549,000. One of the Company's lines of credit has been terminated by its lender
and the Company is currently paying off the outstanding balance (see Note 5). To
date, the Company has been largely dependent on its ability to sell additional
shares of its common stock or other financing to fund its operating deficits.
Under its current operating plan to obtain a national acceptance of the DocStar
product line and to introduce the new Authentidate technology, the Company's
ability to improve operating cash flow is highly dependent on the market
acceptance of its products and the Company's ability to reduce overhead costs.
If the Company is unable to attain projected sales levels for DocStar and other
products, or is unable to implement cost reduction strategies, it may be
necessary to raise additional capital to fund operations and meet its
obligations. There is no assurance that such funding will be available, if
needed.
Financial statements as of and for the three months ended September 30, 1999:
The consolidated financial statements as of and for the three months ended
September 30, 1999 (unaudited) are presented for purposes of additional analysis
and have not been subjected to any auditing procedures by our independent
accountants.
Principles of consolidation:
The consolidated financial statements include the accounts of Bitwise
Designs, Inc. and its subsidiaries, which are wholly-owned. The accounts of the
subsidiaries have been consolidated since the acquisition date. All material
intercompany balances and transactions have been eliminated in consolidation.
F-7
<PAGE> 57
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash equivalents:
The Company considers all highly liquid debt instruments with original
maturities not exceeding three months to be cash equivalents. At June 30, 1999
and 1998, cash equivalents were composed primarily of investments in commercial
paper and overnight deposits.
Inventories:
Inventories are stated at the lower of average cost or market.
Property and equipment:
Property and equipment are stated at cost. Depreciation and amortization
are determined using the straight-line method. Estimated useful lives of the
assets range from three to seven years.
Repairs and maintenance are charged to expense as incurred. Renewals and
betterments are capitalized. When assets are sold, retired or otherwise disposed
of, the applicable costs and accumulated depreciation or amortization are
removed from the accounts and the resulting gain or loss, if any, is recognized.
Deferred licensing costs:
Costs incurred in connection with the licensing of the Company's products
by the Federal Communications Commission are reported net of accumulated
amortization and are amortized using the straight-line method over the products'
estimated life of three years.
Software development costs:
Software development and modification costs incurred subsequent to
establishing technological feasibility are capitalized and amortized based on
anticipated revenue for the related product with an annual minimum equal to the
straight-line amortization over the remaining economic life of the related
products (generally three years). Software development costs capitalized during
1999 and 1998 amounted to $156,293 and $77,392, respectively. Amortization
expense related to software development costs for the years ended June 30, 1999
and 1998 was $114,692 and $70,060, respectively.
Excess of cost over net assets of companies acquired:
Excess of cost over net assets of companies acquired (goodwill) is being
amortized on a straight-line basis over 20 years.
The Company periodically reviews goodwill to assess recoverability, and
impairments would be recognized in operating results if a permanent diminution
in value were to occur. The amortization charged against earnings in 1999 and
1998 was $81,287 and $234,380, respectively. Accumulated amortization at June
30, 1999 and 1998 was $282,002 and $200,715, respectively.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-8
<PAGE> 58
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue recognition and warranty provisions:
Revenue from the sale of products is recognized when the products are
shipped to customers unless such shipments are with right of return, in which
case, revenue is recognized upon sale of the product. The Company provides a one
year warranty on products it manufactures. On products distributed for other
manufacturers, the original manufacturer warranties the product. Warranty
expense was not significant to any of the years presented.
New accounting pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," (SFAS 133). SFAS
133 establishes a new model for accounting for derivatives and hedging
activities. This statement is effective for fiscal years beginning June 30,
2000. The adoption of this standard is not expected to have a significant impact
on the Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general purpose financial statements. This
statement is effective for annual and interim financial statement beginning the
fiscal year ending June 30, 1999, and requires reclassifications of prior
periods. The Company had no other comprehensive income to report for the years
ended June 30, 1999 and 1998.
Advertising expenses:
The Company recognizes advertising expenses as incurred. Advertising and
promotion expense for 1999 and 1998, was approximately $331,000 and $1,175,000,
respectively.
Fourth quarter adjustments:
The Company realized a consolidated net loss of $3,166,488, or $.43 per
share, compared to a consolidated net loss of $5,464,059, or $.74 per share, for
the years ended June 30, 1999 and 1998, respectively. Consolidated net sales
totaled $17,094,765 and $33,755,625 for the years ended June 30, 1999 and 1998,
respectively. During the fourth quarter of 1999, the Company recorded an
adjustment increasing its net loss for sales made with the right of return by
approximately $1,350,000 for which income will not be recognized until sale of
the product by the customer. Additionally, a reserve of approximately $186,000
was recorded for claims arising from the sale of SST. During the fourth quarter
1998, the Company's operating results included the loss on the sale of SST
($256,000), an increase in the reserves for obsolete inventory ($588,000), and
an increase in the allowance for bad debts ($170,000).
Use of estimates:
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Reclassifications:
It is the Company's policy to reclassify, where appropriate, prior year
financial statements to conform to the current year presentation.
F-9
<PAGE> 59
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. LOSS PER SHARE
The following is basic and diluted loss per share information:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net loss applicable to common stockholders........ $(3,166,488) $(5,464,059)
Weighted average shares........................... 7,410,745 $ 7,380,484
Basic and diluted loss per share.................. (.43) (.74)
</TABLE>
The impact of options, warrants and convertible notes was antidilutive to
the calculation of basic and dilutive loss per share, and were accordingly
excluded from the calculation.
3. INVENTORIES
Inventories at June 30, 1999 and 1998 consist of:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Purchased components and raw materials.............. $1,197,192 $2,860,591
Finished goods -- in stock.......................... 559,508 350,277
-- held by resellers................ 2,067,687
---------- ----------
$3,824,387 $3,210,868
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
1999 1998 IN YEARS
----------- ----------- -----------
<S> <C> <C> <C>
Land.......................................... $ 651,932 $ N/A
Building...................................... 1,580,191 40
Machinery and equipment....................... 1,433,904 1,253,958 3-6
Demonstration and rental computers............ 179,752 200,747 5-6
Furniture and fixtures........................ 247,273 237,515 5-7
Leasehold improvements........................ 83,692 84,021 6
Vehicles...................................... 15,090 15,089 5
----------- -----------
4,191,834 1,791,330
Less accumulated depreciation and
amortization................................ (1,242,376) (1,014,405)
----------- -----------
$ 2,949,458 $ 776,925
=========== ===========
</TABLE>
In June 1999, the Company completed construction of a new office/production
facility in Schenectady, New York for approximately $2,300,000. The Company was
awarded a grant totaling $1,000,000 from the Empire State Development
Corporation (an agency of New York State) to be used towards the construction of
the facility. The funding is being received in stages as costs are incurred and
submitted for reimbursement. The grant stipulates that the Company is obligated
to achieve certain annual employment levels at the new site between January 1,
2001 and January 1, 2005 or some or all of the grant will have to be repaid. As
of June 30, 1999, $142,189 had been received and is recorded as deferred
revenue. The remainder of the financing for the new facility, totaling
approximately $1,400,000, is being provided by a local financial institution in
the form of a mortgage loan (See Note 6).
F-10
<PAGE> 60
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization expense on property and equipment for the
years ended June 30, 1999 and 1998 was $230,127 and $321,041, respectively.
5. LINE OF CREDIT
The Company's subsidiary DJS may utilize a line of credit in the amount of
$625,000, of which approximately $256,000 was available at June 30, 1999. This
facility is a wholesale inventory credit facility which is supported by a
guaranty furnished by one of DJS's vendors and expressly limited for purchases
from this vendor. The line is non-interest bearing and payment terms are net 40.
The line is collateralized by all assets of DJS.
In May 1999, the Company's other line of credit for $1,500,000 was
terminated by its lender as a result of the Company not being in compliance with
all of its financial covenants. At June 30, 1999, the balance outstanding was
approximately $1,300,000. Subsequent to year-end, the Company entered into an
agreement with the lender to extend repayment of the outstanding balance until
September 30, 2000. The Company was required to make a partial payment to the
lender of $600,000 by October 4, 1999 with the remainder to be paid off in
weekly installments of $11,778 plus interest. Interest accrues at the prime rate
plus 4%. The agreement has been guaranteed by the President of the Company and
is collateralized by all of the Company's accounts receivable and inventory.
6. LONG-TERM DEBT
Long-term debt at June 30, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Convertible notes payable with 400,000 detachable common
stock purchase warrants. Interest accrues at 8%, payable
semi-annually, in arrears. Each note is in the
denomination of $5,000 and holders may convert at the rate
of $3.25 per share until August 11, 2002 when the notes
mature. The warrants may also be exercised at $3.25 per
share of common stock until August 11, 2002. The warrants
were valued at $650,411 upon issuance and were recorded as
a discount to the face value of the debt and as a credit
to paid in capital. The discount is being amortized to
interest expense over the term of the note. During 1998,
7,692 shares were issued upon conversion of a portion of
the outstanding debt. As of August 11, 1999, the Company
was in default of its obligations as a result of an
overdue interest payment Subsequently, payment of the
interest was extended, the Company paid the interest, and
a waiver of the default has been obtained from the bank... $3,975,000 $3,975,000
Mortgage payable with Central National Bank in the original
amount of $1,400,000 (when fully advanced) with interest,
adjusted every five years, equal to the five-year Treasury
Bill rate plus 2.5%, not to be less than 8.25% (8.25% at
June 30, 1999), payable in monthly installments through
October 2018. The mortgage is collateralized by a first
mortgage lien on the Company's headquarters............... 1,234,493 --
---------- ----------
5,209,493 3,975,000
Less current portion........................................ (23,781)
Less unamortized discount................................... (404,588) (534,668)
---------- ----------
Long-term debt, net of current portion.................... $4,781,124 $3,440,332
========== ==========
</TABLE>
F-11
<PAGE> 61
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate principle maturities of long-term debt for each of the
subsequent five years and thereafter, assuming the convertible notes are not
converted into common stock by August 11, 2002 are as follows:
<TABLE>
<S> <C>
2000..................................................... $ 23,781
2001..................................................... 30,335
2002..................................................... 32,934
2003..................................................... 4,010,757
2004..................................................... 38,821
Thereafter............................................... 1,072,865
----------
$5,209,493
==========
</TABLE>
7. INCOME TAXES
Income tax expense (benefit) for the years ended June 30, 1999 and 1998
consists of currently payable state and local income taxes.
At June 30, 1999, the Company has federal net operating loss carryforwards
for tax purposes approximating $11,570,000. The years in which the net operating
loss carryforwards expire are as follows: 2000 -- $124,000; 2001 -- $684,000;
2002 -- $48,000; 2003 -- $3,000; 2004 -- $6,000; 2008 -- $1,568,000;
2009 -- $867,000; 2011 -- $2,762,000; 2012 -- $686,000, 2013 -- $3,197,000 and
2019 -- $1,625,000.
The following table reconciles the expected tax benefit at the federal
statutory rate of 34% to the effective tax rate.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Computed expected tax benefit..................... $(1,078,250) $(1,843,466)
Increase in valuation allowance................... 1,198,438 867,815
Additional tax gain on sale of subsidiary......... 393,666
Nondeductible goodwill amortization............... 27,638 79,689
Adjustment to prior years' taxes.................. (167,436)
Loss of NOL carryforward on sale of subsidiary.... 470,221
State income taxes, net of federal benefit........ (3,191) 42,101
Other nondeductible expenses...................... 17,966 32,075
----------- -----------
$ (4,835) $ 42,101
=========== ===========
</TABLE>
F-12
<PAGE> 62
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities as of June 30, 1999 and 1998 are presented
below:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred income tax asset:
Allowance for doubtful accounts................. $ 143,146 $ 179,187
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 and inventory
reserves..................................... 176,026 264,368
Other liabilities............................... 186,790 180,724
Deferred revenue................................ 639,904
Net operating loss carryforward................. 3,970,517 3,350,234
----------- -----------
Total gross deferred tax assets......... 5,116,383 3,974,513
Less valuation allowance........................ (5,095,274) (3,896,836)
----------- -----------
Net deferred tax asset.................. 21,109 77,677
Deferred income tax liability:
Equipment, principally due to differences in
depreciation methods......................... (21,109) (77,677)
----------- -----------
Net deferred income taxes............... $ -0- $ -0-
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets as of July 1, 1999 and 1998
was $5,095,274 and $3,896,836, respectively. The net change in the total
valuation allowance for the years ended June 30, 1999 and 1998 was an increase
of $1,198,438 and $867,815, respectively.
8. LEASE COMMITMENTS
The Company is obligated under operating leases for certain equipment and
facilities expiring at various dates through the year 2001.
As of June 30, 1999, future minimum payments by year, and in the aggregate,
noncancelable operating leases with initial terms of one year or more consist of
the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30:
- ---------------------------
<S> <C>
2000...................................................... $ 76,539
2001...................................................... 76,503
--------
$153,042
========
</TABLE>
Rental expense was approximately $216,000 and $309,000 for the years ended
June 30, 1999 and 1998, respectively.
9. PREFERRED STOCK
The Board of Directors is authorized to issue shares of preferred stock,
$.10 par value per share, from time to time in one or more series. The Board may
issue a series of preferred stock having the right to vote on any matter
submitted to shareholders including, without limitation, the right to vote by
itself as a series, or as a class together with any other or all series of
preferred stock. The Board of Directors may determine that the holders of
preferred stock voting as a class will have the right to elect one or more
additional members of the Board of Directors, or the majority of the members of
the Board of Directors. The Board of Directors has designated a series of
preferred stock which has the right to elect a majority of the Board of
Directors. The
F-13
<PAGE> 63
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
holders of preferred stock which have the right to elect a majority of the Board
of Directors are therefore able to control the Company's policies and affairs.
The Board of Directors may also grant to holders of any series of preferred
stock, preferential rights to dividends and amounts payable in liquidation.
Furthermore, the Board of Directors may determine whether the shares of any
series of preferred stock may be convertible into common stock or any other
series of preferred stock of the Company at a specified conversion price or
rate, and upon other terms and conditions as determined by the Board of
Directors.
The Board of Directors has designated 200 shares of preferred stock as
Series A Preferred stock, of which 100 shares have been issued to each of the
chairman/chief executive officer and senior vice president of the Company. The
holders of the Series A Preferred Stock have the right to elect a majority of
the Board of Directors as long as each holder remains, subject to certain
conditions, an officer, director and at least 5% shareholder of the Company.
During such time as the Series A Preferred Stock is outstanding, the holders
have the right to elect a majority of the Board of Directors. To date, the
holders of the Series A Preferred Stock have not exercised such right. The
Series A Preferred Stock is entitled to vote as a group. The holders of the
Series A Preferred Stock have a preference on liquidation of $1.00 per share and
no dividend or conversion rights.
10. STOCK OPTION PLANS AND STOCK WARRANTS
A) 1992 Employees Stock Option Plan:
In May 1992, the shareholders approved the 1992 Employees Stock Option Plan
(the "1992 Plan"). The Plan provided for the grant of options to purchase
600,000 shares of the Company's common stock. In January 1995, the shareholders
approved an amendment to the Plan to increase the number of shares of common
stock available under the Plan to 3,000,000 shares. Under the terms of the 1992
Plan, options granted thereunder may be designated as options which qualify for
incentive stock option treatment ("ISO") under Section 422A of the Internal
Revenue Code, or options which do not so qualify ("non-ISOs"). In 1997, the
Company filed a registration statement with the SEC to register the shares
issued under the 1992 Plan.
The 1992 Plan is administered by a Compensation Committee designated by the
Board of Directors. The Board or the Committee, as the case may be, has the
discretion to determine eligible employees and the times and the prices at which
options will be granted, whether such options shall be ISOs or non-ISOs, the
period during which each option will be exercisable and the number of shares
subject to each option. Options generally begin to vest one year after the date
of grant. Vesting occurs one-third per year over three years. The Board or the
Committee has full authority to interpret the 1992 Plan and to establish and
amend rules and regulations relating thereto. Under the 1992 Plan, the exercise
price of an option designated as an ISO may not be less than the fair market
value of the Company's common stock on the date the option is granted. However,
in the event an option designated as an ISO is granted to a ten percent
shareholder, the exercise price shall be at least 110% of such fair market
value. The aggregate fair market value on the grant date of shares subject to
options which are designated as ISOs which become exercisable in any calendar
year, shall not exceed $100,000 per optionee.
The Board or the Committee may in its sole discretion grant bonuses or
authorize loans to or guarantee loans obtained by an optionee to enable such
optionee to pay any taxes that may arise in connection with the exercise or
cancellation of an option.
Unless sooner terminated, the 1992 Plan will expire in the year 2002.
F-14
<PAGE> 64
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE OPTION
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding at July 1, 1997........................ 1,939,370 $3.53
Options granted equal to market price.............. 973,833 2.93
Options exercised.................................. (35,333) 2.33
Options canceled or surrendered.................... (539,000) 4.79
---------
Outstanding at June 30, 1998....................... 2,338,870 2.99
Options granted equal to market.................... 50,500 1.39
Options canceled or surrendered.................... (404,500) 3.48
---------
Outstanding at June 30, 1999....................... 1,984,870 2.85
=========
</TABLE>
The following is a summary of the status of employee stock options at June
30, 1999:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------- -------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
- -------------------- ------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$ .34 - 2.00.................... 961,870 1.3 $1.54 888,037 $1.54
2.01 - 4.00.................... 675,500 3.1 3.04 561,333 3.09
4.01 - 8.00.................... 347,500 1.6 6.10 343,333 6.11
</TABLE>
As of June 30, 1999 and 1998, 1,792,703 shares and 1,587,703 shares,
respectively, were exercisable under the 1992 Employees Stock Option Plan.
B) Non-Executive Director Stock Option Plan:
In April 1992, the Board of Directors adopted the Non-Executive Director
Stock Option Plan (the "Director Plan") which was approved by the Company's
stockholders in May 1992. With the approval of the shareholders, the Director
Plan was amended in December 1997. Options are granted under the Director Plan
until April 2002 to (i) non-executive directors as defined and (ii) members of
any advisory board established by the Company who are not full-time employees of
the Company or any of its subsidiaries. The Director Plan provides that each
non-executive director will automatically be granted an option to purchase
20,000 shares upon joining the Board of Directors and 10,000 on each September 1
thereafter, provided such person has served as a director for the 12 months
immediately prior to such September 1st. Each eligible director of an advisory
board will receive, upon joining the advisory board, and on each September 1st
thereafter, an option to purchase 5,000 shares of the Company's common stock,
providing such person has served as a director of the advisory board for the
previous 12-month period.
The exercise price for options granted under the Director Plan is 100% of
the fair market value of the common stock on the date of grant. The "fair market
value" is the closing NASDAQ bid price, or if the Company's common stock is not
quoted by NASDAQ, as reported by the National Quotation Bureau, Inc., or a
market maker of the Company's common stock, or if the common stock is not quoted
by any of the above by the Board of Directors acting in good faith. Until
otherwise provided in the Stock Option Plan, the exercise price of options
granted under the Director Plan must be paid at the time of exercise, either in
cash, by delivery of shares of common stock of the Company or by a combination
of each. The term of each option commences on the date it is granted and unless
terminated sooner, as provided in the Director Plan, expires five years from the
date of grant. The Director Plan is administered by a committee of the board of
directors composed of not fewer than three persons who are officers of the
Company (the "Committee"). The Committee has no discretion to determine which
non-executive director or advisory board member will
F-15
<PAGE> 65
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receive options or the number of shares subject to the option, the term of the
option or the exercisability of the option. However, the Committee will make all
determinations of the interpretation of the Director Plan. Options granted under
the Director Plan are not qualified for incentive stock option treatment.
A schedule of director stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE OPTION
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding July 1, 1997........................... 200,000 $3.59
Options granted equal to market price.............. 70,000 2.94
Options cancelled or surrendered................... (130,000) 4.17
--------
Outstanding June 30, 1998.......................... 140,000 3.67
Options granted equal to market price.............. 50,000 1.00
Options cancelled or surrendered................... (60,000) 3.70
--------
Outstanding June 30, 1999.......................... 130,000 2.54
========
</TABLE>
The options range in price from $1.00 to $5.13 per share and have a
weighted average remaining contractual life of 2.6 years.
C) Common Stock Warrants:
A schedule of common stock warrant activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE WARRANT
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Outstanding July 1, 1997.......................... 2,326,995 $4.23
Warrants granted equal to market price............ 40,000 3.44
Warrants granted less than market price........... 400,000 3.25
---------
Outstanding June 30, 1998......................... 2,766,995 4.07
Warrants granted equal to market price............ 232,000 3.02
Warrants cancelled or surrendered................. (100,000) 7.50
---------
Outstanding June 30, 1999......................... 2,898,995
=========
</TABLE>
In August 1997, the Company issued 400,000 detachable common stock purchase
warrants in connection with $4.0 million of convertible debt. Other warrants
issued during the years ended June 30, 1999 and 1998 were to various firms
providing services to the Company.
The following is a summary of the status of common stock warrants at June
30, 1999:
<TABLE>
<CAPTION>
OUTSTANDING WARRANTS EXERCISABLE WARRANTS
----------------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE
- -------------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.50 - 4.00............. 1,151,284 2.7 $2.87 1,151,284 $2.87
4.01 - 8.00............. 1,747,711 1.5 4.53 1,747,711 4.53
</TABLE>
F-16
<PAGE> 66
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D) Options and warrants valuation:
The per share weighted average fair value for all common stock options
granted to employees during fiscal 1999 and 1998 was $2.79 and $1.15,
respectively. These amounts were determined using the Black Scholes
option-pricing model which values options based on the stock price at the grant
date, the expected life of the option, the estimated volatility of the stock,
expected dividend payments and the risk-free interest rate over the expected
life of the option or warrant. The dividend yield was zero in 1999 and 1998. The
expected volatility was based on the stock prices for the period beginning in
May 1992 when the Company completed its first public offering. The expected
volatility was 75.0% and 68.7% for 1999 and 1998, respectively. The risk-free
interest rate was the rate available on zero coupon U.S. government issues with
a term equal to the remaining term for each grant. The risk free rate ranges
from 4.3% to 5.4% in 1999 and 5.5% to 6.3% in 1998, respectively. The expected
life of the option was estimated based on the exercise history from previous
grants and is estimated to be five years.
The Company applies APB No. 25 in accounting for its stock option and stock
warrant plans and, accordingly, no compensation cost has been recognized in the
Company's financial statements for stock options under any of the stock plans.
However, compensation cost has been recognized for warrants granted. If under
SFAS No. 123, the Company determined compensation cost based on the fair value
at the grant date for its stock options and warrants, net loss and loss per
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
Net loss
As reported..................................... $(3,166,488) $(5,464,059)
Pro forma....................................... (2,960,231) (6,160,155)
Basic and diluted loss per share
As reported..................................... $ (.43) $ (.74)
Pro forma....................................... (.40) (.83)
</TABLE>
Under SFAS No. 123, stock options and warrants granted prior to fiscal 1996
are not required to be included as compensation in determining pro forma net
earnings. To determine pro forma net earnings, reported net earnings have been
adjusted for compensation costs calculated for vested stock options granted
during fiscal 1999 and 1998.
The effects of applying SFAS 123 on providing pro-forma disclosures are not
necessarily likely to be representative of the effects on reported net income
for future years.
11. COMMITMENTS -- EMPLOYMENT AGREEMENTS
Effective July 1, 1995, the Company entered into a new employment agreement
with its chief executive officer for a five-year term ending June 30, 2000. The
employment agreement provides for (i) annual compensation of $100,000 for the
first year of the agreement, increasing by 10% each year thereafter; (ii) a
bonus of 3% of the Company's pre-tax income, with such additional bonuses as may
be awarded at the discretion of the Board of Directors; (iii) the award of
non-qualified stock options to purchase 600,000 shares of the Company's common
stock at an exercise price of $1.5625 per share of which increments of 100,000
shares vested on June 30, 1995, and the remainder vests in increments of 125,000
shares on each of June 30, 1996, 1997, 1998 and 1999; (iv) certain insurance and
severance benefits and (v) an automobile and expenses.
F-17
<PAGE> 67
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. CASH FLOWS -- SUPPLEMENTAL INFORMATION
Cash flows:
The Company paid interest in the amounts of $451,387 and $639,446 for the
years ended June 30, 1999 and 1998, respectively. Income taxes paid aggregated
$4,304 and $27,254 during the years ended June 30, 1999 and 1998, respectively.
Noncash investing and financing activities:
During the year ended June 30, 1998, the Company received common shares of
the Company's stock with a market value of $76,296 in satisfaction of a note
receivable with the former shareholders of DJS Marketing Group, Inc. of
$145,657.
In March 1998, the Company issued 7,692 common shares of the Company's
stock pursuant to the conversion of $25,000 of convertible debt into common
stock.
13. RELATED PARTIES
At June 30, 1999 and 1998, "Due from related parties" included non-interest
bearing advances of $48,094 and $48,422, respectively, from employees and
officers of the Company.
14. EMPLOYEE BENEFIT PLAN
Effective July 1, 1993, the Company implemented a qualified defined
contribution 401(k) profit sharing plan for all eligible employees. The Company
can make contributions in percentages of compensation, or amounts as determined
by the Company. The Company did not contribute to the plan during the years
ended June 30, 1999 and 1998.
15. SALE OF BUSINESS
In June 1998, the Company sold SST in a stock sale. The Company received
approximately $3.6 million in cash and approximately $400,000 in accounts
receivable and inventory. In 1999, the Company received certain claims from the
buyer of SST for indemnification under the agreements governing its sale. A
settlement was negotiated and the Company agreed to pay the buyer $341,000 to be
paid monthly over fifteen months accruing interest at 6%. An additional reserve
of approximately $250,000 was recorded in 1999 related to these claims. The
Company realized a loss of approximately $505,000 on the sale.
16. FINANCIAL INSTRUMENTS
Concentrations of credit risk:
Financial instruments which subject the Company to concentrations of credit
risk consist of cash and cash equivalents and trade accounts receivable. To
reduce credit risk, the Company places its temporary cash investments with high
credit quality financial institutions. The Company's credit customers are not
concentrated in any specific industry or business. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information.
Fair value:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses and other current liabilities. The carrying amount of cash and
cash equivalents, accounts receivable, accounts payable and
F-18
<PAGE> 68
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accrued expenses and other current liabilities approximates fair value because
of the short maturity of these instruments.
Lines of credit and long-term debt. The interest rates on the Company's
lines of credit are reset according to changes in the current market. The
remaining balance of long-term debt approximates fair value based on its
discounted face amount. Consequently, the carrying value of the borrowings under
lines of credit and long-term debt approximates fair value.
17. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 is effective for
fiscal years beginning after December 15, 1997. SFAS 131 establishes standards
for reporting financial and descriptive information about an enterprise's
operating segments in its annual financial statements and selected segment
information in interim financial reports.
The Company has two reportable segments: Bitwise, a document imaging
company and DJS Marketing Group, Inc. (DJS), a computer systems integrator.
Bitwise produces a product called DocStar which is a document storage and
retrieval business and DJS markets computer services including network services,
internet services and software installation and integration. In addition, DJS
sells a complete line of personal computers and peripheral equipment.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
The Company's reportable segments are separate companies which are managed
separately. In prior years the Company owned two other subsidiary companies,
Electrograph Systems, Inc. which was sold in April 1997 and Systems Solutions
Technology, Inc. which was sold in June 1998. Both companies marketed personal
computers and peripheral equipment. Those companies are included in the "All
Other" column for fiscal years ending June 30, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
BITWISE DJS ALL OTHER TOTALS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SEGMENT INFORMATION:
June 30, 1999
Revenues from external customers...... $ 7,674,451 $ 9,420,314 $17,094,765
Intersegment revenues................. 116,680 116,680
Interest and other revenue............ 107,208 107,208
Interest expense...................... 595,345 35,051 630,396
Depreciation and amortization......... 586,591 50,595 637,186
Segment profit/(loss)................. (3,331,296) 392,854 (2,938,442)
Segment assets........................ 11,831,310 2,667,161 14,498,471
June 30, 1998
Revenues from external customers...... $ 9,002,203 $11,159,759 $13,593,663 $33,755,625
Intersegment revenues................. 59,738 321,366 381,104
Interest and other revenue............ 156,241 400 6,485 163,126
Interest expense...................... 511,414 225,983 202,198 939,595
Depreciation and amortization......... 686,804 59,642 66,946 813,392
Segment profit/(loss)................. (4,196,227) (594,609) (128,593) (4,919,429)
</TABLE>
F-19
<PAGE> 69
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BITWISE DJS ALL OTHER TOTALS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Other significant non cash items:
Receipt of common shares with a
market value of $76,296 in
satisfaction of a note
receivable....................... 145,657 145,657
Segment assets........................ 12,463,515 2,274,346 14,737,861
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
RECONCILIATIONS:
Revenues:
Total revenues for reportable segments...................... $17,211,445 $34,136,729
Elimination of intersegment revenues........................ (116,680) (381,104)
----------- -----------
Total consolidated revenues................................. $17,094,265 $33,755,625
=========== ===========
Profit or (Loss):
Total profit or loss for reportable segments................ $(2,688,874) $(4,919,429)
Product development expenses................................ (248,801) (230,652)
Loss on sale of subsidiary.................................. (249,568) (255,888)
Elimination of intersegment profits......................... 15,920 (15,989)
----------- -----------
Loss before income taxes.................................... $(3,171,323) $(5,421,958)
=========== ===========
Assets:
Total assets for reportable segments........................ $14,498,471 $14,737,861
Elimination of intersegment profit.......................... (13,487) (29,407)
----------- -----------
Consolidated total assets................................... $14,484,984 $14,708,454
=========== ===========
</TABLE>
18. SUBSEQUENT EVENTS
On October 4, 1999, the Company closed three concurrent private offerings.
In the first offering, the Company sold 740,000 units at an aggregate offering
price of $740,000, each unit consisting of two shares of common stock and two
Series B common stock purchase warrants (the "Series B Warrants"). The Series B
Warrants entitle the holder to purchase one share of common stock at an exercise
price of $1.375 per share during the offering period commencing on the date of
issuance and terminating five years thereafter. The Series B warrants are
redeemable at any time commencing one year after issuance at the option of the
Company with not less than 30 nor more than 60 days written notice to the
registered holders at a redemption price of $.05 per warrant provided; (i) The
public sale of the shares of common stock issuable upon exercise of the Series B
warrants are covered by a tentative registration statement; and (ii) During each
of the immediately preceding 20 consecutive trading days ending within 10 days
of the date of the notice of redemption, the closing bid price of the Company's
common stock is at least $3.25 per share.
In the second offering, the Company sold 50,000 shares of a newly created
class of Series B convertible cumulative preferred stock (the "Series B
Preferred Stock"). The Series B preferred stock was sold at $25.00 per share for
an aggregate offering price of $1,250,000. Dividends on the Series B Preferred
Stock are payable at the rate of 10% per annum, semi-annually in cash. Each
share of Series B Preferred Stock is convertible into shares of the Company's
common stock or is converted into such number of shares of the common stock as
shall equal $25.00 divided by the conversion price of $1.875 per share subject
to adjustment under certain circumstances. Commencing three years after the
closing, the conversion price shall be the lower of $1.875 per share or the
average of the closing bid and asked price of the Company's common stock for the
10 consecutive trading days immediately ending one trading day prior to the
notice of the date of conversion;
F-20
<PAGE> 70
BITWISE DESIGNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provided, however, that the holders are not entitled to convert more than 20% of
the Series B preferred shares held by such holder on the third anniversary of
the date of issuance per month. The Series B Preferred Stock is redeemable at
any time commencing one year after issuance or not less than 30 nor more than 60
days written notice at a redemption price of $25 per share plus accrued and
unpaid dividends provided; (i) the public sale of the shares of common stock
issuable upon conversion of the Series B preferred Stock (the "Conversion
Shares") are covered by an effective registration statement or are otherwise
exempt from registration; and (ii) during the immediately preceding 20
consecutive trading days ending within 10 days of the date of the notice of
redemption, the closing bid price of the Company's Common Stock is not less than
$3.75 per share.
Commencing 34 months after the Closing, the Series B Preferred Stock is
redeemable at the option of the Company without regard to the closing price of
the Company's Common Stock.
The Company also created a new subsidiary, Authentidate.Com, LLC through
which it will market its new Internet service which allows for the verification
of the authenticity of digital images. In connection with the above offerings,
the purchasers were granted the right to purchase 20% of Authentidate.Com, LLC
for $100,000. In addition, the Purchasers were issued an aggregate of 999,999
Series C common stock purchase warrants (the "Series C Warrants"). The Series C
Warrants are redeemable at any time commencing six months after issuance, on not
less than 30 nor more than 60 days written notice to registered holders at a
redemption price equal to $.05 per Warrant, provided (i) the public sale of the
shares of common stock issuable upon exercise of the Series C Warrants (the
"Warrant Shares") are covered by an effective registration statement or are
otherwise exempt from registration; and (ii) during each of the immediately
preceding 20 consecutive trading days ending within 10 days of the date of the
notice of redemption, the closing bid price of the Company's common stock is not
less than 120% of the current exercise price of the Series C Warrants.
The Series C Warrants were also divided into three classes (333,333
warrants per class) to provide for varying exercise prices. The exercise price
of the Series C Warrants is as follows:
Class I -- $1.50 per share of Common Stock, increasing (i) $.75 per share
thirty days after the effective date of the registration statement covering the
underlying shares (the "Registration Statement"); (ii) an additional $.75 per
share seven months after the effective date of the Registration Statement; and
(iii) an additional $.75 per share 13 months after the effective date of the
Registration Statement, subject to adjustment for stock splits and corporate
reorganizations.
Class II -- $1.50 per share of Common Stock, increasing (i) $.75 per share
sixty days after the effective date of the Registration Statement; (ii) an
additional $.75 per share seven months after the effective date of the
Registration Statement; and (iii) an additional $.75 per share 13 months after
the effective date of the Registration Statement, subject to adjustment for
stock splits and corporate reorganizations.
Class III -- $1.50 per share of Common Stock, increasing (i) $.75 per share
ninety days after the effective date of the Registration Statement; (ii) an
additional $.75 per share seven months after the effective date of the
Registration Statement; and (iii) an additional $.75 per share 13 months after
the effective date of the Registration Statement, subject to adjustment for
stock splits and corporate reorganizations.
The Company received gross proceeds of approximately $2,000,000. The
Company has utilized the proceeds of the three offerings as follows:
approximately $600,000 has been utilized to repay a portion of the Company's
line of credit; approximately $400,000 will be utilized to develop the
Authentidate.com business; approximately $160,000 was utilized to make a past
due interest payment on the Company's outstanding 8% convertible notes, and the
remainder has been reserved for working capital. The Company included offering
expenses of approximately $60,000.
F-21
<PAGE> 71
[5,886,416] SHARES
BITWISE DESIGNS, INC.
COMMON STOCK
PROSPECTUS
, [2000]
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The General Corporation Law of Delaware provides generally that a
corporation may indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative in nature
to procure a judgment in its favor, by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) and, in a proceeding not by or in
the right of the corporation, judgments, fines and amounts paid in settlement,
actually and reasonably incurred by him in connection with such suit or
proceeding, if he acted in good faith and in a manner believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reason to believe his conduct was
unlawful. Delaware law further provides that a corporation will not indemnify
any person against expenses incurred in connection with an action by or in the
right of the corporation if such person shall have been adjudged to be liable
for negligence or misconduct in the performance of his duty to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine that, despite the adjudication of liability but in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for the expenses which such court shall deem proper.
Our By-Laws provide for indemnification of our officers and directors to
the greatest extent permitted by Delaware law for any and all fees, costs and
expenses incurred in connection with any action or proceeding, civil or
criminal, commenced or threatened, arising out of services by or on behalf of
us, providing such officer's or director's acts were not committed in bad faith.
The By-Laws also provide for advancing funds to pay for anticipated costs and
authorizes the Board to enter into an indemnification agreement with each
officer or director.
In accordance with Delaware law, our Certificate of Incorporation contains
provisions eliminating the personal liability of directors, except for breach of
a director's fiduciary duty of loyalty to the us or to our stockholders, acts or
omission not in good faith or which involve intentional misconduct or a knowing
violation of the law, and in respect of any transaction in which a director
receives an improper personal benefit. These provisions only pertain to breaches
of duty by directors as such, and not in any other corporate capacity, e.g., as
an officer. As a result of the inclusion of such provisions, neither Bitwise nor
our stockholders may be able to recover monetary damages against directors for
actions taken by them which are ultimately found to have constituted negligence
or gross negligence, or which are ultimately found to have been in violation of
their fiduciary duties, although it may be possible to obtain injunctive or
equitable relief with respect to such actions. If equitable remedies are found
not to be available to stockholders in any particular case, stockholders may not
have an effective remedy against the challenged conduct.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and therefore is unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We will bear all expenses in connection with the issuance and distribution
of the securities, including those set forth below. None of these expenses will
be borne by the Selling Security Holders.
II-1
<PAGE> 73
<TABLE>
<CAPTION>
ITEMS AMOUNTS
- ----- ------------
<S> <C>
Securities and Exchange Commission Registration Fee......... [$12,070.84]
Printing and Engraving Expenses............................. [ $2,000.00]*
Accounting Fees and Expenses................................ [ $3,500.00]
Legal Fees and Expenses..................................... [ $5,000.00]
Blue Sky Fees and Expenses.................................. [ $2,500.00]*
Transfer Agent and Registrar Fees........................... [ $2,000.00]*
Miscellaneous Fees and Expenses............................. $ 0.00*
------------
[$27,070.84]*
============
</TABLE>
- ---------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On October 4, 1999, we closed two concurrent private offerings. In the
first offering, we sold 740,000 units at an aggregate offering price of
$740,000. Each unit consisted of two shares of common stock and two Series B
Common Stock Purchase Warrants.
SERIES B WARRANTS
- The Series B Warrants entitle the holder to purchase one share of common
stock at an exercise price of $1.375 per share during the offering period
commencing on the date of issuance and terminating five years thereafter.
- The Series B Warrants are redeemable at any time commencing one year
after issuance at our option with not less than 30 nor more than 60 days
written notice to the registered holders at a redemption price of $.05
per warrant provided; (1) The public sale of the shares of common stock
issuable upon exercise of the Series B warrants are covered by a
tentative registration statement; and (2) During each of the immediately
preceding 20 consecutive trading days ending within 10 days of the date
of the notice of redemption, the closing bid price of our common stock is
at least $3.25 per share.
In the second offering, we sold 50,000 shares of a newly created class of
Series B convertible cumulative Preferred Stock. The Series B Preferred Stock
was sold at $25.00 per share for an aggregate offering price of $1,250,000.
SERIES B PREFERRED STOCK
The following terms apply to the Series B Preferred Stock:
- - DIVIDENDS Dividends on the Series B Preferred Stock are
payable at the rate of 10% per annum,
semi-annually in cash.
- - CONVERSION Each share of Series B Preferred Stock is
convertible into the number of shares of our
common stock as shall equal $25.00 divided by
the conversion price of $1.875 per share,
subject to adjustment under certain
circumstances.
- - ADJUSTMENT TO CONVERSION
PRICE Commencing three years after the closing, the
conversion price shall be the lower of $1.875
per share or the average of the closing bid and
asked price of our common stock for the 10
consecutive trading days immediately ending one
trading day prior to the notice 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.
II-2
<PAGE> 74
- - REDEMPTION The Series B Preferred Stock is redeemable at
any time commencing one year after issuance or
not less than 30 nor more than 60 days written
notice at a redemption price of $25 plus
accrued and unpaid dividends provided;
- the public sale of the shares of common
stock issuable upon conversion of the
Series B Preferred Stock are covered by
an effective registration statement or
are otherwise exempt from registration;
and
- during the immediately preceding 20
consecutive trading days ending within
10 days of the date of the notice of
redemption, the closing bid price of our
Common Stock is not less than $3.75 per
share.
Commencing 34 months after the Closing, the
Series B Preferred Stock is redeemable at the
our option without regard to the closing price
of our Common Stock.
We also created a new subsidiary, Authentidate.com, Inc. through which we
will market our new Internet service which allows for the verification of the
authenticity of digital images. In connection with the above offerings, the
purchasers [PURCHASED] 20% of Authentidate.com, Inc. [AND 999,999 BITWISE]
Series C Common Stock Purchase Warrants [FOR A TOTAL PRICE OF $100,000. THIS
OFFERING CLOSED ON NOVEMBER 19, 1999].
SERIES C WARRANTS
- The Series C Warrants are redeemable at any time commencing six months
after issuance, on not less than 30 nor more than 60 days written notice
to registered holders at a redemption price equal to $.05 per Warrant,
provided (1) the public sale of the shares of common stock issuable upon
exercise of the Series C Warrants are covered by an effective
registration statement or are otherwise exempt from registration; and (2)
during each of the immediately preceding 20 consecutive trading days
ending within 10 days of the date of the notice of redemption, the
closing bid price of our common stock is not less than 120% of the
current exercise price of the Series C Warrants.
- The Series C Warrants were also divided into three equal classes of
333,3333 each to provide for varying exercise prices. The exercise price
of the Series C Warrants is as follows:
Class I $1.50 per share of Common Stock, increasing (1) $.75 per share
30 days after the effective date of the registration statement
covering the underlying shares; (2) an additional $.75 per
share 7 months after the effective date; and (3) an additional
$.75 per share 13 months after the effective date, subject to
adjustment for stock splits and corporate reorganizations.
Class II$1.50 per share of Common Stock, increasing (1) $.75 per share
60 days after the effective date of the registration
statement; (2) an additional $.75 per share 7 months after the
effective date; and (3) an additional $.75 per share 13 months
after the effective date, subject to adjustment for stock
splits and corporate reorganizations.
Class III
$1.50 per share of Common Stock, increasing (1) $.75 per share
90 days after the effective date of the registration
statement; (2) an additional $.75 per share 7 months after the
effective date; and (3) an additional $.75 per share 13 months
after the effective date, subject to adjustment for stock
splits and corporate reorganizations.
We received gross proceeds of approximately [$2,090,000 FROM ALL OF THE ABOVE
OFFERINGS].
II-3
<PAGE> 75
We have utilized the proceeds of the three offerings as follows:
- approximately $600,000 has been utilized to repay a portion of our line
of credit;
- approximately $400,000 will be utilized to develop the Authentidate.com
business;
- approximately $160,000 was utilized to make a past due interest payment
on our outstanding 8% convertible notes; and
- the remainder has been reserved for working capital.
We incurred offering expenses of approximately $60,000.
ITEM 27. EXHIBITS.
The following exhibits are filed herewith. [AN * INDICATES EXHIBITS WHICH
WERE PREVIOUSLY FILED AS PART OF OUR REGISTRATION STATEMENT ON FORM SB-2, FILED
WITH THE COMMISSION ON NOVEMBER 15, 1999 (FILE NO. 333-91475). AN ** INDICATES
EXHIBITS FILED HEREWITH.]
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1 Certificate of Incorporation of Bitwise Designs,
Inc.-Delaware (Exhibit 3.3.1 to Registration Statement on
Form S-18, File No. 33-46246-NY)
3.1.1 [*] Certificate of Designation of Series B Preferred Stock
3.2 By-Laws (Exhibit 3.2 to Registration Statement on Form S-18,
File No. 33-46246-NY)
4.1 Form of Common Stock Certificate (Exhibit 4.1 to
Registration Statement on Form S-18, File No. 33-46246-NY)
4.2 Form of Series A Preferred Stock Certificate (Exhibit 4.2 to
Registration Statement on Form S-18, File No. 33-46246-NY)
4.3 Form of Note and Warrant Purchase, Paying and
Conversion/Exercise agency agreement dated as of August 8,
1997 between the Company and Banca del Gottardo (Exhibit 4.7
to the Company's Form 10-KSB dated June 30, 1997).
4.4 Terms of 8% Convertible Notes due August 11, 2002 (Exhibit
4.8 to the Company's Form 10-KSB dated June 30, 1997).
4.5 [*] Form of Series B Warrant
4.6 [*] Form of Series C Warrant
4.7 [*] Form of Warrant held by members of Goldstein & DiGioia, LLP
4.8 [*] Form of Series B Convertible Preferred Stock
5. Opinion of Goldstein & DiGioia, LLP re legality of shares
offered
10.1 Employment agreement with John T. Botti, dated April, 1992
(Exhibit 10.8 to Registration Statement on Form S-18, File
No. 33-46246-NY)
10.2 Employment agreement with Ira C. Whitman, dated April, 1992
(Exhibit 10.9 to Registration Statement on Form S-18, File
No. 33-46246-NY)
10.3 1992 Employee stock option plan (Exhibit 10.10 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.4 1992 Nonexecutive Directors stock option plan (Exhibit 10.11
to Registration Statement on Form S-18, File No.
33-46246-NY)
10.5 Loan agreement with Norstar Bank dated February 6, 1992
(Exhibit 10.13 to Registration Statement on Form S-18, File
No. 33-46246-NY)
10.6 Form of Conversion Agency Agreement between the Company and
Banca del Gottardo dated as of August 8, 1997 (Exhibit 10.24
to Form 10-KSB dated June 30, 1997).
</TABLE>
II-4
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.7 Form of Warrant Agency Agreement between the Company and
Banca del Gottardo dated as of August 8, 1997 (Exhibit to
Form 10-KSB dated June 30, 1997).
10.8 Stock Purchase and Merger Agreement dated April 7, 1998
between the Company USI and SST. (Exhibit A to Proxy
Statement dated May 8, 1998).
10.9 [*] Financial Consulting Agreement, dated September 21, 1999, by
and between Bitwise Designs and Corporate Funding Group,
LLC.
10.10 [*] Consulting Agreement, dated September 23, by and between
Bitwise Designs, Inc. and Nicholas Themelis.
10.11 [*] Line of Credit Agreement with Bank of America, dated October
1, 1999.
10.12 [*] Service Agreement, dated September 15, 1999, by and between
Bitwise Designs, Inc. and Shore Venture Group, L.L.C.
10.13 [**] Form of Series B Preferred Stock Subscription Agreement
Executed by all Holders of Series B Preferred Stock.
11 Statement re: Computation of Per Share Earnings (Exhibit 11
to Form 10-KSB, filed October 4, 1999).
21 Subsidiaries of Registrant. (Exhibit 21 to Form 10-KSB,
filed October 4, 1999).
23.1 Consent of PricewaterhouseCoopers, LLP.
23.2 Consent of Goldstein & DiGioia, LLP, contained in Exhibit 5.
</TABLE>
ITEM 28. UNDERTAKINGS
(a) We hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10 (a) (3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of a prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a twenty percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement;
(iii) To include any material information with respect to the plan
of distribution.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions,
II-5
<PAGE> 77
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-6
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we certify that
we have reasonable grounds to believe that we meet all of the requirements for
filing on Form SB-2 and have duly caused this Registration Statement to be
signed on our behalf by the undersigned, thereunto duly authorized, in the City
of Albany, New York, on February 11, 2000.
BITWISE DESIGNS, INC.
By: /s/ JOHN T. BOTTI
------------------------------------
John T. Botti
Chief Executive Officer, Chairman of
the
Board and President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below substitutes and appoints John Botti his true and lawful attorney-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be don in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1933, this
registration statement has been signed below by the following persons on our
behalf and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ JOHN T. BOTTI President, Chief Executive [JANUARY 31,
- --------------------------------------------------- Officer, Chairman of the Board 2000]
John T. Botti and Director
/s/ IRA C. WHITMAN Senior Vice President, [JANUARY 31,
- --------------------------------------------------- Secretary and Director 2000]
Ira C. Whitman
/s/ STEVEN A. KRIEGSMAN Director [JANUARY 31,
- --------------------------------------------------- 2000]
Steven A. Kriegsman
/s/ J. EDWARD SHERIDAN Director [JANUARY 31,
- --------------------------------------------------- 2000]
J. Edward Sheridan
/s/ CHARLES C. JOHNSTON Director [JANUARY 31,
- --------------------------------------------------- 2000]
Charles C. Johnston
/s/ NICHOLAS T. THEMELIS Director [JANUARY 31,
- --------------------------------------------------- 2000]
Nicholas T. Themelis
/s/ DENNIS H. BUNT Chief Financial Officer and [JANUARY 31,
- --------------------------------------------------- Principal Accounting Officer 2000]
Dennis H. Bunt
</TABLE>
II-7
<PAGE> 79
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1 Certificate of Incorporation of Bitwise Designs,
Inc.-Delaware (Exhibit 3.3.1 to Registration Statement on
Form S-18, File No. 33-46246-NY)
3.1.1 [*] Certificate of Designation of Series B Preferred Stock
3.2 By-Laws (Exhibit 3.2 to Registration Statement on Form S-18,
File No. 33-46246-NY)
4.1 Form of Common Stock Certificate (Exhibit 4.1 to
Registration Statement on Form S-18, File No. 33-46246-NY)
4.2 Form of Series A Preferred Stock Certificate (Exhibit 4.2 to
Registration Statement on Form S-18, File No. 33-46246-NY)
4.3 Form of Note and Warrant Purchase, Paying and
Conversion/Exercise agency agreement dated as of August 8,
1997 between the Company and Banca del Gottardo (Exhibit 4.7
to the Company's Form 10-KSB dated June 30, 1997).
4.4 Terms of 8% Convertible Notes due August 11, 2002 (Exhibit
4.8 to the Company's Form 10-KSB dated June 30, 1997).
4.5 [*] Form of Series B Warrant
4.6 [*] Form of Series C Warrant
4.7 [*] Form of Warrant held by members of Goldstein & DiGioia, LLP
4.8 [*] Form of Series B Convertible Preferred Stock
5. Opinion of Goldstein & DiGioia, LLP re legality of shares
offered
10.1 Employment agreement with John T. Botti, dated April, 1992
(Exhibit 10.8 to Registration Statement on Form S-18, File
No. 33-46246-NY)
10.2 Employment agreement with Ira C. Whitman, dated April, 1992
(Exhibit 10.9 to Registration Statement on Form S-18, File
No. 33-46246-NY)
10.3 1992 Employee stock option plan (Exhibit 10.10 to
Registration Statement on Form S-18, File No. 33-46246-NY)
10.4 1992 Nonexecutive Directors stock option plan (Exhibit 10.11
to Registration Statement on Form S-18, File No.
33-46246-NY)
10.5 Loan agreement with Norstar Bank dated February 6, 1992
(Exhibit 10.13 to Registration Statement on Form S-18, File
No. 33-46246-NY)
10.6 Form of Conversion Agency Agreement between the Company and
Banca del Gottardo dated as of August 8, 1997 (Exhibit 10.24
to Form 10-KSB dated June 30, 1997).
10.7 Form of Warrant Agency Agreement between the Company and
Banca del Gottardo dated as of August 8, 1997 (Exhibit to
Form 10-KSB dated June 30, 1997).
10.8 Stock Purchase and Merger Agreement dated April 7, 1998
between the Company USI and SST. (Exhibit A to Proxy
Statement dated May 8, 1998).
10.9 [*] Financial Consulting Agreement, dated September 21, 1999, by
and between Bitwise Designs and Corporate Funding Group,
LLC.
10.10 [*] Consulting Agreement, dated September 23, by and between
Bitwise Designs, Inc. and Nicholas Themelis.
10.11 [*] Line of Credit Agreement with Bank of America, dated October
1, 1999.
10.12 [*] Service Agreement, dated September 15, 1999, by and between
Bitwise Designs, Inc. and Shore Venture Group, L.L.C.
10.13 [**] Form of Series B Preferred Stock Subscription Agreement
Executed by all Holders of Series B Preferred Stock.
11 Statement re: Computation of Per Share Earnings (Exhibit 11
to Form 10-KSB, filed October 4, 1999).
21 Subsidiaries of Registrant. (Exhibit 21 to Form 10-KSB,
filed October 4, 1999).
23.1 Consent of PricewaterhouseCoopers, LLP.
23.2 Consent of Goldstein & DiGioia, LLP, contained in Exhibit 5.
</TABLE>
<PAGE> 1
BITWISE DESIGNS, INC.
SUBSCRIPTION AGREEMENT
OFFERING OF
50,000 SHARES OF SERIES B PREFERRED STOCK
TOTAL SUBSCRIPTION PRICE: $1,250,000
PER SHARE OFFERING PRICE: $25.00 PER SHARE.
THIS PRIVATE PLACEMENT AGREEMENT CONTAINS MATERIAL NONPUBLIC INFORMATION
CONCERNING BITWISE DESIGNS, INC. AND OTHER COMPANIES AND IS PREPARED SOLELY FOR
THE USE OF THE OFFEREE NAMED ABOVE. ANY USE OF THIS INFORMATION FOR ANY PURPOSE
OTHER THAN IN CONNECTION WITH THE CONSIDERATION OF AN INVESTMENT IN THE
SECURITIES OFFERED HEREBY MAY SUBJECT THE USER TO CRIMINAL AND CIVIL LIABILITY.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH OR APPROVED BY THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES REGULATORY
AUTHORITY OF ANY STATE, NOR HAS SUCH COMMISSION OR REGULATORY AUTHORITY PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS AGREEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
September 21, 1999
<PAGE> 2
INFORMATION FOR ALL INVESTORS
PROSPECTIVE INVESTORS AND/OR THEIR REPRESENTATIVES SHOULD REVIEW THE
FOLLOWING LEGENDS REQUIRED BY CERTAIN JURISDICTIONS AND BE AWARE OF THEIR
CONTENTS. PLEASE REVIEW THE FOLLOWING MATERIAL CAREFULLY TO DETERMINE WHETHER
ANY OF THESE LEGENDS APPLY.
THIS OFFER CAN BE WITHDRAWN AT ANY TIME BEFORE A CLOSING OF THE SALE OF
THE MINIMUM NUMBER OF SECURITIES OFFERED, AND THE OFFER OF SECURITIES IS
SPECIFICALLY MADE SUBJECT TO THE TERMS DESCRIBED IN THIS AGREEMENT. THE COMPANY
RESERVES THE RIGHT TO REJECT ANY SUBSCRIPTION, IN WHOLE OR IN PART, OR TO ALLOT
TO ANY PROSPECTIVE INVESTOR LESS THAN THE NUMBER OF UNITS SUBSCRIBED FOR BY SUCH
PROSPECTIVE INVESTOR. ANY REPRESENTATION TO THE CONTRARY IS UNAUTHORIZED AND
MUST NOT BE RELIED UPON.
PROSPECTIVE INVESTORS WILL BE REQUIRED TO MAKE REPRESENTATIONS WITH
RESPECT TO THEIR NET WORTH OR INCOME AND TO REPRESENT, AMONG OTHER THINGS, THAT
THEY ARE FAMILIAR WITH AND UNDERSTAND THE TERMS OF THIS OFFERING AND HAVE ALL
REQUISITE AUTHORITY TO MAKE SUCH INVESTMENT.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
THE SECURITIES DESCRIBED HEREIN IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SALE.
THIS OFFERING IS BEING MADE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE REGULATIONS
THEREUNDER (THE "SECURITIES ACT") FOR AN OFFER AND SALE OF SECURITIES THAT DOES
NOT INVOLVE A PUBLIC OFFERING BY VIRTUE OF THE COMPANY'S INTENDED COMPLIANCE
WITH THE PROVISIONS OF SECTIONS 4(2) AND 4(6) AND REGULATION D THEREOF. THE
SECURITIES OFFERED HEREBY MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF,
EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES
LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THERE IS CURRENTLY NO
PUBLIC OR OTHER MARKET FOR THE SHARES OF THE SERIES B PREFERRED STOCK OF THE
COMPANY AND THERE CAN BE NO ASSURANCE THAT A PUBLIC OR OTHER MARKET WILL
DEVELOP. EACH PROSPECTIVE
i
<PAGE> 3
INVESTOR SHOULD PROCEED ONLY ON THE ASSUMPTION THAT SUCH PROSPECTIVE INVESTOR
MAY HAVE TO BEAR THE ECONOMIC RISK OF AN INVESTMENT IN THE SECURITIES OFFERED
HEREBY FOR AN INDEFINITE PERIOD OF TIME.
THIS AGREEMENT HAS NOT BEEN FILED WITH OR REVIEWED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER COMMISSION OR REGULATORY
AUTHORITY, AND HAS NOT BEEN FILED WITH OR REVIEWED BY THE ATTORNEY GENERAL OF
THE STATES OF NEW YORK OR NEW JERSEY OR ANY OTHER STATE NOR HAS ANY SUCH
COMMISSION, AUTHORITY OR ATTORNEY GENERAL DETERMINED WHETHER IT IS ACCURATE OR
COMPLETE OR PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. ONLY THOSE WHO CAN BEAR THE RISK OF LOSS OF THEIR ENTIRE
INVESTMENT SHOULD INVEST. SEE "RISK FACTORS".
BY ACCEPTING DELIVERY OF THIS AGREEMENT, THE RECIPIENT HEREOF AGREES TO
KEEP THE CONTENTS HEREOF, AND ANY INFORMATION OBTAINED BY SUCH PERSON IN
CONNECTION HEREWITH, IN STRICTEST CONFIDENCE.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THIS OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. PROSPECTIVE INVESTORS SHOULD NOT CONSTRUE THE CONTENTS OF
THIS AGREEMENT AS INVESTMENT OR LEGAL ADVICE. THIS AGREEMENT AND THE OTHER
DOCUMENTS DELIVERED HEREWITH, AS WELL AS THE NATURE OF AN INVESTMENT IN THE
SECURITIES OFFERED HEREBY, SHOULD BE REVIEWED BY EACH PROSPECTIVE INVESTOR AND
SUCH INVESTOR'S INVESTMENT, TAX, LEGAL, ACCOUNTING AND OTHER ADVISORS.
ii
<PAGE> 4
NO GENERAL SOLICITATION WILL BE CONDUCTED AND NO OFFERING LITERATURE OR
ADVERTISING IN ANY FORM WILL OR MAY BE EMPLOYED IN THE OFFERING OF THE SERIES B
PREFERRED STOCK, EXCEPT FOR THIS AGREEMENT (INCLUDING AMENDMENTS AND SUPPLEMENTS
TO THIS AGREEMENT) AND THE DOCUMENTS SUMMARIZED HEREIN OR ENCLOSED HEREWITH. NO
PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS AGREEMENT (INCLUDING AMENDMENTS AND SUPPLEMENTS TO THIS
AGREEMENT) OR IN THE DOCUMENTS SUMMARIZED HEREIN OR ENCLOSED HEREWITH AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON.
THE INFORMATION CONTAINED IN THIS AGREEMENT HAS BEEN SUPPLIED BY THE
COMPANY AND HAS BEEN INCLUDED HEREIN IN RELIANCE ON THE COMPANY. THIS AGREEMENT
CONTAINS SUMMARIES, BELIEVED BY THE COMPANY TO BE ACCURATE, OF CERTAIN
DOCUMENTS, BUT REFERENCE IS HEREBY MADE TO SUCH DOCUMENTS FOR COMPLETE
INFORMATION CONCERNING THE RIGHTS AND OBLIGATIONS OF THE PARTIES THERETO. COPIES
OF SUCH DOCUMENTS ARE AVAILABLE ON A CONFIDENTIAL BASIS AT THE OFFICES OF
BITWISE DESIGNS, INCORPORATED, 2165 TECHNOLOGY DRIVE, SCHENECTADY, NEW YORK
12308. ATTENTION: JOHN BOTTI, PRESIDENT. ALL SUCH SUMMARIES ARE QUALIFIED IN
THEIR ENTIRETY BY THIS REFERENCE.
THIS AGREEMENT HAS BEEN PREPARED SOLELY FOR THE BENEFIT OF PROSPECTIVE
INVESTORS INTERESTED IN THE PROPOSED PRIVATE PLACEMENT OF THE SERIES B PREFERRED
STOCK AND CONSTITUTES AN OFFER ONLY IF THE PERSON WHOSE NAME APPEARS IN THE
APPROPRIATE SPACE PROVIDED ON THE COVER OF THIS AGREEMENT. DISTRIBUTION OF THIS
AGREEMENT TO ANY PERSON OTHER THAN SUCH PROSPECTIVE INVESTOR AND THOSE PERSONS
RETAINED TO ADVICE SUCH PROSPECTIVE INVESTOR WITH RESPECT THERETO IS
UNAUTHORIZED, AND ANY REPRODUCTION OF THIS AGREEMENT, IN WHOLE OR IN PART, OR
THE DIVULGENCE OF ANY OF ITS CONTENTS, WITHOUT PRIOR WRITTEN CONSENT OF THE
COMPANY IS PROHIBITED. EACH PROSPECTIVE INVESTOR, BY ACCEPTING DELIVERY OF THIS
AGREEMENT, AGREES TO RETURN IT AND ALL OTHER DOCUMENTS RECEIVED BY SUCH
PROSPECTIVE INVESTOR TO THE COMPANY AT ITS ADDRESS SPECIFIED BELOW IF THE
PROSPECTIVE INVESTOR DOES NOT SUBSCRIBE FOR THE PURCHASE OF THE SERIES B
PREFERRED STOCK, THE PROSPECTIVE INVESTOR'S SUBSCRIPTION IS NOT ACCEPTED OR THIS
OFFERING IS TERMINATED.
iii
<PAGE> 5
FLORIDA RESIDENTS
PURSUANT TO SECTION 517.061(11)(A)(5) OF THE FLORIDA STATUTE, FLORIDA
INVESTORS HAVE A THREE DAY RIGHT OF RECISSION. IF A FLORIDA RESIDENT HAS
EXECUTED A SUBSCRIPTION AGREEMENT, HE MAY ELECT, WITHIN THREE BUSINESS DAYS
AFTER SIGNING THE SUBSCRIPTION AGREEMENT, TO WITHDRAW FROM THE SUBSCRIPTION
AGREEMENT AND RECEIVE A FULL REFUND AND RETURN (WITHOUT INTEREST) OF ANY MONEY
PAID BY HIM. A FLORIDA RESIDENT'S WITHDRAWAL WILL BE WITHOUT ANY FURTHER
LIABILITY TO ANY PERSON. TO ACCOMPLISH SUCH WITHDRAWAL, A FLORIDA RESIDENT NEED
ONLY SEND A LETTER OR TELEGRAM TO THE COMPANY AT THE ADDRESS SET FORTH IN THIS
INVESTMENT SUMMARY INDICATING HIS INTENTION TO WITHDRAW. SUCH LETTER OR TELEGRAM
MUST BE SENT AND POSTMARKED PRIOR TO THE END OF THE AFOREMENTIONED THIRD
BUSINESS DAY. IF A FLORIDA RESIDENT SENDS A LETTER, IT IS PRUDENT TO SEND IT BY
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO INSURE THAT IT IS RECEIVED AND ALSO
TO EVIDENCE THE TIME AND DATE WHEN IT IS MAILED. SHOULD A FLORIDA RESIDENT MAKE
THIS REQUEST ORALLY, HE SHOULD ASK FOR WRITTEN CONFIRMATION THAT HIS REQUEST HAS
BEEN RECEIVED.
PENNSYLVANIA RESIDENTS
THE SECURITIES ARE OFFERED PURSUANT TO A CLAIM OF EXEMPTION UNDER
SECTION 203(D) OF THE PENNSYLVANIA SECURITIES ACT OF 1972, AS AMENDED (THE
"ACT"). PURSUANT TO SECTION 207(M) OF THE ACT EACH PERSON WHO ACCEPTS AN OFFER
TO PURCHASE THESE SECURITIES DIRECTLY FROM THE ISSUER OR AFFILIATE OF THE ISSUER
SHALL HAVE THE RIGHT TO WITHDRAW HIS OR HER ACCEPTANCE AND RECEIVE THE FULL
REFUND OF ALL MONIES PAID, WITHOUT INCURRING ANY LIABILITY TO THE SELLER OF ANY
OTHER PERSON WITHIN TWO (2) BUSINESS DAYS FROM THE DATE OF RECEIPT BY THE ISSUER
OF HIS OR HER WRITTEN BINDING CONTRACT OF PURCHASE EVIDENCED BY HIS OR HER
SUBSCRIPTION AGREEMENT. THESE SECURITIES MAY NOT BE SOLD BY THE INVESTOR FOR A
PERIOD OF TWELVE (12) MONTHS AFTER THE DATE OF PURCHASE. THESE SECURITIES MAY
NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE REQUIREMENTS OF SECTION 203(D)
OF THE ACT AND REGULATION 203.041 PROMULGATED THEREUNDER.
iv
<PAGE> 6
BITWISE DESIGNS, INC.
2165 Technology Drive
Schenectady, New York 12308
Re: 50,000 Shares of Series B Preferred Stock
Dear Purchaser:
Bitwise Designs, Inc., a Delaware corporation (the "Company"), has
agreed to sell to certain "accredited investors" (as defined under Rule 501 of
Regulation D promulgated under the Securities Act of 1933, as amended (the
"Act")) (the "Investors") up to 50,000 Shares of Series B Preferred Stock (the
"Preferred Shares") at a price of $25.00 per share. The Preferred Shares are
being offered by the Company pursuant to Section 4(2) of the Act, and/or
Regulation D promulgated thereunder.
The Preferred Shares are being offered (the "Preferred Offering") on a
"best efforts all or none" basis. All proceeds received by the Company from
Investors for the Preferred Shares offered hereby will be deposited in a
non-interest bearing escrow account established by Goldstein & DiGioia, LLP,
counsel to the Company. The Preferred Offering commences on the date of this
Agreement and terminates on September 30, 1999 unless extended by the Company
until October 10, 1999 (as extended, the "Offering Period"). If the Preferred
Shares are subscribed for prior to the expiration of the Offering Period, a
closing (the "Closing") will be held as soon as practicable and the funds held
in escrow will be released to the Company. Funds received by the Company, but
not cleared, prior to the termination of the Offering Period, will be allowed to
clear after such date.
DESCRIPTION OF SECURITIES.
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 stockholders, 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 previously designated a
series of preferred stock as Series A Preferred Stock which has the right to
elect a majority of the Board of Directors and as a result, the holders of the
Series A Preferred Stock are able to control the Company's policies and affairs.
The Board of Directors may also grant to holders of any series of
Preferred Stock preferential rights to dividends and amounts payable in
liquidation. Furthermore, the Board of Directors may determine whether the
shares of any series of Preferred Stock may be convertible into Common Stock or
any other series of Preferred Stock of the Company at a specified conversion
price or rate, and upon other terms and conditions as determined by the Board of
1
<PAGE> 7
Directors.
SERIES A PREFERRED STOCK
As of the date of this Agreement, the Board of Directors has designated
200 shares of Preferred Stock as Series A Preferred Stock, of which 100 shares
have been issued to each of John T. Botti and Ira C. Whitman, the President and
Senior Vice President, respectively, of the Company. The holders of the Series A
Preferred Shares have the right to elect a majority of the Board of Directors as
long as such holder remains, subject to certain conditions, an officer, director
and 5% stockholder of the Company. During such time as the Series A Preferred
Stock is outstanding, the Board of Directors will consist of an odd number of
directors, a majority of whom will be designated as "Preferred Directors" and be
elected solely by the holders of Series A Preferred Stock voting separately as a
group. The holders of the Series A Preferred Stock have a preference on
liquidation of $1.00 per share and no dividend or conversion rights.
SERIES B PREFERRED STOCK
Prior to the Closing, the Company will file a Certificate of
Designation (the "Certificate of Designation") designating 50,000 shares of
Preferred Stock as "Series B Convertible Redeemable Preferred Stock" ("Series B
Preferred Stock"). The following is a summary of the rights, preferences and
privileges of the Series B Preferred Stock and is qualified in its entirety by
the provisions of the Company's Certificate of Incorporation and the Certificate
of Designation. A copy of the Certificate of Designation is annexed hereto as
Exhibit A.
Dividends. Subject to the limitations described below, holders of
shares of the Series B Preferred Stock will be entitled to receive, when, as and
if declared by the Board out of funds of the Company legally available for
payment, dividends in cash at an annual rate of 10% per share, payable
semi-annually and commencing on December 31, 1999 and thereafter on June 30th
and December 31st of each year. Dividends will be cumulative from the date of
original issuance of the Series B Preferred Stock and will be payable to holders
of record as they appear on the stock books of the Company on the tenth business
day prior to the dividend payment date.
The Series B Preferred Stock will be junior to dividends to any series
or class of the Company's stock hereafter issued which ranks senior as to
dividends to the Series B Preferred Stock ("Senior Dividend Stock"), and if at
any time any dividend on Senior Dividend Stock is in default, the Company may
not pay any dividend on the Series B Preferred Stock until all accrued and
unpaid dividends on the Senior Dividend Stock for all prior periods and the
current period are paid or declared and set aside for payment. No such Senior
Dividend Stock shall be issued without the approval of holders of a majority of
the Series B Preferred Stock. The Series B Preferred Stock will have priority as
to dividends over the Common Stock and any other series or class of the
Company's stock hereafter issued which ranks junior as to dividends to the
Series B Preferred Stock ("Junior Dividend Stock"), and no dividend (other than
dividends payable solely in Junior Dividend Stock) may be paid on, and no
purchase, redemption or other acquisition may be made
2
<PAGE> 8
by the Company of, any Junior Dividend Stock unless all accrued and unpaid
dividends on the Series B Preferred Stock for all prior periods and the current
period have been paid or declared and set apart for payment. The Company may not
pay dividends on any class or series of the Company's stock having parity with
the Series B Preferred Stock as to dividends ("parity dividend stock"), unless
it has paid or declared and set apart for payment or contemporaneously pays or
declares and sets apart for payment all accrued and unpaid dividends for all
prior periods on the Series B Preferred Stock and may not pay dividends on the
Series B Preferred Stock unless it has paid or declared and set apart for
payment or contemporaneously pays or declares and sets apart for payment all
accrued and unpaid dividends for all prior periods on the parity dividend stock.
Whenever all accrued dividends are not paid in full on the Series B Preferred
Stock or any parity dividend stock, all dividends declared on the Series B
Preferred Stock and such parity dividend stock will be declared or made pro rata
so that the amount of dividends declared per share on the Series B Preferred
Stock and such parity dividends stock will bear the same ratio that accrued and
unpaid dividends per share on the Series B Preferred Stock and such parity
dividend stock bear to each other.
The amount of dividends payable for the initial dividend period and for
any period shorter than a full year dividend period will be computed on the
basis of a 360-day year of twelve 30-day months. No interest will be payable in
respect of any dividend payment on the Series B Preferred Stock which may be in
arrears.
See "Redemption" below for information regarding restrictions on the
Company's ability to redeem the Series B Preferred Stock when dividends on the
Series B Preferred Stock are in arrears.
Voting Rights. The holders of the Series B Preferred Stock will be
entitled to no voting rights except with respect to (i) the establishment of
another class of preferred stock with rights equal to or senior to the Series B
Preferred Stock, (ii) any proposed changes in the rights of the Series B
Preferred holders, or (iii) as required by Delaware law.
Redemption at Option of Company. The Series B Preferred Stock is
redeemable at any time commencing one year after the Closing at the option of
the Company, on not less than 30 nor more than 60 days written notice to
registered holders at a redemption price equal to $25.00 plus accrued and unpaid
dividends, provided (i) the public sale of the shares of Common Stock issuable
upon conversion of the Preferred Shares (the "Conversion Shares") are covered by
an effective registration statement or are otherwise exempt from registration;
and (ii) during the immediately preceding 20 consecutive trading days ending
within 10 days of the date of the notice of redemption, the closing bid price of
the Company's Common Stock is not less than $3.75 per share, subject to
proportional adjustments for stock splits, stock dividends, combinations of
shares, corporate reorganizations or like events. However, commencing 36 months
after the Closing, the Series B Preferred Stock is redeemable at the option of
the Company, on not less than 30 nor more than 60 days written notice to
registered holders at a redemption price equal to $25.00 plus accrued and unpaid
dividends, provided the public sale of the shares of Common Stock issuable upon
3
<PAGE> 9
conversion of the Series B Preferred Stock (the "Conversion Shares") are covered
by an effective registration statement or are otherwise exempt from
registration.
If less than all of the outstanding shares of Series B Preferred Stock
are to be redeemed, the Company will select those to be redeemed pro rata or by
lot or in such other manner as the Board of Directors may determine. There is no
mandatory redemption or sinking fund obligation with respect to the Series B
Preferred Stock. In the event that the Company has failed to pay accrued and
unpaid dividends on the Series B Preferred Stock, it may not redeem any of the
then outstanding shares of the Series B Preferred Stock, unless all the then
outstanding shares are redeemed, until all such accrued and unpaid dividends and
(except with respect to shares to be redeemed) the then current semi-annual
dividend have been paid in full.
Notice of redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of record of shares of Series
B Preferred Stock to be redeemed at the address shown on the stock books of the
Company. After the redemption date, dividends will cease to accrue on the shares
of Series B Preferred Stock called for redemption, and all rights of the holders
of such shares will terminate except the right to receive the redemption price
without interest (unless the Company defaults in the payment of the redemption
price). Shares of Series B Preferred Stock redeemed by the Company will be
restored to the status of authorized but unissued shares of preferred stock,
without designation as to series, and may thereafter be issued, but not as
shares of Series B Preferred Stock unless used to pay dividends on the then
outstanding Series B Preferred Stock.
Conversion Rights. The holders of Series B Preferred Stock will be
entitled at any time to convert their shares of Series B Preferred Stock into
one share of Common Stock (the "Conversion Shares"), at any time commencing one
year after the closing of the Offering (the "Closing"), at the option of the
holder, into such number of shares of the Company's Common Stock as shall equal
$25.00 divided by the conversion price (the "Conversion Price") of $1.875 per
share, subject to adjustment to for stock splits, stock dividends, combinations
of shares, corporate reorganizations or like events. However, commencing three
years after the Closing, the Conversion Price shall be the lower of (i) $1.875
per share, subject to adjustment for stock splits and corporate reorganizations,
and (ii) the average of the closing bid and asked prices of the Company's Common
Stock for the immediately preceding 10 consecutive trading days ending one
trading day prior to the date of the notice of conversion; provided, however,
that the holder shall not be entitled to convert more than 20% of the Series B
Preferred Shares held by such holder on the third anniversary of the Closing
during any period of thirty days. For purposes of conversion, each share of
Series B Preferred Stock shall be valued at $25.00 per share. However,
conversion rights will expire after 5:00 p.m. on the redemption date for any
shares of Series B Preferred Stock which the Company has called for redemption.
No payment or adjustment will be made in respect of dividends for Series B
Preferred Stock that may be accrued or unpaid or in arrears upon conversion of
shares of Series B Preferred Stock. No fractional shares will be issued and, in
lieu of any fractional share, cash in an amount based on the then current market
price, determined as provided in the Certificate of Designation, of the Common
Stock will be paid.
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In case of any consolidation or merger of the Company with any other
corporation (other than a wholly owned subsidiary), or in case of sale or
transfer of all or substantially all of the assets of the Company, or in the
case of any share exchange whereby the Common Stock is converted into other
securities or property, the Company will be required to make appropriate
provision so that the holder of each share of Series B Preferred Stock then
outstanding will have the right thereafter to convert such share of Series B
Preferred Stock into the kind and amount of shares of stock and other securities
and property receivable upon such consolidation, merger, sale, transfer or share
exchange by a holder of the number of shares of Common Stock into which such
share of Series B Preferred Stock might have been converted immediately prior to
such consolidation, merger, sale, transfer or share exchange.
Liquidation Rights. In case of the voluntary or involuntary
liquidation. dissolution or winding up of the Company, holders of shares of
Series B Preferred Stock are entitled to receive the liquidation price of $25.00
per share, plus an amount equal to any accrued and unpaid dividends to the
payment date, before any payment or distribution is made to the holders of the
Common Stock or any other series or class of the Company's stock hereafter
issued which ranks junior as to liquidation rights to the Series B Preferred
Stock. The holders of the shares of the Series B Preferred will not be entitled
to receive the liquidation price of such shares until the liquidation price of
any other series or class of the Company's stock hereafter issued which ranks
senior as to the liquidation rights to the Series B Preferred Stock ("senior
liquidation stock") has been paid in full. No such senior liquidation stock
shall be issued without the approval of holders of a majority of the Series B
Preferred Stock. See "Voting Rights." The holders of Series B Preferred Stock
and all series or classes of the Company's stock hereafter issued 'which rank on
a parity as to liquidation rights with the Series B Preferred Stock ("parity
liquidation stock") are entitled to share ratably, in accordance with the
respective preferential amounts payable on such stock, in any distribution
(after payment of the liquidation price of the senior liquidation stock) which
is not sufficient to pay in full the aggregate of the amounts payable thereon.
After payment in full of the liquidation price of the shares of the Series B
Preferred Stock, the holders of such shares will not be entitled to any further
participation in any distribution of assets by the Company. Neither a
consolidation or merger of the Company with another corporation, nor a sale or
transfer of all or part of the Company's assets for cash, securities or other
property will be considered a liquidation, dissolution or winding up of the
Company.
No Sinking Fund. The Company is not required to provide for the
retirement or redemption of the Series B Preferred Stock through the operation
of a sinking fund.
Other Provisions. The shares of Series B Preferred Stock, when issued,
will be duly and validly issued, fully paid and nonassessable. The holders of
the shares of the Series B Preferred Stock have no preemptive rights with
respect to any shares of capital stock of the Company or any other securities of
the Company convertible into or carrying rights or options to purchase any such
shares.
REGISTRATION RIGHTS
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The Company shall use its best efforts to file with the Securities and
Exchange Commission (the "SEC") a registration statement with the SEC on or
before October 30, 1999 to allow the resale by the Purchaser(s) of the
Conversion Shares.
In connection with any registration of the Conversion Shares offered
hereby, the Company covenants and agrees as follows:
(a) The Company shall use its best efforts to have any
registration statements filed with the SEC including the
Conversion Shares declared effective at the earliest possible
time, and shall furnish each Purchaser desiring to sell
Conversion Shares such number of prospectuses as shall
reasonably be requested. The Company shall keep effective any
registration or qualification contemplated hereby and shall
from time to time amend or supplement each applicable
registration statement, preliminary prospectus, final
prospectus, application, document and communication for a
period of time equal to the earlier of (i) the date that all
of the Conversion Shares have been sold pursuant to the
registration statement or (ii) the date the Purchasers receive
an opinion of counsel that the Conversion Shares may be sold
under Rule 144(k) or (iii) the third anniversary of the
effective date of the registration statement.
(b) The Company shall pay all costs (excluding fees and
expenses of Purchaser(s) counsel and any underwriting or
selling commissions), fees and expenses in connection with all
registration statements filed pursuant to this Subscription
Agreement including, without limitation, the Company's legal
and accounting fees, printing expenses, blue sky fees and
expenses; provided that the Company shall not be responsible
for transfer taxes, fees and disbursement of accountants and
counsel for Purchasers, and other related selling expenses
incurred by the Purchasers.
(c) The Company will use reasonable efforts to qualify the
Conversion Shares included in a registration statement for
offering and sale under the securities or blue sky laws of
such states as reasonably are requested by the Purchaser(s),
provided that the Company shall not be obligated to execute or
file any general consent to service of process or to qualify
as a foreign corporation to do business under the laws of any
such jurisdiction or to subject itself to taxation in any such
jurisdiction.
(d) (i) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless the Purchaser(s) of any
of the Conversion Shares, their officers, directors, partners,
employees, agents and counsel, and each person, if any, who
controls any such person within the meaning
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of Section 15 of the Act or Section 20(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), from
and against any and all loss, liability, charge, claim, damage
and expense whatsoever (which shall include, for all purposes
of this paragraph (d), but not be limited to, reasonable
attorneys' fees and any and all expense whatsoever reasonably
incurred, and any and all amounts paid in settlement of any
claim or litigation), as and when incurred, arising out of,
based upon, or in connection with (A) any untrue statement or
alleged untrue statement of a material fact contained (Y) in
any registration statement, final prospectus, or any amendment
or supplement thereto, or (Z) in any application or other
document or communication (in this paragraph (d) collectively
called an "application") executed by or on behalf of the
Company filed in any jurisdiction in order to register or
qualify any of the Conversion Shares under the securities or
blue sky laws thereof; or any omission or alleged omission to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading,
unless such statement or omission was made in reliance upon
and in conformity with written information furnished to the
Company with respect to the Purchaser(s) of any of the
Conversion Shares by or on behalf of such Purchaser expressly
for inclusion in any such registration or final prospectus, or
any amendment or supplement thereto, or in any application, as
the case may be; or (B) any breach of any representation,
warranty, covenant or agreement of the Company contained in
this Agreement.
(ii) Promptly after receipt by any person in respect
of which indemnity may be sought pursuant to this Paragraph
(d) (an "Indemnified Party") of notice of any claim or the
commencement of any action, the Indemnified Party shall, if a
claim in respect thereof is to be made against the person
against whom such indemnity may be sought (an "Indemnifying
Party"), notify the Indemnifying Party in writing of the claim
or the commencement of such action; provided that the failure
to notify the Indemnifying Party shall not relieve it from any
liability which it may have to an Indemnified Party otherwise
than under this Paragraph (d) except to the extent of any
actual prejudice resulting therefore. If any such claim or
action shall be brought against an Indemnified Party and it
shall notify the Indemnifying Party thereof, the Indemnifying
Party shall be entitled to participate therein, and, to the
extent that it wishes, jointly with any other similarly
notified Indemnifying Party, to assume the defense thereof
with counsel reasonably satisfactory to the Indemnified Party.
After notice from the Indemnifying Party to the Indemnified
Party of its election to assume the defense of such claim or
action, the Indemnifying Party shall not be liable to the
Indemnified Party for any legal or other expenses subsequently
incurred by the Indemnified Party in connection with the
defense thereof
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other than reasonable costs of investigation; provided that
the Indemnified Party shall have the right to employ separate
counsel to represent the Indemnified Party in connection with
any claim in respect of which indemnity may be sought by the
Indemnified Party against the Indemnifying Party, but the fees
and expenses of such counsel shall be for the account of such
Indemnified Party unless (A) the Indemnifying Party and the
Indemnified Party shall have mutually agreed in writing to the
retention of such counsel or (B) the Indemnifying Party shall
not have assumed the defense thereof with counsel reasonably
satisfactory to the Indemnified Party or (C) in the opinion of
counsel to such Indemnified Party, representation of both
parties by the same counsel would be inappropriate due to
actual or potential conflicts of interest between them, it
being understood however, that the Indemnifying Party shall
not, in connection with any one such claim or action or
separate but substantially similar or related claims or
actions in the same jurisdiction arising out of the same
allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (together
with local counsel) at any time for all Indemnified Parties.
No Indemnifying Party shall, without the prior written consent
of the Indemnified Party, effect any settlement of any claim
or pending or threatened proceeding in respect of which the
Indemnified Party is or could have been a party and indemnity
could have been sought hereunder by such Indemnified Party and
such settlement includes an unconditional release of such
Indemnified Party from all liability arising out of such claim
or proceeding. Whether or not the defense of any claim or
action is assumed by the Indemnifying Party, such Indemnifying
Party will not be subject to any liability for any settlement
made without its consent, which consent will not be
unreasonably withheld.
(iii) The Purchaser(s) of Conversion Shares agree,
severally, and not jointly, to indemnify and hold harmless the
Company, its officers, directors, employees, accountants,
agents or counsel and each other person, if any, who controls
the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to the Purchaser(s) in
paragraph (d)(ii), but only with respect to statements or
omissions, if any, made in any registration statement,
preliminary prospectus, or final prospectus (as from time to
time amended and supplemented), or any amendment or supplement
thereto, or in any application, in reliance upon and in
conformity with written information furnished to the Company
with respect to the Purchaser or his plan of distribution, by
or on behalf of the Purchaser expressly for inclusion in any
such registration statement, preliminary prospectus, or final
prospectus, or any amendment or supplement thereto, or in any
application, as the case may be. If any action shall be
brought against the
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Company or any other person so indemnified based on any such
registration statement, preliminary prospectus, or final
prospectus, or any amendment or supplement thereto, or in any
application, and in respect of which indemnity may be sought
against the Purchaser pursuant to this paragraph (d)(iii), the
Purchaser shall have the rights and duties given to the
Company, and the Company and each other person so indemnified
shall have the rights and duties given to the indemnified
parties, by the provisions of paragraph (d)(i).
(e) The Company as soon as practicable, but in any event not
later than 45 days after the end of the 12-month period
beginning on the day after the end of the fiscal quarter of
the Company during which the effective date of the
registration statement occurs (90 days in the event that the
end of such fiscal quarter is the end of the Company's fiscal
year), shall make generally available to its security holders,
in the manner specified in Rule 158(b) of the Rules and
Regulations, an earnings statement which will be in the detail
required by, and will otherwise comply with, the provisions of
Section 11(a) of the Act and Rule 158(a) of the Rules and
Regulations, which statement need not be audited unless
required by the Act, covering a period of at least 12
consecutive months after the effective date of the
Registration Statement.
(f) In connection with the registration of the Conversion
Shares, the Purchasers shall have the following obligations:
(i) It shall be a condition precedent to the
obligations of the Company to complete the registration
pursuant to this Agreement with respect to the Conversion
Shares of a particular Purchaser that such Purchaser shall
furnish to the Company such information in writing regarding
itself, the Conversion Shares held by it, and the intended
method of disposition of the Conversion Shares held by it, as
shall be reasonably required to effect the registration of
such Conversion Shares. In addition, each Purchaser shall
execute such other documents in connection with such
registration as the Company may reasonably request. At least
fourteen (14) days prior to the first anticipated filing date
of the Registration Statement, the Company shall notify each
Purchaser of the information the Company requires from each
such Purchaser (the "Requested Information"). If at least 5
business days prior to the effective date of the registration
statement the Company has not received the Requested
Information from a Purchaser (a "Non-Responsive Purchaser"),
then the Company may request effectiveness of the Registration
Statement without including securities of such Non-Responsive
Purchaser;
(ii) Each Purchaser, by such Purchaser's acceptance
of the Conversion Shares, agrees to cooperate with the Company
as reasonably
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<PAGE> 15
requested by the Company in connection with the preparation
and filing of the Registration Statement hereunder; and
(iii) Each Purchaser agrees that, upon receipt of any
notice from the Company of (A) the happening of any event as a
result of which the prospectus included in the registration
statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to
be stated therein or necessary to make the statements therein
in light of the circumstances under which they were made, not
misleading; or (B) the issuance by the SEC of any stop order
or other suspension of the effectiveness of the registration
statement, such Purchaser will immediately discontinue
disposition of Conversion Shares pursuant to the Registration
Statement covering such Conversion Shares until such
Purchaser's receipt of the copies of a supplemented or amended
Prospectus in the case of all event described in clause (A)
above, or a notice of the removal of any suspension in the
case of an event described in clause (B) above. If so directed
by the Company, such Purchaser shall deliver to the Company or
destroy (and deliver to the Company a certificate of
destruction) all copies in such Purchaser's possession of the
prospectus covering such Conversion Shares at the time of
receipt of such notice. Notwithstanding the foregoing,
however, the Purchaser may retain his copy of the prospectus
covering such Conversion Shares, but must agree in writing not
to use such prospectus to offer securities.
Other Simultaneous Offerings
This Preferred Offering is subject to the successful
completion of a concurrent offering of 740,000 units of the Company's
securities, each unit consisting of 2 shares of common stock and 2 Series B
Common Stock Purchase Warrants to purchase common stock of the Company (the
"Unit Offering"). The Company will not conduct a closing on subscriptions for
the Preferred Shares unless it is able to close on the Unit Offering.
Contemporaneously, the Company is offering for $100,000, 999,999 Series C Common
Stock Purchase Warrants to purchase common stock of the Company, along with
membership interests representing 20% of the membership interests of
Authentidate.Com, LLC, a subsidiary of the Company, after giving effect to the
separate sale of $1,500,000 of Authentidate's securities (the "Authentidate
Offering") (the Preferred Offering, Unit Offering and Authentidate Offering may
be collectively referred to herein as the "Offerings"). The Company will use its
best efforts to register for public distribution all the Common Shares, Series B
Warrants, the Shares underlying the Series B and C Warrants and Shares into
which the Preferred Shares are convertible.
The Series B Warrants are exercisable for a period of three
years from the date of issuance at a price of $1.375 per share and are
redeemable by the Company at any time commencing one year after the closing at a
redemption price of $.05 per Warrant provided, (i) that the shares underlying
the warrants are covered by an effective registration statement or are otherwise
exempt from registration and (ii) the closing bid price of the common stock is
not less than $3.25 per share,
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as proportionately adjusted to reflect any stock splits, stock dividends,
combination of shares, corporate reorganizations or like events during the
immediately preceding 20 consecutive trading days ending within 10 days of the
date of notice.
The Series C Warrants are exercisable for a period of three
years from the date of issuance at base price of $1.50 per share which will
increase by $.75 at three different milestone dates. The Series C Warrants will
be issued in three classes and each class contain differing milestone dates. The
Series C Warrants are also redeemable by the Company at any time commencing six
months after the closing at a redemption price of $.05 per Warrant provided, (i)
that the shares underlying the warrants are covered by an effective registration
statement or are otherwise exempt from registration and (ii) the closing bid
price of the common stock is not less than 120% of the current exercise price
during each of the immediately preceding 20 consecutive trading days ending
within 10 days of the date of notice.
1. Subscription: The Preferred Offering
a. By your execution of this Subscription Agreement and delivery of the
subscription amount to the Company, you hereby subscribe to purchase the
aggregate amount of Preferred Shares as set forth on pages 35-36 of this
Agreement.
b. Subscription payments by check should be made payable to "Bitwise
Designs, Inc." and should be delivered, together with one fully executed and
completed copies of this Agreement, to Victor J. Dioia, Esq., Goldstein &
DiGioia, LLP, 369 Lexington Avenue, New York, NY 10017. Alternatively, funds may
be wired directly to an escrow account at Republic National Bank of New York. In
the event the subscription is not accepted in whole or in part by the Company,
the full amount of any subscription payment will be promptly refunded to the
Investor without deduction therefrom or interest thereon.
c. This subscription is subject to the terms and conditions of the
Preferred Offering which are described herein, as same may be amended or
supplemented. Upon acceptance by the Company of any subscription, and following
clearance of funds, the Company will deliver to the Subscriber the Preferred
Stock certificates in the amount subscribed.
2. Description of Business
OVERVIEW
Bitwise Designs, Inc. ("Bitwise" or the "Company"), and its
wholly-owned subsidiary DJS Marketing Group, Inc. ("DJS") (Bitwise and DJS are
sometimes collectively referred to herein as the "Company") are engaged in the
manufacture and distribution of document imaging systems, computer systems and
related peripheral equipment, components, and accessories and network and
internet services.
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
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Schenectady, New York 12308, and its telephone number is (518) 346-7799.
In March 1996, the Company acquired DJS, a system integrator, computer
reseller and personal computer manufacturer in Albany, New York. DJS is an
authorized sales and support provider for Novell, Microsoft Solutions and Lotus
Notes, as well as a member of Microage Infosystems. DJS operates under the
tradename "Computer Professionals."
RECENT EVENTS
In August 1998, the Company organized a subsidiary, Authentidate.Com,
LLC ("Authentidate"), a Delaware limited liability company. As of the date of
this Subscription Agreement, Bitwise owns 92.5% of the membership interests of
Authentidate. Through Authentidate, the Company intends to implement a business
line which provides for the verification of the authenticity of digital images
through a secure clock to stamp the date and time on each image.
The product name is Authentidate(TM) Image Marking and the Company has a patent
pending for the innovative technology behind this business plan.
Concurrent to this Offering, the Company is also commencing two other
offerings. The first, the Unit Offering, is an offering by the Company of
740,000 units of its securities for an aggregate offering price of $740,000. The
units consist of 2 shares of common stock and 2 Series B Common Stock Purchase
Warrants. The second offering, the Authentidate Offering, is by Authentidate and
the Company. The Authentidate offering is for 20% of the outstanding membership
interests of Authentidate (after giving effect to the sale of $1,500,000 of
Authentidate's securities), plus Bitwise Designs Series C Warrants for the
purchase of up to 999,999 shares of Bitwise common stock. The offering price is
$100,000. This Preferred Offering is conditioned on the successful completion of
the Unit Offering.
The Company has been notified that its line of credit with Nations
Credit Distribution Service, Inc. (the "Bank") will be terminated on September
30, 1999. The line of credit contained a balance of approximately $1,100,000.
The Bank has requested the Company to repay this obligation by September 30,
1999. The Company intends to negotiate with the Bank in order to obtain more
favorable repayment terms. Approximately $500,000 of the proceeds raised in the
Offerings will be applied towards the repayment of this obligation. If the
Company is not able to obtain more favorable repayment terms or reinstate the
line of credit, it will be forced to pay off the line of credit in full by the
September 30, 1999, thereby necessitating a greater portion of the net proceeds
of the Offerings to be used for debt repayment.
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
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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
time-saving tool to the modern office.
The main components of a document management system are a personal
computer, a high speed electronic document scanner, a laser printer capable of
reproducing documents quickly, and a software package which controls scanning,
indexing, storage and reproduction. Bitwise purchases 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 of various
versions of existing software from other developers, as well as software
developed by the Company. Options and accessories include a jukebox, an optical
disk tower, additional software, scanner upgrades, monitor upgrades and hardware
upgrades.
The Company markets the document management system under the tradename
DocStar through a national dealer network. The Company owns one dealership in
the Albany, New York region, which also serves as a test market for new
applications and software. The Company believes that the emerging document
imaging market will be its primary business and basis for growth during the next
few years. This is an evolving market which will experience significant growth
in the future. The Company believes that this emerging 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.
Computer Products and Integration Services
The Company purchases 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 that the market for personal
computers and integration services will continue to grow for 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.
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Although 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 services, including installation of web pages.
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.
The Company will continue to improve its document imaging products in an effort
to satisfy the needs of an ever changing marketplace.
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.
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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 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 and the optical disk tower option which are
part of the DocStar system.
PATENTS AND TRADEMARKS
The Company has one patent pending and has registered the logo "BitWise
Designs" and Bitwise's associated trademarks, "DocStar" and "Authentidate." The
patent pending is for innovative technology that can verify the authenticity of
digital images by employing a secure clock to stamp the date and time on each
image captured. The product name is Authentidate(TM) Image Marking. No assurance
can be given that registration will be effective to protect the Company's
trademarks. The Company believes the tradename "BitWise Designs" and the
trademarks "DocStar" and "Authentidate" 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, one
district sales manager and three direct sales manager to cover the significant
markets of the country.
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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 greater financial,
technical, manufacturing and marketing resources, as well as a larger installed
base, than the Company.
EMPLOYEES
Bitwise employs 50 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.
3. Use Of Proceeds
The gross proceeds from the sale of the Series B Preferred Shares
offered hereby will be approximately $1,250,000. Additionally, the gross
proceeds from the Unit and Authentidate Offerings will be $840,000. The net
proceeds from the Offerings, estimated to be $2,003,000, will be used for
general working capital needs, including costs associated with general operating
expense such as the payment of outstanding payables and the purchase of
inventory. It is estimated that $500,000 will be applied towards paying down the
Company's line of credit with the Bank and $400,000 will be used for initial
funding of Authentidate.
4. Management
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE OFFICE
<S> <C> <C>
John T. Botti 35 President, Chief Executive Officer and Chairman of
the Board
Ira C. Whitman 36 Senior Vice-President--Research and Development,
Secretary and Director
Steven A. Kriegsman 56 Director
J. Edward Sheridan 62 Director
Charles C. Johnston 63 Director
</TABLE>
16
<PAGE> 22
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 engineering in 1994 with a concentration in computer systems
design and in 1996 earned a Master of Business Administration degree from RPI.
Ira C. Whitman, a co-founder, is Senior Vice-President 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.
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.
J. Edward Sheridan joined the Board of Directors in June, 1992. From
1985 to the present, Mr. Sheridan has 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.
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.
17
<PAGE> 23
5. Summary Financial Information
The following selected financial data were derived from the Company's
most recent draft of its Form 10-K, due to be filed with the Securities and
Exchange Commission by September 28,1999. This information is unaudited and the
data for the 1999 fiscal year is therefore subject to change based on the audit
which is currently in progress. The complete draft of the Form 10-K, and the
Company's reports on Form 10-Q for the quarters ending September 30, 1998,
December 31, 1998 and March 31, 1999 are attached as Exhibits B and C,
respectively.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998 1997
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales 19,503,730 33,755,625 53,109,469
Gross Profit 6,723,592 8,092,566 10,006,736
Net (Loss)/Net Income (2,038,664) (5,464,059) (2,143,159)
Basic and Diluted
Net(Loss)/Net Income
Per Common Share (0.28) (0.74) (0.30)
BALANCE SHEET DATA:
Current Assets 10,965,661 12,138,995 13,622,171
Current Liabilities 6,206,211 4,789,896 7,730,498
Working Capital 4,759,450 7,349,099 5,891,673
Total Assets 15,592,963 14,708,454 18,924,765
Total Long Term Liabilities
4,923,313 3,975,000(1) 1,297
Stockholders' Equity 4,463,529 6,478,226 11,192,970
</TABLE>
6. RISK FACTORS
An investment in the Preferred Shares involves a high degree of risk and should
be considered only by those investors who could afford the risk of loss of their
entire investment.
- --------
(1) Long-term liabilities excluding discount of $534,668
18
<PAGE> 24
THIS SUBSCRIPTION AGREEMENT 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.
SIGNIFICANT LOSSES; UNCERTAINTY OF INTEGRATION OF INTRODUCED PRODUCT LINES
The Company incurred losses of $2,038,664; $5,464,059 and $2,143,159
for its fiscal years ended June 30, 1999, 1998 and 1997. Furthermore, in 1996,
the Company expanded nationally its sales of its DocStar line of document
imaging systems which has led to increased costs associated with the product
line. The Company will continue to incur these costs in the future as it
attempts to increase market awareness and sales. The Company's prospects should
be considered in light of the difficulties frequently encountered in connection
with the establishment of a new business line and the competitive environment in
which the Company operates. There can be no assurance that the Company will be
able to achieve profitable operations in future operating periods.
NEED FOR ADDITIONAL FINANCING
The Company's capital requirements have been and will continue to be
significant. The Company has been substantially dependent upon public offerings
and private placements of its securities and on short-term and long-term loans
from lending institutions to fund such requirements. The Company anticipates it
will utilize significant amounts of capital to promote and market DocStar. The
Company's line of credit with Nations Credit Distribution Service, Inc. (the
"Bank") will be terminated on September 30, 1999. The line of credit contained a
balance of approximately $1,100,000 and the Bank has requested the Company to
repay this obligation by
19
<PAGE> 25
September 30, 1999. The Company intends to negotiate with the Bank in order to
obtain more favorable repayment terms. Approximately $500,000 of the proceeds
raised from the Offerings will be applied towards the repayment of this
obligation. There can be no assurance that more favorable repayment terms will
be obtained, in which case $1,100,000 of the proceeds of the Offerings may have
to be utilized to repay this loan. In this event, the remaining funds may be
insufficient to accomplish the objectives of the Offerings. Further, there can
be no assurance that the amount of proceeds from the Offerings, together with
cash generated from other sources, will be sufficient to maintain operations or
finance further Company development. The Company, in the future, may need
additional funds from loans and/or the sale of equity securities. No assurance
can be given that such funds will be available or, if available, will be on
commercially reasonable terms satisfactory to the Company. In the event such
funds are not available, the Company may be forced to curtail operations, or, in
an extreme situation, cease operations.
SECURITY INTERESTS; RESTRICTIVE COVENANTS
The Company has granted security interests with respect to
substantially all of its assets to secure certain of its indebtedness, which
will continue following this offering. In the event of a default by the Company
on its secured obligations, a secured creditor could declare the Company's
indebtedness to be immediately due and payable and foreclose on the assets
securing the defaulted indebtedness. Moreover, to the extent that all of the
Company's assets continue to be pledged to secure outstanding indebtedness, such
assets will not be available to secure additional indebtedness. The Company's
loan agreement with its institutional lender restricts the ability of the
Company to incur additional indebtedness. The terms of such agreement may limit
the ability of the Company to obtain additional financing on terms favorable to
the Company or at all.
UNCERTAINTY OF WIDESPREAD MARKET ACCEPTANCE OF THE DOCSTAR SYSTEM
Although, the Company introduced its 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. Moreover,
there can be no assurance that these products will ever achieve widespread
market acceptance or increased sales or that the sale of such products will be
profitable.
TECHNOLOGICAL OBSOLESCENCE; RECENT DECREASES IN RETAIL PRICES
The computer industry is characterized by extensive research and
development efforts which result in the frequent introduction of new products
which render existing products obsolete. The ability of the Company to compete
successfully in the future will depend in large
20
<PAGE> 26
part on its ability to maintain a technically competent research and development
staff and its 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 its customers. Although the Company is
dedicated to continued research and development of its products with a view
towards offering products with the most advanced capabilities, there can be no
assurance that the Company 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, the Company does not have a targeted level
of expenditures for research and development. The Company will evaluate all
opportunities but believes the majority of its research and development will be
devoted to enhancements of its existing products.
Technological improvements in new products offered by the Company and
its competitors, 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 desktop
computers. 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 the
Company's profit margins.
LACK OF PATENT/INTELLECTUAL PROPERTY PROTECTION
The Company does not currently hold any patents and the technology
embodied in the Company's current products cannot be patented. The Company (1)
has a patent pending for the innovative technology underlying the Authentidate
business plan that can verify the authenticity of digital images by employing a
secure clock to stamp the date and time on each image captured and (2) has
registered as trademarks the logo "BitWise Designs," "DocStar" and
"Authentidate". The Company relies on confidentiality agreements with its key
employees to the extent it deems such to be necessary. The Company further
intends to file a patent application for any new products it 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 the Company's 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 the Company's products from duplication
by other developers. Other companies operating within the Company's business
segment may independently develop substantially equivalent proprietary
information or otherwise obtain access to the Company's know-how. In addition,
there can be no assurance that the Company will be able to afford the expense of
any litigation which may be necessary to enforce its rights under any patent.
Although the Company believes that the products sold by it 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 sold by the Company are deemed to infringe upon the patents or
proprietary rights of others, the Company could be required to modify its
products or obtain a license for the manufacture and/or sale of such products.
There can be no assurance that, in such an event, the Company would be able to
do so in a timely manner, upon acceptable terms
21
<PAGE> 27
and conditions, or at all, and the failure to do any of the foregoing could have
a material adverse effect upon the Company. Moreover, there can be no assurance
that the Company will have the financial or other resources necessary to enforce
or defend a patent infringement or proprietary rights violation action. In
addition, if the Company's products or proposed products are deemed to infringe
upon the patents or proprietary rights of others, the Company could, under
certain circumstances, become liable for damages, which could also have a
material adverse effect on the Company.
DEPENDENCE ON THIRD-PARTY MANUFACTURING AND SUPPLIERS
The Company does not own or lease any manufacturing facilities and does
not manufacture any of the component parts for its products but rather purchases
all of such components from unaffiliated suppliers. All of the Company's
products are assembled at the Company's facilities. The Company believes that at
the present time it has sufficient sources of supply of component parts, and
that in the event any existing supplier ceases to furnish component parts to the
Company, alternative sources are available. However, there can be no assurance
that future production capacity of the Company's current suppliers and
manufacturers will be sufficient to satisfy the Company's 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.
COMPETITION
The computer hardware industry is highly competitive. The Company
competes in the portable computer market with major computer manufacturers such
as International Business Machines, Inc., Apple Computers, Inc., Compaq Computer
Corporation and Dell Computer, as well as various manufacturers of super
portables who are concentrated in the Company's target market, such as Dolch
Computer Systems, Inc. and Ergo Computing, Inc. All of these companies have
substantially more experience and greater sales, financial and distribution
resources than that of the Company. The Company also competes with many
independent computer companies, smaller than those mentioned, many of which also
have substantially greater sales, financial resources and experience than that
of the Company. The most significant factors which form the basis upon which the
Company competes are the quality of its products, including advanced
capabilities, and price. There can be no assurance the Company can effectively
continue to compete in the future.
The microcomputer distribution industry is intensely competitive and is
characterized by constant pricing pressures and rapid product performance,
improvement and technological change resulting in relatively short product lives
and early product obsolescence. Competition is primarily based on product lines
and availability, price, delivery and other support services. Competing
distributors include other national distributors, regional distributors and
manufacturers' direct sale organizations, many of which have substantially
greater technical, financial and other resources than the Company. Major
wholesale electronic distribution
22
<PAGE> 28
competitors include Ingram Micro D, Inc., Merisel, Inc., Robec, Inc., Tech Data
Corporation, Entertainment Marketing Inc. and Gates/FA Distributing Inc. The
Company's ability to compete favorably is, in significant part, dependent upon
its ability to control costs, react timely and appropriately to short- and
long-term trends and competitively price its products while preventing erosion
of its margins, and there is no assurance that the Company will be able to do
so.
DEPENDENCE UPON EXECUTIVE OFFICERS
The success of the Company is largely dependent upon the services of
its Chairman of the Board and President, John T. Botti and Ira C. Whitman, its
Senior Vice-President. The loss of the services of one or more of these
individuals would have a material adverse affect on the Company's business and
prospects. The Company has entered into a five-year employment agreement with
Mr. Botti expiring in June 2000. The Company has obtained, for its benefit, "key
man" life insurance in the amount of $1,000,000 on the lives of Messrs. Botti
and Whitman.
POSSIBLE ACQUISITIONS
The Company may at times become involved in discussions with potential
acquisition candidates. Accordingly, a portion of the proceeds of this offering
currently allocated to working capital may be used by the Company in connection
with the acquisitions of compatible product lines and businesses. However, there
can be no assurance that the Company will identify and/or consummate an
acquisition, or that such acquisitions, if completed, will be profitable.
Further, there can be no assurance that any proceeds received by the Company
from the Offering, together with cash flow, will be sufficient to finance such
acquisitions.
To the extent the Company effects a business combination with a
financially unstable company or an entity in its early stage of development or
growth (including entities without established records of sales or earnings),
the Company will become subject to numerous risks inherent in the business and
operations of financially unstable and early stage or potential emerging growth
companies. Although the Company will endeavor to evaluate the risks inherent in
a particular acquired business or industry, there can be no assurance that the
Company will properly ascertain or assess all significant risk factors.
The Company evaluates acquisition candidates by analyzing the company's
products which complement or expand the Company's product line; financial
stability, including the Company's profitability and cash flow; and management.
The Company's long term plan is to expand the Company's sales and income
potential by achieving economies of scale as it expands its revenue base.
Technological growth will be considered after the above basic criteria are
evaluated.
In addition, should the Company consummate an acquisition, such
acquisition could have
23
<PAGE> 29
an adverse affect on the Company's liquidity and earnings. The Company is
currently not considering any acquisition and the Company cannot give any
assurances that any business acquisition opportunities may be obtained in the
future or if obtained, may be negotiated on terms favorable to the Company.
CONTROL BY PRESENT MANAGEMENT
John T. Botti and Ira C. Whitman, the Company's President and Senior
Vice-President, respectively, are currently entitled to elect a majority of the
directors of the Company through the exercise of the rights and preferences
accorded holders of the Company's Series A Preferred Stock. The Series A
Preferred Stock allows Messrs. Botti and Whitman to elect a majority of the
Company's Board of Directors, subject to certain conditions. The Series A
Preferred Stock may make the Company a less attractive acquisition candidate and
such power may also discourage or impede offers to acquire the Company not
approved by the Board of Directors, including offers for some or all of the
shares of the Company's Common Stock at substantial premiums above the then
current market value of such shares.
NO DIVIDENDS
The Company has not paid any dividends on its Common Stock since its
inception and does not contemplate or anticipate paying any dividends on its
Common Stock in the foreseeable future. Earnings, if any, will be used to
finance the development and expansion of the Company's business.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM;
RISKS RELATING TO LOW PRICED "PENNY" STOCKS
The Company's Common Stock is listed on Nasdaq SmallCap Market (Symbol
"BTWS"). In order to continue to be listed on Nasdaq, however, the Company must
maintain $2,000,000 in net tangible assets and a $1,000,000 market value of the
public float. The failure to meet these maintenance criteria in the future may
result in the delisting of the Company's Common Stock from Nasdaq, and trading,
if any, in the Company's securities would thereafter be conducted in the
non-Nasdaq over-the-counter market. As a result of such delisting, an investor
could find it more difficult to dispose of, or to obtain accurate quotations as
to the market value of, the Company's securities.
The Company is currently completing its audited financial statements
and its Annual Report on form 10-K for the fiscal year ending June 30, 1999. The
Form 10-K is due to be filed with the SEC and Nasdaq on or about September 30,
1999.
Although the Company anticipates that the Common Stock will be continue
to be listed for trading on Nasdaq, if the Common Stock were to become delisted
from trading on Nasdaq
24
<PAGE> 30
and the trading price of the Common Stock were to fall below $5.00 per share on
the date the Common Stock was delisted, trading in such securities would also be
subject to the requirements of certain rules promulgated under the Exchange Act,
which require additional disclosure by broker-dealers in connection with any
trades involving a stock defined as a penny stock (generally, any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage broker-dealers from effecting transactions in
the Company's securities, which could severely limit the market price and
liquidity of such securities and the ability of purchasers to sell their
securities of the Company in the secondary market.
ARBITRARY OFFERING PRICE OF PREFERRED STOCK
The offering price of the Series B Preferred Stock, as well as the
Conversion Price of the Series B Preferred Stock has been determined by the
Company and is arbitrary in that it does not necessarily bear any relationship
to the assets, earnings or book value of the Company, the market value of the
Company's Common Stock, or any other recognized criteria of value.
SHARES AVAILABLE FOR FUTURE SALE; SALES BY AFFILIATES
Approximately 1,131,806 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 the Company's 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 the Company 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 the Company's Common Stock by certain present stockholders
under Rule 144 may, in the future, have a depressive effect on the market price
of the Company's 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 the Company's securities.
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<PAGE> 31
SIGNIFICANT OUTSTANDING OPTIONS AND WARRANTS
As of June 30, 1999, there were outstanding immediately exercisable
stock options to purchase an aggregate of 2,094,870 shares of Common Stock at
exercise prices ranging from $0.34 to $8.00 per share, and outstanding
immediately exercisable warrants to purchase an aggregate of 2,898,995 shares of
Common Stock at exercise prices ranging from $1.50 to $8.00 per share. To the
extent that outstanding stock options and warrants are exercised dilution to the
Company's shareholders will occur. Moreover, the terms upon which the Company
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 them at a time when the Company would, in all likelihood, be able to
obtain any needed capital on terms more favorable to the Company than the
exercise terms provided by the outstanding options and warrants.
TAX LOSS CARRYFORWARDS
At June 30, 1999, the Company has net operating loss carryforwards
("NOLS") for federal income tax purposes of approximately $13,000,000 available
to offset future taxable income. Under Section 382 of the Internal Revenue Code
of 1986, as amended, utilization of prior NOLS is limited after an ownership
change, as defined in Section 382, to an annual amount equal to the value of the
loss corporation's outstanding stock immediately before the date of the
ownership change multiplied by the federal long-term exempt tax rate. Use of the
Company's NOLS could also be limited as a result of grants of stock options
under stock option plans and other events. In the event the Company achieves
profitable operations, any significant limitation on the utilization of NOLS
would have the effect of increasing the Company's current tax liability.
AUTHORIZATION OF PREFERRED STOCK; EXISTENCE OF SERIES A PREFERRED STOCK
The Company's Certificate of Incorporation authorize the issuance of
"blank check" preferred stock with such designation, rights and preferences as
may be determined from time to time by the Board of Directors. As of the date of
this Agreement, the Board of Directors has designated 200 shares of Preferred
Stock as Series A Preferred Stock, of which 100 shares have been issued to each
of John T. Botti and Ira C. Whitman, the President and Senior Vice President,
respectively, of the Company. The holders of the Series A Preferred Shares have
the right to elect a majority of the Board of Directors as long as such holder
remains, subject to certain conditions, an officer, director and 5% stockholder
of the Company. During such time as the Series A Preferred Stock is outstanding,
the Board of Directors will consist of an odd number of directors, a majority of
whom will be designated as "Preferred Directors" and be elected solely by the
holders of Series A Preferred Stock voting separately as a group. The holders of
the Series A Preferred Stock have a preference on liquidation of $1.00 per share
and no dividend or conversion rights. Moreover, the Board of Directors is
empowered, without shareholder approval, to make additional issuances of
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights
26
<PAGE> 32
of the holders of the Company's Common Stock. The holders of the Series A
Preferred Stock have the right to elect a majority of the Board of Directors. In
the event of additional issuances, the preferred stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Except for the Series B Preferred Stock being
offered by the Company, the Company has no present intention to issue any
additional shares of its currently authorized preferred stock or to create any
new series of preferred stock. However, there can be no assurance that the
Company will not do so in the future.
LIMITED TRANSFERABILITY OF UNITS; LACK OF TRADING MARKET
Purchasers of the Unit offered hereby must be aware of the long-term
nature of their investment and be able to bear the economic risks of their
investment for an indefinite period of time. No trading market exist for the
Unit. Neither the Unit offered hereby nor the Securities included therein have
been registered under the Act or the securities laws of any state. The right of
any purchaser to sell, transfer, pledge or otherwise dispose of the Units or the
Securities included therein will be limited by the Act and state securities laws
and the regulations promulgated thereunder. Consequently, a holder of Units may
not be able to liquidate his investment.
7. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, you as follows:
(a) The Company, and each of its subsidiaries, is duly
organized, validly existing and in good standing under the laws of their
respective states of incorporation, with all requisite power and authority to
own, lease, license, and use its properties and assets and to carry out the
business in which it is engaged. The Company, and each of its subsidiaries, is
duly qualified to transact the business in which it is engaged and is in good
standing as a foreign corporation in every jurisdiction in which its ownership,
leasing, licensing or use of property or assets or the conduct of its business
make such qualification necessary.
(b) The Company has all requisite power and authority to (i)
execute, deliver and perform its obligations under this Agreement and (ii) to
issue, sell and deliver the Preferred Shares and Conversion Shares. This
Agreement has been duly authorized by the Company, and (subject, with respect to
enforceability, to the provisions of bankruptcy and similar laws) when executed
and delivered by the Company, will constitute the legal, valid and binding
obligation of the Company, enforceable as to the Company in accordance with its
terms. The Preferred Shares have been duly authorized by the Company and
(subject, with respect to enforceability, to the provisions of bankruptcy and
similar laws), when executed, issued, sold and delivered in accordance with the
terms of this Agreement, against payment therefor, the Preferred Shares will
have been validly executed, issued, sold and delivered and will constitute the
legal, valid and binding obligation of the Company, enforceable as to the
Company in accordance with its terms.
(c) No consent, authorization, approval, order, license,
certificate or permit of
27
<PAGE> 33
or from, or declaration or filing with, any federal, state, local or other
governmental authority or any court or any other tribunal is required by the
Company for the execution, delivery or performance by the Company of this
Agreement or the execution, issuance, sale or delivery of the Preferred Shares
and Conversion Shares.
(d) No consent of any party to any contract, agreement,
instrument, lease, license, arrangement or understanding to which the Company is
a party or to which any of its properties or assets are subject is required for
the execution, delivery or performance by the Company of this Agreement, or the
execution, issuance, sale and delivery of the Preferred Shares and Conversion
Shares.
(e) The execution, delivery and performance of this Agreement,
and the execution, issuance, sale and delivery of the Preferred Shares, will not
violate, result in a breach of, conflict with (with or without the giving of
notice or the passage of time or both) or entitle any party to terminate or call
a default under any contract, agreement, instrument, lease, license, arrangement
or understanding or violate or result in a breach of any term of the certificate
of incorporation or by-laws of, or conflict with any law, rule, regulation,
order, judgment or decree binding upon, the Company or to which any of its
operations, businesses, properties or assets are subject.
(f) The Company has, as of the date hereof, an authorized
capitalization consisting of 20,000,000 shares of Common Stock, par value $.001,
of which 7,410,745 shares are issued and outstanding and 5,000,000 shares of
Preferred Stock, par value $.10, of which 200 shares are designated as Series A
Preferred Stock and are issued and outstanding. Each issued and outstanding
share of Common Stock and Preferred Stock is duly authorized, validly issued,
fully paid, and non-assessable, without any personal liability attaching to the
ownership thereof solely by being such a holder, and has not been issued and is
not owned or held in violation of any preemptive rights of stockholders. There
is no commitment, plan, or arrangement to issue, and no outstanding option,
warrant, or other right calling for the issuance of, any share of capital stock
of the Company or any security or other instrument which by its terms is
convertible into, exercisable for, or exchangeable for capital stock of the
Company other than: (1) the 1992 Incentive Stock Option Plan, as amended, which
provides for the issuance of up to 3,000,000 shares of Common Stock and under
which options to purchase an aggregate of 1, 984,870 shares of Common Stock are
outstanding; (2) the 1992 Non-executive Director Plan, as amended, which
provides for the issuance of options to purchase 20,000 shares of Common Stock
to each director upon appointment to the Board and 10,000 shares of Common Stock
for each year of service and provides for the issuance of 5,000 shares of Common
Stock to each member of an advisory board upon appointment and for each year of
service, under which options to purchase an aggregate of 110,000 shares of
Common Stock are outstanding; and (3) warrants to purchase 2,898,995 shares of
Common Stock.
(g) The unaudited financial statements as of and for the
period ended June 30, 1999 (the "Financial Statements") of the Company to be
audited and included within the Form 10-K, the draft of which is annexed as
Exhibit B hereto, and the audited financial statements as of and for the period
ended June 30,1998, annexed as Exhibit D hereto, fairly present in accordance
with
28
<PAGE> 34
generally accepted accounting principles the financial position, the results of
operations, and the other information with respect to the Company purported to
be shown therein at the respective dates and for the respective periods to which
they apply. The Financial Statements have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, are correct and complete, and are in accordance with the books
and records of the Company. There has at no time been a material adverse change
in the financial condition, results of operations, business, properties, assets,
liabilities, or future prospects of the Company from the latest information set
forth herein, except that the Company anticipates that losses for the year ended
June 30, 1999 will be approximately $2,038,664.
(h) As of the date hereof there is no litigation, arbitration,
claim, governmental or other proceeding (formal or informal), or investigation
pending or to the Company's knowledge threatened, with respect to the Company,
or its respective operations, businesses, properties, or assets, except as
individually or in the aggregate do not now have and will not in the future have
a material adverse effect upon the operations, business, properties, or assets
of the Company. The Company is not in violation of, or in default with respect
to, any law, rule, regulation, order, judgment, or decree, except as properly
described elsewhere in this Agreement and the Form 10-K annexed hereto, or such
as individually or in the aggregate do not have and will not in the future have
a material adverse effect upon the operations, business, properties, or assets
of the Company; nor is the Company required to take any action in order to avoid
any such violation or default.
(i) As of the date hereof, the Company has free and marketable
title to all real property that it owns and good title to all other properties
and assets which are owned by it, free and clear of all liens other than liens
for taxes not yet due and payable, charges, pledges, mortgages, security
interests, and encumbrances, except as may be properly described elsewhere in
this Agreement and the Form 10-K annexed hereto, or such as in the aggregate do
not now have and will not in the future have a material adverse effect
(individually or in aggregate) upon the financial condition, results of
operations, business, properties, or assets of the Company.
(j) As of the date hereof, the Company is not in violation or
breach of, or in default with respect to complying with, any material provision
of any material contract, agreement, instrument, lease, license, arrangement,
other than any such violation or breach which would not have, individually or in
the aggregate, a material adverse effect on the Company's business, and each
such contract, agreement, instrument, lease, license, arrangement, and
under-standing is in full force and effect and is the legal, valid, and binding
obligation of the parties thereto enforceable as to them in accordance with its
terms. The Company enjoys peaceful and undisturbed possession under all leases
and licenses under which it is operating as of the date hereof. As of the date
hereof, the Company is not a party to or bound by any contract, agreement,
instrument, lease, license, arrangement, or understanding, or subject to any
charter or other restriction, which has had or may in the future have a material
adverse effect on the financial condition, results of operations, business,
properties, assets, liabilities, or future prospects of the Company. The Company
is not in violation or breach of, or in default with respect to, any term of its
Certificate of Incorporation or By-Laws.
(k) There is no right under any patent, patent application,
copyright, franchise, or
29
<PAGE> 35
other intangible property or asset (all of the foregoing being herein called
"Intangibles") necessary to the business of the Company as presently conducted
except that the Company (1) has a patent pending for the innovative technology
underlying the Authentidate business plan that can verify the authenticity of
digital images by employing a secure clock to stamp the date and time on each
image captured and (2) has registered as trademarks the logo "BitWise Designs,"
"DocStar" and "Authentidate." To the knowledge of the Company, there is no
Intangible of others which has had or may in the future have a materially
adverse effect on the financial condition, results of operations, business,
properties, assets, liabilities, or future prospects of the Company.
(l) To its best knowledge, the Company has not infringed, is
not infringing, and has not received notice of infringement with respect to
asserted Intangibles of others. To the best knowledge of the Company, none of
the patents, patent applications, trademarks, service marks, trade names and
copyrights, and licenses and rights to the foregoing presently owned or held by
the Company, materially infringe upon any like right of any other person or
entity. The Company (i) owns or has the right to use, free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects or
other restrictions of any kind whatsoever, sufficient patents, trademarks,
service marks, trade names, copyrights, licenses and right with respect to the
foregoing, to conduct its business as presently conducted and (ii) is not
obligated or under any liability whatsoever to make any payments by way of
royalties, fees or otherwise to any owner or licensee of, or other claimant to,
any patent, trademark, service mark, trade name, copyright, know-how, technology
or other intangible asset, with respect to the use thereof or in connection with
the conduct of its business as now conducted or otherwise. The Company has
direct ownership of title to all its intellectual property (including all United
States and foreign patent applications and patents), other proprietary rights,
confidential information and know-how; owns all the rights to its Intangibles as
are currently used in or have potential for use in its business.
(m) The Company will use its best efforts to cut its operating
expenses for fiscal year 2000 by 15%.
(n) The Company will not incur any debt for borrowed money,
except for accounts receivable working capital credit facility, without the
consent of the holders of a majority interest of the Series B Preferred Stock.
(o) The following table sets forth certain information as of
September 21, 1999 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 Company to be the beneficial owner of more than five (5%)
percent of the Company's Common Stock and Series A Preferred Stock.
<TABLE>
<CAPTION>
Amount and Nature
Type of Name and Address of of Beneficial Percentage
Class Beneficial Holder Ownership (1) of Class
- ----- ----------------- ------------- --------
<S> <C> <C> <C>
Common John T. Botti 944,683 (2) 10.8%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
</TABLE>
30
<PAGE> 36
<TABLE>
<S> <C> <C> <C>
Common Ira C. Whitman 667,239(3) 7.6%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common Steven Kriegsman 30,000(4) .3%
c/o Bitwise Designs
2165 Technology Drive
Schenectady, NY 12308
Common Dennis Bunt 74,216(5) 0.8%
c/o Bitwise Designs, Inc.
2165 Technology Drive
Schenectady, NY 12308
Common J. Edward Sheridan 70,000(6) .8%
c/o Bitwise Designs, Inc.
2165 Technology Drive
Schenectady, NY 12308
Common Charles Johnston 30,000(4) .3%
c/o Bitwise Designs, Inc.
2165 Technology Drive
Schenectady, NY 12308
Series A John T. Botti 100(7) 50%
Preferred Stock c\o Bitwise Designs, Inc.
2165 Technology Drive
Schenectady, NY 12308
Series A Ira C. Whitman 100(8) 50%
Preferred Stock c/o Bitwise Designs, Inc.
2165 Technology Drive
Schenectady, NY 12308
Directors/Officers
as a group (2)(3)(4)(5)(6)(7)(8) 1,816,338 20.7%
</TABLE>
(1) Unless otherwise indicated below, each director, officer and 5%
shareholder has sole voting and sole investment power with respect to
all shares that he beneficially owns.
(2) Includes vested stock options to purchase 710,185 shares of Common
Stock.
(3) Includes vested stock options to purchase 435,185 shares of Common
Stock.
(4) Includes vested options to purchase 30,000 shares of Common Stock.
(5) Includes vested options to purchase 71,333 shares of Common Stock and
excludes nonvested options to purchase 6,667 shares of Common Stock.
Includes 1,000 shares of Common Stock owned by Mr. Bunt's wife.
(6) Includes vested options to purchase 60,000 shares of Common Stock.
(7) See footnote (2). Each share of Series A Preferred Stock is entitled to
ten (10) votes per share.
(8) See footnote (3). Each share of Series A Preferred Stock is entitled to
ten (10) votes per share.
*Percentage not significant.
31
<PAGE> 37
8. Representations and Warranties of the Investor. You hereby represent
and warrant to, and agree with, the Company as follows:
(a) You are an "Accredited Investor" as that term is defined
in Section 501(a) of Regulation D promulgated under the Securities Act of 1933,
as amended (the "Securities Act").
Specifically you are (CHECK APPROPRIATE ITEMS(S)):
A bank as defined in Section 3(a)(2) of the Securities
Act, or a savings and loan association or other institution as defined in
Section 3(a)(5)(A) of the Securities Act, whether acting in its individual or
fiduciary capacity; a broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); an insurance
company as defined in Section 2(13) of the Securities Act; an investment company
registered under the Investment Company Act of 1940 or a business development
company as defined in Section 2(a)(48) of that Act; a small Business Investment
Company licensed by the U.S. Small Business Administration under Section 301(c)
or (d) of the Small Business Investment Act of 1958; a plan established and
maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivisions, for the benefit of its
employees, if such plan has total assets in excess of $5,000,000; an employee
benefit plan within the meaning of the Employee Retirement Income Security Act
of 1974, if the investment decision is made by a plan fiduciary, as defined in
Section 3(21) of such Act, which is either a bank, savings and loan association,
insurance company, or registered investment advisor, or if the employee benefit
plan has total assets in excess of $5,000,000 or, if a self-directed plan, with
investment decisions made solely by persons that are accredited investors;
_____ (ii) A private business development company as defined
in Section 202(a)(22) of the Investment Advisers Act of 1940;
_____ (iii) An organization described in Section 501(c)(3) of
the Internal Revenue Code, corporation, Massachusetts or similar business trust,
or partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
_____ (iv) A director, executive officer, or general partner
of the Company;
_____ (v) A natural person whose individual net worth, or
joint net worth with that person's spouse, at the time of his or her purchase
exceeds $1,000,000;
_____ (vi) A natural person who had an individual income in
excess of $200,000 in each of the two most recent years or joint income with
that person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current year;
_____ (vii) A trust, with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring the securities
offered, whose purchase is directed by a sophisticated person as described in
Rule 506(b)(2)(ii); or
_____ (viii) An entity in which all of the equity owners are
accredited investors. (If this alternative is checked, you must identify each
equity owner and provide statements signed by
32
<PAGE> 38
each demonstrating how each qualified as an accredited investor.)
(b) If you are a natural person, you are: a bona fide resident
of the State contained in your address set forth at the end of this Agreement as
your home address; at least 21 years of age; and legally competent to execute
this Agreement. If an entity, you are duly authorized to execute this Agreement
and this Agreement, when executed and delivered by you, will constitute your
legal, valid and binding obligation enforceable against you in accordance with
its terms.
(c) You have received, read carefully and are familiar with
this Agreement. Respecting the Company, its business, plans and financial
condition, the terms of the Preferred Offering and any other matters relating to
the Preferred Offering: you have received all materials which have been
requested by you; and the Company has answered all inquiries that you or your
representatives have put to it. You have had access to all additional
information necessary to verify the accuracy of the information set forth in
this Agreement and any other materials furnished herewith, and you have taken
all the steps necessary to evaluate the merits and risks of an investment as
proposed hereunder.
(d) You or your purchaser representative have such knowledge
and experience in finance, securities, investments and other business matters so
as to be able to protect your interests in connection with this transaction, and
your investment in the Company hereunder is not material when compared to your
total financial capacity.
(e) You understand the various risks of an investment in the
Company as proposed herein and can afford to bear such risks, including, but not
limited to, the risks of losing your entire investment.
(f) You acknowledge that no market for the Preferred Shares
presently exists and none may develop in the future and that you may find it
impossible to liquidate your investment at a time when it may be desirable to do
so, or at any other time.
(g) You have been advised by the Company that the Preferred
Shares have not been registered under the Securities Act, that the Preferred
Shares will be issued on the basis of the statutory exemption provided by
Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder
relating to transactions by an issuer not involving any public offering and
under similar exemptions under certain state securities laws; that this
transaction has not been reviewed by, passed on or submitted to any Federal or
state agency or self-regulatory organization where an exemption is being relied
upon, and that the Company's reliance thereon is based in part upon the
representations made by you in this Agreement. You acknowledge that you have
been informed by the Company of, or are otherwise familiar with, the nature of
the limitations imposed by the Securities Act and the rules and regulations
thereunder on the transfer of securities. In particular, you agree that no sale,
assignment or transfer of the Preferred Shares shall be valid or effective, and
the Company shall not be required to give any effect to any such sale,
assignment or transfer, unless (i) the sale, assignment or transfer of the
Preferred Shares is registered under the Securities Act, or (ii) the Preferred
Shares are sold, assigned or transferred in accordance with all the requirements
and limitations of Rule 144 under the Securities Act, it being understood that
Rule 144 is not available at the present time for the sale of the Preferred
Shares, or (iii) such sale, assignment, or transfer is otherwise exempt from
registration under the Securities Act. You acknowledge that the Preferred
33
<PAGE> 39
Shares shall be subject to a stop transfer order and the certificate or
certificates evidencing any Preferred Shares shall bear the following or a
substantially similar legend and such other legends as may be required by state
blue sky laws:
"These securities have not been registered under the Securities Act of 1933.
Such securities may not be sold or offered for sale, transferred, hypothecated
or otherwise assigned in the absence of an effective registration statement with
respect thereto under such Act or an opinion reasonably acceptable to the
Company of counsel reasonably acceptable to the Company that an exemption from
registration for such sale, offer, transfer, hypothecation or other assignment
is available under such Act."
(h) You will acquire the Preferred Shares for your own account
(or for the joint account of you and your spouse either in joint tenancy,
tenancy by the entirety or tenancy in common) for investment and not with a view
to the sale or distribution thereof or the granting of any participation
therein, and that you have no present intention of distribution or selling to
others any of such interest or granting any participation therein.
(i) It never has been represented, guaranteed or warranted by
any broker, the Company, any of the officers, directors, shareholders, employees
or agents of either, or any other persons, whether expressly or by implication,
that:
(i) the Company or you will realize any given
percentage of profits and/or amount or type of consideration, profit or
loss as a result of the Company's activities or your investment in the
Company; or
(ii) the past performance or experience of the
management of the Company, or of any other person, will in any way
indicate the predictable results of the ownership of the securities or
of the Company's activities.
(j) You understand that the net proceeds from all
subscriptions paid and accepted pursuant to the Offerings (after deduction for
expenses of the Offerings, including any agent fees) will be used for, in
conjunction with the net proceeds received from the other concurrent offerings,
by Authentidate.Com, LLC for the initial implementation of its business plan and
by Bitwise for general working capital, the payment of vendors and the repayment
of the line of credit.
(k) Without limiting any of your other representations and
warranties hereunder, you acknowledge that you have reviewed and are aware of
the Risk Factors set forth in Section 6 herein.
(l) You are aware that this Preferred Offering is subject to
the successful completion of the Unit Offering referenced in Section 2, "Recent
Events" herein. You understand that no subscriptions for Preferred Shares will
be accepted by the Company unless the Unit Offering is fully subscribed.
(m) You are aware that Authentidate may be converted into a C
corporation. You
34
<PAGE> 40
understand and agree that if Authentidate is converted into a C corporation,
based on its capitalization after giving effect to a sale of $1,500,000 of its
securities, it will issue up to 20% of its shares of common stock in lieu of
membership interests.
(n) (i) You hereby agree not to directly or indirectly use the
shares of Bitwise Common Stock acquired pursuant to these Offerings, and the
voting power attached to such shares, either voting separately or as part of a
group, to effect a "Change in Control," as defined below, of Bitwise.
(ii) You hereby further agree, on behalf of yourself
and any entity which owns shares of Bitwise Common Stock beneficially owned by
you (within the meaning of Rule 13d-3), not to exercise any Series B Warrants or
Series C Warrants, or convert any shares of Series B Preferred Stock,
beneficially owned by you (within the meaning of Rule 13d-3), if the shares
received upon such exercise or conversion, will, when added to any other shares
of Bitwise Common Stock beneficially held by you within sixty days of the date
of such exercise or conversion, equals or exceeds 10% of the outstanding shares
of Bitwise Common Stock. Bitwise further agrees that in the event you are
prohibited from exercising any Warrant or converting any share of Series B
Preferred Stock on account of this subparagraph 8. (n) (ii), the exercise period
of the Warrant or the conversion period of the Series B Preferred Stock shall be
deemed extended, with respect to the amount of such Warrant or Series B
Preferred Stock which you had a bona fide intent to exercise or convert and
which you were not able to exercise or convert, until you are able to effectuate
such exercise or conversion without violating this subparagraph 8. (n) (ii) (not
to exceed 90 days in any one instance), and with respect to the Series C
Warrants, any and all increases in the exercise price provided for in section
1.2 of the Series C Warrants shall be delayed for a period equal to the
extension in the exercise period provided by this subparagraph 8. (n) (ii);
provided that you furnish notice to Bitwise specifying the number of Warrants or
Series B Preferred Stock which you were prohibited from exercising or converting
within two business days of such attempted exercise or conversion.
(iii) A "Change in Control" of Bitwise shall be
deemed to have occurred if there shall be consummated or there shall have
occurred without the approval of the Continuing Directors, as defined below:
(A)(1) any consolidation or merger of Bitwise in which Bitwise is not the
continuing or surviving corporation or pursuant to which shares of the Bitwise's
Common Stock would be converted into cash, securities or other property, other
than a merger of Bitwise in which the holders of the Bitwise's Common Stock
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger, or (2) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of Bitwise, or
(B) the approval by the stockholders of Bitwise of any plan or proposal for the
liquidation or dissolution of Bitwise, or (C) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the entire Board of Directors shall cease for any reason to constitute a
majority thereof unless the election, or the nomination for election by
Bitwise's stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period (the "Continuing Directors"). A Change of Control shall
not include any sale of securities in a public offering or the exercise of any
right to designate a director pursuant to an agreement outstanding on the date
hereof.
35
<PAGE> 41
9. Corporate Funding Group, LLC. Upon the closing of the Preferred and
Unit Offerings, the Company will retain Corporate Funding Group, LLC ("Corporate
Funding") to perform certain financial consulting services. Pursuant to the
letter agreement between the Company and Corporate Funding, Corporate Funding
will, at the Company's request, furnish advice and recommendations with respect
to such aspects of the business and affairs the Company and assume
responsibility for consenting, or withholding the consent for, the private sale
by certain securityholders and officers of the Company of securities of the
Company. In addition, Corporate Funding will be granted a three-year
preferential right to purchase any of the Company's securities which the Company
may seek to sell in a private offering exempt from the registration requirements
of the Act. As compensation for providing such services to Bitwise, Bitwise
shall sell to Corporate Funding 20,000 Series B Warrants, at a price of $.001
per warrant. Corporate Funding is an affiliate of certain anticipated
purchasers.
10. Indemnification. You acknowledge that you understand the meaning
and legal consequences of the representations and warranties contained in
paragraph 8 hereof, and you hereby agree to indemnify and hold harmless the
Company and each incorporator, officer, director, employee, agent and
controlling person thereof, past, present or future, from and against any and
all loss, damage or disability due to or arising out of a breach of any such
representation or warranty.
11. Transferability. This Agreement is assignable or transferable by
you except as prohibited by applicable Federal and State Securities Laws.
12. Miscellaneous.
(a) All notices and other communications provided for
hereunder or under the Series B Preferred Shares shall be in writing, and, if to
you, shall be delivered or mailed by registered mail addressed to you at your
address as set forth below, or to such other address as you may designate to the
Company in writing, and if to the Company, shall be delivered or mailed by
registered mail to the Company at 2165 Technology Drive, Schenectady, New York
12308, Attention: Office of the President, or to such other address as the
Company may designate to you in writing. All such notices shall be effective one
day after delivery or three days after mailing.
(b) This Agreement shall be construed in accordance with and
governed by the internal laws of the State of New York without reference to that
State's conflicts of laws provisions.
(c) This Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof and may be amended
only by a writing executed by all parties hereto.
(d) This Agreement may be executed in one or more counterparts
representing, however, one and the same agreement.
36
<PAGE> 42
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year this subscription has been accepted by the Company as set
forth below.
Very truly yours,
BITWISE DESIGNS, INC.
Dated: ______, 1999 By: __________________________
Name:
Title:
37
<PAGE> 43
EXECUTION PAGE FOR SUBSCRIPTION BY INDIVIDUALS
(not applicable to subscriptions by entities, Individual
Retirement Account, Keogh Plans or ERISA Plans)
TOTAL SUBSCRIPTION AMOUNT $__________________________.
<TABLE>
<S> <C>
__ INDIVIDUAL OWNER __ CUSTODIAN UNDER
(One signature required below) Uniform Gifts to Minors Act
__ JOINT TENANTS WITH RIGHT _______________________________
OF SURVIVORSHIP (Insert applicable state)
(All tenants must sign below) (Custodian must sign below)
__ TENANTS IN COMMON __ COMMUNITY PROPERTY
(All tenants must sign below) (Both spouses in community
property states must sign
below)
</TABLE>
PRINT INFORMATION AS IT IS TO APPEAR ON THE COMPANY RECORDS.
<TABLE>
<S> <C>
- ------------------------------ ----------------------------------
(Name of Subscriber) (Social Security or Taxpayer ID No.)
- ------------------------------
- ------------------------------ ----------------------------------
(Home Address) (Home Telephone)
- ------------------------------
- ------------------------------ ----------------------------------
(Business Address) (Business Telephone)
- ------------------------------ ----------------------------------
(Name of Co-Subscriber) (Social Security or Taxpayer ID No.)
- ------------------------------
- ------------------------------ ----------------------------------
(Home Address) (Home Telephone)
- ------------------------------
- ------------------------------
- ------------------------------ ----------------------------------
(Business Address) (Business Telephone)
SIGNATURE(S)
Dated ___________________, 1999.
(1) By (2) By
------------------------ ---------------------------
Signature of Authorized Signature of Authorized Co-
Signatory Signatory
------------------------ ---------------------------
Print Name of Signatory Print Name of Co-Signatory
and Title, if applicable and Title, if applicable
ACCEPTED AND AGREED:
BITWISE DESIGNS, INC.
By: Dated , 1999
-------------------------- ------------------------
</TABLE>
38
<PAGE> 44
EXECUTION PAGE FOR SUBSCRIPTION BY NON-INDIVIDUALS
TOTAL SUBSCRIPTION AMOUNT $ .
--------------------------
__ EMPLOYEE BENEFIT PLAN OR TRUST (including pension plan, profit sharing plan,
other defined contribution plan and SEP)
__ IRA, IRA ROLLOVER OR KEOGH PLAN
__ TRUST (other than employee benefit trust)
__ CORPORATION (Please include certified corporate resolution authorizing
signature)
__ PARTNERSHIP
__ OTHER _____________________________________________________________________
PRINT INFORMATION AS IT IS TO APPEAR ON THE COMPANY RECORDS.
- ------------------------------ ----------------------------------
(Name of Subscriber) (Taxpayer ID No.)
- ------------------------------ ----------------------------------
(Plan number, if applicable)
- ------------------------------ ----------------------------------
(Address) (Telephone Number)
- ------------------------------------------------------------------------------
Name and Taxpayer ID number of sponsor, if applicable
The undersigned trustee, partner, corporate officer or
fiduciary certificates that he or she has full power and authority from all
beneficiaries, partners or shareholders of the entity named above to execute
this Subscription Agreement on behalf of the entity and to make the
representations, warranties and agreements made herein on their behalf and that
investment in the Common Stock has been affirmatively authorized by the
governing board or body of such entity and is not prohibited by law or the
governing documents of the entity.
<TABLE>
SIGNATURE(S)
<S> <C>
Dated , 1999.
-------------------
By By
------------------------ ---------------------------
Signature of Authorized Signature of Authorized Co-
Signatory Signatory
------------------------ ---------------------------
Print Name of Signatory Print Name of Required
Co-Signatory
------------------------ ---------------------------
Print Title of Signatory Print Title of Required Co-Signatory
ACCEPTED AND AGREED:
BITWISE DESIGNS, INC.
By: Dated , 1999
------------------------ -----------------------
</TABLE>
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