-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EkdO6459RI0uVEdEpTz/vvNmPEaw5V3w2pdwRIPnHhoULi8xmk0GLZonwQpYcpPn Pm5fPQcK0YOGU4fSJ6k5HQ== 0000950123-00-001118.txt : 20000215 0000950123-00-001118.hdr.sgml : 20000215 ACCESSION NUMBER: 0000950123-00-001118 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BITWISE DESIGNS INC CENTRAL INDEX KEY: 0000885074 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 141673067 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-91475 FILM NUMBER: 537764 BUSINESS ADDRESS: STREET 1: BLDG 50 ROTTERDAM INDUSTRIAL PK CITY: SCHENECTADY STATE: NY ZIP: 12306 BUSINESS PHONE: 5183569741 MAIL ADDRESS: STREET 1: BLDG 50 ROTTERDAM INDUSTRIAL PARK CITY: SCHENECTADY STATE: NY ZIP: 12306 SB-2/A 1 BITWISE DESIGNS, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 2000 FILE NO. [333-91475] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) DELAWARE 3571 14-1673067 (STATE OF INCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER INDUSTRIAL CLASSIFICATION NO.) IDENTIFICATION NUMBER)
------------------------ 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)
------------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------- 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] - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
(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)]. 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] 4 TABLE OF CONTENTS
PAGE ---- 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]
i 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 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 7 THE OFFERING 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"
- --------------- (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 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."
YEAR ENDED JUNE 30, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- 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
- --------------- (1) Long-term liabilities excluding discount of $404,588. (2) Long-term liabilities excluding discount of $534,668. 4 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 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 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 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 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.
MAXIMUM NUMBER OF PERCENTAGE OF TOTAL SHARES OF COMMON SHARES OF COMMON [CONVERSION PERIOD CONVERSION RATE STOCK ISSUABLE STOCK OUTSTANDING ------------------ --------------- ---------------- ------------------- 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%]
[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 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 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 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 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. 13 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 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 15 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. 16 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: 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.
17 22 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.
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. 18 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]. 19 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 20 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 21 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. 22 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. 23 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 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:
NAME AGE OFFICE - ---- --- ------ 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]
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 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 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 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
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 - --------------------------- ------ -------- ----- ------------ ---------- ------------ 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
- --------------- (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 $226,604 on such date, without giving effect to the diminution in value attributed to the restriction on such shares. OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE ALTERNATIVE TO VALUE AT (F) AND (G) ASSUMED ANNUAL GRANT DATE PERCENT OF INDIVIDUAL GRANTS RATES OF VALUE TOTAL ------------------------ STOCK PRICE -------------- NUMBER OF OPTIONS/SARS APPRECIATION SECURITIES GRANTED TO FOR UNDERLYING EMPLOYEES EXERCISE OF OPTION TERM GRANT DATE OPTION/SARS IN FISCAL BASE PRICE EXPIRATION -------------- PRESENT NAME GRANTED(#) YEAR (S/SH) DATE 5%($) 10%($) VALUE $ (A) (B) (C) (D) (C) (F) (G) (H) - ---- ----------- ------------ ----------- ---------- ----- ------ -------------- John Botti............... 0 N/A N/A N/A 0 0
No Stock Appreciation Rights were granted to any of the named executive officers during the last fiscal year. 28 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
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 - ---- ----------- -------- ------------------------- ------------------------- John T. Botti.............. 0 -- 835,185/0 6,406/0
- --------------- (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 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 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.
AMOUNT AND NATURE NAME AND ADDRESS OF OF BENEFICIAL PERCENTAGE TYPE OF CLASS BENEFICIAL HOLDER OWNERSHIP(1) OF CLASS[(*)] - ------------- ---------------------------- ----------------- ------------- 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
31 36
AMOUNT AND NATURE NAME AND ADDRESS OF OF BENEFICIAL PERCENTAGE TYPE OF CLASS BENEFICIAL HOLDER OWNERSHIP(1) OF CLASS[(*)] - ------------- ---------------------------- ----------------- ------------- 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%]
- --------------- (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.] 32 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 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
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) - ----------------------- ------------------ ------------------ ------------------ ------------- 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 ++
34 39
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) - ----------------------- ------------------ ------------------ ------------------ ------------- 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 ++ ------------------ ------------------ ------ --
- --------------- ++ 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 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 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 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 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 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 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 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: 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.
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 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:
HIGH LOW ---- --- 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
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 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 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 50 CONTENTS
PAGE ---------- 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
F-1 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 52 BITWISE DESIGNS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND 1998 AND SEPTEMBER 30, 1999
JUNE 30, --------------------------- SEPTEMBER, 30 1999 1998 1999 ------------ ------------ ------------- (UNAUDITED) 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 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-3 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
JUNE 30, -------------------------- SEPTEMBER 30, 1999 1998 1999 ----------- ----------- ------------- (UNAUDITED) 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) =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-4 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
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 --------- -------- ---------- --------- ----------- ------------ -------- ------------- 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 === === ========== ====== =========== ============ ======== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-5 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
JUNE 30, -------------------------- SEPTEMBER 30, 1999 1998 1999 ----------- ----------- ------------- (UNAUDITED) 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 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-6 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 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 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 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:
1999 1998 ----------- ----------- 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)
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:
1999 1998 ---------- ---------- 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 ========== ==========
4. PROPERTY AND EQUIPMENT Property and equipment at June 30, 1999 and 1998 consists of the following:
ESTIMATED USEFUL LIFE 1999 1998 IN YEARS ----------- ----------- ----------- 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 =========== ===========
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 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:
1999 1998 ---------- ---------- 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 ========== ==========
F-11 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: 2000..................................................... $ 23,781 2001..................................................... 30,335 2002..................................................... 32,934 2003..................................................... 4,010,757 2004..................................................... 38,821 Thereafter............................................... 1,072,865 ---------- $5,209,493 ==========
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.
1999 1998 ----------- ----------- 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 =========== ===========
F-12 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:
1999 1998 ----------- ----------- 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- =========== ===========
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:
FISCAL YEAR ENDING JUNE 30: - --------------------------- 2000...................................................... $ 76,539 2001...................................................... 76,503 -------- $153,042 ========
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 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 64 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WEIGHTED NUMBER OF AVERAGE OPTION SHARES PRICE PER SHARE --------- --------------- 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 =========
The following is a summary of the status of employee stock options at June 30, 1999:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS ---------------------------------- ------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE EXERCISE PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE - -------------------- ------- ----------- -------- ------- -------- $ .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
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 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:
WEIGHTED NUMBER OF AVERAGE OPTION SHARES PRICE PER SHARE --------- --------------- 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 ========
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:
WEIGHTED NUMBER OF AVERAGE WARRANT SHARES PRICE PER SHARE --------- --------------- 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 =========
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:
OUTSTANDING WARRANTS EXERCISABLE WARRANTS ----------------------------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE REMAINING EXERCISE EXERCISE EXERCISE PRICE RANGE NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE - -------------------- --------- ---------------- -------- --------- -------- $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
F-16 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:
JUNE 30, JUNE 30, 1999 1998 ----------- ----------- 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)
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 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 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.
BITWISE DJS ALL OTHER TOTALS ----------- ----------- ----------- ----------- 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)
F-19 69 BITWISE DESIGNS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BITWISE DJS ALL OTHER TOTALS ----------- ----------- ----------- ----------- 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
JUNE 30, 1999 JUNE 30, 1998 ------------- ------------- 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 =========== ===========
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 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 71 [5,886,416] SHARES BITWISE DESIGNS, INC. COMMON STOCK PROSPECTUS , [2000] 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 73
ITEMS AMOUNTS - ----- ------------ 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]* ============
- --------------- * 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 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 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.]
EXHIBIT NO. DESCRIPTION - ------- ----------- 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).
II-4 76
EXHIBIT NO. DESCRIPTION - ------- ----------- 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.
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 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 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.
NAME TITLE DATE ---- ----- ---- /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
II-7 79 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 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.
EX-10.13 2 SERIES B PREFERRED STOCK SUBSCRIPTION AGREEMENT 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 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 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 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 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 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 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 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 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. 4 10 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 5 11 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 6 12 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 7 13 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 8 14 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 9 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, 10 16 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 11 17 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 12 18 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. 13 19 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. 14 20 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. 15 21 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:
NAME AGE OFFICE 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
16 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 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.
YEAR ENDED JUNE 30, 1999 1998 1997 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
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 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 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 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 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 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 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 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. 25 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 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 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 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 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.
Amount and Nature Type of Name and Address of of Beneficial Percentage Class Beneficial Holder Ownership (1) of Class - ----- ----------------- ------------- -------- Common John T. Botti 944,683 (2) 10.8% c/o Bitwise Designs 2165 Technology Drive Schenectady, NY 12308
30 36 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%
(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 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 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 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 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 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 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 43 EXECUTION PAGE FOR SUBSCRIPTION BY INDIVIDUALS (not applicable to subscriptions by entities, Individual Retirement Account, Keogh Plans or ERISA Plans) TOTAL SUBSCRIPTION AMOUNT $__________________________. __ 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)
PRINT INFORMATION AS IT IS TO APPEAR ON THE COMPANY RECORDS. - ------------------------------ ---------------------------------- (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 -------------------------- ------------------------
38 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. SIGNATURE(S) 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 ------------------------ -----------------------
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